Tax Return Basics
SWASFAA Conference
November 8 – 10, 2006
What must FAAs know about
Federal tax returns????
Federal Student Aid Handbook states
“Financial Aid Administrators must have a
fundamental understanding of relevant tax
issues that can considerably affect the
need analysis. (06-07 page AVG-101)
Required Verification Items from
Tax Return
• Adjusted Gross Income
• U.S. Income Taxes paid
• Certain Untaxed Income and
Benefits
FAAs should have a basic
understanding of:
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•
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Filing Requirements
Filing Status
Personal Exemptions
Implied Assets
FAAs are required to know…
• whether individual was required to file a
federal tax return
• what the correct filing status should be
• that an individual cannot be claimed as an
exemption by more than one person
Conflicting Information
• There are zero assets on the FAFSA yet there is
business and/or investment income on the Tax
Return
• Discrepant tax data such as incorrect filing
status, incorrect number of personal exemptions,
or failure to file when required are all considered
conflicting information
• FAAs MUST resolve conflicting information
before disbursing FSA funds
Conflicting Information (cont.)
• “..a school must have an adequate internal
system to identify conflicting information –
regardless of the source and regardless of
whether the student is selected for verification..”
• “If you discover discrepancies after disbursing
FSA funds, you must still reconcile the conflicting
information and take appropriate actions under
the specific program requirements.”
06-07 AVG-101
Who is required to file a tax
return?
• To determine if a taxpayer is required
to file a federal return, you need to
know:
– Marital status
– Age
– Gross Income
Who is required to file a tax
return?
• Generally a federal tax return IS required when
gross income equals or exceeds the taxpayer’s
standard deduction plus personal exemptions.
– Exception: Self employment net earnings > $400
– Exception: Church employee income > $108.28, if church is
exempt from employer social security and Medicare taxes
– Exception: Married filing separate taxpayer, if gross income
exceeds personal exemption ($3,200 in 2005)
– Exception: Taxpayer received “advance” earned income credit
(EIC) payments from employer (box 9 on W-2)
– Exception: Taxpayer received tip income that was not reported to
their employer
Gross Income Filing
Requirements for 2005
Individuals who are:
Single
Under 65
65 or older
Required to file if
gross income is:
$ 8,200
$ 9,450
Married Filing Jointly
Both under 65
One spouse 65 +
Both 65 or older
$16,400
$17,400
$18,400
Gross Income Filing
Requirements for 2005 (cont)
Married Filing
Separately (any age)
Head of Household
Under 65
65 or older
Qualifying Widow(er)
With Dependent Child
Under 65
65 or older
$ 3,200
$10,500
$11,750
$13,200
$14,200
Filing Requirements for
Dependents*
• If parents (or someone else) can claim taxpayer
as a dependent*, then taxpayer has different
filing requirements (Generally cannot be considered a
dependent* on someone else’s tax return if income is >
$3,200 unless < 19 or full-time student < 24.)
• For dependents* the marital status, the age, and
gross income determine if a return is required
Note: *IRS dependent is NOT the same as a Financial Aid dependent
student
Filing Requirements for
Dependents* (cont)
Single Dependents* (Under 65 & Not Blind) Must
File a Return in 2005 if:
– Unearned income was more than $800
– Earned income was more than $5,000
– Gross income was more than the larger of:
• $800 or
• Earned income (up to $4,750) + $250
Note: *IRS dependent is NOT the same as a Financial Aid
dependent student
Filing Requirements for
Dependents* (cont.)
Married Dependents* (Under 65 & Not Blind) Must
File a Return in 2005 if:
– Unearned income was more than $800
– Earned income was more than $5,000
– Gross income was at least $5 and spouse files a
separate return with itemized deductions
– Gross income was more than the larger of:
• $800 or
• Earned income (up to $4,750) + $250
Note: *IRS dependent is NOT the same as a Financial Aid
dependent student
IRS Form 4506-T
• FAAs may request the taxpayer to verify
non-filing status by completing IRS Form
4506-T Request for Transcript of Tax
Return (Section 7)
Caution – Taxpayer’s 1099 and W-2 Forms must be reported to SSA
• Taxpayer may also request Tax Return
Transcript using Form 4506-T (Section 6a)
- Includes most line items from tax return
- Available for current year as well as three prior years
Federal Tax Filing Status
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•
•
•
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Single
Married filing jointly
Married filing separately
Head of household
Qualifying widow(er)
Federal Tax Filing Status (cont.)
