Accounting Aid Society
2006 Tax Season
Federal Tax Training
January, 2006
Overview
 Our training is designed to provide you with skills
to prepare taxes for the clients of Accounting Aid
Society.
 Our clients are individuals with household income
less than $20,000 or families making less than
$38,000.
 Check with IRS Publication 17 and/or your tax
supervisor whenever you encounter something
unusual.
Quality
 Our number one priority is quality!
 We are not going to do complicated returns which
exceed our training or capability.
 Don’t guess if you are not sure how to handle a
particular situation.
 Consult the instructions, IRS Publication 17 and/or
your tax supervisor for help.
 All returns should be reviewed by a tax supervisor.
Reference Materials
 Throughout this training session we will be
referencing the following publications:
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Step-By-Step for TaxWise
IRS Publication 4012, Volunteer Resource Guide
(the spiral book)
IRS Publication 17, Your Federal Income Tax for
Individuals
What’s New for Tax Year 2005?
 New Rules for Dependency Exemptions – Uniform Definition of a
Qualifying Child
 Several amounts used in the calculations have been increased to allow
for inflation:
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Exemption amount is now $3,200 (was $3,100)
The Standard Deduction amounts have increased.
 New Rules for Car Donations
 Mileage rate increase:
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Business Miles – 40.5 cents per mile
(48.5 cents per mile – September – December)
Who Must File?
(See IRS Pub. 4012, Pg. 6)
 Many low-income people do not have to file federal
returns, but may be required to file state or city
returns.
 People who file Federal returns should generally
file state returns as well.
 Some clients should file to recover withholding or
collect refundable credits, even if they are not
required to file by the gross income guidelines.
 See the income table on the next slide.
Who Must File
(IRS Pub. 4012, pg. 6)
Who Must File?
(See IRS Pub. 4012, Pg. 6)
 The gross income limits are lower if the
taxpayer is someone else’s dependent. – See
the instructions.
 There are other special situations listed in
IRS Publication 17 such as;
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Self-employment income of $400 or more,
You received Advanced Earned Income Credit
And others.
Which Form to Use?
 There are three choices – 1040, 1040A and 1040EZ.
 The amount of tax or refund is not affected by the form
chosen.
 TaxWise users should always use Form 1040. Form 1040
can be used for most returns.
 TaxWise defaults to the 1040.
.
Which Form to Use?
 Form 1040NR is for Non-Resident Aliens. Don’t
prepare these returns without additional training.
 Form 1040X is for amending a return that’s already
been filed.
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Early in the season we often get clients with a W-2, but
not all of their W-2’s. Make sure that they have
everything or we’ll end up having to amend the return.
A tax return is a compilation of all relevant information
for an entire year. Nothing stands alone!
Entering the SSN
Starting a New Return in TaxWise
 It is crucial to check the social security numbers on
all of the taxpayer’s documents.
 The names and social security numbers for the
taxpayer, spouse and dependents that are entered on
the tax return have to match what’s on file at the
Social Security office or the return will be rejected.
Entering the SSN
Starting a New Return in TaxWise
 If the client presents you with forms (W-2, 1099,
etc.) that don’t match the Social Security card,
advise the client to contact the payer to make a
correction. Consult with the tax supervisor before
preparing a return in this situation.
 Take your time and double-check.
Social Security Numbers
 There has been a lot of identity theft lately.
 Social Security numbers can be a key to this crime.
 It’s important to keep this, along with whatever else
a client tells or shows us, in the strictest
confidentiality.
 Speak softly!
 Shred all unneeded tax return pages. Do not discard
in the wastebasket.
TaxWise Main Information Sheet
 Entries on the Main Information Sheet flow to all
parts of the return. An error here is significant, but
can easily be corrected by changing the entry.
 If you discover an error in name or address while
working in another part of TaxWise, always go back
to Main Information to correct it.
Main Information Sheet Sections
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Customer Card
Taxpayer Information
Filing Status
Exemptions
Dependents
Type of Return
Bank account information
Preparer Use Fields
Customer Card
 Mailing Address – use the address where any
refunds are to be sent. Make sure to include the
apartment number if applicable.
 Telephone number – we need a telephone number
for an e-file in case we need to contact the client
 Birthdate - Required
 Occupation – Optional, but we should enter
 Presidential Election Campaign
Presidential Election Campaign
Fund
 $3 can go to the fund if the taxpayer (or spouse)
checks “Yes”.
