Accounting Aid Society 2006 Tax Season Federal Tax Training

1. Accounting Aid Society 2006 Tax SeasonFederal Tax Training January, 2006

2. Overview • Our training is designed to provide you with skills to prepare taxes for the clients of Accounting Aid Society. • Our clients are individuals with household income less than $20,000 or families making less than $38,000. • Check with IRS Publication 17 and/or your tax supervisor whenever you encounter something unusual.

3. Quality • Our number one priority is quality! • We are not going to do complicated returns which exceed our training or capability. • Don’t guess if you are not sure how to handle a particular situation. • Consult the instructions, IRS Publication 17 and/or your tax supervisor for help. • All returns should be reviewed by a tax supervisor.

4. Reference Materials • Throughout this training session we will be referencing the following publications: • Step-By-Step for TaxWise • IRS Publication 4012, Volunteer Resource Guide (the spiral book) • IRS Publication 17, Your Federal Income Tax for Individuals

5. What’s New for Tax Year 2005? • New Rules for Dependency Exemptions – Uniform Definition of a Qualifying Child • Several amounts used in the calculations have been increased to allow for inflation: • Exemption amount is now $3,200 (was $3,100) • The Standard Deduction amounts have increased. • New Rules for Car Donations • Mileage rate increase: • Business Miles – 40.5 cents per mile • (48.5 cents per mile – September – December)

6. Who Must File? (See IRS Pub. 4012, Pg. 6) • Many low-income people do not have to file federal returns, but may be required to file state or city returns. • People who file Federal returns should generally file state returns as well. • Some clients should file to recover withholding or collect refundable credits, even if they are not required to file by the gross income guidelines. • See the income table on the next slide.

7. Who Must File (IRS Pub. 4012, pg. 6)

8. Who Must File? (See IRS Pub. 4012, Pg. 6) • The gross income limits are lower if the taxpayer is someone else’s dependent. – See the instructions. • There are other special situations listed in IRS Publication 17 such as; • Self-employment income of $400 or more, • You received Advanced Earned Income Credit • And others.

9. Which Form to Use? • There are three choices – 1040, 1040A and 1040EZ. • The amount of tax or refund is not affected by the form chosen. • TaxWise users should always use Form 1040. Form 1040 can be used for most returns. • TaxWise defaults to the 1040. .

10. Which Form to Use? • Form 1040NR is for Non-Resident Aliens. Don’t prepare these returns without additional training. • Form 1040X is for amending a return that’s already been filed. • Early in the season we often get clients with a W-2, but not all of their W-2’s. Make sure that they have everything or we’ll end up having to amend the return. • A tax return is a compilation of all relevant information for an entire year. Nothing stands alone!

11. Entering the SSNStarting a New Return in TaxWise • It is crucial to check the social security numbers on all of the taxpayer’s documents. • The names and social security numbers for the taxpayer, spouse and dependents that are entered on the tax return have to match what’s on file at the Social Security office or the return will be rejected.

12. Entering the SSNStarting a New Return in TaxWise • If the client presents you with forms (W-2, 1099, etc.) that don’t match the Social Security card, advise the client to contact the payer to make a correction. Consult with the tax supervisor before preparing a return in this situation. • Take your time and double-check.

13. Social Security Numbers • There has been a lot of identity theft lately. • Social Security numbers can be a key to this crime. • It’s important to keep this, along with whatever else a client tells or shows us, in the strictest confidentiality. • Speak softly! • Shred all unneeded tax return pages. Do not discard in the wastebasket.

14. TaxWise Main Information Sheet • Entries on the Main Information Sheet flow to all parts of the return. An error here is significant, but can easily be corrected by changing the entry. • If you discover an error in name or address while working in another part of TaxWise, always go back to Main Information to correct it.

15. Main Information Sheet Sections • Customer Card • Taxpayer Information • Filing Status • Exemptions • Dependents • Type of Return • Bank account information • Preparer Use Fields

16. Customer Card • Mailing Address – use the address where any refunds are to be sent. Make sure to include the apartment number if applicable. • Telephone number – we need a telephone number for an e-file in case we need to contact the client • Birthdate - Required • Occupation – Optional, but we should enter • Presidential Election Campaign

17. Presidential Election Campaign Fund • $3 can go to the fund if the taxpayer (or spouse) checks “Yes”. • The taxpayer’s tax or refund will not change by checking “Yes.” • TaxWise does not carry this election to the state forms.

