2012 volunteer training manual
TRANSCRIPT
2012
Volunteer Tax PreparerTraining Manual
The 2012 Volunteer Training Manual is a work product of the Center for Economic Progress and cannot be used, reproduced, or distributed without the written consent of the Center for Economic Progress, 29 East Madison, Suite 900, Chicago, IL 60602. Contact [email protected] for more information. © 2011 Center for Economic Progress
THIS MANUAL IS DEDICATED TO ALL OF THE BRAVE, STRUGGLING, ANGRY, LAUGHING, CRYING MARY LAKES THAT COME TO THE CENTER FOR ECONOMIC PROGRESS (CEP) SITES.
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1 Basic Tax Preparation 1
Learning Objectives
1. Learn about CEP clients and how to obtain the information necessary to prepare complete and accurate tax returns.
2. Understand issues of basic income tax law that affect CEP clients: filing status, exemptions, qualifying children, and dependents.
3. Become familiar with tax site operations and the basic steps of tax preparation.
4. Be able to use resource tools to correctly determine filing status, dependents, and qualifying children.
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Center fOr eCOnOmiC PrOgress (CeP)
mission statement: The Center for Economic Progress (CEP) helps hard-working, low-income families move from financial uncertainty to financial security.
Local in service but national in voice, CEP achieves this mission in three ways: • We provide trusted tax and financial counseling, giving Illinois families the tools to make sound choices. • We lead a national coalition of organizations that promote economic progress for low-wage workers and
their families. • We advance policies and practices to create a financial system that works for all.
CEP has free tax sites in over 15 communities throughout Illinois. Each year, volunteers at these tax sites help more than 20,000 people file their taxes and get all the tax credits they’ve earned and refunds they’re owed. Our free tax sites are more than a place to get taxes prepared. At most sites, clients can open bank accounts and learn about ways to save.
Our tax sites are part of the Internal Revenue Service Volunteer Income Tax Assistance (VITA) program. This national program promotes and supports free income tax preparation and electronic filing to low-income families. The volunteer preparers at VITA sites receive free training and are required to pass a VITA certification exam each year.
A note from Our President
Dear Volunteers,
Thank you for joining us this tax season! Volunteers truly are the heart and soul of CEP.
We hope that your volunteer experience becomes one of the rewarding experiences in your life. And your efforts will be rewarded, not with dollars and cents, but with something incredibly more valuable – smiles of appreciation and the remarkable high that comes from having made a tangible difference in the life of helping families get the most out of tax time. In these challenging economic times, as many as one in three Illinois residents qualify for our services. Without you we wouldn’t be able to help the thousands of families and individuals we serve each year.
Before you can enjoy the experience of helping families get ahead, we ask that you satisfactorily complete your training. Our expert staff and instructors are here to support you. Again, thank you for volunteering and may our training not only provide you with the right tools and knowledge but inspire a renewed sense of purpose.
Warmly,
David marzahl President
IntroductionC H A P t e r 1
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TAX PREPARATION RESOURCES
Center for Economic Progress (CEP)
Volunteer training manual provides integrated instruction on basic tax law, CEP forms and procedures, and
TaxWise software.
You Can Do it! is a collection of guidelines, charts and instructions covering many aspects of tax and financial
services offered at our tax sites. The guide is designed to be a quick reference tool to use at the site.
Internal Revenue Service (IRS)
Hard copies of the following items are available at tax sites. Most IRS publications, forms and instructions are also
available online at www.irs.gov.
Publication 17, Your federal income tax is a comprehensive summary of basic federal income tax law. This
well-indexed book is a good resource tool for questions related to tax law.
Volunteer resource guide (Publication 4012) is a collection of flow charts and outlines designed for free
tax return preparers. Includes specific guidelines on TaxWise software.
form 1040 instruction Book contains line by line instructions, various tax worksheets, income tax tables,
and earned income tax credit tables.
Link & Learn independent study
Preparers are encouraged to take the online IRS Link & Learn tax law training and use the online Practice Lab
to supplement classroom training. Topics of particular interest include: filing status, dependency exemptions
and earned income tax credit.
CLASSROOM INSTRUCTORS
CEP’s tax preparation classroom instructors are selected for their tax knowledge, TaxWise expertise and tax
preparation experience. To learn more about individual instructors, visit www.economicprogress.org/volunteers.
Click on the resources tab. A menu will appear on the right that directs you to a number of training resources,
which will include instructor biographies.