 The taxpayer’s tax or refund will not change by
checking “Yes.”
 TaxWise does not carry this election to the state
forms.
Filing Status – Single
(See Pub. 4012, Pg. 9-10)
 Single on the last day of the year.
 Do not qualify for another status.
Filing Status – Married
(See Pub. 4012, Pg. 9-10)
 Married Filing Jointly is used if you are married on
the last day of the year or your spouse died during
the year.
 Married Filing Separately is rarely a good deal for
the taxpayer. It disqualifies them for certain credits
such as the Earned Income Credit. Social Security
benefits may be taxed if the couple lived together at
any time during the tax year. Nevertheless, some
couples do not get along well enough to file
together.
Filing Status – Head of Household
(See Pub. 4012, Pg. 9-10)
 You are unmarried or “considered unmarried” on the last day of
the year.
 You paid more than half the cost of keeping up a home for the
year.
 A qualifying person lived with you for more than half the year.
 There are certain tests to meet to be “considered unmarried”,
including that you did not live with your spouse at any time
during the last 6 months of the tax year, your home was the
main home of your child for more than half the year, and you
must be able to claim an exemption for the child. Check IRS
Publication 17 for a complete definition.
 This filing status is not available on state or local returns. The
the filing status would be Single on the Michigan and local
returns.
Head of Household – Qualifying
Person (See Pub. 4012, Pg. 9-10)
 Who is a qualifying person is a function of:
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Their relationship to you
Whether or not you can claim an exemption for
them, and,
How long they lived with you.
 See the table on Page 22 in IRS Publication
17 any time you encounter an unusual
situation.
Filing Status – Qualifying
Widow(er) with Dependent Child
 Can be filed for the two years following the death
of a spouse.
 Must not be remarried.
 Must have a dependent child, step-child, adopted
child or foster child
 Paid more than half the cost of keeping up a home
that is the main home for you and that child for the
entire year, except for temporary absences.
 This filing status is not available on state or local
returns.
Filing Status
(IRS Pub. 4012, pg. 9)
Personal Exemptions
 TaxWise will automatically enter a personal
exemption for the filer.
 If the filer can be claimed as a dependent on
another return, they are not entitled to their
own personal exemption. Box 6(a) on Main
Info should be checked to remove the
personal exemption.
Dependents – TaxWise Entries
 TaxWise requires several entries for each
dependent. Be very careful as these entries are a
major source of errors that cause e-filing rejects and
incorrect returns.
 Required Entries: Name, Social Security Number,
Date of Birth, Relationship, Code (listed in the
TaxWise instructions).
 Optional Entries: DC, EIC
 CTC (Child Tax Credit): Automatically calculated
by TaxWise
Dependents – TaxWise Entries
 Optional entries - DC
 Enter an “X” in this box if the Dependent
Care Credit is applicable. See later
explanation of this credit. This entry only
results in a Form 2441 waiting for
information. Because most of clients owe no
income tax, this credit is usually not a factor.
Dependents – TaxWise Entries
 Optional Entry: EIC
 Enter an “X” in this box if the child appears eligible
for the Earned Income Tax Credit. This credit will
be explained later.
 Other qualifying questions will be asked later in the
TaxWise program.
 Important: If you don’t enter an “x” here, the EITC
will not calculate.
Dependency Exemptions for Qualifying
Children and Qualifying Relatives (2005)
 Tests applicable to all dependents
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Dependent of another (a dependent can have no
dependents)
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Joint return test
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Citizenship or residency test (U.S., Canada, or
Mexico)
Dependency Exemption Tests for
Qualifying Children
 Relationship Test – Child, grandchild, brother sister
(including stepbrother & stepsister, niece or nephew), foster
child placed by agency
 Residency – Lived with taxpayer more than ½ of the year
(temporary absences are ok)
 Age – Under 19, under 24 and a full-time student, or
permanently and totally disabled
 Support – Did not provide more than ½ of his/her own
support
Dependency Exemption Tests For
Qualifying Relatives (old rules apply)
 Support
 Member of Household or Relationship
 Gross Income
Support Test
 Taxpayer must provide more than 50% of the
dependent’s support
An exception to support test requirement:
 Multiple support agreement
Relationship Test
 Dependent must be one of the specified
relatives of the taxpayer (either taxpayer, if
joint return) or be a member of the
taxpayer’s household for the entire year
 Once a relationship is established by
marriage, it continues even if there is a
change in marital status
 The relationship cannot be in violation of
local law (still an issue in Michigan).
