Welcome to VITA

United Way of Central Iowa Larry Davis & Cecilia Gass

2011-12 Tax Year 1

What is VITA?

• Voluntary Income Tax Assistance • Supported & monitored by the Internal Revenue Service • Provide free tax return preparation to eligible taxpayers • Targeted clients: low to moderate income, elderly, disabled, recent immigrants, etc • Volunteers make it happen 2

“The ultimate expression of generosity is not in giving of what you have, but in giving of who you are.” Johnnetta B. Cole

3

Training Approach

•Requires reading material in advance (2 hours or preparation for every 1 hour of class time) •Classroom time is to review, reinforce, and answer questions •A Lab will be offered to familiarize yourself with a simulated tax site, client interview, and use of the TaxWise software to prepare a return •Process Based Training – hands on learning •Use of Intake/Interview & Quality Review Sheet •Quality Review 4

Objectives of the Training Classes

•Learn interviewing skills •Build client rapport •Probe for necessary information •Overcome communication barriers •Locate the tools and resources you need •Successfully prepare accurate income tax returns 5

Resources

• Volunteer Resource Guide Pub 4012 • Federal Publication 17 • IRS.gov – for additional publications • Iowa Income Tax Volunteer Training & Reference Manual • State of Iowa 1040 Forms & Expanded Instructions 6

Certification Process

•Must pass the Volunteer Standards of Conduct, Basic and Intermediate level exams •Passing the Advanced level increases your value & flexibility (highly recommended !!!) •Test is open book •Two chances to pass each test – 80% is passing •You have been given both the test, and re-test questions (Publication 6744) •Site Leader will keep a copy of your Volunteer Agreement and Certificate for the highest exam passed 7

Link & Learn

• www.irs.gov/app/vita • On-line tutorial for those who want to learn on their own, or to reinforce tax knowledge •Organized by exam level: Basic, Intermediate, Advanced • Tax software practice lab -- password “learntwo”. You will be given a unique 6 digit user ID to use every time you enter the lab, and to access practice returns. Help Center provides access to a wealth of IRS resources • On-line test can be accessed from each exam level tutorial. You will create a user ID. Password will be “learntwo”. Can print volunteer agreement and certificate from this location after successfully passing each exam 8

Types of Returns You Can Prepare

1. Basic

• Covers income from wages, interest, dividends, social security, and the more frequently used tax credits

2. Intermediate

• Adds educational credits, additional income (alimony, and Schedule C for self employed), itemized deductions, adjustments to income, and some pension issues

3. Advanced

• Adds more detail on pension benefit options, stock, and sale of home (everything within VITA scope) 9

Legal Liability

•Paid tax preparers are legally liable under Federal Law •You are not paid, and therefore protected by Federal Volunteer Protection Act of 1997 as long as you:  Are acting within the scope of your volunteer responsibilities  The return is within the scope of your certification level  The harm was not caused by willful, criminal, reckless, grossly negligent, or conscious, flagrantly indifferent acts 10

What Does a VITA Site Look Like?

•

Greeter:

 Welcomes the clients & maintains order of returns  Ensures client has the correct identification, all wage/income forms, and a copy of the prior year’s return  Instructs clients to complete the Intake Worksheet •

Preparer (you):

 Interviews the client  Prepares the return (sometimes with the client present)  Explains the results to the client following quality review (sign & date) 11

VITA Site -- Continued

•

Quality Review:

 Reviews the prepared return for accuracy  Asks clarifying questions of the preparer and discusses potential corrections to the prepared return  Is an additional resource for preparers •

Site Leader :

 Manages the site and responsible for all supplies, equipment, and compliance with IRS regulations  Checks all returns for completeness before electronically filing  Handles all rejected returns 12

Volunteer Standards of Conduct

Volunteers must agree to the following standards of conduct prior to working in a VITA site. As a participant in the VITA Program: 1.I will follow the Quality Site Requirements (QSR).

2. I will not accept payment or solicit donations for federal or state tax return preparation.

3. I will not solicit business from taxpayers I assist or use the knowledge I gained about them (their information) for any direct or indirect personal benefit for me or any other specific individual.

4. I will not knowingly prepare false returns.

5. I will not engage in criminal, infamous, dishonest, notoriously disgraceful conduct, or any other conduct deemed to have a negative effect on the VITA/TCE Programs 6. I will treat all taxpayers in a professional, courteous, and respectful manner 13

Quality Site Requirements

QSR#1, Certification —remain within scope of certification QSR#2, Intake/Interview Process – use Form 13614-C QSR#3, Adhere to Quality Review Process QSR#4, Reference Materials – Pub 4012 and 17 QSR#5, Volunteer Agreement – complete Form 13615 QSR#6, Timely Filing QSR#7, Title VI – Civil Rights Act of 1964 QSR#8, Site Identification Number on all returns QSR#9, Electronic Filing Identification Number on all returns QSR#10, Follow Security, Privacy and Confidentiality guidelines 14

Ramifications for failure to comply with Volunteer Standards of Conduct

•Volunteers performing egregious activities are barred from volunteering for VITA/TCE Programs, and may be added to a registry of barred volunteers •Terminating the partnership between the IRS and the sponsoring organization • Discontinuing IRS support • Revoking or retrieving the sponsoring organization’s grant funds • Deactivating IRS EFIN • Removing all IRS products, supplies, and loaned equipment from the site 15

Screening & Interviewing – Take Your Time, Don’t Rush This Step

•Put your client at ease with small talk •Treat clients with respect and dignity •Explain the screening, tax preparation, and review process •Review intake worksheet for completeness •Ensure all supporting documents are included (social security cards or ITIN, drivers license, W2’s. 1099’s, 1098’s etc) •Ask clarifying questions & encourage them to ask questions •Actively listen •Determine filing status & confirm eligibility of dependents 16

Overcoming Communication Barriers

•Be friendly & respectful •Speak clearly and simply •Stay calm •Use nonverbal cues like nodding, smiling appropriately, make eye contact •Reassure the taxpayer– “I hear you”…”I understand” •Provide a motivator..”This is difficult, but I need this information so I can make sure you are allowed all the benefits available to you” •Letting the other person take the time they need to express themselves •Responding by restating what the other person said to ensure you understand •Expressing sympathy or other appropriate emotion 17

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Does Client Need to File a Return?

•

Age

•

Gross income

•

Likely filing status

---------------------------------

Other special circumstances requiring a filing

: •Self employed income > $400 •Taxpayer owes special tax (e.g. Social Security or Medicare tax on tips not reported to the employer) •Taxpayer who received the 2008 First-Time Homebuyer Credit are required to file a return to repay a portion of the credit 19

Does Client Need to File a Return?

Exercises

Question 1: Bob is 27 years old. His gross income was $9,550 during the tax year. Based only on this information, is he required to file a tax return? Question 2: Janet and Harry are married and usually file jointly. During the tax year, she turned 66 and he turned 64. Their gross income was $16,200. Based only on this information, are they required to file a tax return? Question 3: Juanita has a dependent child and can file as a Qualifying Widow. She is 47 years old. Her gross income was $15,400. Based only on this information, is she required to file a tax return?

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When Should the Taxpayer File a Return Even When Not Required?

A taxpayer should file a return, even when not required, to obtain:

 A refund of withheld taxes  Earned Income Credit  Additional Child Tax Credit  American Opportunity Higher Education Credit  The Health Coverage Tax Credit (Form 8885 —refer to professional tax preparer) 21

Out of Scope

There will be some clients we cannot help because their income is over the limit, or they have earnings from sources outside the VITA scope (rental property/passive income; self employed with expenses over $10,000; complex stocks & bond portfolios; etc)…or they simply don’t have all the information needed Thank the client for coming, and apologize for not being able to help them today.

Refer them to AARP if income is the only issue, or to a paid preparer.

On occasion, we may complete a paper return for the client when married filing separate but no contact with their spouse -- ask the site leader for direction 22

What Form Do I Use?

The start of a return is the

Main Information Sheet

where you enter information you gathered on the Intake/Interview Sheet. When using the tax software (TaxWise) , always defaults to

form 1040

You can either use the

“Go to Interview”

method which takes you through a series of questions to enable TaxWise to determine appropriate forms and pre-fill as much information as possible, or

….”Go to Tax Forms”

which allows you to link in the appropriate forms as you complete the 1040 23

Practice Lab

Log into Practice Lab and enter taxpayer information onto the Main Information Page for Exercise 1 in 4491W – we’ll add income later 24

Determine Filing Status

•Single •Married filing jointly •Married filing separately •Head of Household •Qualifying Widow(er) with dependent child 25

Single

•Never married •Legally separated or divorced •Widowed before the beginning of the tax year and did not remarry 26

Married

•Legally married •Married and living apart, but not legally separated or divorced •Lived together in a common law marriage •Did not remarry after spouse died during the tax year 27

Married Filing Separately

Client either chooses to file separate returns, or can’t agree on joint  Tax rate is generally higher than on a joint return  Report their own income and deductions on separate returns  Cannot take credits for child and dependent care expenses, earned income credit, adoption, and education expenses  Some credits and deductions are reduced based upon income (child tax credit, retirement savings contribution credit, itemized deductions, exemption for AMT, and deduction for personal exemptions)  Often advantageous for a married couple to file IA State return as married filing separately on a joint return (Federal & State filing status does not need to be identical) 28

Head of Household

•Unmarried or considered unmarried and are not a Qualifying Widow(er) with dependent child on the last day of the tax year, and •Paid more than half the cost of keeping up a home during the tax year,

and

•Had a qualifying

relative

living in their home for more than half the year

and

can claim an exemption for them  If the qualifying person is the taxpayer’s dependent child, and the only reason the taxpayer is not claiming their child as a dependent is because the non-custodial parent can claim the exemption, this requirement is met •Taxpayer can claim Head of Household if unmarried and maintain a home for their parents

and

can claim exemption for them 29

Examples – Head of Household

Michael provided all the costs of keeping up his home for the year. Michael’s son Justin lived with him the entire year. Justin is 22 and was not a full-time student in 2011. Although Justin only worked part time, he earned too much (more than $3,700 for tax year 2011) for Michael to claim him as a dependent. Therefore, Michael cannot file Head of Household because he does not have a qualifying person.