18. Filing Status – Single (See Pub. 4012, Pg. 9-10) • Single on the last day of the year. • Do not qualify for another status.

19. Filing Status – Married(See Pub. 4012, Pg. 9-10) • Married Filing Jointly is used if you are married on the last day of the year or your spouse died during the year. • Married Filing Separately is rarely a good deal for the taxpayer. It disqualifies them for certain credits such as the Earned Income Credit. Social Security benefits may be taxed if the couple lived together at any time during the tax year. Nevertheless, some couples do not get along well enough to file together.

20. Filing Status – Head of Household (See Pub. 4012, Pg. 9-10) • You are unmarried or “considered unmarried” on the last day of the year. • You paid more than half the cost of keeping up a home for the year. • A qualifying person lived with you for more than half the year. • There are certain tests to meet to be “considered unmarried”, including that you did not live with your spouse at any time during the last 6 months of the tax year, your home was the main home of your child for more than half the year, and you must be able to claim an exemption for the child. Check IRS Publication 17 for a complete definition. • This filing status is not available on state or local returns. The the filing status would be Single on the Michigan and local returns.

21. Head of Household – Qualifying Person(See Pub. 4012, Pg. 9-10) • Who is a qualifying person is a function of: • Their relationship to you • Whether or not you can claim an exemption for them, and, • How long they lived with you. • See the table on Page 22 in IRS Publication 17 any time you encounter an unusual situation.

22. Filing Status – Qualifying Widow(er) with Dependent Child • Can be filed for the two years following the death of a spouse. • Must not be remarried. • Must have a dependent child, step-child, adopted child or foster child • Paid more than half the cost of keeping up a home that is the main home for you and that child for the entire year, except for temporary absences. • This filing status is not available on state or local returns.

23. Filing Status (IRS Pub. 4012, pg. 9)

24. Personal Exemptions • TaxWise will automatically enter a personal exemption for the filer. • If the filer can be claimed as a dependent on another return, they are not entitled to their own personal exemption. Box 6(a) on Main Info should be checked to remove the personal exemption.

25. Dependents – TaxWise Entries • TaxWise requires several entries for each dependent. Be very careful as these entries are a major source of errors that cause e-filing rejects and incorrect returns. • Required Entries: Name, Social Security Number, Date of Birth, Relationship, Code (listed in the TaxWise instructions). • Optional Entries: DC, EIC • CTC (Child Tax Credit): Automatically calculated by TaxWise

26. Dependents – TaxWise Entries • Optional entries - DC • Enter an “X” in this box if the Dependent Care Credit is applicable. See later explanation of this credit. This entry only results in a Form 2441 waiting for information. Because most of clients owe no income tax, this credit is usually not a factor.

27. Dependents – TaxWise Entries • Optional Entry: EIC • Enter an “X” in this box if the child appears eligible for the Earned Income Tax Credit. This credit will be explained later. • Other qualifying questions will be asked later in the TaxWise program. • Important: If you don’t enter an “x” here, the EITC will not calculate.

28. Dependency Exemptions for Qualifying Children and Qualifying Relatives (2005) • Tests applicable to all dependents • Dependent of another (a dependent can have no dependents) • Joint return test • Citizenship or residency test (U.S., Canada, or Mexico)

29. Dependency Exemption Tests for Qualifying Children • Relationship Test – Child, grandchild, brother sister (including stepbrother & stepsister, niece or nephew), foster child placed by agency • Residency – Lived with taxpayer more than ½ of the year (temporary absences are ok) • Age – Under 19, under 24 and a full-time student, or permanently and totally disabled • Support – Did not provide more than ½ of his/her own support

30. Dependency Exemption Tests For Qualifying Relatives (old rules apply) • Support • Member of Household or Relationship • Gross Income

31. Support Test • Taxpayer must provide more than 50% of the dependent’s support An exception to support test requirement: • Multiple support agreement

32. Relationship Test • Dependent must be one of the specified relatives of the taxpayer (either taxpayer, if joint return) or be a member of the taxpayer’s household for the entire year • Once a relationship is established by marriage, it continues even if there is a change in marital status • The relationship cannot be in violation of local law (still an issue in Michigan).