Gross Income Test
 Dependent’s gross income must be less than
the amount allowed for an exemption
($3,200 for 2005)
Dependency Exemptions
(IRS Pub. 4012, pg. 16)
Dependency Exemptions
(IRS Pub. 4012, pg. 16)
Mini-Quiz #1
 Mary Jones is single, 20 years old and not a student. She
lived with her single mother, Jane, for the entire tax year.
She earned $4,000 which she spent on her car, video games
and a trip to Disneyworld. Jane provided health insurance,
lodging, food and clothing which is worth $5,000.
 Can Jane claim her as a dependent?
 Can Mary take a personal exemption?
 What is Mary’s filing status?
 What is Jane’s filing status?
 What is Jane’s filing status if she were married, but did
not live with her husband during the last six months of
the tax year?
Mini-Quiz #1 - Answer
 Can Mary’s mother claim her as a dependent?
 No, Mary is not a Qualifying Child or Qualifying Relative.
The Gross Income Test has not been met.
 Note that if Mary had been under 19 or a full-time student,
Mary’s mother could have claimed her as a Qualifying Child.
 Can Mary take a personal exemption? - Yes
 What is Mary’s filing status? - Single
 What is Jane’s (Mary’s mother’s) filing status?
 Single. Mary has to qualify as her dependent in order to be a
qualifying person for Head of Household filing status.
 Her Michigan and local filing status is Single.
Mini-Quiz #1 – Answer (cont.)
 What is Jane’s filing status if she were married, but did not
live with her husband during the last six months of the tax
year?
 Single. Jane does not meet all of the tests for
“considered unmarried” under Head of Household.
Specifically, she has to be able to claim Mary as a
dependent to be considered unmarried.
 Jane’s Michigan and local filing status would be Married
Filing Separately.
Mini-Quiz #2
 Martha Washington is 35. She lives with her
dependent son, Andrew (16). Her husband
George died in the previous tax year. She
has not remarried. What is her filing status?
Mini-Quiz #2 - Answer
 Martha’s filing status is Qualifying Widow(er) with
Dependent Child.
 She could also file as Head of Household, but Qualifying
Widow is more advantageous.
 Note that on the Michigan return, Qualifying Widow is not
an option. She’ll file her Michigan and local returns as
Single.
 If George had died in this tax year, Martha could have filed
Married Filing Jointly.
 If Martha had remarried, she would be Married Filing
Jointly or Married Filing Separately.
Mini-Quiz #3
 George (30) is single and lives with his
daughter, Sue (10). George’s income is
$2,000 in wages from a part-time job and
$6,000 in benefits from the State of Michigan
Department of Human Services (DHS).
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What is George’s filing status?
Can George claim a dependency exemption for
Sue?
Mini-Quiz #3 - Answer
 What is George’s filing status?

George is Single. He does not qualify as Head of
Household because he did not pay more than half the
cost of maintaining the home. Most of the money came
from the state.
 Can George claim a dependency exemption for
Sue?

Yes. Sue is a Qualifying Child because she did not
provide more than one-half of her own support.
Other Main Info Items
 The other Main Info entries will be discussed
in your computer lab session.
Gross (taxable) Income
 Income is entered in various places in TaxWise.
Most income items are entered in worksheets that in
many cases replicate the source document.
 Part C of Step-by-Step lists typical income items
and where to enter them (Items 1 – 7).
 Nontaxable items (Items 8-13) only affect the
Michigan return and will be discussed in the
Michigan training module.
Wages
(Step by Step Item C.1.)
 Wages are reported on Form W-2.
 Enter all of the information from the W-2 into TaxWise,
including the withholding and the special codes.
 TaxWise may use the coded information to determine
eligibility for certain credits.
 Copy B of the W-2 is attached to paper returns or submitted
with the E-file packet for electronic returns.
 One copy is attached to the city return.
 One copy is retained by the client.
Sample W-2 Form
Social Security Benefits
(Step by Step Item C.2.)
