Tax Basics
Taking Some of the Confusion
Out of Filing Your Taxes
Montgomery County
Julie D. Judy
Family and Consumer Sciences
“Educating People to Help Themselves”
Overview
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Ways to File
Basic Tax Equation
Income Sources
Deductions
Exemptions
Credits
Pitfalls
Paying Your IRS Debt
How Can You File?
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e-file through the IRS
Tax Software
On-site Preparers
Certified Public Accountants
Tax Attorneys
VITA Sites
Definitions
• Gross Income: total amount of money you make
• Deductions: items that reduce your taxable income
• Exemptions: items that reduce your taxable income
• Adjusted Gross Income (AGI): Gross income
minus deductions
• Credits: items that reduce the amount
of taxes that you owe
Simplified Tax Formulas
Basic Steps for Determining Taxes Owed (or Refund)
1. Gross Income – Deductions & Exemptions = AGI
2. AGI x Tax Rate = Taxes Due (or Refund)
3. Taxes Due – Credits = Total Taxes Paid (or Refund)
Ex.
Susan’s salary = $30,000
Deductions/Exemptions = $10,000
AGI = $20,000
$20,000 x 15% = $ 2,245
Credits = $ 3,000
Refund = $ 755
Sources of Income
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Employment Wages (W-2)
Investments
Social Security Benefits
Pensions or Annuities (1099-R)
Government Payments (1099-G)
Tax Refund from last year
Home Sales
Other Income (including children’s income)
Biggest Deductions
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Home
Children
Cars and Personal Property
Medical Expenses
Education
Charitable Contributions
Retirement/Investments
Exemptions
• Self
• Spouse
• Dependents
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Tax Credits
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Earned Income Credit
Child Tax Credit
Dependent and Child Care Credit
Hope Credit
Lifetime Learning Credit
Retirement Savings Contribution Credit
More Credits
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Residential Energy Credits
Mortgage Interest Credits
Electric/Clean Fuel Car Credits
Health Coverage Tax Credit
Telephone Tax Refund
Elderly/Disabled Credit
Refundable vs. Non-refundable
• Refundable credits allow you to get
money back when you don’t owe any
taxes.
• Non-refundable credits will reduce the
amount of taxes you owe but will not
give you money back.
Common Mistakes
• Not filing
• Not providing proper documentation for
charitable contributions
• Ignoring preprinted IRS materials
• Forgetting to sign your return
• Not meeting the deadline
TAX HELP
• Personal Computer – www.irs.gov
– FAQs
– Forms and Publications
– Refund Status
• Telephone
– Order forms and publications (1-800-829-3676)
– Ask questions (1-800-829-1040)
– Prerecorded messages (1-800-829-4477)
• In-person – 1-800-829-1040 for locations
– VITA sites (Volunteer Income Tax Assistance)
– TCE sites (Tax Counseling for the Elderly)
– IRS Taxpayer Assistance Centers (local #s in phone book)
Consumer Beware!
Rapid Tax Refunds
or Refund
Anticipation
Loans (RALs)
Refund
Anticipation
Checks (RACs)
Stored
Value
Cards
Comparison of Options
E-file
RAL
RAC
SVC
$0
$100
$25
$25
$0
$32
$32
$32
Tax Preparation Fee $0
$146
$146
$146
Check Cashing Fee
$0
$65
$65
$0
Refund Receipt
7-10 days 1-4 days
7-10 days
7-10 days
APR
0%
Up to 700%
Advantages
Free; no
risk
Immediate cash No upfront costs;
bank account not
required
Bank account
not required
Risk
None
High:
may owe the
lender; damage
to credit
Low: no risk, but
high in cost
Medium:
overdrawn
accounts; loss
of card
Total
$0
$343
$268
$204
RAL Loan Fees
(including dummy
account fee)
Application/Admin
Fee
Better Options
To avoid paying unnecessary fees
for a rapid refund, consider any of
the following options:
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Open a bank deposit account
Don’t go to check cashers
File tax returns electronically
Delay paying bills
Have taxes done for free
What To Do with Your Refund
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Pay down/off some bills
Build up your emergency fund
Invest it
Splurge
Combination
Montgomery County
Julie D. Judy
Family and Consumer Sciences
“Educating People to Help Themselves”
Earned Income Credit (EIC)
• Started by Congress in 1975
• Provides income to workers and their families whether they owe
income taxes or not
• 27% of eligible families
do not participate
• Refundable
Eligibility
• Families with 2+ qualifying children, AGI up to
$36,348 ($38,348 for married filing jointly), up to
$4,140 in credit
• Families with 1 qualifying child, AGI up to
$32,001 ($34,001 for married filing jointly), up to
$2,506 in credit
• Workers age 25-64 with no qualifying children,
AGI up to $11,060, up to $376 in credit
EIC Values
What is a Qualifying Child?
• May be a natural child, grandchild, stepchild,
adopted child, foster child, or sibling if cared for
as your child
• Must be under 19 years of age (age 24 if fulltime student or ANY age if totally and
permanently disabled)
• Does not have to be your dependent but had to
live with you for more than half of the year
More About Children
• If divorced, either parent can claim a qualifying
child, but not both.
• If divorced, several qualifying children could be
divided between the parents by agreement.
• In cases of joint custody when the parents can’t
agree, the parent with whom the child lived the
longest during the year (or if that’s equal, the
parent with the highest AGI) can claim the child.