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Examples – Head of Household

Jane and Todd are not married. Their daughter, Amanda, lived all year with Jane in an apartment. Todd lived alone. Todd earns more than Jane, and provides for some of her living expenses. He paid over half the cost of Jane’s rent and utilities. He also gave Jane extra money for groceries.

Even though Todd paid over half the cost of providing a home for Jane and Amanda, he cannot file Head of Household because Amanda did not live with him over half the year. Jane cannot be Head of Household either because she did not provide more than half the cost of keeping up the home for her daughter 31

Examples – Head of Household

Nancy is single and lives alone. Nancy’s mother, Maxine, lives alone in another city. Maxine receives social security payments, but has no other income. Nancy pays all of the costs of keeping up the home her mother lives in, and provides over half her support. Even though Maxine did not live with her, Maxine is Nancy’s qualifying person for Head of Household filing status because Nancy can claim her mother as a dependent under the rules for qualifying relative.

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Last Example -- Head of Household

Since her husband died five years ago, Joan has lived with her friend, Mary Ann, who is also a widow. Joan is a U.S. citizen, is single, and lived with Mary Ann all year. Joan had no income and received all of her support from Mary Ann. Joan is Mary Ann’s

qualifying relative

because she lived with Mary Ann all year as a member of her household. Mary Ann

can claim Joan as a dependent on her return

.

However, Joan is

not a qualifying person for Head of

Household because she is not related to Mary Ann

in one of the ways listed in Publication 17, Relatives who do not have to live with you. She is MaryAnn’s qualifying relative dependent

only because she lived with Mary Ann all year as a member of her

household. Joan does not fall under the other relative definition in the Volunteer Resource Guide(Tab B), Filing Status.

33

Qualifying Widow(er) With a Dependent Child

•Spouse died in 2009 or 2010 •Were entitled to file a joint return for the year their spouse died •Did not remarry before the end of the 2011 tax year •Has a dependent child they can claim as an exemption •Paid more than half the cost of keeping up a main home for them and that child for the entire year •The standard deduction and tax tables are the same as for Married Filing Jointly status. These are more favorable than those for Head of Household filing status. 34

Example

--

Qualifying Widow(er) With a Dependent Child

Laura’s husband, Jim, died in September of the tax year. She has not remarried, and provides all the support for their dependent children, ages 8 and 10. Laura can file as Married Filing Jointly, claiming an exemption for her deceased husband. For the next two years, she can use the Qualifying Widow(er) with Dependent Child status if she does not remarry.

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Exemptions

•Allowable exemptions reduce taxable income •

Personal exemption

allows the taxpayer to claim themselves, and possibly their spouse – a person cannot take a personal exemption if they CAN be claimed as a dependent by any other person •If married (as of December 31 of the tax year) filing jointly, they can take a personal exemption for each spouse •If married filing separate, each spouse claims their own personal exemption (there is an exception that allows the taxpayer to claim their spouse on a separate return if the spouse had no income and is not filing a return) •

Dependency exemptions

allow taxpayers to claim qualifying dependents – can be either a qualifying child or relative 36

How Dependents appear on the Intake/Interview Sheet

37

Qualifying Child Tests

• Relationship • Age • Support • Residence • Citizen/Residency • Joint Return 38

Qualifying Child –Must Meet These Tests

Relationship:

 Taxpayer’s child, stepchild or adopted child, or their descendant (grandchild)  Taxpayer’s brother, sister, stepbrother, stepsister or their descendant (niece or nephew)  A foster child placed with the taxpayer by an authorized placement agency or court order 39

Qualifying Child – Age Test

Age:

 Younger than the taxpayer unless totally disabled  Under age 19  Under age 24 if a full time student for at least 5 months of the year. School does not include on-the-job training, correspondence school, or a school offering courses only through the internet  Any age if permanently and totally disabled 40

Qualifying Child – Support Test

Support:

 A child cannot have provided more than half of his/her own support during the tax year  A person’s own funds are not support unless they are actually spent for support 41

Qualifying Child – Support Test Examples

Bob, 22, is a full-time student and lives with his parents when he is not in the dorm. He worked part-time and made $6,000, but that was not over half of his total support. Bob meets the relationship, age, and support tests. -------------------------------------------------------------------------------------- Doris, a U.S. citizen, is 8 years old and had a small role in a television series. She made $60,000 during the tax year, but her parents put all the money in a trust fund to pay for college. She lived with her parents all year. Doris meets the relationship, age, and residency tests. Doris also meets the support test since the $60,000 in earnings were not used for her own support. Since she meets the tests for a qualifying child, she can be claimed as a dependent by her parents.

42

Qualifying Child – Residence Test

Residence:



Child must have the same principal residence as the taxpayer for more than half the year

 The child is considered to have the same residence as the taxpayer even if the child (or parent) is temporarily absent due to education, illness, vacation, business, or military service  The taxpayers home can be any location where they regularly live (e.g. the child and taxpayer could live more than half the year in a homeless shelter and still be a qualifying child)  A taxpayer can claim an exemption for a child who has been kidnapped, a child born alive and then died, or any other dependent that died during the year that meets the other tests 43

Qualifying Child – Citizen/Residency and Joint Return Tests

Citizenship or Residency:

 Must be either a US citizen, a US national,

OR resident

the US, Canada, or Mexico of  Foreign exchange students generally are not US residents and do not meet the citizen or resident test, so they cannot be claimed as dependents

Joint Return

 The dependent must not have filed a joint return for the year unless it was only to claim of refund of taxes withheld and no tax liability would exist for either spouse on separate returns 44

Example: Joint Return

Ruth, who had no income, was married in November of the tax year. Ruth’s husband had $16,700 income, and they claimed two personal exemptions on their return. Although Ruth’s father supported her and paid for the wedding, he cannot claim her as a dependent because she is filing a joint return with her husband. While the return is being filed to claim a refund of taxes withheld, Ruth’s husband would have tax liability if he filed a separate return.

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Qualifying Child – Only One Person Can Claim the Tax Benefits

Can only be the qualifying child of one person for the following six tax benefits (unless the special rule for children of divorced or separated parents applies) : • Dependency exemption • Child tax credits • Head of Household filing • Credit for child and daycare expenses • Exclusion for dependent care benefits • Earned Income Credit 46

Qualifying Child – Tie Breaker Rules

If more than one person can claim the child: • If only one of the taxpayers is the child’s parent, the child is treated as the qualifying child of the parent • If two of the persons are the child parents, the child is considered the qualifying child of the parent with whom the child lived for the longer period of time---if equal time, then to the parent with highest AGI • If no parent can claim the child as a qualifying child, or neither parent chooses to claim the child, the child is treated as the qualifying child of the person with the highest AGI, but only if that person’s AGI is higher than the highest AGI of either of the child’s parents

and

they can claim the child as a dependent 47

Qualifying Child and Filing Status Exercise – all citizens with SS cards

•Adam & Kristin are married with one child, Abbi. They lived all year rent free with Kristin’s mother, Lisa, who has been divorced for two years.

•Adam & Kristin go to school, and work part-time. They each earned $15,000 in 2011.

•Lisa works full time, earning $29,000 in 2011.

 Who is eligible to claim Abbi as a qualifying child?

 If Lisa claims an exemption for Abbi, is she also eligible to file as Head of Household?

48

Practice Lab

Log onto Practice Lab and complete Exercise 2 in 4491W…entering only through filing status and dependency…we’ll add income later 49

Qualifying Relative

•Not a qualifying child •Member of household or relationship test •Citizen or residency test •Gross income test •Support test •Joint return test •Dependent taxpayer test 50

Qualifying Relative – Not a Qualifying Child

•Not a qualifying relative if the child is the taxpayer’s qualifying child, or is the qualifying child of another taxpayer •The exception to this rule is when the other taxpayer is not required to file a US income tax return and:  Does not file a return, or  Only files a return to get a refund of income tax withheld 51

Qualifying Relative – Member of Household or Relationship Test

•Must have

either

a close familial relationship with the taxpayer (descendant, sibling, niece/nephew, parent, aunt/uncle, grandparent, in-laws, etc), but is not required to live with the taxpayer,

or

•Must have lived with the taxpayer for the

entire year

– and the relationship does not violate local laws •Cousins can meet the relationship test for a qualifying relative but

ONLY

if they live with the taxpayer the entire year 52

Qualifying Relative --Citizenship or Residency Test and Gross Income Test

•Must be a US Citizen, US National,

OR

a resident of the United States, Canada, or Mexico for any part of the year •The dependent’s gross income for the year must be less than the personal exemption amount ($3,700 for 2011).

Remember, this test does not apply to qualifying children, only to qualifying relatives

53

Qualifying Relative -- Support Test

•Taxpayer must have provided more than 50% of the dependent’s total support •Social Security benefits received by the child

AND USED

towards support are considered to have been provided by the child •State benefit payments like welfare, temporary assistance to needy families, food stamps, Medicaid, or housing assistance are considered support provided by the state, not the taxpayer •Special rules apply when more than one person provides support, and must include form 2120 Multiple Support Declaration with their tax return 54

Example --Qualifying Relative

•Todd has lived with his girlfriend, Eva, and her two children all year in his home. Eva is not required to file, and does not file, a 2011 tax return. Eva and her two children pass the “not a qualifying child test” to be Todd’s qualifying relatives. Todd can claim them as dependents if he meets all the other tests.

