SaveFirst: A Tax Preparation and Financial Literacy Initiative

1
SaveFirst A Tax Preparation and Financial
Literacy Initiative

• Intermediate
• Tax Training

2
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

3
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

4
Itemized Deductions

• Every taxpayer can take a specific amount for a
  standard deduction, which reduces taxable
  income.
• There are certain designated expenses that a
  taxpayer can choose to list out separately, and
  if they total more than the standard deduction,
  the taxpayer will itemize his deductions, which
  reduces his taxable income by a greater amount.

5
Itemized DeductionsWhen to Itemize

• On the federal level, a taxpayer generally needs
  to have a home mortgage payment or a large number
  of medical bills to be better off itemizing.
• On the state level, the standard deduction is
  much lower, and itemizing may be beneficial at
  the state even when it is not at the federal.

6
Itemized DeductionsWhen to Itemize

• If a taxpayer has answered yes to the itemized
  deductions questions on the interview sheet,
  complete the Schedule A to see if it is
  beneficial to itemize at the state or federal
  level.
• If the Alabama A appears with a green check,
  complete the Schedule A fully.

7
Itemized Deductions

• The main expenses that are itemized
• Unreimbursed Medical Expenses
• Charitable Contributions
• Taxes
• Home Mortgage Interest
• Miscellaneous Deductions

8
Itemized DeductionsUnreimbursed Medical Expenses

• A taxpayer can claim unreimbursed medical
  expenses for
• Himself/Herself
• Spouse
• Dependents

9
Itemized DeductionsUnreimbursed Medical Expenses

• Taxpayers can only deduct the amount of expenses
  that exceeds 7.5 of AGI.
• At the Alabama level, taxpayers can deduct the
  amount of expenses that exceeds 4 of AGI.

10
Itemized DeductionsUnreimbursed Medical Expenses

• Deductible expenses
• Prescription drugs
• Health insurance premiums
• Long-term care insurance premiums (cap on amount
  based on age)
• Co-pays to doctor, dentist, eye doctor
• Cost of glasses, hearing aids
• Cost of medical equipment
• Cost of surgery, operations
• Miles to and from doctor

11
Itemized DeductionsUnreimbursed Medical Expenses

• Nondeductible expenses
• Life insurance policy premiums
• Nonprescription drugs
• Funeral, burial, cremation costs
• Unnecessary cosmetic surgery

12
Itemized DeductionsCharitable Contributions

• Contributions must be made to organizations that
  are organized for religious, charitable,
  educational, scientific, or literary purposes.
• Nonqualifying organizations include businesses,
  civic or political organizations, social clubs,
  foreign organizations, homeowners associations.

13
Itemized DeductionsCharitable Contributions

• Deductible items
• Monetary donations
• FMV of clothing, furniture
• Uniforms required to be worn during service
• Unreimbursed transportation expenses
• Must subtract FMV of any good received in
  exchange for the donation.
• Taxpayer must keep receipts!

14
Itemized DeductionsCharitable Contributions

• Nondeductible expenses
• Raffle, bingo, lottery tickets
• Tuition
• Value of time of service
• Blood
• Contributions to individuals

15
Itemized DeductionsTaxes

• Deduct taxes imposed on and paid by the taxpayer.
• Taxpayers cannot deduct a tax they pay for
  someone else, their own tax someone else pays, a
  tax not paid in 2008.

16
Itemized DeductionsTaxes

• State and local taxes
• Real estate taxes (Property Tax)
• Sales taxes
• Ad valorem tax on car tags
• Nondeductible taxes federal taxes hunting
  licenses water/sewer taxes on alcohol, tobacco,
  or gas utilities

17
Itemized DeductionsHome Mortgage Interest
18
Itemized DeductionsInterest

• Personal interest cannot be deducted (e.g.,
  interest on personal loans, car loans, or credit
  cards).

19
Itemized DeductionsMiscellaneous Deductions

• Union dues
• Uniforms (that cannot be worn in any other
  circumstance)
• Professional books, journals
• Employment-related educational expenses
• Expenses for looking for a new job
• Tax preparation fee from last year
• Safe deposit box
• Gambling losses up to amount of winnings

20
Itemized DeductionsMiscellaneous Deductions

• Nondeductible Expenses
• Burial or funeral expenses
• Wedding expenses
• Fees and licenses
• Fines, penalties, traffic tickets
• Home repairs and insurance
• Rent
• Insurance premiums (except health)
• Losses from sale of home

21
Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums
• 2. Vitamins
• 3. Federal income tax
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

22
Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins
• 3. Federal income tax
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