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BASICS
site manager Directs overall site activities.
client flow Clients are taken on a first-come, first-served basis. The reception area will have a client sign-in sheet. income guidelines CEP’s tax sites serve clients with family incomes of $50,000 or less and single individuals who have no children with incomes of $25,000 or less.
electronic preparation All tax returns are prepared on computers, using TaxWise software.
electronic transmission Most current year (tax year 2011) federal and Illinois state income tax returns are electronically transmitted to the IRS from the site each day after the site closes.
paper filing Some current year income tax returns cannot be filed electronically. Prior year returns (tax years 2008, 2009 and 2010) and amended tax returns cannot be filed electronically. Clients are given envelopes, and they are responsible for mailing these returns.
financial services Financial services are offered at most tax sites. These include opening a bank account and help completing a free application for federal student aid (FAFSA). When a client is interested in FAFSA assistance and cannot be served at the tax site, direct the client to call: 312-630-0248.
tax clinic referral CEP’s low-income taxpayer clinic assists taxpayers involved in controversies with the Internal Revenue Service.
Tax Site OperationsC H A P t e r 2
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THE CLIENT EXPERIENCE
intake Staff or designated volunteers greet the client and determine if the client meets the guidelines for tax preparation.
tax preparation The client sits down with a tax preparer at a computer. The preparer completes an interview and prepares a tax return using TaxWise software.
quality review The site manager or designated reviewer reviews the documents and the tax returns on the computer to ensure that they are correct and complete.
sorting The client moves to a sorting station where staff sort the paperwork and compiles an envelope of proper records for the client.
ALert! Any volunteer may be asked to fill the role of sorter. Although this job may not have the inherent glamour of tax preparation, it is critically important. Please be ready to take your turn. It may look like sorters are just shuffling a bunch of papers, but they often correct errors that could cause big problems for the client.
financial services The client receives appropriate financial services as identified or requested during intake and preparation.
tax clinic CEP’s tax clinic is a Low Income Taxpayer Clinic (LITC) that assists taxpayers involved in controversies with the Internal Revenue Service, such as audits and collection issues including levies, liens and offers-in-compromise. The clinic also assists clients in applying to IRS for Individual Taxpayer Identification Numbers (ITINs). To find a schedule of ITIN events where a client can apply for an ITIN, go to: www.economicprogress.org. If you think that a client needs assistance with a tax controversy matter, consult your site manager about making a referral to the clinic.
seven Basic steps of tax Preparation
1. review Client intake forms: form 13614-C, supplemental intake sheet, and Consent to Use/Disclose. • Make sure all are complete. • Check for the client signature on the consent forms. • Get all of your questions answered!
2. Complete the taxWise intake forms. • Main Information Sheet: Pay close attention to the dependent/nondependent section. • Preparer Use Form: Enter the answers to the questions asked on the Supplemental Intake Sheet.
3. enter all income. • Enter W-2s, 1099s, and other income. • Complete any Schedule C-EZs or Cs.
4. enter all adjustments, deductions, and credits. • Enter adjustments, such as student loan interest and/or tuition and fees deduction. • Enter property tax paid and determine if client should itemize using Schedule A. • Enter child care payments and child care provider information. • If client or client’s dependent attended college, enter education expenses.
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5. get the red out! • Address all red exclamation points. • Use Ctrl-E to find problem areas on a specific form.
6. review. • Run TaxWise diagnostics and correct any errors. • Click the e-file button if the client is filing electronically. • Have a site manager or other quality reviewer review the return. • Print the return and ask the client to look it over.
7. Counsel. • If there is a balance due, discuss prevention: W-4 or estimated tax options. • If the client can’t pay the balance due, discuss payment options and give the client a CEP tax clinic
referral card. • When the client has a refund, discuss direct deposit: bank account, savings bond, and debit card
options. • If the client is interested in FAFSA preparation, refer the client to the on-site specialists or direct the
client to call the CEP office at 312-630-0248.
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Client IntakeC H A P t e r 3
OPening interVieW
After greeting the client, make sure that you have all the information needed to prepare the tax return.
1. intake forms There are three intake documents that the client is asked to complete during the intake process. Make sure that all three are thoroughly completed.
• Intake and Interview Sheet (Form 13614-C) • Supplemental Intake Sheet • Use and Disclosure
Things to know about the intake forms…• Every question must be answered and every section completed. Each and every topic on the forms is there for a
reason and probably affects the accuracy of the tax return being prepared.
• Always review the intake forms with the clients. Enter any missing information and clarify any questionable items. When the handwriting is not perfectly clear on an intake document, rewrite above the client’s entry.
• Do not begin preparing the tax return until the intake forms are complete. This will facilitate preparation of an accurate tax return.
Some clients may need substantial assistance due to literacy or language barriers.