•All the facts are the same as in the previous example, except that Eva is required to file a tax return since she earned $12,000. Since Eva has a filing requirement and her children meet the tests to be Eva’s qualifying children, Todd can no longer claim the children as qualifying relatives.

•Since late in 2010, Sally has been supporting her friend, Ann, and Ann’s young son, Bobby. Ann and Bobby lived with Sally all of 2011 and meet all the tests to be Sally’s qualifying relatives. Ann worked part-time and made $3,100 in wages during 2011. Ann files a return only to have her withholding refunded. She does not claim her own exemption. Sally can claim Ann and Bobby as dependents.

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Examples -- Qualifying Relative – Support Test

1.

2.

Fred’s father, Charlie, lives with him and receives 27% of his support from social security, 40% from Fred, 24% from Charlie’s brother Ray, and 9% from one of Charlie’s friends. Either Fred or Ray can take the exemption for Charlie because they each provided more than 10% of Charlie’s support, and together contributed more than 50% toward his support. If they agree that Fred should take the exemption, Ray will sign Form 2120 and Fred will attach the form to his tax return.

Diane and her brother each provided 20% of their grandmother’s support for the year. Two persons who are not related to Diane’s grandmother, and who do not live with her, provided the remaining 60% of her support equally. No one is entitled to the dependency exemption, since more than half of the grandmother’s support is provided by people who cannot claim her exemption.

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Qualifying Relative --Joint Return and Dependent Taxpayer

•To pass the joint return test, the dependent must not file a joint return for the year unless:  The joint return is filed to claim a refund, AND  No tax liability would exist for either spouse on separate returns •The taxpayer cannot be a dependent on anyone else’s tax return 57

Special Rules for Children of Divorced, Separated, or Never Married Persons

•Qualifying child or relative must have received over half of their support from the parents who are divorced, legally separated, lived apart at all times during the last 6 months of the tax year •In general, the child will be considered the dependent of the custodial parent •The custodial parent can agree to allow the non-custodial parent to treat the child as a qualifying child or qualifying relative if certain conditions are met and they sign a Form 8332 and attach to the non-custodial parents income tax return, or attached to Form 8453 if filing electronically •Custodial parent can revoke prior written authorization by providing notice in year prior to effected return (notice in 2010, for 2011 tax year) by completing Part III of Form 8332 & attach copy to return 58

Special Rules for

Children

of Divorced, Separated, or Never Married Persons



Non-custodial parent with 8332 = dependent exemption & child tax credit



Custodial parent = Head of Household, Earned Income Credit, & dependent care expense

59

Non-resident Aliens

A U.S. citizen or resident alien who is married to a nonresident alien spouse who does not meet either the green card or substantial presence test generally has three filing status options: • The taxpayer may choose to file as Married Filing Separately • The couple may choose to file as Married Filing Jointly (using worldwide income and spouse ITIN) • The taxpayer may qualify for Head of Household under the regular rules for a married person who is “considered unmarried” even while living with the nonresident alien spouse 60

Example: Non-resident Aliens

Tom is a U.S. citizen. He married Anna, a Korean citizen, in 2011, but came back to the U.S. without her. Anna is still in Korea getting her paperwork in order. She did not choose to file a joint return with him. Tom is filing as Married Filing Separately. Anna has no U.S. source income and cannot be claimed as a dependent on anyone else’s U.S. tax return. She has an ITIN for now. Tom can claim her personal exemption on his tax return.

61

Practice Lab

•Log into practice lab and enter information onto the main information screen for Exercise 4 through filing status and dependency But, let’s complicate the return a little.  One of Teena’s best friends, Bailey, divorced in 2010 and has lived with them all year. Bailey has not found work yet, but helps around the house and watches the kids  Bailey Smith, 10/15/1973, 057-xx-xxxx •In addition to the 2 children listed on the Intake/Interview sheet the tax payer, Teena, tells you she has 2 children from a former marriage who also lived with them all year but this is her ex spouse’s turn to take the dependency exemption for them:  Brandon Stephens, son, 3/15/2005, 055 –xx-xxxx  Lisa Stephens, daughter, 6/22/2007, 056-xx-xxxx 62

Finally – the 1040

63

April 17, 2012

64

65

Earned Versus Non-Earned Income

Earned Income –

any income received for work, including profit/loss from self-employment

Unearned Income –

any income produced by investments, such as interest on savings, dividends on stock, or rental income. But also includes unemployment compensation, alimony, pension distribution, social security, etc 66

Income – Wages, Interest, etc

•Refer to Tables A & B in Section D, page D-1, of the Volunteer Resource Guide for examples of Taxable and Non-Taxable Income. Non-Taxable income is excludable and not shown on the return. •Gross income is all income received in the form of money, goods, property, and services that is not exempt from tax. Gross income can include part of Social Security benefits •Tips reported to the employer are included on the W-2. Cash and Non-Cash tips not reported to the employer are taxable and must be added to the return.

•Refer to Volunteer Resource Guide Yellow Tab 2-3 and 2-4 to see how to enter wages into Tax Wise 67

Income – Wages, Interest, etc

•Scholarships are reported on a 1098-T. Refer to page D-3 of Volunteer Resource Guide for tips on Tax Treatment of Scholarship and Fellowship Payments •If the scholarship/grant on 1098-T exceeds actual deductible expenses, the excess is taxable.

•Refer to Yellow Tab 2, Tax Wise Income in the Volunteer Resource Guide to see how to input the various types of income into the tax software at 2-1 and 2-2 •Alimony is income to the person receiving it, and an adjustment to income to the payer 68

Late or Missing Wage Statements

•Employer’s should make the W-2 available by 1/31 (may be mailed, available at the work site, or accessible on-line) •Taxpayer may contact the IRS for assistance obtaining a late W-2 by calling 1-800-829-1040,

but not before 2/15

•If taxpayer does not receive a Form W-2 in time to file the return, they can file the return with a Form 4852, Substitute for Form W-2 or Form 1009-R, Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, etc 69

Interest Income--Schedule B

•Common sources include checking & savings accounts, certificates of Deposit (CDs), US government bonds, interest on insurance proceeds, and interest on loans the taxpayer makes to others •

Interest income is reported on Form 1099-INT

•Original Issue Discount (OID) are long -term obligations that pay no interest until maturity and are considered to be issued at a discount and are fully taxable. 1099-OID Box 1 shows OID amount and Box 2 shows interest that year (added to get total effective interest).

•Most taxpayers don’t report savings bond interest as it accrues each year. They report the total interest when they cash the bond. •The interest on bonds issued in the names of more than one owner are usually taxable to the person who purchased the bond.

•

Interest on traditional IRA’s is generally taxable only when withdrawn and the taxpayer receives a Form 1099-R

70

Interest Income -- Examples

•Bob holds a promissory note for a cash loan that he made to his brother-in-law, Stan. Stan pays Bob principal and interest each month. Even though Bob does not receive a Form 1099-INT, he reports that interest on Schedule B of his tax return.

•Hazel has four savings accounts in four different banks. The total amount of interest earned from the accounts is $1,700. Hazel will receive four Forms 1099-INT. She will list each payer and amount on Schedule B and file it with her tax return.

71

Practice Lab

Go back to exercise 1 now and add the income Rose Hudson 021-xx-xxxx 72

Dividends--Schedule B

•

Ordinary Dividends

– reported in box 1a of Form 1099-DIV •

Qualified Dividends –

reported in box 1b of Form 1099-DIV, and subject to a lower tax rate •

Capital Gain Dividends/Distributions —

reported in box 2a of Form 1099-DIV and are from mutual funds and real estate investment trusts (REITs). These represent the owner’s share of the gain when a fund sells shares of stock it holds. These distributions are taxed at the lower, long-term capital gains rate, regardless of how long the taxpayer holds the shares •

Non-Dividend Distributions –

reported in box 3, the part of the distribution that is non-taxable because it is a return of the taxpayer’s cost or basis (TP needs to keep for records) 73

State Income Tax Refund

•Reported on Form 1099-G •Taxpayers who claimed the standard deduction on the tax return for the year they received a refund do

NOT

include the refund in their taxable income •Only taxpayers who itemized deductions

and

received a tax benefit for deducting their state or local income taxes have to include the state/local tax refund in their taxable income •

If the taxpayer itemized deductions but deducted the state sales tax rather than the state income tax, none of the state refund is reported in taxable income

74

Out-of-Scope

• Other gains/losses (line 14) or Farm income (line 18) • Dependent child who has investment income of more than $1,900 • Casualty losses • Accrual method for reporting income • Taxpayers who buy or sell bonds between interest payment dates • Form 1099-INT, box 9 • Adjustments needed for any of the amounts listed on Form 1099-OID •Form 1099-DIV, boxes 2b, 2c, 2d, 8, 9 • State or local income tax refunds received in 2011 for a tax year other than 2010 • Alimony/divorce agreements executed before 1985 • Minister tax returns with parsonage/housing allowance 75

Self-Employment Business Income

• An activity qualifies as a business if the primary purpose for engaging in the activity is for income or profit and the taxpayer is involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business.

• Hobby income is reported on line 21 of 1040, not Schedule C • A taxpayer does not have to conduct regular full-time business activities to be self-employed. Having a part time business in addition to a regular job or business may be self-employment.

