1040 Local Office Training Materials

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Individual Taxation
and 1040 Preparation
“In this world nothing is guaranteed but death
and taxes”—Benjamin Franklin
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Main Sections of 1040 Return
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Part I- Income (Lines 7-22)
Part II - Adjustments to Income (Line 23-37)
Part III – Deductions (Line 40)
Part IV – Taxable Income and Tax Calculation
(Lines 43-44)
Part V – Credits (Lines 47-57)
Part VI – Tax Payments Withheld (Lines 6472)
Part VII– REFUND/PAYMENT (LINE 73)
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Bhattarai Family (4 People)
Gross income
$60,000
Deduct. for AGI
Adj. Gross Income
60,000
Less:
1a. Standard Ded.
10,300
1b. Itemized Ded.
12,000
(12,000)
2. Exemptions
Taxable Income
3,400
13,600
(13,600)
34,400
Tax Before Credits
$5,160
Less Credits
(1,000)
Less Taxes Withheld
(5,000)
Refund
840
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Filing Status
•
•
•
•
Single Individuals
Married Filing Joint (MFJ)
Married Filing Separate (MFS)
Head of Household (HH)- pay more than
50% of the household costs for a qualifying
dependent living with you, or parent not living with
you.
• Qualifying Widower-Death within two
years, and support child. File Married filing jointly the
year of death.
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Gross Income
Includes:
 Wages and Salary (Form W-2)
 Interest Income (Form 1099-INT)
 Dividends from Stock (Form 1099-DIV)
 Alimony
 Tips and Cash bonuses
 Capital Gains / Losses
 Unemployment compensation
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Compensation – Wages
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Adjustments to Gross Income (to
Calculate AGI)
Adjustments to AGI are (mainly) deductions, to reduce your income when the
government recognizes that they should not tax someone for a given
reason
Common deductions are:

1. 10% early IRA withdrawal penalties

2. Moving expenses (if the move is job required, more than 50 miles
away from original home, and have stayed at the place for more than 9
months): can deduct direct moving costs such as truck rental or motel
expenses
 Example of when taxpayer needs to keep documentation
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3. Business Expenses (Schedule C) – Beyond Scope
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4. Self-employment tax (50% deductible)
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5. Student loan interest deduction (Form 1098-E)
 Up to $2500 max
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Standard Deduction and Exemption
Standard Deduction amount depends on FILING STATUS and changes
every year. For 2007:

1. Single and MFS - $5350
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2. MFJ - $10,700 (double of Single)
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3. Qualified Widow/Widower - $10,700 (same as MFJ)
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4. Head of Household - $7850
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5. Dependent - $850 to $5350
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6. Additional if blind or if age 65 or older - $1050
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Standard Deduction and
Exemption
Exemptions
 1. Note that the number of exemptions
allowed per taxpayer is determined on the
first page of the 1040
 2. Per taxpayer and dependent, exemption
amount for 2007 is $3400 (note that a
dependent cannot claim an exemption unless
the taxpayer claiming him/her did not take it)
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Qualifying Child Requirements
Definition of a qualifying child for purposes of the dependency
exemption, child tax credit, EIC, dependent care credit and HOH
filing status.

Support Test- provided more than one-half of his or her support

Citizenship/Resident Test-Must be a citizen/resident of US, Mexico,
Canada

Joint Return Test

Relationship Test- Must be taxpayers child or a descendent of the
taxpayers child or taxpayers sibling
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Itemized Deductions
NOTE: The GREATER of the Standard Deduction or Itemized Deduction
should be taken.
Itemized deductions usually exceed the Standard when the taxpayer has
significant home mortgage interest; this greatly increases the taxpayer’s
annual expense, and the government takes that into account. A limited
number of items are allowed in the calculation of Itemized Deductions,
including:

1. Charitable Contributions
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2. Theft and Casualty
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3. Property and/or State/Local taxes
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4. Personal interest (includes mortgage)
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Taxable Income and Tax Rates
Single Rates
Married Rates
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Credits
Tax Credits mainly reflect government’s equity, social, and economic
considerations. All of them use AGI as a benchmark to determine the amount of
allowable credit.

Credits directly reduce the amount of tax owed by a taxpayer. For the purposes
of the VITA program, we will be focusing on the following credits:

1. Credit for child and dependent care expenses (line 48) –Child Under 13 years

2. Education credits (line 50); includes:

Hope Credit ($1650 $/$), OR Lifetime Learning Credit (20% up to $2000)
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3. Child tax credit (line 53) –Under 17 child ($1000)
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4. Earned Income Credit (line 66a) –For working poor even if you didn’t pay tax
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5. Additional child tax credit (line 68)
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Payment or Refund
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Compare taxes after credits to:
Taxes withheld during the year
Difference is Payment or Refund
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2008 Economic Stimulus



Must file a tax return to qualify
Most individuals will receive $600 ($1200 for
joint filers)
Another $600 per each additional child
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Nepali Specific Issues

Students must file 1040NR for first five years
of residence in U.S.


Not allowed to take standard deductions
Only allowed to take certain itemized deductions
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When to File
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
Due April 15th
Automatic 4 month extension (file Form 4868)
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No impact if you are getting refund
Will get charged interest if you have to pay
Additional 2 month extension available
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Simple Tax Planning Ideas
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401ks and Retirement Accounts provide tax deferral
Defer paying off student loans as long as possible
Invest in Stocks: LT Gains taxed at maximum of
15%, losses deductible up to $3000
Interest income taxed at ordinary tax rates, try to
convert to dividend income taxed at 15%
Start a business, more deductions possible
Rental Properties—Depreciation will provide income
buffer
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Free Resources
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AccountAbility MN: Free tax preparation to
individuals with income of $30,000, families
with an annual income of $40,000
IRS Free Efile if you make less than $54K
http://www.hrblock.com/taxes/tax_tips/index.h
tml
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