VITA Tax Preparer Training Slides Set #2

Volunteer Tax Assistance at

United Way of Washtenaw County

Requirements for VITA volunteers All VITA volunteers must adhere to IRS volunteer standards of conduct, which requires them to view a presentation & take a 10 question certification test. All VITA volunteers must also review a Powerpoint presentation regarding the intake form we use to help clients with their taxes. Return preparers/reviewers/site coordinators must obtain additional training.

What do I do next? Go to www.uwgive.org/vitavolunteers to access training for “Return Preparers”.

Steps 1-4,6,8 & 9 are done. Now, steps 5,7,11 & 13

Pathway for Preparers 5. You must take and pass either the Basic test (recommended for new volunteers) or the Advanced test (required for reviewers and recommended for returning volunteers). You must get at least 80% of the questions correct. You may only take test twice, so contact Gina Torielli or Melissa Gilchrist for assistance if you do not pass the first time. A print copy of the tests is available [6744]. We recommend you work through the relevant test and retest on the print copy, note your answers, then complete the test online. Note, online questions will come from either the printed test or retest, but will be questions will only come from one of those tests.

Lesson 3 – Filing Basics

Reminder 6. IRS has online course modules for all certification tests on Vita Central for learning the substantive tax law you are likely to see on returns we prepare. If you are unfamiliar with the EITC, filing status, the various child care and educational credits and deductions you should review the IRS courses. There are also hardcopy materials that are very helpful. Publication 4012 has flowcharts and checklists for common topics. You likely will use this publication a lot for the test and also on the VITA site. Lesson 3 – Filing Basics

POLL 1. How many completed the “homework” – Scenarios 1-5? 2. How many want to practice on returns right now?

Lesson 3 – Filing Basics

Pathway for preparers 7. The tests require you to prepare tax returns on the Taxwise software. There is a practice lab you should use for this purpose. To access the practice lab enter below the password “learntwo” (case sensitive). You will be prompted to create an account (not the same as your IRS certification test account.) We have prepared a step by step guide to using this software, which is available here*. We also have prepared a packet of Michigan documents* that you may use to prepare State returns for some of the scenarios. You will save time doing the federal and state returns together, and recording your answers on the Michigan certification test mentioned below.

Lesson 3 – Filing Basics

BETTER WAY TO PRACTICE 1. Using only IE or Chrome go to

www.twonline.taxwise.com/training

2. Use Client ID 2736072 3. Use your last name and first initial for both username & password 4. Create a new password. Lesson 3 – Filing Basics

Scenario 1 Q 1? – Personal exemptions. See 4012, Tab C, pp C-2 and C-3 “Can” not “Did”

Q 2? – Filing requirements. See 4012, Tab A, pp A-2

Lesson 3 – Filing Basics

Scenario 2 Q 3? – Filing Status See 4012, Tab B, p B-2 [Bonus question – Can Agnes be Joanne’s dependent?] Q 4? – ACA, Minimum essential coverage. Let’s talk about ACA

Affordable Care Act Most people will be required to prove health insurance coverage for themselves and their dependents. If a taxpayer does not have proof of insurance coverage for anyone, a Personal Responsibility Payment will be added to the return. Taxpayers cannot choose to not claim someone as a dependent to avoid this payment. It will be levied on the taxpayer who could have claimed the uninsured person as a dependent, even if the taxpayer chose not to claim the dependent exemption. 11

ACA – Minimal Essential Coverage MEC includes: • Medicare/Medicaid • Employee or Retiree coverage • COBRA • Private health insurance purchased directly or through the Marketplace • CHIP

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ACA – Minimal Essential Coverage MEC does not include: •Limited plans, such as dental, vision, or worker’s comp. •Limited Medicaid, such as pregnancy or familyplanning only plans •Accident or disability insurance For full list, see ACA-4 in Pub 4012

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ACA - Exemptions If TP does not have MEC, TP will be required to make a Personal Responsibility Payment, unless TP qualifies for an exemption: • No filing requirement • Single short gap (less than three months) • Member of Indian tribe • Undocumented alien • Incarcerated • Religious conscience • Not affordable (premiums exceed 8% of Household Income) For full list, see ACA-5 in Pub 4012

Lesson 3 – Filing Basics

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ACA - Marketplace • Private insurance may qualify for a credit. • Most private insurance is currently being sold on the government-run Marketplace. • Premiums on the Marketplace include an estimate of the credit. • In these situations, IRS requires a reconciliation between credit included in the premium & actual credit calculated on the tax return. • These returns will be handled by specialists.

Lesson 3 – Filing Basics

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ACA Two major issues for preparers:

1. Did every person in the household have MEC in each month of 2014? - If NO, get help For the basic test, you must know what MEC is. For advanced, you must know whether there is an exception to the requirement and who might be liable for the SRP penalty. 2. Did the taxpayer buy insurance on a healthcare exchange? – If YES, get help.