• In addition to tax preparation, the intake forms gather information needed to provide financial services to clients, and to provide data to CEP and to funders about the clients we serve.
2. Client documents These are the papers, such as W-2s, that the client brings to the site.
Things to know about the client documents…• Begin by asking to see all of the client’s documents. It is best not to just ask for W-2s, because a client may
unintentionally hold back relevant information.
• The documents generally include W-2s and social security cards. You may also see a copy of a prior year tax return, 1099s, or IRS notices.
• In CEP’s promotional material, clients are told to bring the following documents. All W-2s and 1099s
Social security cards or ITIN letters for all family members
Copy of last year’s tax return
Bank account number and routing number for direct deposit
Amounts spent on higher education
Property tax bill
• The documents are reviewed during the intake process to ensure that the client has brought everything needed. However, if it is discovered that something is missing, see your site manager.
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Form 13614-C (Rev. 10-2011)
Department of the Treasury – Internal Revenue Service
Intake/Interview & Quality Review Sheet OMB # 1545-1964
Section A. You should complete Pages 1-3 Thank you for allowing us to prepare your tax return. You are responsible for the information on your return soplease provide complete and accurate information to the certified tax preparer. If you have any questions pleaseask your preparer. You will need your: • Tax information such as Forms W-2, 1099, 1098.• Social security cards or ITIN letters for you and all persons on your tax return.• Proof of Identity (such as a valid drivers license or other government issued picture ID).
Part I. Your Personal Information 1. Your First Name M. I. Last Name Are you a U.S. Citizen?
Yes No 2. Spouse’s First Name M. I. Last Name Is spouse a U.S. Citizen?
Yes No3. Mailing Address Apt# City State Zip Code
4. Contact InformationPhone: Cell Phone: E-mail:
5. Your Date of Birth 6. Your Job Title Are you: 7. Legally Blind Yes No 8. Totally and Permanently Disabled Yes No
9. Spouse’s Date of Birth 10. Spouse’s Job Title Is Spouse: 11. Legally Blind Yes No 12. Totally and Permanently Disabled Yes No
13. Can anyone claim you or your spouse on their tax return? Yes No Unsure
Catalog Number 52121E Form 13614-C (Rev. 10-2011) 1
Part II. Marital Status and Household Information 1. As of December 31, 2011, were you?
SingleMarried: Did you live with your spouse during any part of the last six months of 2011? Yes No Divorced or Legally Separated: Date of final decree or separate maintenance agreement: Widowed: Year of spouse’s death:
2. List names below of everyone who lived in your home in 2011 (other than you or spouse). Also list anyone wholived outside of your home that you supported during 2011. If additional space is needed please check here andlist on page 3.
Name (first, last) Do not enter your name or
spouse’s name below.
(a)
Date of Birth (mm/dd/yy)
(b)
Relationship to you (e.g. daughter, son, mother, sister, none)
(c)
Numberof months
lived in your home
in 2011
(d)
US Citizen or resident of the US, Canada or Mexico in 2011
(yes/no)
(e)
Marital Statusas of
12/31/11(S/M)
(f)
Full-time
studentin 2011 (yes/no)
(g)
Receivedless than
$3700incomein 2011 (yes/no)
(h)
• Volunteers assisting with preparing your return are trained to provide high quality service and uphold the highest ethical standards.
To report unethical behavior to IRS, email us at [email protected] or call toll free 1-877-330-1205.•To check the status of your REFUND visit “Where’s My Refund?” on www.irs.gov
or call 1-800-829-1954 for assistance.
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Section A. Please complete – check Yes, No or Unsure to all questions below. Please ask if you need help.Part III. Income – In 2011, did you (or your spouse) receive: Yes No Unsure
1. Wages or Salary? (Form W-2) 2. Tip Income? 3. Scholarships? (Forms W-2, 1098-T) 4. Interest/Dividends from: checking/savings accounts, bonds, CDs, brokerage? (Forms 1099-INT,
1099-DIV)5. Refund of state/local income taxes? (Form 1099-G) 6. Alimony Income? 7. Self-Employment payments (such as cash received for services, small business)? (Form 1099-MISC) 8. Income (or loss) from the sale of Stocks, Bonds or Real Estate (including your home)?