76

Self-Employment -- Business Income

Business income information may come from the following: • Forms 1099-MISC, Miscellaneous Income, box 7, Non-employee Compensation • Forms W-2, Wage and Tax Statement with Statutory Employee checked in box 13 • Taxpayer’s books and records • Forms 1099-K, Merchant Card and Third Party Payments 77

Self-Employment Business

Tim works as an independent contractor for ABC Construction Company. The company sent Tim a Form 1099-MISC that shows he received $15,000 for the work he did for them. He also received cash payments of $4,000 from several different individuals for the work he completed. He did not receive Forms 1099-MISC for the $4,000. Tim must include the $4,000 cash payments as self-employment income along with the $15,000 from Form 1099-MISC.

78

Form 1099-K, Merchant Card and Third Party Payments

Form 1099-K is used to report the proceeds of payment card and third party network transactions made to taxpayers under Internal Revenue Code section 6050W. Merchant card and third party network payers, as payment settlement entities (PSE), must report the proceeds of payment card and third party network transactions made to taxpayers on Form 1099-K.

Taxpayers may receive Form 1099-K if they accepted merchant cards for payments or because they received payments through a third party network that exceeded $20,000 in gross total reportable payment transactions, and the total number of those transactions exceeded 200 for the calendar year. See Instructions to Form 1099-K for more information.

79

Self-Employment Income Business Income – Schedule C-EZ

• Expenses under $5,000 •No inventory •Have positive net income (business with a loss out-of-scope) •Operate only one business as a sole proprietor during the year (husband and wife could each have separate business) •Have no employees •Are not required to compute depreciation •Do not deduct expenses for business use of the home •Do not have prior year un-allowed passive activity loss from the business 80

Eligible Business Expenses

Taxpayers can deduct the costs of running their business. These costs are known as business expenses. To be deductible, a

business expense must be both ordinary and necessary

. An ordinary expense is one that is common and accepted in the taxpayer’s industry. A necessary expense is one that is helpful and appropriate for the taxpayer’s trade or business.

Examples: Advertising, Car/Truck expenses, parking & tolls, commission & fees, insurance, legal & professional services, office expense, rent/lease, supplies, taxes & licenses, travel/meals, entertainment, etc 81

When are Transportation Expenses Deductible?

82

Completing Schedule C-EZ

NEW Line F – Did the business make any payments in 2011 that would require filing of Form(s) 1099?

Check “Yes” or “No” box.

NEW Line G – If line F is Yes, did or will the business file all required Forms 1099

? Check “Yes” or “No” box.

Part II: Figure Net Profit

NEW Line 1 is now 1a through 1d: Enter the amount as stated for each line.

• 1a - Payments from Form 1099-K • 1b- Gross receipts or sales not reported on Form 1099-K. This includes amounts paid to the business, whether or not it was reported on a Form 1099-MISC.

• 1c - Income reported to the taxpayer on Form W-2 if the “Statutory Employee” box on that form is checked. (See Schedule C-EZ Instructions before completing this line.) • 1d – Total 83

Self-Employment Income - Schedule C

•Same guidelines as Schedule C-EZ but business expense is between $5,000 and $10,000 • Can do multiple Schedule C’s per taxpayer •To report income from an activity not for profit, see the instructions for Form 1040, line 21, and Publication 17, Chapter 12, Other Income.

84

Returns & Allowances Plus Other Adjustments

In addition to returns and allowances, Schedule C, line 2 is used to enter any non-income amounts that were included on Form 1099-K, box 1 entered on line 1a as gross receipts from merchant cards and third party network payments. Non-income amounts include transaction fees, certain taxes, tips, and “cash back” on a debit card purchase.

Example:

A taxpayer received Form 1099-K showing $1,200 in box 1. However, included in this amount is $200 that the taxpayer paid as “cash back” to the buyer who used a debit card. The taxpayer enters $1,200 on Schedule C, line 1a and enters $200 on line 2 so it will be subtracted from gross receipts.

85

Self Employment Tax (Social Security and Medicare Tax)

•Required for self-employment income of $400 or more •Tax is computed on Form SE and transferred to the 1040, line 56 to be added to other taxes they owe •Results in an adjustment to income on line 27 of the 1040 for ½ of the self-employment tax payable 86

Capital Gains and Losses--Schedule D

•

Proceeds from Sale –

Gross or net proceeds from the sale of stock or mutual fund is reported to taxpayer on Form 1099 B or on a 1099 Consolidated Statement •

How to record on Schedule D ?

–

determine the

“basis”

and the First need to

“holding period”

87

Capital Gain/Loss -- Basis

•Original cost of the asset, adjusted for commissions •The basis for stock received as a gift or inheritance is Fair Market Value at the time it was received by taxpayer (will discuss exception for 2010 later) •If the taxpayer cannot provide the basis, the IRS will assume $0 •Dividends of stock in lieu of cash increase taxpayer’s ownership so original basis is spread over more shares…thus reducing effective basis •Stock splits reduce original basis (e.g. 2 for 1 = 50%) 88

Capital Gain/Loss Basis -- Example

Alice paid $1,100 for 100 shares of ABC, Inc. stock (which included the broker’s commission of $25).The original basis per share was $11 ($1,100 ÷ 100). She received 10 additional shares as a tax-free stock dividend. Her $1,100 basis must be allocated to the 110 shares (100 original shares plus the 10-share stock dividend). This results in an adjusted basis of $10 per share ($1,100 ÷ 110).

89

Capital Gain/Loss – Holding Period

•Short-term property is held one year or less •Long-term property is held more than one year, and is taxed at a lower rate that short term gains •Inherited stock is always treated as long-term property (see exception for 2010 discussed next) •Using cash dividends to purchase additional shares of stock simply adds new stock with it’s own separate basis and holding period 90

Capital Gain/Loss Special Rules for 2010 Inheritance

•Repeal of estate tax for decedents dying after 12/31/2009 and before 1/1/2011 •Automatic long term holding period does not apply to inherited stock •If taxpayer sells property inherited from someone who died in 2010, refer the taxpayer to a professional tax preparer 91

New Broker Reporting Requirements

NEW Beginning in 2011,

brokers must report cost or other basis on Form 1099-B, unless the securities sold were non-covered securities

NEW Beginning in 2011,

brokers must report whether the gain or loss is short-term or long-term on Form 1099-B, unless the securities sold were non-covered securities Generally, a non-covered security is a security other than stock, stock purchased before 2011, stock in most mutual funds, or stock held in a dividend reinvestment plan in 2011.

Taxpayers will have to continue to provide the information for non-covered 92

Capital Gain/Loss – How to Report

•Reported to taxpayer on Form 1099-B or on a Consolidated Statement •Form 1099-S usually reflects gross proceeds of real estate transactions •Refer to Volunteer Resource Guide Yellow Tab 2-11 to see how to enter on Schedule D •If box 5, 10, 11,12, 13, or 14 has an entry, refer the taxpayer to a professional tax preparer. These boxes provide information about wash sales, regulated futures contracts, and bartering, which are out of scope 93

Capital Gain/Loss Example

Lenny bought 500 shares of XYZ Corporation stock for $1,500, including his broker’s commission. Five years later, XYZ distributed a 2% nontaxable stock dividend (10 shares). Three days after the stock dividend was distributed, Lenny sold all his XYZ stock for $2,030.

Although Lenny owned the 10 shares for only three days, all the stock has a long-term holding period. Stock acquired as a nontaxable stock dividend has the same holding period as the original stock owned. Because he bought the stock for $1,500 and then sold it for $2,030 more than a year later, Lenny has a long-term capital gain of $530 on the sale of his 510 shares.

94

Capital Gain/Loss Example

Margo bought stock for $1,500, plus a $25 commission; 18 months later she sold all the stock for $2,000 and paid a $25 commission. Her Form 1099-B shows the gross proceeds of $2,000 as the sales price.

Basis = ($1,500 + $25 + $25) = $1,550 Sales Price = $2,000 Gain or Loss = Sales Price – Basis = $2,000 – $1,550 = $450 Margo had a long-term gain of $450.

95

Mutual Funds

•A mutual fund is a regulated investment company •Owners of mutual funds may receive both a 1099-DIV and 1099-B •Form 1099-DIV: reports capital gain distributions from sales of stock held by the mutual fund, and is then reported on Form 1040, Schedule B •Form 1099-B: reports the taxpayer’s sale of any of their shares in the mutual fund itself. The taxable gain or loss from the sale or exchange of the taxpayer’s share in the mutual fund is reported on Form 1040, Schedule D 96

Capital Loss Carryover

•Taxpayer’s cannot take loss of more than $3,000 in any one year ($1,500 for married filing separately) •Unused losses can be carried over to later years until completely used •Carryover losses are combined with gains in that year •Short –term losses offset short-term gains •Long –term losses offset long term gains 97

Prior Year’s Carryover Loss

To take credit for a 2010 carryover loss on 2011 return, use Capital Loss Carryover Worksheet from Schedule D (need the Schedule D Worksheet from 2010 return) •Short-term capital loss carryover (from Schedule D Worksheet 2, Line 8) goes to Schedule D, Part I, Line 6 •Long-term capital loss carryover (from Schedule D Worksheet 2, Line 14) goes to Schedule D, Part II, Line 14 98

Form 8949 and Schedule D

NEW In 2011, Form 8949, Sales and Other Dispositions of Capital Assets, replaces Schedule D-1 for

reporting information from Form 1099-B. Schedule D was revised to allow for entries from the new Form 8949 and changes made to Form 1099-B.

All capital gains and losses are detailed on Form 8949; none are reported directly on Schedule D. The subtotals from Form 8949 are carried over to Schedule D, where aggregate gain or loss is calculated .

