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Liberty Tax Service Basic Income Tax Course Lesson 3

Liberty Tax Service Basic Income Tax Course Lesson 3. HOMEWORK (CLASSWORK 2). CLASSWORK 2: True or False. (1) The custodial parent can sign an agreement allowing the noncustodial parent to claim an exemption for their child. T

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Liberty Tax Service Basic Income Tax Course Lesson 3

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  1. Liberty Tax Service Basic Income Tax CourseLesson 3

  2. HOMEWORK (CLASSWORK 2) CLASSWORK 2: True or False. (1) The custodial parent can sign an agreement allowing the noncustodial parent to claim an exemption for their child. T (2) The support test for qualifying child states that the child cannot have provided over half of his/her own support. T (3) Every person claimed as a dependent must have a social security number or other valid taxpayer identification number. T (4) You can never take an exemption for your dependent if he/she files a joint return. F (5) The custodial parent can sign a statement releasing the child’s exemption to the noncustodial parent. The written declaration can only release the exemption for one year.F (6) A technical school does not meet the school definition for the age test for qualifying child. F (7) If your filing status is MFS, you can always claim an exemption for yourself and one for your wife. F 2

  3. EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (8) Temporary absences due to special circumstances do not prohibit someone from being a member of your household. T (9) If your spouse died during the year, you cannot claim their exemption. F (10) The custodial parent is the parent with whom the child lived the greater part of the year. T (11) An eligible foster child meets the relationship test for qualifying child. T (12) If two people together contribute more than half an individual’s support, they both can claim the exemption. F (13) You can use entertainment costs in calculating total support for a person. T (14) A person must live with you over half the year as a member of your household or be related to you in one of the ways listed in “relatives who do not have to live with You all year”, to meet the member of household or relationship test for qualifying relative. F 3

  4. EXEMPTIONS AND DEPENDENTS CLASSWORK 2: True or False. (15) To meet the citizenship test, a person must be a U.S. citizen for the entire year. F (16) A household member who dies during the year meets the member of household test for qualify relative. T (17) Gross income includes money, property, tax-exempt income, and services. F (18) A person related to your spouse is not considered to meet the relationship test for you once you are divorced. F (19) If your child is 24 years old and a full-time student with a gross income of $3,650, you cannot claim an exemption for that child. T (20) To qualify for the gross income test for a qualifying relative, your 27-year-old child must earn less than $3,650. T

  5. HOMEWORK CHAPTER 2 Robert R. (SSN 211-22-3344) and Shirley M. Peters (SSN 210-21-2121) have three children that live with them, Keith, Martha, and Jude. Robert’s mother, Lucy Peters (SSN 045-66-5465), also lives with them at 45 Deer Park Run, Allen Park, MI 48101. Robert and Shirley are filing jointly. Keith (born 4/2/2002, SSN 377-41-6857) is their youngest. He was adopted in 2008 from a legal agency in Columbia. Martha (SSN 318-22-9857) is 18 years old and worked at a department store where she earned $3,400. Jude (SSN 379-37-5964) is 22 years old and a full-time college student. He works part-time during school and full-time during the summer. He earned $3,750 in 2009 and lives at home. Lucy Peters is a widow. She received $5,100 in social security payments in 2009. Her savings account of $5,500 earned $220 of interest, which she left in the account. The rest she spent on herself. The fair rental value of their house is $1,050 per month. The Peters paid $850 per month for food and $300 per month for utilities and phone. Lucy’s other expenses for the year are as follows: Which, if any, of the Peters’ children can be claimed as dependents? Keith, Martha and Jude. Fill out the dependency support sheet for Lucy Peters. Does she qualify as a dependant? No. Fill in the heading, filing status, and exemption sections of Form 1040 for Robert and Shirley.

  6. HOMEWORK CHAPTER 2

  7. HOMEWORK CHAPTER 2

  8. Questions & Answers

  9. REMINDERS • OPEN BOOK –> OPEN NOTES –> CLOSED MOUTH • QUIZ - 15 MINS. TO ANSWER (AVG.10 ?S) • 10 MINUTES TO REVIEW THE QUIZ • FOLLOWED BY… • A BREAK • REVIEW NEXT CHAPTER • KEEPS US ON TRACK • ALLOWS COMPUTER TIME

  10. QUIZ

  11. BREAK – 10 MINS

  12. Chapter 3: FILING STATUS Chapter Content • Purpose of Filing Status • Filing Status (1): Single • Filing Status (2): Married Filing Joint • Filing Status (3): Married Filing Separate • Filing Status (4): Head of Household • Filing Status (5): Qualifying Widow(er) with Dependent Child • Key Ideas Objectives • Understand the Five Filing Statuses • Determine the Filing Status of an Individual

  13. B.A.M. • Great start • Must have a thourough understanding of the filing statuses • B.A.M Stands for: • BRAINS • AND • MOTIVATION • APPLY THEM HERE AND YOU’LL SUCCEED!