23
Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

24
Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan
• 5. Church contribution
• 6. Tax preparation fee from last year

25
Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan (NO)
• 5. Church contribution
• 6. Tax preparation fee from last year

26
Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan (NO)
• 5. Church contribution (YES)
• 6. Tax preparation fee from last year

27
Itemized DeductionsExercise 1

• Are the following expenses deductible?
• 1. Medical insurance premiums (YES)
• 2. Vitamins (NO)
• 3. Federal income tax (NO)
• 4. Interest on car loan (NO)
• 5. Church contribution (YES)
• 6. Tax preparation fee from last year (YES)

28
Itemized Deductions

• TAXWISE EXERCISE

29
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Deductions
• Intermediate Credits

30
Self-Employment Income

• We can file a Schedule C-EZ if the taxpayer
• Had business expenses of less than 5,000
• Cash method of accounting
• No inventory
• No net loss
• Only one business (if taxpayer owns a business)
• No employees during the year
• Does not want to depreciate

31
Self-Employment Income1099-MISC

• Income reported in Box 7 on a 1099-MISC is
  considered self-employment income and should be
  reported on a Schedule C-EZ.

32
Self-Employment Income1099-MISC
Box 7 Nonemployee Compensation
33
Self-Employment IncomeSchedule C-EZ

• Include net profit
• Deductible expenses advertising, vehicle
  expenses, insurance, interest, legal and
  professional services, repairs, 50 of business
  entertainment, utilities
• If deducting car expenses, you will need to
  provide additional information on the Schedule
  C-EZ.

34
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

35
Pensions Retirement Plans

• Pension series of payments for past work
• Annuity series of payments from a contract with
  company, trust, individual
• 401(k) Plan employer contributes part of
  employees cash wages to a retirement plan on a
  pre-tax basis (not subject to income tax when
  deferred)

36
Pensions Retirement Plans
37
Pensions Retirement Plans

• A retirement plan is fully or partially taxable
  depending on whether the employee contributed to
  the plan.
• The cost of the pension is the amount that the
  employee contributed.

38
Pensions Retirement Plans

• If the taxpayer did not contribute to the cost of
  the pension plan (e.g., all of the contributions
  came straight from the employer), the plan is
  fully taxable.
• If the taxpayer contributed to the plan with
  before-tax dollars, the plan is fully taxable.

39
Pensions Retirement Plans

• If the taxpayer contributed to the plan with
  after-tax dollars, the plan is only partially
  taxable.
• Part of the pension income received has already
  been taxed. Therefore, only part of the pension
  plan is taxable.
• Roth IRAs are not taxable because all
  contributions were made with after-tax dollars.

40
Pensions Retirement Plans

• If the taxpayer contributed to the pension with
  after-tax dollars (has a cost to recover), he
  can exclude part of each pension payment from
  income until all of the cost has been recovered.
• Tax-free portion remains the same each year.

41
Pensions Retirement Plans

• You can prepare returns for retired individuals
  if the taxable amount of the retirement
  distribution has been determined.

42
Pensions Retirement PlansRailroad Retirement

• RRB-1099 treat like SSA-1099 (e.g., social
  security benefits)
• RRB-1099-R treat like 1099-R (e.g., pension)

43
Pensions Retirement PlansAlabama Tax Rules

• Defined Benefits Plan Employee receives a
  specific amount of money based on salary history
  and years of service. Contributions from
  employee, employer, both. Employer bears
  investment risk.
• Defined Contributions Plan (e.g., 401(k) or
  403(b) Employee chooses to defer part of salary
  into plan. Employee bears investment risk.

44
Pensions Retirement PlansAlabama Tax Rules

• Defined Benefits Plans are not taxable at the
  Alabama level.
• We have a list that covers most plans that are
  not taxable, but if your taxpayers plan is not
  listed, you must contact the plan administrator
  to determine if it is a defined benefits plan.
• BE SURE TO CLICK BOX 1 IN TAXWISE IF IT IS A
  DEFINED BENEFITS PLAN.

45
Pensions Retirement PlansAlabama Tax Rules
46
Pensions Retirement PlansAlabama Tax Rules

• 1099-R issues can get complicated when the
  taxpayer does not have enough information
  regarding his/her retirement plan.
• You may need to call the IRS or the company that
  administers the retirement plan to find out if it
  is a defined benefits or defined contributions
  plan.

47
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

48
Adjustments to Income

• Adjustments decrease taxable income.
• Lines 23-37 on Form 1040.