 Social Security recipients will get a year end statement,
Form SSA-1099, showing benefits received. If applicable,
the statement will indicate the Medicare premiums deducted
from their benefit.
 Enter the amount from Box 5 of Form SSA-1099, and the
amount of Medicare premiums deducted, on “1040 Wkt 1”
in TaxWise, not directly on the 1040.
 Social Security is not generally taxable for low income
people who qualify for our program, but must be shown on
the form.
 Again, Married Filing Separately people who have lived
together at any time during the tax year will generally have
some of their benefits taxed.
Supplemental Security Income
(SSI) – Not taxable
 SSI is paid to people who are 65 or older, or are blind or
disabled, and have limited income and financial
resources.
 For 2005, the maximum amount of SSI is $579 per
month for an individual.
 These same recipients generally get quarterly payments
of $42 every three months from the Michigan
Department of Human Services (DHS).
Supplemental Security Income
(SSI) – Continued
 There is no year end statement sent.
 Neither of these payments is taxable for Federal or State
purposes, but be included in Household Income for the
Michigan credits. This will be discussed further in the
Michigan module.
Pensions
(Step by Step Item C.3.)
 Pensions are reported on a Form 1099-R.
 Enter all of the data into TaxWise.
 Be sure to attach a copy to paper returns or include
it with the E-file packet.
 If the taxable amount is not determined, you need to
ask more questions. If the employee paid in to the
fund while working, some of the payment is not
taxable. The calculations are complicated, and may
be impossible if they don’t have records.
Form 1099-R
Pensions - Continued
 Hourly workers at the auto companies do not
pay into the plans, but salaried do. If the
worker is hourly, the total distribution is the
taxable amount.
 Otherwise, advise them to get help, or they
may be overpaying.
 Even if there is no Federal tax liability, the
state credits will likely be affected.
Self-Employment
(Step by Step Item C.4.)
 Some clients do work for which they receive money which
is not wages.
 If they do, we need to prepare a Schedule C or Schedule CEZ.
 They may or may not receive a Form 1099-MISC.
 They have to pay both the employee’s and the employer’s
Social Security and Medicare taxes. This is computed on
Schedule SE, Self-Employment Tax.
 TaxWise will automatically bring in a Schedule SE and
calculate this tax.
Self-Employment – Continued
 We can do simple returns with self-employment
income. For example, if the client earned $5,214
providing day care and had expenses of $553 for
care-related expenses.
 The client should have records.
 Be sure to work with a supervisor on these.
 Do not do these returns if the business is
complicated, the client has hired other people to
help, there is inventory, or there are numerous
income and expense items.
Form 1099-MISC
Unemployment
(Step by Step Item C.5.)
 Unemployment is reported on a Form 1099-G
 There may or may not be federal and/or state tax
withholding.
 Enter all of the data directly into TaxWise.
 Unemployment is fully taxable for Federal and
Michigan purposes, but many clients do not elect to
have withholding. These people get lower refunds
or owe. Please encourage your clients to have taxes
withheld on any future payments.
Form 1099-G
Gambling Winnings
(Step by Step Item C.6.)
 Contrary to what might have been heard at the
casino, gambling winnings are taxable.
 If they are above a certain level, the taxpayer will
receive a Form W-2G.
 These are entered in TaxWise on Form W2G and
treated as “Other Income”.
 Losses are not deductible unless you itemize and
are limited to the amount of winnings reported.
 The fair market value of prizes and awards is also
taxable.
Form W2G
Interest Income
(Step by Step Item C.7.)
 Interest is money paid for the use of money, usually by a
bank.
 Interest is reported on Form 1099-INT.
 This information is entered onto Schedule B in TaxWise.
 Banks don’t have to send a 1099-INT if the amount is
less than $10, but the amount is taxable whether a Form
1099-INT was sent or not.
Interest Income – Continued
(Step by Step Item C.7.)
 Interest is almost always taxable for our clients.
Exceptions are for interest from Municipal Bonds, and
under certain conditions, US government bonds, if it is
used to pay for education expenses.
Form 1099-INT
Dividend Income
(Step By Step Item C.7.)
 Dividends are earnings that a company pays to
shareholders.
 Dividends are reported on Form 1099-DIV.
 Enter all of the data in TaxWise on Schedule B.