33. Gross Income Test • Dependent’s gross income must be less than the amount allowed for an exemption ($3,200 for 2005)

34. Dependency Exemptions(IRS Pub. 4012, pg. 16)

35. Dependency Exemptions(IRS Pub. 4012, pg. 16)

36. Mini-Quiz #1 • Mary Jones is single, 20 years old and not a student. She lived with her single mother, Jane, for the entire tax year. She earned $4,000 which she spent on her car, video games and a trip to Disneyworld. Jane provided health insurance, lodging, food and clothing which is worth $5,000. • Can Jane claim her as a dependent? • Can Mary take a personal exemption? • What is Mary’s filing status? • What is Jane’s filing status? • What is Jane’s filing status if she were married, but did not live with her husband during the last six months of the tax year?

37. Mini-Quiz #1 - Answer • Can Mary’s mother claim her as a dependent? • No, Mary is not a Qualifying Child or Qualifying Relative. The Gross Income Test has not been met. • Note that if Mary had been under 19 or a full-time student, Mary’s mother could have claimed her as a Qualifying Child. • Can Mary take a personal exemption? - Yes • What is Mary’s filing status? - Single • What is Jane’s (Mary’s mother’s) filing status? • Single. Mary has to qualify as her dependent in order to be a qualifying person for Head of Household filing status. • Her Michigan and local filing status is Single.

38. Mini-Quiz #1 – Answer (cont.) • What is Jane’s filing status if she were married, but did not live with her husband during the last six months of the tax year? • Single. Jane does not meet all of the tests for “considered unmarried” under Head of Household. Specifically, she has to be able to claim Mary as a dependent to be considered unmarried. • Jane’s Michigan and local filing status would be Married Filing Separately.

39. Mini-Quiz #2 • Martha Washington is 35. She lives with her dependent son, Andrew (16). Her husband George died in the previous tax year. She has not remarried. What is her filing status?

40. Mini-Quiz #2 - Answer • Martha’s filing status is Qualifying Widow(er) with Dependent Child. • She could also file as Head of Household, but Qualifying Widow is more advantageous. • Note that on the Michigan return, Qualifying Widow is not an option. She’ll file her Michigan and local returns as Single. • If George had died in this tax year, Martha could have filed Married Filing Jointly. • If Martha had remarried, she would be Married Filing Jointly or Married Filing Separately.

41. Mini-Quiz #3 • George (30) is single and lives with his daughter, Sue (10). George’s income is $2,000 in wages from a part-time job and $6,000 in benefits from the State of Michigan Department of Human Services (DHS). • What is George’s filing status? • Can George claim a dependency exemption for Sue?

42. Mini-Quiz #3 - Answer • What is George’s filing status? • George is Single. He does not qualify as Head of Household because he did not pay more than half the cost of maintaining the home. Most of the money came from the state. • Can George claim a dependency exemption for Sue? • Yes. Sue is a Qualifying Child because she did not provide more than one-half of her own support.

43. Other Main Info Items • The other Main Info entries will be discussed in your computer lab session.

44. Gross (taxable) Income • Income is entered in various places in TaxWise. Most income items are entered in worksheets that in many cases replicate the source document. • Part C of Step-by-Step lists typical income items and where to enter them (Items 1 – 7). • Nontaxable items (Items 8-13) only affect the Michigan return and will be discussed in the Michigan training module.

45. Wages (Step by Step Item C.1.) • Wages are reported on Form W-2. • Enter all of the information from the W-2 into TaxWise, including the withholding and the special codes. • TaxWise may use the coded information to determine eligibility for certain credits. • Copy B of the W-2 is attached to paper returns or submitted with the E-file packet for electronic returns. • One copy is attached to the city return. • One copy is retained by the client.

46. Sample W-2 Form

47. Social Security Benefits(Step by Step Item C.2.) • Social Security recipients will get a year end statement, Form SSA-1099, showing benefits received. If applicable, the statement will indicate the Medicare premiums deducted from their benefit. • Enter the amount from Box 5 of Form SSA-1099, and the amount of Medicare premiums deducted, on “1040 Wkt 1” in TaxWise, not directly on the 1040. • Social Security is not generally taxable for low income people who qualify for our program, but must be shown on the form. • Again, Married Filing Separately people who have lived together at any time during the tax year will generally have some of their benefits taxed.

49. Supplemental Security Income (SSI) – Not taxable • SSI is paid to people who are 65 or older, or are blind or disabled, and have limited income and financial resources. • For 2005, the maximum amount of SSI is $579 per month for an individual. • These same recipients generally get quarterly payments of $42 every three months from the Michigan Department of Human Services (DHS).

50. Supplemental Security Income (SSI) – Continued • There is no year end statement sent. • Neither of these payments is taxable for Federal or State purposes, but be included in Household Income for the Michigan credits. This will be discussed further in the Michigan module.