49
Adjustments to IncomeEducator Expenses

• K-12 teachers, counselors, administrators who
  work at least 900 hours in the year
• Deduct 250 of classroom expenses, including
  books, supplies, or equipment
• Must reduce if reimbursed, had tax-free interest
  on savings bonds, or non-taxable earnings from
  QTP, ESA

50
Adjustments to Income½ of self-employment tax

• TaxWise will automatically calculate if you have
  completed a Schedule C-EZ.

51
Adjustments to IncomePenalty on early withdrawal
of savings

• TaxWise will automatically calculate if you have
  included this on the Interest Statement.

52
Adjustments to IncomeAlimony Paid

• Deduct alimony paid (be sure to calculate for
  year, not for one month)
• Must have recipients SSN
• Child support is NOT considered alimony

53
Adjustments to IncomeIRA Deduction

• IRA Individual Retirement Arrangement
• Personal savings plan that offers tax advantages
  to set aside money for retirement.

54
Adjustments to IncomeIRA Deduction

• Contributions to a traditional IRA can be
  deductible or nondeductible.
• Earnings and gains on the contributions are not
  taxed until withdrawn from the IRA account.

55
Adjustments to IncomeIRA Deduction

• Anyone under 70 ½ years of age who has taxable
  compensation can contribute to a traditional IRA.
• Contribution limit is the lesser of
• 4,000 (5,000 if age 50)
• Taxable compensation

56
Adjustments to IncomeIRA Deduction

• If the taxpayers file a joint return and one
  spouses compensation is greater than the
  others
• Married taxpayers combined contributions cannot
  exceed combined compensation
• Neither spouse can contribute more than 4,000
  (5,000 if age 50)

57
Adjustments to IncomeIRA Deduction

• Contributions for 2008 can be made up until the
  due date of the return (e.g., April 15, 2009).
• An excess contribution above these limits and any
  earnings on it will be taxed.
• Nondeductible IRA contributions should still be
  reported on Form 8606.
• If the taxpayer has made excess contributions,
  refer them to a paid preparer.

58
Adjustments to IncomeIRA Deduction

• The allowable deduction may be adjusted based on
  filing status, whether or not the taxpayer/spouse
  is covered by an employer retirement plan, and
  income.

59
Adjustments to IncomeIRA Deduction

• Taxpayers may incur penalties for
• Excess contributions
• Early withdrawals
• Too little withdrawals

60
Adjustments to IncomeStudent Loan Interest

• Can deduct up to 2,500 of interest paid
• Taxpayer
• Spouse
• Dependent (when the loan was obtained)
• Student must have been enrolled at least
  half-time in a program leading to a degree,
  certificate, or other credential.

61
Adjustments to IncomeStudent Loan Interest

• Filing status cannot be MFS.
• Taxpayer cannot be claimed as dependent.
• Qualified expenses include tuition and fees, room
  and board, books, supplies, and other necessary
  expenses.
• Must be reduced by scholarships,
  employer-provided benefits, or tax-free
  educational assistance.

62
Adjustments to IncomeStudent Loan Interest

• Eligible schools are those that qualify to
  participate in student aid program or conduct
  internship/residency programs leading to a degree
  or certificate.
• Must be accredited.

63
Adjustments to IncomeTuition Fees Deduction

• Deduct up to 4,000 of higher education expenses
  for taxpayer, spouse, or dependent whom taxpayer
  claims.
• Cannot be MFS
• Cannot be a dependent
• Cannot also claim Hope and Lifetime Learning on
  same student

64
Adjustments to IncomeTuition Fees Deduction

• Eligible expenses include tuition, fees, and
  other expenses required for enrollment
• Non-eligible expenses include transportation,
  room board, insurance, medical expenses, living
  expenses

65
Adjustments to IncomeTuition Fees Deduction

• Institution must be able to participate in
  student aid programs administered by Dept of
  Education (almost all accredited schools)
• Must reduce if receive tax-free scholarship
• Can claim if paid with loan

66
Adjustments to IncomeJury duty pay given to
employer

• Jury duty pay is taxable income.
• But, if that pay were given to employer, it can
  be deducted as an adjustment.
• On TW, find the line for Other under line 35.

67
Intermediate Tax Training Outline

• Itemized Deductions
• Self-Employment Income
• Retirement Plans
• Adjustments to Income
• Intermediate Credits

68
Intermediate CreditsForeign Tax Credit

• Take if a taxpayer paid income to a foreign
  country U.S. possession or political
  subdivision, agency, or instrumentality of a
  foreign country.
• We may see some foreign tax reported on a
  1099-DIV. See the student training guide for
  requirements for reporting directly on Form 1040.