 Qualified dividends and capital gain distributions
are eligible for special tax rates and make
calculating the tax complicated.
 If the data is entered correctly, TaxWise will handle
the calculations.
Form 1099-DIV
Capital Gains
 Capital Gains happen when an investment is
sold for a profit. Our clients might see this
on a statement from a mutual fund.
 Like qualified dividends, some Capital Gains
are eligible for special tax rates.
 We typically do not prepare returns if a
taxpayer has sales of stock. Consult the site
supervisor if you encounter this situation.
Rental Income
 We generally do not prepare returns for landlords.
 There are complicated rules for depreciation and
expenses.
 Sometimes a client will state that they are paying
rent to a parent or other relative.
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We need to make them understand that if this is reported
as rent, their parent needs to show this as income on their
return.
They may choose instead to treat their payments as
“helping out with expenses” rather than rent.
Other Taxable Income
 Alimony is taxable income, but Child
Support is not. Most of our clients do not
receive alimony. Child support is usually
paid through the Friend of the Court and is
included in Household Income on the
Michigan credits.
 Jury duty is shown as other income.
 Hobby income.
Other Non-Taxable Income for
Federal Purposes
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Child Support
Gifts
Inheritances
Welfare benefits (Michigan Department of Human Services)
Veteran’s Benefits
 Important – While non-taxable items do not affect the
Federal return, they will be included in Household Income
for Michigan credits. This will be covered in the Michigan
module.
Adjusted Gross Income
 The taxable income is totaled, and then some adjustments are
subtracted to arrive at Adjusted Gross Income (AGI).
 Adjustments include, but are not limited to,:
 IRA deduction – rare for our clients
 Student loan interest deduction – with some limits – See 1098-E
 Tuition and fees deduction – Our clients would probably be better
off using the Hope or Lifetime Learning Credits
 One-half of self-employment tax
 Penalty on early withdrawal of savings – from Form 1099-INT
 Worksheets are available in TaxWise by linking to them from the
Form 1040 entry.
Standard Deduction
 The standard deduction is subtracted from
Adjusted Gross Income before the taxes are
figured.
 TaxWise Software automatically calculates
the standard deduction based upon what you
have entered for Filing Status, whether a
dependent of someone else, age and
blindness.
Standard Deduction Amounts
Filing Status
SD
ASD*
Single
Married, Filing Jointly
Surviving Spouse
Head of Household
Married, Filing Separately
$ 5.000
$10,000
$10,000
$ 7,300
$ 5,000
$1,250
$1,000
$1,000
$1,250
$1,000
* The Additional Standard Deduction is allowed for those 65
and over or blind.

Note: The Standard Deduction for an individual who may be claimed by
another taxpayer is limited to $800 or the sum of $250 and the individual’s
earned income.
Itemizing Deductions
 This is not something you should do unless you
have had more extensive training than this session.
 This only helps a client with a tax liability. For
example, if a client has an AGI of $15,000, but is
Head of Household with two dependents, then they
have no tax liability. This is because $15,000 is less
than the Standard Deduction plus three times the
exemption amount. ($7,300 + 3 X $3,200 =
$16,900). Itemizing deductions would not affect
the refund or amount owed.
Itemizing Deductions
 If a client does have tax liability, it is in their best
interest to use the larger of the Standard Deduction
or Itemized deductions.
 Clients with unusually large mortgage interest,
property taxes and/or large charitable contributions
may benefit from itemizing deductions.
 Itemized deductions are reported on Schedule A.
 If a taxpayer is filing as MFS and their spouse
itemizes, they must also itemize.
Itemizing Deductions
 Itemized deductions include:
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Medical expenses over 7.5% of AGI
State and local income taxes (or sales tax) paid
Real property taxes paid
Personal property tax paid (License Plates)
Mortgage interest
Charitable contributions
Casualty and theft losses over $100 and 10% of AGI
Other miscellaneous items over 2% of AGI.
Other miscellaneous items not subject to the 2% limit.
Rules For Contributions of Motor Vehicles,
Boats, and Airplanes (New for 2005)
 If the claimed value exceeds $500 and the item is sold by the charity, the
deduction is limited to the gross proceeds from the sale.
 If the charity will significantly use or materially improve the item, the
deduction will be the fair market value.