99

Capital Gain/Loss from Home Sale

•

Advanced Only

•If main home (owned and used by the taxpayer for 2 of the 5 years prior to sale), then $250,000 of gain is non-taxable for Individual taxpayers and $500,00 for Married Filing Jointly •Amount realized = sales price – selling expenses •Adjusted Basis = purchase price + additions improvements with a useful life of more than one year •Gain/Loss = amount realized – adjusted basis •A gain is reported on Schedule D. Losses are not deductible. •A gain from the sale of home that is not a main home is reported as taxable income (Schedule D) 100

Cancellation of Debt

•

Advanced only – need additional certification

•Most frequently involves auto loans, credit cards, medical expenses, professional services, installment payments on furniture, etc. When a debt is forgiven, the taxpayer receives a Form 1099-C, Cancellation of Debt and must report the amount as income on Line 21 of Form 1040 •Mortgage Forgiveness Debt relief Act of 2007 – taxpayers may exclude debt forgiven or cancelled on their principal residence. •Foreclosure– Form 1099-A, Acquisition or Abandonment of Secured Property —used to determine gain/loss •Other exclusions also apply e.g.

discharge of dept through bankruptcy or insolvency but these are outside VITA scope

101

Retirement Income -- Form 1099-R

•Social Security, annuities, retirement or profit sharing plans, insurance contracts, IRAs, etc •Taxable portion reported in box 2a of Form 1099-R •If no amount reported in box 2a, we need to compute the taxable amount (

advanced only)

 If the taxpayer made all contributions to the plan with before tax dollars, the entire distribution is taxable income (typical 401K plan).  If the taxpayer made contributions with after tax dollars, only the earnings/investment gain will be taxed  Rollovers within 60 days from one retirement account to another are not taxable 102

Individual Retirement Arrangements (IRA)

•

Traditional IRA –

distribution is fully taxable regardless of age •

Roth IRA –

distributions are tax free if:  Taxpayer is 59 ½ or disabled  Distribution is made 5 or more years after Roth was established  Used to pay qualified first-time homebuyer amount up to $10,000 (holding period still applies, but not age) •

Savings Incentive Match Plans for Employees (Simple) IRA and Simplified Employee Pension (SEP) IRA –

generally, contributions are not included as employee income in the year made, therefore, distributions are fully taxable (these are out of scope for VITA) 103

Calculating the Taxable Portion of Pensions and Annuities

•Box 7 of Form 1099-R is left unchecked •Unless an exception applies (which puts return out-of-scope for VITA), use the Simplified Method to determine the taxable portion of annuity payments from a qualified plan •The number of payments is based on the taxpayer’s age (and the spouse’s age if a joint/survivor annuity)

at the time of the first monthly distribution

•Taxpayer’s cost basis is found in Box 9b of Form 1099-R •Taxpayer’s cost basis / number of monthly payments = monthly tax free portion •Determine tax- free amounts from prior years from last year’s worksheet (Simplified Method question 5) 104

Disability Pension Income

•Taxpayers who retire on disability must include all of their disability payments as income. Disability payments are taxed as wages until their normal retirement date, then is treated as pension income •Employers may report disability income on either a W-2 or 1099-R with a code 3 in box 7. If the taxpayer has not reached the minimum retirement age, the income is reported as wages on line 7 of Form 1040 (see note on 2-17 of Volunteer Resource Guide for how to properly code the 1099-R) •If the disability pay is treated as wages, it might affect Earned Income Credit 105

Premature Distributions

•Early withdrawal from a retirement fund prior to age 59 ½ •Subject to 10% penalty •If distribution code in box 7 of Form 1099-R is a 2, 3, or 4 the taxpayer is not subject to the early distribution penalty •If the distribution code in box 7 of Form 1099-R is 1, the taxpayer is subject to the 10% penalty 106

Exceptions to Premature Distribution Penalty – Form 5329

•Form 5329, Part I – refer to Yellow Tab 6-4 in Volunteer Resource Guide •Determine if one of the allowable exceptions applies based on client interview (most common would be unreimbursed medical expenses, health insurance premium while unemployed, education expenses, or first home purchase) 107

Required Minimum Distributions

•Required Minimum Distribution (RMD) is April 1 of the calendar year following the year in which taxpayer turns 701/2, or retired, whichever is later •Each year thereafter, RMD must be received by 12/31 •If RMD is not taken as required, a tax penalty applies of 50% of the difference between the minimum distribution and the amount actually distributed for the tax year •These rules do not apply to a ROTH IRA 108

Withdrawal of Excess IRA Contributions

•Maximum annual contribution is greater of $5,000 ($6,000 if age 50 or older), or taxable compensation for the year •Once identified, excess contribution and earnings on excess must be withdrawn by due date of the return •The withdrawn excess contribution is not included in the taxpayer’s gross income on the return if no deduction was allowed for the excess, and all interest or other income earned on the excess is also withdrawn •If excess amount is not withdrawn on time, taxpayer is subject to an additional 6% penalty tax on the excess amount (refer to professional tax preparer) 109

Schedule K-1 Income

•Taxpayer’s share of income, other distributions, deductions, and credits from partnerships, S Corporations, and some estates and trusts •Income reported on Schedule K-1 will be reported in various places on the return:  Interest and/or Dividend Income = 1040, unless Schedule B is required  Net short or long term capital gains/losses = Schedule D  Tax-exempt interest income = Form 1040, line 8b  Royalty Income = Schedule E Part 1, code 6 •The name and identification number for the estate/trust, partnership, or S Corporation are reported in Part II of Schedule E 110

Unemployment Compensation

•Reported to taxpayer on Form 1099-G •Entered on Form 1040, line 19 •In 2009, the first $2,400 of unemployment compensation was non-taxable .

This exclusion was

NOT

continued in future tax years 111

Practice Lab

Go back to exercise 4 and add the income information Windsor Clark 051-xx-xxxx 112

Social Security and Railroad Retirement

•Includes monthly retirement, survivor, and disability benefits. Do not include Supplemental Security Income (SSI) •Reported to taxpayer on Form SSA-1099 or Form RRB-1099 •Generally, if Social Security is the only source of income, the benefits are not taxable and the taxpayer may not be required to file a return.

•However, if Married Filing Separately and taxpayer lived with their spouse at any time during the year, 85% of the benefits will be taxable •If there are other sources of income, calculate the amount of taxable Social Security or Railroad Retirement Benefits using the Social Security Benefits Worksheet 113

Social Security and Railroad Retirement Lump Sum Payments

•Box 3 will include lump sum payment, with explanation •Taxpayer can choose to either 1.

Report the whole payment in year received, or 2.

Treat payment as received in earlier year and add only the portion that would have been taxable in the prior year to this year’s return (amended prior year return not required). Copies of prior year returns needed for this option.

114

Social Security and Railroad Retirement Lump Sum Payments

In 2010, Jane applied for social security disability benefits but was told she was ineligible. She appealed the decision and won. In 2011, she received a lump sum payment of $6,000, of which $2,000 was for 2010 and $4,000 was for 2011. Jane also received $5000 in social security benefits in 2011, so her 2011 Form SSA-1099 shows benefits paid of $11,000.

Jane had other taxable income in both 2010 and 2011. She should figure her taxable benefits under the lump-sum election method to see if it is lower.

115

Practice Lab

Go back to exercise 2 and enter income information Mary Beringer 031-xx-xxxx 116

Other Income – Reported on Form 1040, Line 21

 Gambling winnings reported on Form W-2G  Cash for Keys – 1099 Misc  State Agency payment for childcare – 1099 Misc  Prizes and awards  Jury duty fees  Cancellation of debt  Non-qualified HSA withdrawals  Hobby income 117

Adjustments to Income -- 1040

118

Adjustments to Income

•Half of self-employment tax - shows up on line 27 of 1040 •Penalties for early withdrawal of savings (1099-INT or 1099-OID) – line 30 •Alimony paid (does not include child support)-line 31 •Retirement Savings Contribution Credit (line 32) – refer to chart on page E-2 of Volunteer Resource Guide 119

Adjustments to Income -- continued

•Educator Expenses – incurred by k-12 teachers for expenses up to $250 paid for books, supplies, computer equipment, etc used in the classroom (not home schooled) – line 23 •Student loan interest up to $2,500 per eligible student (taxpayer, spouse, or dependent) for eligible expenses at an eligible institution – line 33 •Tuition and Fees – Can reduce taxable income up to $4,000 using Form 8917 – line 34 120

Health Savings Accounts (HSA)

•

Advanced Only --

Special tutorial & certification available on Link and Learn •Taxpayer covered under a qualified high deductible health plan •Complete Form 8889  Part I for contributions  Part II for HSA distributions 121

Standard Deduction

•Deductions are subtractions from the taxpayer’s adjusted gross income, which reduces the amount of income subject to tax •The standard deduction is a pre-defined amount based on filing status •Individual who can be claimed on another taxpayer’s return get a lower standard deduction (greater of $950, or income plus $300…not to exceed the standard deduction) •An increased standard deduction is available for taxpayers who are:  Age 65 or older  Blind 122

Itemized Deductions

• Allows taxpayers to reduce their taxable income based on specific personal expenses •Generally, taxpayers benefit from itemizing only if they have:  Mortgage interest  Significant unreimbursed medical/dental expenses compared to their income  Large amount of charitable contributions • Itemize only if greater than the standard deduction •If Married Filing Separately, one spouse cannot take the standard deduction if the other Spouse itemizes 123

Itemized Deductions – Medical & Dental Expenses

•Must be able to itemize to deduct medical and dental expenses •Only the amount of unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income (AGI) is deductable •Types of expenses that can be included:  Health and LTC premiums paid after tax  Unreimbursed eligible medical, dental, vision, and prescription drug expenses  Smoking cessation programs •Cannot deduct cosmetic surgery, funeral/burial, weight loss programs not prescribed, diet food •Include expenses for taxpayer, spouse, and all eligible dependents 124

Qualified Medical Expense Total?