  14. FILING STATUS What is your filing status used in determining? • Filing requirements. • Tax rate • Standard deduction. Also plays a role in determining which tax form to use when preparing the return. Depends on your marital status and family situation. For tax purposes, you are considered married or unmarried. When are you considered unmarried for tax purposes? You are considered unmarried for the whole year if, on the last day of your tax year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance agreement. State law governs whether you are married or legally separated under a divorce or separate maintenance decree

  15. FILING STATUS What are the five filing statuses? • Single (S) • Married Filing Jointly (MFJ) • Married Filing Separately (MFS) • Head of Household (H/H) • Qualifying Widow(er) with Dependent Child (Q/W). Which two filing statuses have the same tax rate? Married filing jointly and qualifying widow(er) with dependent child have the same tax rate and it is generally the lowest tax rate. Married filing separately usually has the highest tax rate.

  16. FILING STATUS

  17. FILING STATUS Form 1040 page 1

  18. SINGLE (1) Who qualifies to use SINGLE (S) as their filing status? • You were never married. • You were legally separated from your spouse under a divorce or separate maintenance decree. • You were widowed before January 1, 2009 and did not remarry in 2009. Your filing status is SINGLE if you do not qualify for another filing status. If you are unmarried, or are married but lived apart from your spouse, check the requirements for head of household or qualifying widow(er).

  19. FILING STATUS Ted MacNamara is unmarried and a part-time student. He rents an apartment and works at Wal-Mart. SINGLE Judy Vasquez lost her husband two years ago. She lives alone in a retirement home. SINGLE • Rita is 20 years old and unmarried. She lives with her boyfriend, Ali, who is a full-time student and does not work. She works at the campus bookstore and provides all of the cost of maintaining the home. • SINGLE

  20. FILING STATUS David Astelle pays the full cost of the home in which he and his 23 year old daughter live. She is not a full time student or disabled. His daughter earns $3,600 and does not qualify as his dependent. His wife died in 2007. SINGLE Shilo Cruise is unmarried and lived all year with her boyfriend, Sweeny Todd, and Sweeny’s 10-year-old son, Johnny. Sweeny does not know how to locate Johnny’s mother. Sweeny was a bouncer and earned $5,000. He will file a return only to get his withholding back. Shilo is a lawyer and provides over half of the support of both Sweeny and Johnny and more than half of the cost of keeping up the home. Shilo meets the test to claim Johnny as a qualifying relative. SINGLE

  21. MARRIED FILING JOINTLY(2) To use MARRIED FILING JOINTLY (MFJ) as your filing status, what must be TRUE? • You were married on the last day of the tax year even if you did not live with your spouse. • Your spouse died during the tax year and you did not remarry during the year. • You are living together in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began.

  22. MARRIED FILING JOINTLY(2) Do both individuals have to have income to us MFJ? No. Both individuals do not need to have income. However you must include all income of both spouses. You must also deduct your combined allowable expenses. You are both responsible for the return and you must both sign the return. Filing a joint return may give you a lower tax rate than any other filing status. • What if you are divorced during the year? If you are divorced under a final decree by the last day of the year, and have not remarried, you are considered unmarried for the whole year and cannot choose MFJ as your filing status. My spouse is a non resident alien. Can we still use MFJ? If at any time during the tax year your spouse was a nonresident alien, you may file a joint return only if your spouse reports all income (domestic and foreign) on the return.

  23. MARRIED FILING JOINTLY(2) Fred Williams died on September 1, 2009. His wife, Marlene, did not work. They had filed MFJ in previous years. They had no dependents and Marlene has not remarried. May Marlene file a joint return for 2009? Yes Even though Marlene was not married on December 31, 2009, she may file a joint return for 2009.