• Single
- Taxpayers who are legally separated or have final divorce decree
as of December 31 would file as Single (or Head of Household, if
eligible)
• Married (as of December 31 of tax year)
- Married taxpayers living together at the end of the year
may file either:
- Married filing jointly, or
- Married filing separately
- Same sex unions are not considered “married” on the FAFSA
(Reference GEN 05-16)
- If Spouse dies during the year, taxpayer still considered married
for the entire year for tax purposes.
Federal Tax Filing Status (cont.)
• Married (cont.)
- Common
Law Marriages are recognized in 16 states
including Oklahoma and Texas. Generally to be considered
“common law married” heterosexual couples must:
- cohabitate for a “significant (undefined) period of time”,
- hold themselves out as married (refer to each other as
“my husband” or my wife” and/or file a joint tax return), AND
- intend to be married.
• Head of household
- Taxpayer is unmarried or “considered unmarried” on the last day of
the year
- Taxpayer paid more than half the cost of keeping up a home for
the year
- Taxpayer had “qualifying child and/or relative” live in their home for
more than half the year (exceptions would include children away
at school or parent(s) who met the support test.)
Federal Tax Filing Status (cont.)
• Head of Household (cont.)
- A married taxpayer may file as Head of Household if they are
considered “unmarried” for tax purposes and meet other HOH
eligibility requirements.
Refer to IRS Pub.17
• Qualifying Widow(er) w/ Dependent Child
- Taxpayer may be eligible to file as Qualifying widow(er) for two
years following spouse’s death if
- eligible to file joint return when spouse was living
- taxpayer has child, step-child, foster child or adopted child for
whom they can claim an exemption
- taxpayer paid more than half the cost of keeping up a home
that is the main home for the child for the entire year.
Married but Considered Unmarried
for Tax Purposes
A married Taxpayer is considered “unmarried” for tax
purposes on the last day of the tax year IF they meet
ALL five (5) of the following tests:
– Taxpayer files a separate return
– Taxpayer paid more than half the cost of keeping up their home
for the tax year
– Taxpayer’s spouse did NOT live in their home during the last 6
months of the tax year. Their spouse is considered to live in their
home even if he/she is temporarily absent due to special
circumstances.
– Taxpayer’s home was the main home for their child for more than
half the year or the main home of a foster child for the entire year
– Taxpayer must be able to claim an exemption for the child
(unless non-custodial parent is allowed to claim exemption using
IRS Form 8332-”Release of Claim to Exemption for Child of
Divorced or Separated Parents”)
“A legally married couple that is living
together on December 31 can NEVER use
head of household as a filing status. If
they use head of household as their filing
status, you have conflicting information”
NASFAA Student Aid Transcript “Discovering
Tax Discrepancies” by James Briggs, 2005
Personal Exemption
• Only one personal exemption is allowed
per person
- Schools must resolve situations where the
student claimed his/herself as a personal
exemption AND the parent claims the
student as well. Either the parent or
student must file an amended return.