(Forms 1099-S, 1099-B)9. Disability Income (such as payments from insurance or workers compensation)? (Forms 1099-R, W-2)
10. Distributions from Pensions, Annuities, and/or IRA? (Form 1099-R) 11. Unemployment Compensation? (Form 1099-G)12. Social Security or Railroad Retirement Benefits? (Forms SSA-1099, RRB-1099) 13. Income (or loss) from Rental Property? 14. Other Income: (gambling, lottery, prizes, awards, jury duty, etc.) Specify:
(Forms W-2 G, 1099-MISC)
Part IV. Expenses – In 2011 Did you (or your spouse) pay: Yes No Unsure
1. Alimony: If yes, do you have the recipient’s SSN? Yes No2. Contributions to a retirement account? IRA Roth IRA 401K Other 3. Educational expenses paid for yourself, spouse or dependents, such as tuitions, books, fees, etc.?
(Form 1098-T) 4. Unreimbursed employee business expenses (such as teacher supplies, uniforms or mileage)?5. Medical expenses (including health insurance premiums)?6. Home mortgage interest? (Form 1098)7. Real estate taxes for your home or personal property taxes for your vehicle? (Form 1098)8. Charitable contributions? 9. Child/dependent care expenses, such as day-care?
Part V. Life Events – In 2011 Did you (or your spouse): Yes No Unsure
1. Have a Health Savings Account? (Forms 5498-SA, 1099-A, W-2 with code W in Box 12)2. Have debt from a mortgage or credit card canceled/forgiven by a commercial lender? (Form 1099-C)3. Buy, sell or have a foreclosure of your home? (Form 1099-A) 4. Have Earned Income Credit (EIC) disallowed in a prior year? If yes, for which tax year?5. Purchase and install energy efficient home items (such as windows, furnace, insulation, etc.)?6. Live in an area that was affected by a natural disaster? If yes, where? 7. Receive the First Time Homebuyers Credit in 2008? 8. Pay any student loan interest? (Form 1098-E) 9. Make estimated tax payments or apply last year’s refund to your 2011 tax? If so how much?
10. Attend school as a full time student? (Form 1098-T) 11. Adopt a child?12. File a 2010 federal tax return containing a “capital loss carryover” on Form 1040 Schedule D?
Presidential Election Campaign Fund: (If you check a box, your tax or refund will not change.) Check here if you, or your spouse if filing jointly, want $3 to go to this fund You SpouseCatalog Number 52121E Form 13614-C (Rev. 10-2011)
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intAKe AnD interVieW sHeet (fOrm 13614-C)
Clients are asked to complete all of pages 1 and 2, and the top half of page 3.
Part i. Your Personal information
1– name The name should be the same as the name on the social security card or ITIN letter. U. s. Citizen When the client answers “no,” be sure to check the client’s answer to the second question on
the Supplemental Intake Sheet. If the client is on an F, M, J or Q Visa, or if the client does not have either a social security number or an individual tax identification number, see your site manager.
2 – Spouse Name In most cases, a married client needs his/her spouse’s name and social security number, even if they are not filing together.
An error in the name or social security number is the most frequent cause of rejected returns and refund delays.
3 – Mailing Address This should be the current address. This often does not match the address on the W-2s. When refunds will be sent by U.S. mail, advise the clients that his/her name should be on the mailbox. If no apartment number is listed, be sure to ask the client.
4 – Phone Enter more than one number, if available. CEP occasionally contacts clients by telephone, particularly when there is a problem processing the client’s tax return.
Always get at least one phone number. If an electronically transmitted return is rejected, a current phone number can be the key to resolving the problem and getting the client’s refund back on track. Don’t hesitate to write in best times to be reached.
E-mail Address CEP sends surveys about our service and information about issues of interest to our clients via e-mail.
5 and 9 – Date of Birth This must be correct. It affects many deductions and credits.
6 and 10 – Occupation Certain jobs indicate issues to pursue further, such as tip income for a waiter.
7, 8, 11, 12 – Legally Blind /Disabled When either question is answered “yes,” it can affect the tax return.
13 – Can someone else claim you? This will affect the client’s personal exemption, standard deduction and other aspects of the return.
Clients often will not understand or know the answer to this question. Don’t hesitate to discuss the client’s situation to determine the correct answer.
Whenever a client answers a question by checking “Unsure,” discuss the issue and clarify the answer.
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Part ii family and Dependent information
1 – marital status This is relevant to determine the client’s correct filing status. Make sure that the appropriate dates are entered.
2 – individuals living in the household This section is designed to identify potential dependents and qualifying children. Household members can also affect the earned income tax credit, child tax credit and filing status.
Do not assume that everyone listed in the family information section goes on the tax return. In certain cases, some of the member(s) of the household will not be entered into TaxWise at all.
Part iii income
Virtually all income received by a client during the tax year must be reported and entered during return preparation. This is true, even if the amount was paid in cash and no income document, such as a W-2 or 1099, was issued.