  24. FILING STATUS • Joe and Mary Smith are married. Joe works as a computer technician. Mary stays home with their baby and has no income. • MFJ • Mike and Cathy Cato are married and they both are truck drivers. They only lived together for three months of 2009. They have no dependents. • MFJ

  25. MARRIED FILING SEPARATELY (3) To use MARRIED FILING SEPARATELY (MFS) as your filing status, any of the following may be TRUE: • You want to be responsible for only your own tax. • You and your spouse do not agree to file a joint return. When filing as MFS, you generally report only your own income, exemptions, credits, and deductions. Married filing separate usually means paying more tax than if you file a joint return. You should figure your tax both ways and chose the method that produces the least tax. When using MFS, you must write your spouse’s full name on line 3 of Form 1040 and enter the spouse’s social security number in the heading section.

  26. MARRIED FILING SEPARATELY (3)(MY FAVORITE STATUS) Married filing separate status disqualifies you from certain tax benefits. Give me some examples: • You cannot claim the earned income credit. • You cannot take the credit for adoption expenses. • You cannot claim the standard deduction if your spouse itemizes deductions. • You cannot claim the credit for child and dependent care expenses in most instances. • You cannot deduct interest paid on a qualified student loan. • You cannot claim education credits. • If you lived with your spouse at any time during the tax year: • You cannot take the credit for the elderly or the disabled. • You cannot roll over amounts from a traditional IRA into a Roth IRA. • You may have to include in income more of your social security benefits.

  27. MARRIED FILING SEPARATELY (MFS) MY FAVORITE STATUS • MARRIED FILING STUPID(LY) • SPECIAL HAT FOR THEM

  28. MARRIED FILING SEPARATELY (3) Jack and Joan were married on December 12, 2009. They both have major investments and they want to be responsible only for their own tax. How should they file? MFS When filing as MFS, you generally report only your own income, exemptions, credits, and deductions.

  29. MARRIED FILING SEPARATELY (3) Tim P. (SSN 321-66-8181) and Tina A. Halloway are filing as MFS. Tina’s social security number is 051-33-9839. How would they fill out their 1040?

  30. MARRIED FILING SEPARATELY (3) Tim P. (SSN 321-66-8181) and Tina A. Halloway are filing as MFS. Tina’s social security number is 051-33-9839. When using MFS, you must write your spouse’s full name on line 3 of Form 1040 and enter the spouse’s social security number in the heading section.

  31. HEAD OF HOUSEHOLD: (4) What are the rules for claiming H of H? To use HEAD OF HOUSEHOLD (H/H) as your filing status, you must be unmarried or considered unmarriedas of the last day of the tax yearAND: • Have paid more than half the cost of keeping up a home for the tax year; and, in most cases, • A qualifying person generally must have lived with you in the home for more than half the tax year

  32. HEAD OF HOUSEHOLD: (4) In determining the cost of keeping up a home: • Include amounts you paid for rent, mortgage interest, real estate taxes, home insurance, repairs, utilities, and food eaten in the home • Do not include amounts you paid for clothing, education, medical treatment, vacations, life insurance, and transportation or the rental value of home you own • Exclude payments from public assistance programs as amounts you paid. Include these amounts in the total cost of keeping up a home in determining whether you paid over half the cost

  33. HEAD OF HOUSEHOLD: (4) Who can be a qualifying person for H of H? • An unmarried child including child, grandchild, stepchild, or foster child (The child does not have to be your dependent.) • A married child including child, grandchild, stepchild, or foster child (In most cases the child must be your dependent) • A qualifying relative who is your dependent; a qualifying relative includes your child who is not a qualifying child, parent, grandparent, brother, sister, stepbrother, stepsister, half brother, or half sister (or descendant of these such as a niece or nephew) • A parent not living with you if you paid more than half the cost of keeping up a home that was the parent’s main home for the entire year. (The parent must be your dependent.)

  34. HEAD OF HOUSEHOLD: (4) Page 3-8

  35. HEAD OF HOUSEHOLD: (4) Megan A. Taft lived all year with her mother, Alise. Alise pays all of the cost of the household expenses. Megan’s father claims her as his dependent. May Alise file as H/H? Yes Alise may file H/H with Megan as the qualifying child.

  36. HEAD OF HOUSEHOLD: (4) Megan A. Taft lived all year with her mother, Alise. Alise pays all of the cost of the household expenses. Megan’s father claims her as his dependent. How would the 1040 be filled out? Alise would check box 4 under Filing Status on Form 1040 and enter Megan’s name on the line provided.

  37. HEAD OF HOUSEHOLD: (4) John’s girlfriend, Jane, lives with him all year. He maintains the home and totally supports her. She does not work. He can claim H/H. No He cannot claim H/H because she even if she can be claimed as a qualifying relative she is not a qualifying person for H/H.