Lesson 3 – Filing Basics

Scenario 3 Q 5? Dependents Q 6? EITC Let’s talk about that.

(Is child a qualifying child?) (Is grandchild?

Lesson 3 – Filing Basics

What is the EIC? • A refundable tax credit available to eligible TPs who do not earn high incomes

• Qualifying TPs can receive a refund even if they have no filing requirement, owe no tax, & had no income tax withheld • 2014: Maximum EIC for families with three or more children is $6,143

Lesson 29 3 ––Filing Earned Basics Income Credit (EIC)

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Qualifying for the EIC • Three sets of rules: 1. General eligibility rules for everyone 2. Rules for TPs with one or more qualifying children 3. Rules for TPs who do not have a qualifying child • Review Pub 4012 (Tab i), Summary of EIC Eligibility Requirements; focus on Part A & Part D

• Avoid common EIC filing errors: • Incorrectly reported income • Incorrectly reported SSNs • Married TPs incorrectly filing as Single or Head of Household • Claiming a non-qualifying child

Lesson 29 3 ––Filing Earned Basics Income Credit (EIC)

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Rules for Taxpayers with Qualifying Children • Claiming a child who is not a qualifying child is one of the most common EIC errors; make sure you apply the rules correctly. • Review Pub 4012 (Tab I, page I-4): • Summary of EIC Eligibility Requirements, Part B • EIC General Eligibility Rules Interview Tips • EIC with a Qualifying Child Interview Tips • Qualifying Child of More than One Person

Lesson 29 3 ––Filing Earned Basics Income Credit (EIC)

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Rules for Taxpayers without Qualifying Children Rules are presented in Pub 4012 (Tab i) Part C, & in the Interview Tips

•Must be at least age 25 but under age 65 as of December 31 •Cannot be the dependent of another person • Check Part I, question 13 on Form 13614-C •Must have lived in the U. S. more than half the year

Lesson 29 3 ––Filing Earned Basics Income Credit (EIC)

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Scenario 4 ITIN return: Q 7? Filing Requirements

Q 8? EITC. Q9? Dependents

Lesson 3 – Filing Basics

Determining Alien Status • Nonresident aliens taxed differently from resident aliens • See Pub 4012 (Tab L), ITIN returns Determining Residency Status decision tree • Green card test • An individual with a green card is, for tax purposes, a resident alien • But not the only test!

Lesson 73 – Unique Filing Basics Filing Status & Exemption Situations

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Exemption for Nonresident Alien Spouse • What are two ways a citizen or resident alien who is married to a nonresident alien can claim the personal exemption for their spouse? • Treat the spouse as resident alien on a joint return, or • Treat the spouse as a nonresident alien on a Head of Household or Married Filing Separately return. • TPs must declare in writing that they are choosing to treat a spouse as a resident alien on a joint return.

Lesson 73 – Unique Filing Basics Filing Status & Exemption Situations

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Dependency Exemptions The dependency tests for a qualifying relative or qualifying child apply in the same way to citizens or resident aliens

• There may be unique issues with the support test & the citizen/resident test. Refer to: • Pub 4012 (Tab C) Personal Exemptions Interview Tips • Pub 17, Chapter 3, Citizen or Resident Test • Interactive Tax Assistant: Who Can I Claim as a Dependent? & How Much Can I Deduct for Each Exemption I Claim? • Special rules for children born overseas & adopted children

Lesson 73 – Unique Filing Basics Filing Status & Exemption Situations

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Scenario 5 Q 10? Filing Status Q 11? EITC

Lesson 3 – Filing Basics

Scenario 6 Q 12? Education Credits Q 13? Let’s talk about education.

Lesson 3 – Filing Basics

Taxable Scholarship Income • Taxable scholarship income may be reported on Form W-2 & Form 1098-T

• If the TP did not receive a Form W-2, the taxable amount should still be reported • Review Pub 4012 (Tab D) Tax Treatment of Scholarship & Fellowship Payments

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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Education Credits Introduction • Education credit amounts are based on qualified education expenses paid during 2014 • For an overview of education credits, see Pub 4012 (Tab J), Highlights of Education Tax Benefits • To help guide your interview, use Pub 4012 (Tab J), Education Credits • Disqualifying conditions include if a TP: • Can be claimed as dependent on someone else’s return • Files as Married Filing Separately • Has an AGI above the limit for the TP’s filing status • Was a nonresident alien for any part of 2014, & did not elect to be treated as a resident alien for tax purposes Lesson 23 3 ––Filing Education BasicsCredits

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Dependents / Eligible Institutions • To claim the credit for a student’s qualified expenses, the TP must claim the student as a dependent • Expenses must have been paid to an eligible educational institution • A searchable database of all accredited schools is available at http://ope.ed.gov/accreditation