Revenue Producing Assets
• Rental Properties, Oil/Gas Royalties,
Partnerships, S-Corps – Schedule E
• Self Employment Income – Schedule C or
Schedule C-EZ
• Stocks and Bonds – Dividend Income – 1040
Line 9a
• Capital Gains/Losses - Schedule D
• Depreciation - Schedule 4562
• Mutual Funds, Savings Accounts, Trusts
Assets
• Property owned by the family with an
exchange value
• Required to report on the FAFSA
- Cash, Savings, & Checking Accounts
- Investments
- Businesses (except Small Business Assets <100 employees GEN 06-05)
- Investment Farms
• Value as of the day the FAFSA was signed
- Net Worth Reported (FMV minus debt owed)
- Partial Ownership of an Asset
Excluded Assets include:
• Personal Property including Cars, Stereos, Clothes &
Furniture
• Principal Place of Residence
• Family Farm (must materially participate/reside on farm)
• Net worth of a family-owned and controlled small
business <100 F.T. employees (GEN 06-05)
• Value of Qualified Education Benefit Plans if dependent
student is owner of plan (GEN 06-05)
• Value of Pensions & Whole Life Insurance Plans
• Certain Assets for Native American Students
(06-07 AVG19)
Resolution of Conflicting Tax
Information
“If an institution has reason to believe that
any information on an application used to
calculate an EFC is inaccurate, it shall
require the applicant to verify the
information that it has reason to believe is
inaccurate.” 34 CFR 668.54(a)(3)
Resolution of Conflicting Tax
Information
• Possible resolutions include:
– Amended tax returns
– Change of facts/Written explanation
– Statement from IRS/tax preparer
• Resolution must be documented in the
student’s file
Acceptable Tax Returns
• A copy of the original signed return (1040,
1040A, or 1040EZ (photocopy, fax, or digital
image)
• A copy of the original unsigned return with the
signature of the filer (at least one of the filers if a
joint return)
• A tax form that has been completed to duplicate
the filed return with at least one filer’s signature
Acceptable Tax Returns (Cont.)
• Electronic Return if it contains all the information
normally provided on the IRS tax return with the
filer’s signature (IRS Form 8453 is not
acceptable)
• A copy of an IRS form with tax return information
that the IRS mailed directly to your school
(otherwise must be signed by one of the filers)
• TeleFile discontinued in 2005
Tax Preparer Signatures
• In lieu of the signature of the tax filer, the school may
accept a return on which the tax preparer has stamped,
typed, signed, or printed his/her name AND his/her
SSN, EIN (Employer Identification Number) or PTIN
(Preparer Tax Identification Number)
• “Tax Preparer’s Name” refers to an individual person’s
name, not the name of a company or organization. For
example, “H&R Block” would not be acceptable as a tax
preparer’s name.
1040 Required?
• To determine if the student qualifies for the
simplified need formula or auto zero EFC you
must determine if the tax filer was REQUIRED to
file a 1040 instead of a 1040A or 1040EZ
(See IRS Publication 17 “Which Form Should I Use?” pages 6 - 8)
• The maximum income to file a 1040A and
1040EZ have increased; the AGI limit for the
simplified needs analysis has not changed
• If a 1040 was filed solely to claim an education
tax credit the applicant may still eligible for the
simplified formula or auto zero EFC
Simplified Needs Test
• To be eligible:
– AGI less than $50,000; and
– Student/Spouse (Independent) or Parent (Dependent)
were not required to file or were eligible to file 1040A
or 1040EZ, or
– Student/Spouse (Independent) or Parent/Student
(Dependent) received means-tested benefits in
previous 12 month period (DCL GEN 06-05)
• Asset information NOT considered in the EFC
calculation
• States & Schools may require asset information for their
own aid programs
Automatic Zero EFC
• Parent/s (Dependent) or Student/Spouse
(Independent) had adjusted gross income of
$20,000 or less; and
Either
• Parent/s (Dependent) or Student/Spouse
(Independent) were not required to file or were
eligible to file 1040A or 1040EZ, or
• Parent/Student (Dependent) or Student/Spouse
(Independent) received means-tested benefits in
the previous 12-month period (GEN 06-05)
Resources
• 2006-2007 Federal Student Aid Handbook
http://ifap.ed.gov
• IRS Publication 17 - Federal Income Tax for
Individuals www.irs.gov or (800) 829-3676
• IRS Form 4506-T
• Student Aid Transcript, The Tax Detective
Discovering Tax Discrepancies
Questions???
Deborah McIntyre
Tulsa Community College
Email: dmcintyre@tulsacc.edu
Telephone: (918) 595-7284