  38. HEAD OF HOUSEHOLD: (4) Peggy Purcell maintains a home and is unmarried. Her daughter, Kelly, is a 20-year-old full-time student at Erie College. Kelly stayed in the dormitory for all of last year. She did come home to visit during term breaks. Can Peggy may file as H/H. Yes Kelly’s absence from the home for education purposes is considered temporary and Peggy may file as H/H.

  39. HEAD OF HOUSEHOLD: (4) What is the special rule for married taxpayers for H of H filing status? If you are married but living apart from your spouse, you may be considered unmarried for tax purposes and qualify for H/H if ALL the following tests are met: • You file a separate return. • You paid more than half the cost of keeping up your home for the tax year. • Your spouse did not live in your home at any time during the Last 6 Months of the tax year. Your spouse is considered to live in your home even if they were temporarily absent due to special circumstances. • Your home was the main home of your child, stepchild, or eligible foster child for more than half the year. • You must be able to claim an exemption for the child. However, you can still meet the test if you cannot claim the exemption only because the non-custodial parent is allowed to claim the exemption for the child.

  40. HEAD OF HOUSEHOLD: (4) Jason and Joan Jutt have been separated since January 31, 2009. Josie, their daughter, lives with Joan and Joan supplies over half the cost of keeping up the home. Joan is legally still married to Jason but may be treated as considered unmarried and may be eligible to file as head of household. If Jason did not move out of the house until August 8, 2009, Can she file as H/H? No Joan would still be considered married for tax purposes and must file as MFJ or MFS. She cannot claim head of household because she does not meet the considered unmarried requirement since Jason and Joan lived together during the last 6 months of the tax year.

  41. HEAD OF HOUSEHOLD: (4)

  42. Question • Debra Johnson is legally separated from her husband. She pays over half the cost of maintaining her home. Her ten-year-old son lives with her and is claimed by her estranged husband as his dependent. • H/H

  43. QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD (5) To use QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD (Q/W) as your filing status for 2009,what requirements must be met? • You could have filed a joint return for the tax year your spouse died. • Your spouse died in 2007 or 2008 and you did not remarry before the end of 2009. • You have a child or stepchild who is your dependent. • You paid over half the cost of keeping up a home that is the main home for you and the dependent child for the entire year.

  44. QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD (5) Jeff Termack died in 2007. He is survived by his wife, Sue, and a daughter, Tracy. Sue has not remarried and keeps up a home for Tracy. For 2007, Sue filed as MFJ. Is her filing status for 2009 H/H? No In 2008 and 2009, she may use Qualifying Widow as her filing status.

  45. QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD (5) How will her 2009 1040 be filled out?

  46. Questions

  47. BREAK

  48. FILING STATUS SUMMARY Single • Unmarried as of December 31 • Legally separated under a separate maintenance decree • Do not qualify for another filing status Married Filing Jointly • Married as of December 31 • Include both incomes • Both must sign • Both responsible for payment of tax Married Filing Separately • Married as of December 31 • Report only own income • Provide name and SSN of spouse • If one itemizes, other spouse must also

  49. FILING STATUS SUMMARY Qualifying Widow(er) with dependent child • Must have a dependent • Paid over half of household expenses • Did not remarry • May use this status for 2 years after year of death of spouse Head of Household/Single • Paid more than half of household expenses • Maintained a home for more than 6 months for: • Unmarried child need not be a dependent • *Married child must be a dependent • **Qualifying relative must be your dependent • Parent must be a dependent, but does not have to live with taxpayer Head of Household/Considered Unmarried • Lived apart from spouse last 6 months of the year • Paid more than half household costs for dependent child that lives with you more than 6 months (exception for divorced or separated parents with court decree or other documentation). *Includes grand, step, adopted, and eligible foster child **See exception for married child earlier

  50. FILING STATUS Determine the only filing status available or the most advantageous filing status for each of the following: Mark and Katie Sanders were married and they lived together with their daughter, Abigail, age ten, until 2008 when Mark died. Abigail attends a boarding school and comes home for the summer. Q/W Debra Johnson is legally separated from her husband. She pays over half the cost of maintaining her home. Her ten-year-old son lives with her and is claimed by her estranged husband as his dependent. H/H Patrick Bartley’s wife died in April 2009. In November 2009, he married her sister, Jezebel. MFJ (new Spouse)

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