Lesson 23 3 ––Filing Education BasicsCredits

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Qualifying Expenses • Qualified education expenses are tuition & certain related expenses required for attendance at an eligible educational institution

• The definition for “certain related expenses” differs between the lifetime learning credit & the American opportunity credit • Necessary proof of expenses includes such documents as receipts or Form 1098-T, Tuition Statement, issued by the school

• Qualified expenses must be reduced by the amount of any tax-free educational assistance TPs receive • TPs can claim payments that were prepaid for the academic period that begins in the first three months of the next year

Lesson 23 3 ––Filing Education BasicsCredits

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American Opportunity Tax Credit • Available for the first 4 years of college per eligible student • The credit covers 100% of the first $2,000 & 25% of the second $2,000 of eligible expenses, up to the amount of tax or a maximum of $2,500 • 40% of the credit is a refundable credit

• See Form 8863 Instructions for more information

Lesson 23 3 ––Filing Education BasicsCredits

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Lifetime Learning Credit • The credit is 20% of the first $10,000 of eligible expenses, up to the amount of tax or a maximum of $2,000 • The credit is non-refundable • Eligible students are not required to be enrolled at least half-time or in a degree program, & a felony drug conviction is not a disqualification • Refer to Pub 4012 (Tab J), Education Benefits for basic requirements

Lesson 23 3 ––Filing Education BasicsCredits

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Choosing Between the Credits / No Double Benefits TPs cannot receive multiple benefits for the same student’s expenses TPs have several options for claiming education expenses: 1. American opportunity credit or lifetime learning credit 2. Tuition & fees deduction 3. Itemizing on Schedule A 4. Reporting as business expenses on Schedules C or C-EZ

Lesson 23 3 ––Filing Education BasicsCredits

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Scenario 7 Q 14? IP-TIN Q 15? Interest income. Q 16? Social Security.

Lesson 3 – Filing Basics

Identity Protection • The IRS Identity Protection PIN (IP PIN) is a unique 6 digit number that is assigned annually to victims of identity theft for use when filing their federal tax return to show that taxpayer is the rightful filer of the return. For the 2013 filing season, IRS expects to provide more than 1.2 million IP PINs. The IP PIN will allow these individuals to avoid delays in filing returns and receiving refunds. • When assisting taxpayers who are victims or may be victims of identity theft at VITA/TCE site, you should: • Consult Tab P of the 4012 • Contact site coordinator for help with state issues.

Lesson 3 – Filing Basics

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Determining Taxable & Nontaxable Income What are the differences between taxable & nontaxable income? • Nontaxable (excludable) • Gifts & inheritances • Exempt income • Earned • Received for work, such as wages, business income • Unearned • Interest income from investments • Review Pub 4012 (Tab D) for examples

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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Determining Taxable & Nontaxable Income • Remember: Volunteers probe taxpayers to determine all sources of income

• Media: Videos & Audio for topic • FAQ, Taxable & Nontaxable Income

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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Reporting Wages, Salaries, Tips, etc. • Form W-2: Issued to employees by January 31, reports wages & other compensation

• Pub 4012 (Tab D) How/Where to Enter Income • Pub 4012 (Tab D) Form W-2 Instructions • Pub 4012 (Tab D) How to Enter Tips

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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Reporting Wages, Salaries, Tips, etc. • Remember: • Household employees earning less than $1,700 may not receive a Form W-2, but the income must be reported • Self-employed TPs who receive tips should include their tips in gross receipts on Schedule C

• Media: Videos & Audio for topic • Tax Map: Tip Income • Missing Form W-2 (YouTube video & Podcast)

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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Interest Income • Interest income (unearned income) is reported on Form 1099-INT • Common sources: savings accounts, CDs, saving certificates, government bonds, interest on insurance proceeds, loan interest • Use TaxWise Interest Statement worksheet

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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State & Local Refunds • On Form 1099-G, refund will be in box 2 • Report only if: • TP itemized deductions last year, & • Received an income tax benefit. • Do not report if state sales tax was deducted. • Taxable refund is reported on Form 1040, line 10 • Link to state tax refund worksheet in TaxWise

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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Alimony • Do not confuse child support payments with alimony • Where do you get alimony information? • Ask the TP • Alimony payments under an agreement executed before 1985 are out of scope

Lesson 83 – Income Filing Basics from Form 1040 Lines 7-11

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Lesson 9 – Business Income See Tab D, pD12-14 for Instructions. Form 1099- MISC will not automatically flow to the return. You must add it your self.