Part iV expensesWhen there is a “Yes” answer regarding any of these expenses, the client probably qualifies for a tax deduction or credit.
Things to keep in mind… Question 2 – Generally, a contribution to a 401(k) will be reflected in box 12 of a W-2. Sometimes the client
doesn’t realize that these contributions have been made and will answer this question “No” in error.Question 3 – If the client had education expenses, the client probably qualifies for an education credit.Question 6 – If the client is paying a mortgage, that client would likely benefit from itemizing deductions on
Schedule A.Question 7 – Real estate taxes almost always result in a tax benefit: as an itemized deduction or an Illinois
property tax credit.Question 9 – Expenses paid for child care often result in a child care credit.
Note: The preprinted Form 13614-C is four pages long. CEP primarily uses pages one and two that are discussed here.
Part V Life events
If there is a “Yes” answer to any of these questions, there is probably an additional entry that needs to be made during tax preparation.
Things to keep in mind…Question 2 – If the client had a debt cancelled or a home foreclosure, see your site manager.Question 4 – If the client had trouble receiving EITC, an additional form may be required.Question 7 – If the client received the first-time homebuyer credit for a home purchased in 2008, the 15-year
repayment process began on the 2010 tax return. Question 10 – A full time student who lives with his or her parents probably should not be claiming his or her own
personal exemption.Question 11 – If the client adopted a child in 2011, the client may qualify for an adoption tax credit – even if
the client had no out-of-pocket adoption expenses. If you encounter this situation, see your site manager. CEP will probably refer that client to a paid preparer.
Presidential Election Campaign Fund – If the client checks “yes,” it does not affect the final outcome of the tax return.
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Additional Information and Questions related to the preparation of your return
Many free tax preparation sites operate by receiving grant money. The data from the following questions maybe used by this site to apply for these grants. Your answers will be used only for statistical purposes.
Other than English what language is spoken in the home?
Are you or a member of your household considered disabled? Yes No
If you are due a refund or have a balance due:
• Ask your preparer about Direct Deposit. It is the fastest, easiest way to receive your tax refund. An e-filed returnmeans a fast refund. Taxpayers who combine e-file and Direct Deposit can get their refunds in as few as 10 days.
• Ask your preparer about purchasing Series I U.S. Savings Bonds with part or all of your tax refund. Savings bonds are a safe and secure way to invest in the future. Purchase I Bonds for yourself or others in multiples of $50 andearn interest for up to 30 years.
If you are due a refund, would you like a direct deposit? Yes No
If you are due a refund, would you like information on how to purchase U.S. Savings Bonds? Yes No
If you are due a refund, would you like information on how to split your refund between accounts? Yes No
If you have a balance due, would you like to make a payment directly from your bank account? Yes No
Additional information and Questions
The first two questions provide information concerning language and disability that does not affect the tax return.
The final section that is completed by the client asks how the client wishes to receive the refund or handle any balance due. When a client wants to utilize direct deposit, the bank information is entered as part of return preparation.
All clients can use direct deposit, even clients who do not e-file.
sections B and C
CEP staff prepares Sections B and C on the last page of Form 13614-C.
• Section B is completed by the preparer for all returns where the client is claiming dependents, qualifying children, or head of household filing status.
• Section C is not completed by the preparer. This will be used by the reviewer when the return is checked for accuracy and completeness.
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Section B. For Certified Volunteer Preparer Completion
Remember: You are the link between the taxpayer’s information and a correct tax return. Verify the taxpayer’s information on pages 1, 2 & 3 is complete. All questions must be discussed with the taxpayer and all“Unsure” responses should be changed to “Yes” or “No”. Must be completed by Certified Volunteer only if persons are listed in Part II Question 2
Check if persons are listed in Part II Question 2
Yes No 1. Can anyone else claim any of the persons listed in Part II, Question 2, as a dependent on their return? If yes, which ones:
Yes No 2. Were any of the persons listed in Part II, Question 2, totally and permanently disabled? If yes, whichones:
Yes No 3. Did any of the persons listed in Part II, Question 2provide more than 50% of their own support? If yes,which ones:
Yes No N/A
4. Did the taxpayer provide more than half the support for any of the persons in Part II, Question 2? If yes,which ones:
Yes No 5. Did the taxpayer pay over half the cost of main-taining a home for any of the persons in Part II, Question 2? If yes, which ones:
RemindersUse Publication 4012, Volunteer Resource Guide and Publication 17, Your Federal Income Tax in making tax law determinations.
Section C. For Certified QualityReviewer Completion
Confirm each item after reviewingthe tax return and verifying that itreflects correct tax law applicationto the information provided by the taxpayer.