Medical Expenses Amount Deductible

Unreimbursed doctors’ bills $500 Unreimbursed orthodontist bill for braces $1,200 Hospital insurance premiums $300 Life insurance premiums $500 Unreimbursed prescription medicines $100 Vitamins $70 Hospital bill of $2,000; insurance paid $1,000 Smoking-cessation program $150 125

Itemized Deductions – Taxes You Paid

Taxes you can deduct: •State and local Income Tax, or State/Local Sales Tax •Real estate taxes, usually reported on Form 1098 if paid through escrow, Mortgage Interest Statement, or from taxpayer records (can also check on-line) •Foreign income tax (either taken as an itemized deduction on Schedule A, or as offset to federal income tax on 1040) •Personal property tax – auto license fees 126

Itemized Deductions – Interest You Paid

Types of deductible interest (shown on Form 1098): •Home mortgage interest (taxpayer’s home(s), line of credit, or a home equity loan) •Points, also called loan origination fees, discount points, or prepaid interest paid on a new main home or home improvement loan for your main home (included on Form 1098 if fully deductible in that year) •Points paid when you refinance , or points paid on a second home, are generally spread over the life of the loan •Mortgage Insurance Premium is deductible as Interest 127

Itemized Deductions – Gifts to Charity

•Types of organizations that qualify for charitable deductions:  Operate exclusively for religious, charitable, educational, scientific, or literary purposes  Prevent cruelty to children or animals  Foster national or international amateur sports  War veterans •Deductible amount includes cash, dues, fees, fair market value of non-cash donations, and transportation. Amount over 20% of AGI carried over to future years…and are out of scope for VITA •Non-cash contributions over $500 reported on Form 8283 and are outside of VITA scope 128

Itemized Deductions – Job Expenses and Most Other Miscellaneous Deductions

•Unreimbursed employee expenses: travel, union dues, professional society dues, job education & publications, uniforms not useable for other use, small tools & supplies used for business •Expenses incurred looking for a new job in your present occupation •Tax preparation fees, and credit/debit card convenience fees incurred when paying income tax •Safe deposit box rental if used to hold income producing assets  Only excess over 2% of AGI is deductible 129

Itemized Deductions – Other Miscellaneous Deductions NOT Subject to 2% Limit

•Gambling losses not to exceed gambling winnings. The winnings are reported on Form 1040 line 21 by linking to the earnings form. The losses are reported on Schedule A line 28 •Impairment-related work expenses for persons with a mental or physical disability for attendant care or other expenses in connection with their work place that are necessary for them to be able to work 130

Business Travel Expense

•Transportation: air, bus, train, or car between your home and business destination •Taxi, commuter bus, or airport limo fare & tip •Shipping bags •Car rental or mileage rate for personal car •Lodging & meals •Dry cleaning & laundry •Business calls 131

Business Entertainment Expenses

•General rule: can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or associated test •Can deduct only 50% of the unreimbursed entertainment expense •Use Form 2106 to report business expenses, which then transfers the result as a miscellaneous itemized deduction on Schedule A of Form 1040 132

Nonrefundable Credits – These Reduce Tax

•Child and dependent day care •Education •Foreign tax • Child tax •Retirement savings contributions •Residential energy •Elderly or disabled 133

Child and Dependent Care --For m 2441 Entered on Form 1040, Line 48

Credit is available to those who, in order to work or look for work, pay someone to take care of THEIR qualifying person. A qualifying person is: • Dependent child under 13 years of age • Spouse or dependent who is unable to care for themselves Both the taxpayer (and spouse if married), must have earned income for the year – see guidelines for disabled or student The credit ranges from 20 35% of taxpayer’s expense based on earned and adjusted income. The credit cannot exceed the tax liability, but can reduce it to zero (maximum expense amount is $3000 for one qualifying person, $6,000 for two or more) 134

Child and Dependent Care --Form 2441

Complete form 2441 based on the following scenario: Paula has one dependent child, Jenny, who is 6 years old. She paid $2,900 in qualified expenses. Paula’s Form W-2, box 10, shows she received $1,400 during the year from her employer’s dependent care assistance program. Because she received dependent care benefits, Form 2441, Part III, must be completed before completing Part II.

135

Education Credits – Form 8863 Entered on Form 1040, Line 49

•

Who is eligible

 Taxpayer, spouse, or eligible dependent claimed on the tax return  Attended qualified post -secondary educational institute (college, university, or vocational school) at least half time  Cannot be married filing separately, and cannot be claimed as a dependent on anyone else’s return •

Expenses that qualify

 Tuition (Form 1098-T)  Activity fees if required of all students  Books and supplies  Subtract tax-free assistance (scholarships & grants) 136

Education Credit

Erma Bradley has a grandson named Kevin. He is claimed as a dependent on his parent’s joint return.

Erma paid Kevin’s tuition directly to the university. For purposes of claiming an education credit, Kevin is treated as receiving the money as a gift and paying for the qualified tuition and related expenses.

Since his parents are claiming him on their return, they may be able to use the expenses to claim an education credit. Alternatively, if he is claiming himself on his return, he might be able to claim the expenses as if he paid them to the school.

137

1098 -T

138

Education Credits – American Opportunity Hope Credit

•Expanded for 2009 through 2012 •Applicable first 4 years of higher education •Includes cost of course materials, regardless of where purchased •Credit is 100% of the first $2,000 and 25% of the next $2,000 in eligible expenses per student, up to the amount of tax •40% of the credit is refundable (meaning the taxpayer can receive up to a $1,000

even if they owe no tax

) 139

Education Credits – Lifetime Learning

•No limit to the number of years credit can be claimed •Course-related books, supplies, fees, and equipment are included in qualified educational expense

ONLY

if the fees and expenses must be paid to the institution as a condition of enrollment •No portion of the credit is refundable 140

Which Education Credit Applies?

Question 1

: Bob is a full-time student and is a fifth-year senior. Does he qualify for the American opportunity credit? □ Yes □ No

Question 2

: Janice works full time and takes one course a month at night school. Some of the courses are not for credit, but they are meant to advance her career. Which credit is appropriate for her?

□ American opportunity □ Lifetime

Question 3:

Clark is an older student who has gone back to college half time after serving 18 months in prison for felony drug possession. Which credit is appropriate for him?

□ American opportunity □ Lifetime 141

Education Credits – Continued

•Cannot take credit for the same expense in more than one place •Your role is to determine which credit produces the lowest tax liability:  Business expense on Schedule C-EZ, or  Adjustment to income of Tuition and Fees, or  Itemized deduction on Schedule A for work related education, or  American Opportunity or Lifetime Learning 142

Foreign Tax Credit – Form 1116 Entered on Form 1040, Line 47

•Credit applies to those who have paid tax to a foreign country •Link to Form 1116 from Form 1040 •Can enter directly on 1040 page 2 if the foreign tax is less than $300 Single/$600 Married Filing Jointly, is from passive income, and is reported in

box 6 of their 1099-INT or 1099-DIV

•If the foreign tax is not passive and/or is greater than the election limits, refer to a professional tax preparer (out-of-scope for VITA) 143

Child Tax Credit Entered on Form 1040, Line 51

•Qualifying child under age 17 at end of tax year •US citizen or resident of the United States •Claimed as the taxpayer’s dependent •Did not provide more than half of their own support •Lived with the taxpayer at least half of the year (special rules for children of divorced or separated parents with a Form 8332) •Credit is up to $1,000 per child (offsets tax due) 144

Child Tax Credit

Mary and Ralph got a divorce in 2002. They have one child together, Amy, who lives with Mary. All are U.S. citizens and have SSNs. Mary and Ralph provide more than half of Amy’s support. Mary’s AGI is $31,000, and Ralph’s AGI is $39,000. Amy is 12. The divorce decree does not state who can claim the child.

Ralph, the noncustodial parent, can claim the dependency exemption and child tax credit

only

if Mary signs Form 8332. Mary can still claim the earned income credit, Head of Household, and child and dependent care credit for Amy assuming she qualifies for them.

145

Retirement Savings Credit – Form 8880 Entered on Form 1040, Line 50

•Credit for contributions made to a qualified retirement plan (indicated by an entry in Box 12 of the W2, with an “X” in the Retirement Box) •Must be below income limits ($28,250 AGI Single, $42, 375 for Head of Household, or $56,500 Married Filing Jointly) •Taxpayer must be 18 or older •Not a full time student •Cannot be claimed as a dependent on anyone else’s return •Distributions from a retirement plan (reported on Form 1099-R) can reduce the amount of eligible contributions for this credit 146

Retirement Savings Credit--Continued

•For married taxpayers filing a joint return, both spouses may be eligible for a credit on a maximum annual contribution of $2,000 each. If either spouse has received a distribution during the testing period,

both

spouses must reduce their eligible contribution by that amount.

•Form 8880 is used to figure the credit. The credit can be as low as 10% or as high as 50% of a maximum annual contribution of $2,000 per person depending on filing status and adjusted gross income •Contributions to a traditional or Roth IRA also qualify – link to IRA Deduction Worksheet from Form 1040, line 32 147

Retirement Savings Credit--Continued

Eligible contributions are reduced by the following distributions received during the testing period: • Any distribution from a qualified retirement plan or eligible deferred compensation plan that is included in the taxpayer’s gross income • Any distribution from a Roth IRA that is not a qualified rollover contribution

The testing period includes

: • The tax year • The two preceding tax years, and • The period between the end of the tax year and the due date of the return, including extensions 148

Retirement Savings Credit--Continued

Joe and Mary are married and filed joint returns for 2009 and 2010, and plan to do so in 2011. Joe received a distribution from a qualified plan in 2009 and a distribution from an eligible deferred compensation plan in 2010. Mary received distributions from a Roth IRA in 2010.