Requirements for EIC
• Must have earned income derived from wages,
salaries, tips, or self-employment
• Must file a tax return to receive money
• Must be a US citizen or resident alien for the entire
year
• Must have a valid Social Security Number (you and
any qualifying children)
• Cannot file as ‘married filing separately’
• Investment income cannot exceed $2,550
• Cannot file Form 2555 or 2555EZ, Foreign Earned
Income
Additional Information
• Non-taxable income is not included in AGI
• Filing for and receiving the EIC has no effect on
certain welfare benefits including food stamps,
low-income housing, supplemental security
income, and Medicaid.
• Temporary Assistance to Needy Families
(TANF) may be affected.
How Do You Get the Credit?
• Workers without children, File Form 1040 EZ
• Workers with children, file Form 1040A or Form 1040,
then file Schedule EIC
• If you owe, you subtract the credit. You will owe less or
get money back.
• If you don’t owe, you get money back.
– $500 taxes due
+ $2000 credit
= $1500 refund
Advanced EIC
• Not everyone is
eligible to participate
• File a W-5 form with
your employer
State and Local EICs
Some State and Local
Earned Income Tax Credits
Based on the Federal Credit
Refundable Credits
District of Columbia
Maryland
New Jersey
New York
Rhode Island
Non-refundable Credits
Delaware
Maine
Virginia
Local Credits
Montgomery County, Maryland
New York City, New York
Child Tax Credit (CTC)
• Up to $1000 per child
• Nonrefundable credit
• Must use Form 1040 or Form 1040A, not Form
1040EZ
• Must provide the name and identification
number (usually a Social Security number) on
your tax return (or Form 8901) for each
qualifying child
Qualifying Children for CTC
A qualifying child for purposes of the child tax credit is a
child who:
• Is your son, daughter, stepchild, foster child, adopted
child, brother, sister, stepbrother, stepsister, or a
descendant of any of them (for example, your
grandchild),
• Was under age 17 at the end of the tax year,
• Did not provide over half of his or her own support for
the tax year,
• Lived with you for more than half of the tax year, and
• Was a U.S. citizen, a U.S. national, or a resident of the
United States.
Limits to CTC
You will not receive the full $1,000 credit if either (1) or
(2) applies:
1. The amount you owe is less than the credit.
Ex. You owe $600. Because you only owe $600 and this
is a non-refundable credit, you will only receive $600
from the Child Tax Credit.
1. Your modified adjusted gross income (MAGI) is
above the amount shown below for your filing status.
– Married filing jointly - $110,000.
– Single, head of household, or qualifying widow(er) $75,000.
– Married filing separately - $55,000.
Additional Child Tax Credit
• This credit is for certain individuals who get less
than the full amount of the child tax credit.
• Refundable
Dependent & Child Care Credit
• Provides a credit for money paid to
someone to care for your child(ren)
• Both spouses must have earned
income, unless one was a full-time
student or mentally/physically
incapable of self-care
• Nonrefundable
Qualifying Expenses
• Care of your dependent who is under 13
• Care of your spouse who was mentally or
physically not able to care for him/herself AND
lived with you for more than one-half the year
• Care for your dependent who was mentally or
physically unable to care for him/herself AND
lived with you for more than one-half the year.
Additional Requirements
• Must provide taxpayer identification number of
the qualifying person
• Must report the name, address, and taxpayer
identification number of the care provider
unless the provider is tax-exempt
• Cannot file as ‘Married filing separately.’
• Cannot pay someone you claim as a
dependent, or your child under 19, even if you
don’t claim them as a dependent
Hope Credit
• A credit to help offset the costs of higher
education
• Nonrefundable credit
• Up to $1,500 for qualified education expenses
paid per eligible student
Claiming the Hope Credit
• You paid qualified expenses of higher education
• You paid for an eligible student
• The eligible student is yourself, your spouse, or your
dependent for whom you claimed an exemption on
your tax return
• Must file single or married filing jointly
• MAGI must be less than $53,000 or $107,000 for
married persons
• Cannot be a nonresident alien
• Cannot claim Hope and Lifetime Learning Credits for
the same student in same year
Qualified Expenses
• Tuition
• Student activity fees
• Course-related books, supplies and equipment
(if required by the institution as a condition of
enrollment)
Lifetime Learning Credit
• A credit to help offset the costs of higher
education
• Nonrefundable credit
• Up to $2,000 for qualified education expenses
paid per return
Comparing Education Credits
Hope Credit
Lifetime Learning Credit
Up to $1,500 credit per eligible student
Up to $2,000 credit per return
Available ONLY until the first 2 years of
post-secondary education are completed
Available for all years of postsecondary
education and for courses to acquire or
improve job skills
Available ONLY for 2 years per eligible
student
Available for an unlimited number of years
Student must be pursuing an
undergraduate degree or other recognized
education credential
Student does not need to be pursuing a
degree or other recognized education
credential
Student must be enrolled at least half-time
for at least one academic period beginning
during the year
Available for one or more courses
No felony drug conviction on student’s
record
Felony drug conviction rule does not apply
Retirement Savings Contribution Credit
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Up to $2000 per person
Nonrefundable
Must make eligible contributions
Must be born before January 2, 1988
Cannot be a full-time student
Cannot be someone else’s dependent
AGI cannot exceed $50,000 (married filing jointly),
$37,500 (head of household), or $25,000 (single,
married filing separately)
• Use Form 8880 to determine the rate and amount of
credit
• You must use Form 1040 or 1040A