School and Student Financial Aid: Using Tax Returns for Better Decision-Making

1. School and Student Service For Financial Aid 2003 NAIS/SSS Financial Aid Workshop Series Mark J. Mitchell, Leslie Bunting, NAIS Margie Nelcoski, ETS

2. Using Tax Returns for Better Decision-Making • The avoidance of taxes is the only intellectual pursuit that carries any reward. • John Maynard Keynes

3. Why Collect and Review Tax Returns? • VERIFY information reported on PFS • IDENTIFY unreported resources • PROTECT the integrity of your resources and process

4. VERIFY • Family income • U.S. income tax paid • Interest/dividend income • Business profit/loss • Other • Household size, family members • Alimony paid and/or received • Deductions, medical, dental, child care expenses

5. IDENTIFY • Paper losses, other write-offs that mean little to cash flow • Unreported and/or underreported assets • Items not asked for on PFS • Value of assets sold—capital gains or losses

6. PROTECT • Ensures accuracy in information • Broader knowledge base to support and document objective decision-making • Assists responsible distribution of limited funds • Recalculate SSS EFC to better represent all information on hand

7. Reviewing 1040 Page One -- Income and Adjustments • Lines 1 – 6 – family information • Line 7 – wages, salaries • Lines 8a, 8b and 9 – interest and dividend income • Line 11 – alimony received • Line 12 – business income • Line 13 – capital gain • Line 17 – rental income • Line 18 – farm income

8. Reviewing 1040 Page Two -- Taxes, Credits, Payments • Certain items here should appear on PFS as untaxed income • Line 56 – self-employment tax • Line 61 – total tax • Line 62 – tax withheld (from W-2) • Line 64 – earned income credit; untaxed income • Signatures -- be sure they are signed by the right person(s)

9. Schedules A & B • Itemized deductions • Cross-check medical and dental expenses shown on PFS #16A • Mortgage interest flag • Interest and dividend income • Sources and amounts • PFS #9C • Clarify differences if unexplained

10. Schedule C/C-EZ • Sole proprietorship profit or loss • DEPRECIATION • Consider expenses to identify paper losses, write-offs • auto expenses • meals and entertainment • Type and location of business • SSS Business/Farm Statement

11. Schedule D • Capital gains and losses • Short-term vs. long-term • Note amount of loss/gain • Consider sales price • Represents asset flow • Tax paid based on gain amount not sales amount • Tax benefit on losses incurred

12. Schedule E • Rental income and expenses • DEPRECIATION • Buildings typically appreciate in value • View carefully as paper loss • May refer to items inside the building, as well • Cross-check with PFS #19, “All Other Real Estate”

13. Supporting Documents • W-2’s to identify personal income, some sources of untaxed income • Form 4506 authorizing release of original forms submitted to IRS • Form 1065 Partnership return • Non-paper filers • Form 8453 • TeleFile worksheet with filer’s confirmation number

14. Complicating Factors • Roth IRA, rollovers (Form 8606) • Sale of home(s) • Partnerships (Form 1065, Schedules K, K-1) • S Corporations (Form 1120S, Schedules K, K-1) • Children’s taxes, assets (Forms 8615, 8814) • Farm assets and depreciation • Electronic filing (Form 8453)

15. Highlights of Changes in 2003 Tax Laws • Educators’ deduction—up to $250 of out-of-pocket expenses, even if filer doesn’t itemize • Taxation rates have been reduced across the board • Fewer taxes paid=more discretionary income • Standard deduction raised for married filing joint and qualifying widow • Higher deduction=lower taxable income=fewer taxes paid=more discretionary income • Maximum child tax credit increased to $1000 per child (up from $600 per child max) • Taxation rates on certain forms of capital gains have been reduced

16. Resources • Annotated 1040 and PFS • Staff accountant, CPA • Guidebooks and IRS publications • Tax preparation courses • www.irs.gov • Download forms, publications • Highlights, summaries of new tax laws

17. www.irs.gov

18. www.irs.gov