Both Joe and Mary made qualifying contributions to an IRA in 2011 and otherwise qualify for the retirement savings credit. They must reduce the amount of their qualifying contributions in 2011 by the total of the distributions they received in 2009 and 2010. This calculation is completed on Form 8880.

149

Residential Energy Credit – Form 5695 Entered on Form 1040, Line 52

The non-business energy property credit has been extended for one year, with the following limitations for 2011: • For tax years after 2005, the total combined credit limit is $500, and the combined credit limit for windows is $200 (Form 5695, Part I).

• The maximum credit for residential energy property costs is $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace, or hot water boiler; and $300 for any item of energy-efficient building property. The energy-efficiency standards for qualified natural gas, propane, or oil furnaces, and hot water boilers have increased.

150

Credit for Elderly or Disabled – Schedule R

•Age 65 or older, or •Retired on permanent and total disability, receiving taxable disability income •Total income must be below the income limits •Refer to Decision Tree and Income Limit Table in Volunteer Resource Guide at G-5 151

Mortgage Interest Credit Certificate

•Taxpayers who hold qualified Mortgage Interest Credit Certificates under a state or local government program may claim a nonrefundable credit for mortgage interest paid •Out-of-scope for VITA 152

Other Taxes – Self-Employment

•

Self-employment tax

: Social Security and Medicare. Transfers from Schedule SE line 6 to Form 1040, Line 56 when you complete Schedule C/C-EZ (generally a client with a 1099 MISC is an independent contractor = self employed) •

NEW: A recent tax law change provides for a temporary decrease in the employee’s share of payroll tax.

Social security will be withheld from an employee’s wages at the rate of 4.2% (down from 6.2%). There is no change to Medicare withholding. The same reduction applies to net earnings from self-employment – the temporary rate will be 10.4% (down from 12.4%). As a result of this change, the self-employment tax rate is reduced from 15.3% to 13.3%.

153

Other Taxes – Unreported SS and Medicare

Unreported Social Security and Medicare Tax

: allocated tips (box 8 on the W2) and unreported tips of $20 or more in a month are entered on Form 4137: Unreported tips go to Form 1040, Line 7.

NEW Social Security and Medicare taxes on unreported tip income – temporary rate decrease from

6.2% to 4.2%

Example:

Carla waits tables at a café. Her employer reports all tips that customers add to their credit card tabs, but she leaves it up to Carla to keep track of her cash tips. Carla receives more than $20 per month in cash tips. Carla keeps a record but, because she doesn’t report her cash tips to her employer, they are not included on her Form W-2. Carla includes the unreported tips as income on Form 1040, line 7. Carla also uses Form 4137 to calculate and pay the social security and Medicare taxes on those tips.

154

Other Tax – Additional Tax on Retirement Plan

Additional tax on IRA or other qualified retirement plan – Form 1040, Line 58

10% penalty applies:  Distribution prior to age 59 ½, not rolled over to another qualified plan -- usually determined by a code 1 in box 7 of Form 1099-R  Minimum distribution not taken when required  Excess contributions not removed by the due date of the return 155

Other Tax – Additional Tax on Retirement Plan

• John is 39 years old and received Form 1099-R with code 1 in box 7. He used the money to pay for car repairs. For the additional tax, enter 10% of the taxable amount on the applicable line of Form 1040. The word “no” appears to the left of this line to indicate that Form 5329 is not required.

•Laura is 41 years old and received an early distribution from her 401(k) account. The volunteer determines that Laura used the money for unreimbursed qualified medical expenses, and she meets the requirements for exception code 05. In this case Form 5329, Part I, would be completed. Laura would not have to pay the additional tax on this distribution.

156

Other Tax – Repayment of 1

st

Time Homebuyers Credit

•Purchased a home in 2008 – taxpayer must repay the credit in 15 equal installments as an “additional tax” beginning in 2010. If the home ceases to be the taxpayer’s main home prior to the end of the 15 years, the remaining balance is due •Sold a home in 2011 for which the homebuyer credit was claimed in 2009 or 2010, and the home was not used as the primary residence for the required 36 month period —the entire credit must be repaid •Use Form 5405, First-Time Homebuyer Credit and Repayment of the Credit (sections III & IV) 157

Payments

158

Payments – Federal Income Tax

•Federal Income Tax withheld from Forms W-2 and 1099 •Estimated tax payments for the current year --ask to see record of payment or 1040-ES •Amounts applied from prior year’s return – shown on 2010 Tax Return 159

Refundable Credit Earned Income

Rules for all: •Must have valid Social Security number (ITINs not eligible) •US citizen or resident alien the entire year •Filing status cannot be married filing separately •Must have

earned income

(refer to H-1 in Volunteer Resource) •Investment income less than $3,150 and be under AGI limits •Cannot have foreign income (Form 2555) •Cannot be qualifying child of another person If no qualifying child: taxpayer must be age 25 through 64, and not be claimed as a dependent by another person If a qualifying child: Child must meet the relationship, age, and residency tests 160

Refundable Credits – Earned Income

Jane, 31, and Todd, 33, have an 8-year-old daughter, Amanda. All are U.S. citizens and have valid SSNs. Jane and Todd have never been married. Jane and Amanda lived together all year in an apartment. Todd lived alone. Jane earned $15,000 working as a clerk in a clothing store. Todd is an assistant manager of a hardware store and earned $48,000. He paid over half Jane’s rent and utilities, and also gave Jane extra money for groceries. Todd does not pay any expenses or support for any other family member. Although Todd provided over half the cost of a home for Jane and Amanda, he cannot file Head of Household and he cannot claim the child for EIC, since Amanda did not live with him more than half the year. Jane cannot file as Head of Household either Jane is the only one who can claim Amanda as a qualifying child for EIC 161

Refundable Credits – Earned Income

• Maureen’s 20-year-old daughter, Angie, lived with her for eight months of the year. Angie is not married and is a full-time college student. Is Angie a qualifying child for the EIC? □ Yes □ No •Starting in February of the tax year, Sam has cared for Lisa, the 10 year-old daughter of his stepson. Does Lisa meet the EIC requirements for a qualifying child? □ Yes □ No •Three children live with Mira, who cares for them as her own: Twila, the 3-year old daughter of Mira’s cousin; Chez, Mira’s newly adopted 2-year-old son from Europe, who has lived with Mira since November of the tax year; and Dwight, Mira’s 20-year-old son, who attends community college part time. Which of them are qualifying children? □ Twila □ Chez □ Dwight □ None 162

Refundable Credits – Earned Income

• Rob and Laura are divorced. Laura is the custodial parent for Dawn, who lived with her all year. Laura signed Form 8332, allowing Rob to claim the dependency exemption for Dawn until she turns 18. Can Rob claim Dawn for the EIC? □ Yes □ No • A married couple is filing jointly. They are raising their 10 year-old granddaughter because their daughter is serving a long prison term. They are also caring for an unrelated 8-year old boy who was placed with them as a foster child by the State Department for Family and Dependent Children. They have wages and an AGI of $41,463. Assuming they meet all other tests, can they claim the EIC?

□ Yes □ No 163

Refundable Credits – Additional Child Tax Credit

•Calculated on Form 8812 •Credit is for individuals who get less than the full amount of the child tax credit ($1,000 per eligible child) •Credit is generally the lesser of:  15% of taxable earned income that is over $3,000, or  The amount of unused child tax credit 164

Refundable Credits – Additional Child Tax Credit

Jose and Yolanda Alameda are Married Filing Jointly and have five dependent children under the age of 17. Jose and Yolanda both have valid SSNs. Their children have Individual Taxpayer Identification Numbers (ITINs). The children are qualifying children for purposes of the child tax credit but not the earned income credit. Jose and Yolanda’s earned income is $8,850, and their tax liability is $0. Their social security and Medicare taxes are $677. Are they eligible to take the additional child tax credit? □ Yes □ No 165

Refundable Credit – 1

st

Time and Long-Time Homeowners

•.Expired for most taxpayers but some members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit. Must have e ntered into contract by 4/30/2011; closed by 9/30/2011 •Principal residence (not purchased from a relative) •Credit is smaller of 10% of purchase price or $8,000 for 1 st time home buyers, or $6,500 for long time residents (5 years in prior home) •Credit is reduced to 50% for married filing separately •Requires paper filing . Complete Form 5405. Attach copy of purchase agreement with date, address, purchase price, and signatures 166

Refund and Amount Owed

Refund:

•Automatic deposit speeds refund (by 4-6 weeks) •Direct deposit can be divided into up to up 3 3 accounts (Form 8888) • US Savings Bonds

Amount Owed:

•There is a direct debit option Form ACH 1040/ES •Preference is a Voucher. Return is filed electronically. Taxpayer mails voucher with tax payment on, or before deadline •If unable to pay, taxpayer can execute pay in full 60 or 120 days agreement or file Form 9465, Installment Agreement Request with the e-filing 167

Basic Tax Formula

Total Taxable Income Minus Adjustments to Income Equals Adjusted Gross Income Minus Deductions Minus Exemptions

=

Taxable Income

X

Tax Rate (Tax Tables)

=

Tax Minus Non-Refundable Credits Minus Payments Minus Refundable Credits = Refund or Balance Due 168

Tax Refund and US Savings Bonds

In addition to the 3 direct deposit accounts, taxpayers can now use their refund to purchase up to 3 US Series I Savings Bonds and/or receive a paper check for the balance of their return: • Bond can be in their name • Bond can have beneficiary or co-owner • Bond can be in someone else’s name Use Form 8888 Allocation of Refund – Part II 169

Underpayment Penalty

•If paid tax is substantially less than the actual tax liability,

the IRS will calculate the penalty due

(recommend adjusting W4 withholding) •Generally, a penalty doesn’t apply if: 1.