 If the charity sells at a price significantly below fair market value to a
needy individual in direct furtherance of the organization’s charitable
purpose, the deduction will be the market value.
 Form 1098-C is used for notification and is to be attached to the tax
return.
Calculating the Tax
 TaxWise will do the calculations.
 You should be able to check the work using
the tables.
 Note that the calculations are more
complicated for people with qualifying
dividends and/or capital gains distributions.
Mini-Quiz #4
 What is the tax for a single person with
taxable income of $10,149 for 2005?
 What is the tax for a qualifying widower with
taxable income of $20,350 for 2005?
 Assume that neither taxpayer has Qualifying
Dividends or Capital Gains.
Mini-Quiz #4 – Answer
 $1,154 is the tax for a single person with
taxable income of $10,149 for 2005.
 $2,326 is the tax for a qualifying widower
with taxable income of $20,350 for 2005.
Refundable and
Non-Refundable Credits
 Non-refundable credits are used to reduce
federal tax liability, but if they exceed the
tax, the taxpayer does not receive the
difference.
 Refundable credits can be returned to the
taxpayer, even if there is no tax.
Earned Income Tax Credit (EITC)
 We spend about an hour with most clients
and find them refunds averaging close to
$1,000. The Earned Income Tax Credit is
responsible for the biggest piece of this.
 Congress has authorized this to help low
income people and encourage them to work.
 It can amount to over $4,000.
Earned Income Credit - 2005
5000
No Children
4500
One Child
4000
Two Children
3500
One Child - MFJ
Credit
3000
Two Children - MFJ
2500
2000
1500
1000
500
0
0
5000
10000
15000
20000
Income
25000
30000
35000
40000
Earned Income Tax Credit (EITC)
 The credit is not available for Married Filing
Separately.
 Your investment income must be less than $2,700.
 The taxpayer cannot be the qualifying child of
another person.
 It’s calculated twice, once based on your earned
income, then again based on your Adjusted Gross
Income. Your credit is based on the smaller of the
two.
Qualifying Child for
Earned Income Tax Credit
 There are three tests:
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
Relationship,
Age, and
Residency.
Qualifying Child for
Earned Income Tax Credit
 The Relationship Test:

The Child must be a Qualifying Child for
dependency purposes.
Qualifying Child for
Earned Income Tax Credit
 The Age Test:



Under 19 at the end of the year, or
Under 24 and a full-time student, or
Totally and Permanently Disabled.
 These are the same rules for a Qualifying
Child for dependency purposes.
Qualifying Child for
Earned Income Tax Credit
 The Residency Test:

Lived with you in the U.S. for more than half of
the year.
Qualifying Child for
Earned Income Credit
 Note that a child can be a qualifying child for more
than one person.
 For example, if daughter (age 3), mother (not a fulltime student and age 22) and grandmother (age 50)
share a household, either mother or grandmother
could use the child as a qualifying child.
 They can agree on who claims the child for the best
benefit.
 They can split-up two or more children.
 If there are four children, mom can take two, and
grandma can take the other two.
Qualifying Child for
Earned Income Tax Credit
 There are tiebreaker rules which generally awards
the child to the parent if they can’t agree.
 If two people claim the same child, the IRS will use
the tiebreaker rules to decide. This will create an
investigation and delay the refund.
 The credit is claimed using Schedule EIC. Answer
the questions in TaxWise and attach the schedule to
paper returns.
 It is crucial to check the “EIC” box in TaxWise
when entering the dependent information in Main
Info, or the software assumes that the child does not
qualify, and the client will be out a lot of money.
Earned Income Tax Credit if
There is No Qualifying Child
 The credit and income levels are much lower.
 Must be at least 25, but under age 65.
 You can’t be someone else’s dependent.
 Must have lived in the US for more than half
of the year.
Advanced Earned Tax Income
Credit
 Taxpayers can receive this money during the
year from their employer by filling out Form
W-5.
 If they did, it would be reported on the Form
W-2 in Box 9.
 Be sure to enter all of the W-2 data into
TaxWise.
Mini-Quiz #5
 Bill (40) and Hillary (39) have wages of $25,432
for 2005 and no other income; their filing status is
Married Filing Jointly. They have one dependent
child, Chelsea (16). Their friend Sally has been
called to active duty in the military. At her request,
they also supported and cared for the entire year for
Sally’s son Ralph (6) as if he were their own child.