Lesson 3 – Filing Basics

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Social Security & Railroad Retirement Benefits • Pub 4012 (Tab D, p D-25) Railroad Retirement, Civil Service, & Social Security Benefits shows how to enter data in TaxWise

Lesson 14 3 ––Filing Income Basics – Social Security Benefits; Form 1040 Line 20a

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Finding the Taxable Portion The taxable amount, if any, depends upon: •Filing status & other reportable income •Whether the benefits were the TP’s only source of income • If the benefits were the only source of income, the benefits are generally not taxable, & the TP need not file a federal income tax return. • If the TP received other income, complete the Social Security Benefits Worksheet to calculate the taxable portion.

Lesson 14 3 ––Filing Income Basics – Social Security Benefits; Form 1040 Line 20a

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Scenario 7 •Q 17? Standard Deduction •Q 18? Balance Due.

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Amount Owed • Payment options for taxes owed are: • Check or money order submitted with Form 1040-V, Payment Voucher • Electronic funds withdrawal • Credit card • Electronic Federal Tax Payment System (EFTPS)

Lesson 30 3 ––Filing Refund Basics & Amount of Tax Owed

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Amount Owed • Review Pub 4012 (Tab K), Balance Due Returns whenever you prepare a return that has an amount owed • TPs who cannot pay the full amount owed may request one of the following agreements: 1. Pay in full within 60 or 120 days with no fee 2. Monthly installment payments using Form 9465, Installment Agreement Request, with a fee

• Balance due payments must be made by the April filing due date to avoid penalties & interest – NOT DATE OF EFILING. Lesson 30 3 ––Filing Refund Basics & Amount of Tax Owed

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Scenario 8 •Q 19? Filing Status •Q 20? “Child”? •Q 21? Taxes Withheld? •Q 22? Child & Dependent Care Expenses? •Child Tax Credits •Deduction for Child & Dependent Care •Let’s talk about that.

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A Nonrefundable Credit • Child tax credit allows TPs to claim a nonrefundable tax credit of up to $1,000 per child

• TPs who claim the child tax credit, but do not qualify for the full amount, may be able to also take the refundable additional child tax credit by completing Form 8812, Additional Child Tax Credit • Review Pub 4012 (Tab G), Child Tax Credit

Lesson 25 3 ––Filing ChildBasics Tax Credit

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Eligibility • To be a qualifying child for the child tax credit, the child must be claimed as the TP’s dependent

• A child must meet certain criteria to qualify for the credit • Review Pub 4012 (Tab G), Child Tax Credit Interview Tips • There are special rules for children of divorced or separated parents, as well as children of parents who live apart • TaxWise automatically determines a TP’s eligibility based on entries for children on the Main Information Screen

Lesson 25 3 ––Filing ChildBasics Tax Credit

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Calculating the Credit • TaxWise will automatically calculate the credit, provided you have correctly completed the: • Dependent section of the Main Information Screen • Form 1040 through the retirement savings contribution credit line • Part I of Form 5695, & Schedule R

Lesson 25 3 ––Filing ChildBasics Tax Credit

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Refund or Tax Due Form 8888, Allocation of Refund, is used to deposit a refund into up to three bank accounts • For more information, review Pub 4012: • Tab K, Split Refund Option • Tab K, Pointers for Direct Deposit of Refunds • Tab K, Balance Due Returns • Double-check accuracy of routing & account numbers for direct deposit refunds • Refund status can be checked at “Where’s My Refund” feature on www.irs.gov, or calling 1-800-829-1954 Lesson 30 3 ––Filing Refund Basics & Amount of Tax Owed

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U.S. Savings Bonds • TPs may purchase U.S. savings bonds with their tax refunds for themselves or for co-owners, such as children or grandchildren

• Form 8888 is used to buy savings bonds • Series I bonds are sold at face value & accrue interest until redeemed or until they reach their final maturity in 30 years

• Series I bonds pay interest based on a combination of a fixed rate & a semiannual inflation rate

Lesson 30 3 ––Filing Refund Basics & Amount of Tax Owed

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Third Party Designees • TPs may choose to authorize another person to discuss their tax return with the IRS • Volunteer tax preparers must never be designated as the 3rd party designee

Lesson 30 3 ––Filing Refund Basics & Amount of Tax Owed

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Printing & Storing Returns • TPs must receive copy of their tax return. To prepare packet: • Print the entire return using TaxWise • Ensure names & social security numbers are legible on every sheet • Assemble the packet starting with Form 1040, followed by each form, schedule, & attachment in order, based on the sequence number • Show TP printed copy of return, & verify key information is correct

• Advise TPs to keep tax-related documents for at least 3 years • Review Pub 4012: • Tab K, Last page, Distributing Copies of the Return

Lesson 32 3 ––Filing Concluding Basics the Interview

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Completing the Return • What are the final steps to completing a return? 1. Run diagnostics on the return 2. Print the return 3. Give the return to your designated quality reviewer 4. Assemble the return & all necessary documentation

Lesson 31 3 ––Filing Quality Basics Review of the Tax Return

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THE END

THANK YOU FOR YOUR ATTENTION!