1. Sections A & B of this form are complete.
2. Taxpayer’s identity, address and phone numbers were verified.
3. Names, SSNs, ITINs or EINs, anddates of birth of taxpayer, spouse and dependents match the supporting documents.
4. Filing Status is correctly determined.
5. Personal and Dependency Exemptions are entered correctly on the return.
6. All information shown on source documents and noted in Section A, Part III is included on the tax return.
7. Any Adjustments to Income arecorrectly reported.
8. Standard, Additional or ItemizedDeductions are correct.
9. All credits are correctly reported.
10. Withholding shown on FormsW-2, 1099 and Estimated Tax Payments are correctly reported.
All tax law issues above havebeen addressed and necessarychanges have been made.
If direct deposit or debit was elected, checking/saving account and routing information match the supporting documents.
Correct SIDN and EFIN are shown on the return.
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This Section For Volunteer Use Only
Supplemental Intake Sheet
Tax Information We need this information so we can prepare your tax return correctly.
General Information
Your Name:
During 2011…
How many jobs did you have? How many jobs did your spouse have?
Are you (or your spouse) in the United States on an F, M, J, or Q Visa? yes no
Did you earn any income that was not reported on a W-2? yes no
Were any of your debts or loans forgiven? yes no
Did you or anyone in your family attend college or vocational school? yes no
Did you receive a letter from the IRS? yes no
Did you purchase items from other states, such as shopping online or yes nofrom a catalog, where you did not pay sales tax?
Is anyone in your household interested in applying for a FAFSA (student financial aid) yes noto help pay for college?
1) What is your ethnicity? AA (African American) AS (Asian/Pacific Islander) CA (Caucasian)
LA (Latino) NA (Native American) OT (Other)
2) During 2011, were you enrolled at any of the City Colleges of Chicago?
1. Yes 2. No
3) As of today, about how much do you have in your savings (including retirement savings such as your pension, 401(k), IRA)?
1. None 2. less than $1,000 3. $1,000 to $5,000 4. $5,001 - $10,000
5. More than $10,000
4) What is your gender? 1. Married couple filing jointly 2. Male 3. Female 4. Transgender
5) Are you self-employed in any of these fields?
1. Yes- I’m a child care provider
2. Yes- I’m a taxi cab driver
3. Yes- I’m a home care aide
4. Yes- I’m a hairdresser
5. Yes- I’m self-employed doing other work
6. No, I’m not self-employed
6) What is the highest level of education you have completed?
1. College degree 2. Some college 3. High School/GED 4. Some High School
5. No High School
7) Other than English what language is spoken in your home?
1. None 2. Spanish 3. Chinese 4. Korean
5. French 6. Italian 7. Vietnamese 8. Japanese
9. Polish 10. Russian 11. Other
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Supplemental Intake Sheet
General Information
Center for Economic Progress // Supplemental Intake Sheet // Filing Season 2012 V.1
8) Are you or a member of your household considered disabled?
1. Yes 2. No
9) How much do you expect your total tax refund will be today (including credits like the EITC)?
(If you expect no refund, write “0”)
10) If a family of 5 people receives a check for $200, and they each split the money evenly, how much will each person get?
1. $20 2. $30 3. $40 4. $50
5. Other
11) Let’s say you have $200 in a savings account. The account earns 10% interest per year. How much would
you have in the account at the end of 2 years if you didn’t spend any of it?
1. $200 2. $220 3. $240 4. $242
5. Other
12) Imagine that you were going to receive a $95 refund but you were told that the check wouldn’t arrive for 6
months. How much would you be willing to pay to instead receive the check for $95 right now?
1. I would pay up to $10. 2. I would pay up to $20. 3. I would pay up to $30.
4. I would pay up to $40. 5. I wouldn’t pay anything.
13) When you think about saving for the future, say 10 years from now, do you think you will be mostly the
same person as now, or will you be a very different person then?
1. Exactly the same 2. Mostly the same 3.A little different
4. Very different
US Savings Bonds are a safe, easy and trusted way to save for your future. You can choose to receive a part of your tax refund today, from $50 to $5,000, as a US Savings Bond. Savings bonds are guaranteed by the United States Government so when you are ready to cash in your bond, you will receive all the money you saved, plus the interest you’ve earned. With this interest, your savings bond will grow in value over time.
Would you like to purchase a US Savings Bond with a part of your refund? 1. Yes 2. No
14) Indicate how much in US Savings Bonds you would like to purchase with your refund (multiples of $50).
1. $50 2. $100 3. $250 4. Other
15) Please enter the intake sheet code listed here: A
Financial Decisions This information will help us to better understand how you think about your finances.