How much is their Earned Income Tax Credit?
Mini-Quiz #5 - Answer
 Bill and Hillary can claim the EITC based on one
Qualifying Child.
 $1,215, from the 2005 Earned Income Tax Credit
(EITC) Table.
 Note that Ralph qualifies as a Dependent as a
Qualifying Relative, however, he is not a
Qualifying Child for purposes of the EITC
because he was not placed in their home by an
authorized agency.
 Note that this is a very unusual situation. Consult
IRS Publication 17 to be sure when you
encounter something out of the ordinary.
Mini-Quiz #6
 Harold has no dependents, lives alone and
his total income was $8,000 wages in 2005.
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If he is 23 years old, how much is his EITC?
How much is his EITC if he’s 26?
How much is his EITC if he’s 67?
Mini-Quiz #6 - Answer
 If he is 23 years old, how much is his EITC?

Zero. Without qualifying children, you must be at least
25 and under age 65 at the end of the tax year to qualify
for the EITC.
 How much is his EITC if he’s 26?

$285, from the 2005 Earned Income Tax Credit (EITC)
Table.
 How much is his EITC if he’s 67?

Zero. Without qualifying children, you must be at least
25 and under age 65 at the end of the tax year to qualify
for the EITC.
Child Tax Credit
 Up to $1,000 per child, but generally non-refundable.
 Children must be under 17 at the end of the year, a citizen
or U.S. resident, and a dependent.
 Child, adopted child, stepchild, brother, sister, or a
descendent of any of them. (For example; grandchild,
niece or nephew)
 Foster children must also be placed by an agency. This is
not required for them to be a dependent as a qualifying
relative.
 TaxWise will do the calculations. Be sure to accurately
enter children’s birth-dates.
Additional Child Tax Credit




Refundable in certain situations
TaxWise will add a Form 8812 if they qualify.
15% of earned income above $11,000 for 2005.
Or, if greater, for taxpayers with three or more
qualifying children, the excess of social security
taxes over the EITC. Non-citizens may qualify
based on this.
 It doesn’t happen often, but trust the software to tell
you when it does, and then recognize what it is.
Child and Dependent Care
Credit
 Credit of up to 35% of day care expenses, but nonrefundable.
 Note that the provider has to give a receipt with
their taxpayer number – most of our clients don’t
get this.
 Limit on eligible expenses:
Lesser of earned income or $3,000 for one
qualifying person ($6,000 for more than one)
 A qualifying person is a dependent under 13 or a
disabled dependent or spouse
 Use Form 2441 (for 1040 returns).
Education Credits
 There are two different non-refundable credits:


The Hope Credit
The Lifetime Learning Credit
 They cover tuition, mandatory fees and books
purchased from the school.
 The school must be eligible for student aid from the
Department of Education. Should send a Form
1098-T.
Education Credits - Continued
 Cannot be used in conjunction with the Tuition and
Fees deduction for the same student or with
Married Filing Separately.
 Report both credits on Form 8863.
Hope Credit
 Good for the first two years of post-secondary
education.
 Covers tuition and mandatory fees.
 Books only covered if required to be purchased
from the school.
 Student must be enrolled at least half-time.
 Good for taxpayers or dependents.
 100% of the first $1,000 of qualified expenses
 50% of the next $1,000 of qualified expenses
 Generally, this is a better deal than the Lifetime
Learning Credit if expenses are less than $7,500.
Lifetime Learning Credit
 Same requirement for an eligible education
institute, but no limit on two years.
 Up to 20% of $10,000 of eligible expenses.
 For our clients, 20% is higher than their
marginal tax rates, so this is probably a better
deal than the Tuition and Fees deduction.
Education Credits
(IRS Pub. 4012, pg. 22)
Retirement Savings
Contributions Credit
 Used to encourage low-income people to save.
 Non-refundable credit of up to $1,000 ($2,000 on
a joint return)
 For making eligible contributions to an employersponsored retirement plan or to an IRA.
 Not available if:



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Amount of AGI exceeds certain limits,
You are under 18 (born after Jan. 1, 1988),
You are a dependent on another person’s return, or
You were a full-time student in 2005
Retirement Savings
Contributions Credit – Cont.