The 2011 tax minus withholding and refundable credits is less than $1,000 2.

Withholding and estimated tax payments plus refundable credits are the smaller of: • 90% of the current year’s tax, or • 100% of the actual tax from prior year’s return 170

Last Steps

•Run diagnostics once all the red on the left hand forms tree has been resolved •Create e-file •Request Quality Review 171

Quality Review

•Another set of eyes •Ensures accuracy in data entry as well as tax law •Follow Quality Review Sheet •United Way VITA uses either dedicated Quality Reviewers or peer-to-peer reviews 172

Explaining the Tax Return to Client

•There will be a person on-site to assemble the completed returns •Have the taxpayer confirm that you have entered the correct spelling of all names, address, dates of birth, and social security numbers •Briefly explain how you used their information to complete the return (wages, expenses, credits, etc) •Show them how their refund or balance due was calculated •Have the taxpayers sign the e-file forms •Ask if the taxpayer has any questions •We will call the phone number in their intake sheet if the IRS contacts us with any questions about their return •Thank the taxpayer for using our service !!!

173

Iowa Income Tax Return

Iowa Income Tax Return

• Tax software will transfer taxpayer information to the Iowa return •County number and school district information must be provided to properly calculate any school district surtax on line 55. The county and school district to enter are the ones in which the clients lived on December 31 of the tax year.

•Health insurance for dependent children doesn’t impact return, but will result in the taxpayer receiving information on free/low cost options if they answer no 175

Iowa Income Tax Return

•Same sex married couples can use filing status 2, 3, or 4 • Generally,

married filing separately on a combined return

results in a lower tax liability for married couples (try both 2 & 3 to see which one is most advantageous) • Each Personal exemption is $40 (additional $20 for 65 or older and/or blind). •Dependents filing their own return should claim the $40 personal exemption

even though

they were claimed as a dependent on another person’s Iowa return 176

Iowa Income Tax Return -- Income

•Interest on Savings Bonds not taxable in Iowa (need to put a minus sign on State Adj Amount column of Federal Schedule B) •Railroad Retirement Benefits are not taxable on the Iowa return (and amounts will not be transferred over from Tax Wise if RRB properly checked on 1099) •Iowa does not tax Social Security benefits in the same manner as Federal (Tax Wise will perform the correct calculation) 177

Iowa Income Tax Return -- Income

If the client is a state or local government employee who retired after December 31, 1994, the 1099-R may show Iowa taxable income different than on the federal return. In this case, when entering IPERS pensions and the Iowa taxable amount is different than the federal amount, it will be necessary to override Box 12 and enter the correct state taxable amount. Be sure to “

key what you see!”

178

Adjustments to Income

•

Health Insurance Deduction

– 100% of all medical and dental insurance premiums paid after tax entered on Line 18, rather than Schedule A • Iowa allows

pension/retirement exclusion

for the first $6,000 for an unmarried person or $12,000 for married on Line 21. Eligibility: Age 55 or older on 12/31/2011, or disabled

Only the pension income of the spouse who meets the eligibility requirement can take the exclusion

179

Pension Exclusion – Line 21 Examples

1. Taxpayer 52 receiving $20,000 pension; Spouse 55 receiving no pension = no exclusion (joint, or separate on combined) 2. Taxpayer 52 receiving $10,000 pension; Spouse age 55 receiving $8,000 pension = $8,000 exclusion (the full $8,000 is allowed on either a married filing separate on a combined return form, or married filing on joint return since a married couple is allowed a combined exclusion of up to $12,000 ) 180

Pension Exclusion – Line 21

Check Box 1 on 1099-R for TaxWise to automatically apply the pension exclusion 181

Other Adjustments –Line 24

•

Disability income

when retired on disability under 65, totally and permanently disabled, with annual doctor’s statement. Use Form 2440 • Deduct up to $5,000 in state

Supplementary Assistance

for unskilled in-home health-related care services to a family member (see instructions for details). Use scratch pad.

• if the client or spouse participate in the

College Savings Iowa 529 Plan

(Iowa Educational Savings Plan Trust) or the

Iowa Advisor 529 Plan

, each participant may deduct an amount contributed not to exceed $2,865 per beneficiary.

182

Other Adjustments –Line 24

Iowa has provided a special capability to make an adjustment on the 2011 tax year return for Iowa’s coupling with the federal Educator Expenses Deduction and Tuition & Fees Deduction. The taxpayer has the option to amend 2010 or adjust 2011.

Deduction of Educator Expenses:

Taxpayers, who meet the requirements of an eligible educator in 2010, can deduct up to $250 of qualified expenses he/she paid in 2010 and claimed on line 23 of the federal return.

Tuition and Fees Deduction for Higher Education:

Taxpayers who paid qualified tuition and fees for themselves, a spouse, or dependent(s) are able to take this deduction IF this was claimed on line 34 of the federal return.

183

Iowa Income Tax Return -- Continued

•

Iowa exempts low income from tax liability (Line 26

)  Single $9,000 ($24,000 if over age 65)  All other filing statuses $13,500 ($32,000 if over age 65) •

Include Federal return as income (Line 27)

• Iowa requires taxpayers who filed a 2010 Iowa tax return to report federal tax refund received in 2011 as income on line 27. • Do not include any amounts received from Earned Income Credit, Additional Child Tax Credit, American Opportunity Education Credit, Making Work Pay, or Homebuyers Credit 184

Additional Federal Tax Paid Line 33

Do not include:

any portion of a payment that covered penalty or interest charges. Any additional tax payments (for any prior year) made by check, credit card, or electronic transfer are entered here. Also, it is important to include additional tax that was paid from refundable credits via the client’s prior-year tax return

(This is easy to overlook ).

185

A close look at this client’s prior-year federal return shows that the client “owed” an additional $2,000 tax, which was “paid” from the client’s refundable credits.

Line 60 Total Tax $2,500 Line 61 Federal Tax Withheld $500

Taxpayer’s refundable credits include: Line 63 Making Work Pay $300 Line 64 EITC $2,000 Line 65 Add’l Child Tax Credit $500 Line 66 American Opportunity Credit $200 Total Refundable Credits $3,000 Line 74 Amount to be refunded $1,000

Analysis: Even though the client received a $1,000 federal refund for that year, the

client actually “paid” $2,000 extra in federal tax for that year. The amount of $2,000 should be entered on IA 1040 Line 33.

186

Including Federal Income Tax Refund

Do not include the Federal refund in the following situations:

• Do not include any federal tax refund received for any year in which the client was a nonresident or not required to file an Iowa return.

• Do not include any part of the federal refund received in a year for which the client was eligible for the Iowa Low-Income Exemption; that is, the client’s income was below the minimum threshold for paying Iowa tax.

•

Do Include

Any refund (or portion) which was retained by the government to pay a debt owed by the client (e.g. child support, student loans).

187

Iowa Income Tax Return -- Continued

•

Standard Deduction

:  Filing Status 1 $ 1,830  Filing Status 3 or 4 $ 1,830 (for each spouse)  Filing Status 2, 5, or 6 $ 4,500 •

Itemized Deductions

:  Can itemize for Iowa even if taxpayer does not itemize Federal  Iowa allows the full amount of mortgage interest to be deducted on line 9b of Schedule A  Charity mileage rate is $.39 per mile ($.25 more than Federal 188

Vehicle Registration Fees

•No deduction for model year 2009 or older pickups, or work vans •For model year 2000 or newer cars (and 2010 or newer pickups weighing 10,000 pounds or more): subtract the weight/250 from the annual registration fee to determine the deduction •For qualifying automobiles model year 2000 or older, the deductible amount is 60% of the registration fee paid in 2011 189

Adjustments to Tax

• Line 48:

Tuition and textbook credit

: 25% up to $1,000 for each qualifying child in an accredited Iowa school grades K-12 • Line 55 :

School district surtax

pulls from county and school district numbers found in back of Iowa Tax Booklet • Line 58

Contributions

: will reduce amount refund or add to amount owed if elected (Fish/Wildlife, State Fair, Firefighters/Veterans, or Child Abuse Prevention) 190

Out-of-State Income – Adjustments to Tax

Non-Resident and Part-Year Resident Credit (Line 51)

• IA 1040 uses all source income • IA Form 126 is used to reflect the IA source income

Out-of-State Tax Credit (Line 62)

• All income an Iowa resident earns is taxable by Iowa, even that portion earned in another state or country • Iowa allows a credit for the tax paid to another state on the income earned in that state • Complete IA Form 130 191

Early Child Development Tax Credit (Line 64)

•Alternative to Child & Dependent Care Credit •Credit is 25% of the first $1,000 qualify expense per child:  Ages 3 through 5  Services provided by a preschool  Books that improve child development (music, art, reading, etc)  Instructional material & lesson plans  Development & educational activities outside the home 192

Iowa Income Tax : Credits & Penalties

Iowa Earned Income Credit (Line 65)

7% of the Federal EITC (also a refundable credit) but income limits vary slightly so some may qualify for Federal EIC but not Iowa (Taw Wise calculates correctly)

Penalty for underpayment of Tax (Line 73)

Do

not

let the software calculate the penalty. If a penalty is due, taxpayer will receive a bill from IA Dept of Revenue. To ensure no penalty, default $1 on the IA 2210 on the line which asked you to enter the 2009 tax – Line 9 193

Next Steps

•Practice Lab on January 14: option for 12:30 or 2:30 • Will also offer 2 hour lab time increments on January 21 starting at 8:30. Can use time for additional practice, or to complete on-line test •Test when ready (sooner the better). Remember, have only 2 chances to score 80% or better •

Please respond to final survey

you will receive from Rachel 194

Thank You!

Questions?

195