Savings Information
Volunteer Use Only
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sUPPLementAL intAKe sHeet
tax information This section asks for information that is needed to prepare a complete and accurate tax return. A “yes” answer to any of these questions means that the preparer needs to ask more questions.
How many jobs did you have? How many jobs did your spouse have? The answer to this question indicates how many W-2s the client should report on the tax return. If the number of jobs listed here doesn’t match the number of W-2s, find out why and document the reason.
Are you (or your spouse) in the United States on an F, M, J or Q Visa? If the client and/or his spouse are in the United States on one of these visas, see your site manager. The return cannot be prepared at most CEP sites. This question will only have a “yes” answer when the client is not a U.S. citizen and is in the U.S. for special educational or employment purposes.
Did you earn any income that was not reported on a W-2? Earned income not reported on a W-2 probably means that the tax return will have self-employment income reported on Schedule C-EZ or Schedule C.
Were any of your debts or loans forgiven? Cancelled debt can result in taxable income. Ask the client for Form 1099-C, Cancellation of Debt, and talk to your site manager.
Did you or anyone in your family attend college or vocational school? Even if tuition is covered by grants or scholarships, any amounts that the client spent on books and other materials could result in a refundable American opportunity tax credit.
Did you receive a letter from the IRS? A letter from IRS is important in two ways. 1. It can affect the way that the tax return is prepared. If the client’s EITC was reduced or disallowed for a prior
year, the client will have received many letters from the IRS and will probably need to complete an additional item, Form 8862, Information to Claim EITC after Disallowance.
2. A “Yes” answer can indicate an unresolved tax controversy that should be referred to CEP’s tax clinic.
Did you purchase items from other states, such as online or from a catalog, where you did not pay sales tax?A client who did online or catalog shopping may need to report Illinois Use Tax.
Are you or anyone in your family interested in attending college? A client who answers “yes” should be referred to a FAFSA volunteer at the site or given a financial services referral card which directs the client to call 312-630-0248.
general information The answers to these questions are all recorded in the preparer use fields on the TaxWise preparer use form.
• The data is used to compile a database about the clients that are served by the CEP. This information helps CEP to secure grants to fund the free services provided to clients, and is used to determine future products and services that would be useful to clients. CEP does not use individual information, just the data set as a whole.
• The answers to questions are entered into the TaxWise preparer use fields. You will enter the item in bold print: for example, AA for African American, LA for Latino.
��
Consent to Disclose Taxpayer Information
INFORMATION: Taxpayer’s 2011 tax return and all information contained therein.
DISCLOSURE:
1) Your tax return will be shared with TaxWise (UTS/CCH Small Firm Services) in order to e-file your return.
2) Information from your return may be released to a financial institution if you provide further written consent.
3) Information from your return may be released to U.S. Department of Education, the Illinois Student Assistance Commission, National Student Clearinghouse, CEP consultants (JBL Associates, Inc.) and schools you request.
PURPOSE:
1) Information released to financial institutions will be used to open bank accounts or other financial products you request.
2) Information from your tax return may be disclosed to apply for FAFSA (Free Application for Federal Student Aid).
CONSENT GRANTED:
I/we the taxpayer, have read the above information and hereby CONSENT to the Tax Preparer’s Disclosure of the Personal Information for the Purpose stated above.
Taxpayer signature: Date:
Print name:
Spouse’s signature: Date:
Print name:
Federal law requires this consent form be provided to you. Unless authorized by law, the Center for Economic Progress cannot disclose, without your consent, your tax return information for purposes other than the preparation and filing of your tax return.
You are not required to complete this form. If we obtain your signature on this form by conditioning our services on your consent, your consent will not be valid. Your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year.
If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission, you may contact the Treasury Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or by email at [email protected].
Taxpayer SSN:
��
Consent to Use Taxpayer Information
INFORMATION: Taxpayer’s 2011 tax return and all information contained therein.
USE:
The Center for Economic Progress (CEP) may use identifying information from your tax return to contact you.
PURPOSE:
1) CEP uses tax return information to determine if you may benefit from a bank account or otherconsumer-friendly financial service.
2) CEP may contact you to conduct research to improve service to clients.
CONSENT GRANTED:
I/we the taxpayer, have read the above information and hereby CONSENT to the Tax Preparer’s Use of the Personal Information for the Purpose stated above.
Taxpayer signature: Date:
Print name:
Spouse’s signature: Date:
Print name:
Federal law requires this consent form be provided to you. Unless authorized by law, the Center for Economic Progress cannot use, without your consent, your tax return information for purposes other than the preparation and filing of your tax return.