 TaxWise will calculate this on Form 8880 for
contributions to a 401K if you enter all of the W-2
information correctly.
Retirement Savings Credit
(IRS Pub. 4012, pg. 22)
Credit for the Elderly or the
Disabled
 Taxpayer must be 65 or older, or retired on permanent and
total disability.
 Filed on Schedule R (1040) or Schedule 3 (1040A)
 Non-refundable.
 Two income limits:


Adjusted Gross Income (AGI)
Nontaxable Social Security and nontaxable pensions
 Must have low Social Security and pensions, yet still have a
tax liability. This doesn’t happen often.
 TaxWise will bring in the schedule if appropriate.
Adoption Credit
 This credit is non-refundable, but can be
spread over several years.
 A credit of up to $10,630 in 2005 for
qualifying adoption expenses. (Same credit is
allowed for the adoption of a child with
special needs even if there are no qualifying
expenses.)
 See the instructions for Form 8839.
E-Filing
 E-filing speeds the processing of returns and
refunds, and improves accuracy.
 The IRS expects us to e-file most of our
returns.
Finishing the E-File Return
 It is very important that the tax preparer follow Accounting
Aid Society’s E-File Checklist and submit all required
documents with the E-file packet.
 One copy of Form 8879 (and one copy of Form MI-8453 if
applicable) is signed by the taxpayer (and spouse for Married
Filing Jointly). Accounting Aid Society retains the signed
copy for their files.
 Make a copy of Form 8879 (and MI-8453 if applicable) for
the client to keep with their tax records.
 Attach one copy of all Forms W-2, W-2G, and 1099s to the Efile packet.
 Make a complete copy of the tax return (including the
Michigan and city return) for the client to keep, and instruct
them to bring it with them next year.
Finishing the Paper Return
 The tax return must be signed and dated by the taxpayer
(and spouse if filing jointly).
 The return has to be mailed by April 15th unless they
request an extension (Form 4868).
 Address the envelope for paper filed returns.
 There are different mailing addresses for taxpayers who
have tax due and those getting a refund.
 The sites will have envelopes/labels in the Site Box.
 Attach federal copy of Form(s) W-2 to the 1040, as well as
any other information documents that have federal tax
withholding (e.g., Form 1099s).
 Make a complete copy of the tax return (including the
Michigan and city return) for the client to keep, and
instruct them to bring it with them next year.
If There is a Refund
 If the client has a bank account and wants direct
deposit of their refund, make sure that you
include the routing number and account number
on the return. This will speed up the refund.
 Refunds for E-filed returns should be deposited
within 3 weeks of the day we prepare it.
 Checks will take about a week longer.
 For Federal paper returns, refunds require 6 –8
weeks to be processed.
 There is a phone number and a website on the
large client envelope for contacting the IRS to
determine the status of a refund.
If There is a Refund
 If the client doesn’t have a bank account,
suggest that they contact the Financial
Literacy Program at Accounting Aid Society.
 Party store banking is expensive!
If There is a Refund
 Past due debts may be subtracted from
refunds.
 These include past-due Federal and State
income taxes, child support and student
loans.
 Injured spouses who file a joint return and
still want to receive their portion of a refund
should file Form 8379, Injured Spouse Claim
and Allocation.
If There is Tax Due
 Most of our clients will be getting money back, but a few
will owe the IRS money.
 This often happens when there is self-employment or
unemployment income.
 TaxWise will prepare a Form 1040-V payment voucher to be
sent with the check or money order.
 For e-file returns, verify with the client that they still want to
e-file their return. Their return would be transmitted that
week, but explain to them that they have until April 15 to
make payment using Form 1040-V.
 For paper returns, Form 1040-V and the check or money
order should be included with the return when it is mailed.
 It is possible to request (for a fee) a monthly installment
agreement to pay any tax that is due – see Form 9465.
Recommendations
 We need to ask appropriate probing questions.
 Don’t assume that all children live with the
taxpayer or that any of the other tests for
dependency, filing status, etc., have been met.
 It’s not necessary to memorize all the flowcharts
and eligibility rules, but you do need to recognize
unique situations and use the tools provided.
 Consult IRS Publication 17 when you encounter
something out of the ordinary. Don’t guess.
Thanks for attending this session!
 A special thanks to Rich Odendahl for his
work in developing this presentation.