You are not required to complete this form. If we obtain your signature on this form by conditioning our services on your consent, your consent will not be valid. Your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year.
If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission, you may contact the Treasury Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or by email at [email protected].
Taxpayer SSN:
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Use AnD DisCLOsUre fOrm
All tax preparers, including commercial preparers as well as VITA, are required to obtain a taxpayer’s written consent to use and disclose tax return information. The IRS implements these safeguards to ensure that taxpayer information is not being used for purposes other than tax preparation, or is not disclosed to anyone without the authorization of the taxpayer.
Examples of the use of taxpayer information:
• Looking at the refund amount to determine whether to recommend that the taxpayer open a bank account; • Using the tax return information to determine if the taxpayer may qualify for FAFSA assistance; and • Using the taxpayer’s contact information to offer financial services.
Examples of disclosure include:
• Sharing information with the TaxWise software company (CCH) in order to e-file the return; • Sharing contact information with a bank or credit union to open a bank account for the client; and • Sharing information from the tax return with the US Dept. of Education to complete a FAFSA.
CEP has developed a Use and Disclosure form to be signed by our clients in order to offer e-filing, bank accounts, financial coaching, FAFSA assistance and other financial products and services. CEP does not charge for the services offered. We provide them as part of our mission to help low-income families access financial opportunities.
During intake, clients will be asked to sign the Use and Disclosure form. The purpose will be explained and the client’s questions will be answered.
When clients sign the Use section, they are permitting CEP to use their information to discuss beneficial products and services such as bank accounts. For example, if the preparer notices that the client will receive a large refund and does not have a bank account, the preparer can suggest opening a bank account with the on-site bank partner. This discussion cannot take place unless the taxpayer allows this use of their information by signing the Use section of the form.
When clients sign the Disclosure section, they are permitting CEP to e-file their tax return. if the client refuses to sign the disclosure section, the volunteer should prepare the tax return but cannot e-file it. the client will be responsible for mailing paper returns to irs and illinois Department of revenue.
�0
Introduction to Qualifying ChildC H A P t e r 4
DefinitiOn
The definition of qualifying child affects five different tax benefits.1. earned income tax Credit (eitC) The EITC is a special credit for low-income families who work.2. Dependency exemptions Each person that is claimed as a dependent lowers taxable income by $3,700.3. Head of household filing status This is an advantageous filing status for unmarried taxpayers who provide a home for a family member.4. Child and Dependent Care Credit This tax credit is based on amounts paid for child care while the taxpayer is at work.5. Child tax Credit This credit reduces tax by up to $1,000 for each dependent qualifying child under age 17.
There are four universal requirements that make up the foundation of the definition of qualifying child.1. Age – The child must be under a certain age. Unless the child is disabled, the child must be younger than the taxpayer.2. relationship – The child must be the taxpayer’s child, stepchild, adopted child, foster child, sibling, step-sibling or a descendent of any of these relatives.3. residency – The child must live with the taxpayer for more than half of the tax year.4. support – The child cannot have provided more than half of his/her own support.
These four requirements are just the basic structure of the definition of qualifying child. There are important exceptions and additions. Moreover, some of the five benefits have other requirements, in addition to these four rules. This chapter discusses the basics and how they are applied. In addition, a summary overview, “All Those Kids,” is provided that can be used as a reference tool.
AgeFor most tax benefits, the age requirement refers to the age on the last day of the tax year. For most taxpayers in most situations, it is the person’s age on December 31, 2011. The child must be younger than the person filing the tax return. For most benefits, a disabled child can be any age.
tie situations Sometimes a child can meet all four requirements and be the qualifying child of more than one person. However, each child can be claimed on only one tax return. (There is an exception for divorced or separated parents.)
During tax preparation… • If one of the qualified persons is the child’s parent and the other is not the child’s parent, the non-parent can
claim the child only if that non-parent has higher adjusted gross income (AGI) than either parent. • When the non-parent income is higher than the parent, the family can decide which qualified person claims the
child. • Once it is determined who will claim the child, that person will claim the child for all five benefits, assuming
the taxpayer meets all of the other qualifications.
After the tax return is filed…If the family errs and more than one person claims a child, the IRS will step in and apply the following tiebreaker rules: • If one of the taxpayers is the child’s parent, the child is the qualifying child of the parent. • If both taxpayers are the child’s parents, the child is the qualifying child of the parent with whom the child has
lived for the longest period of time during the tax year. If the residency period is the same for both parents, the child is the qualifying child of the parent with the highest adjusted gross income (AGI).
• If neither taxpayer is the child’s parent, the child is the qualifying child of the taxpayer with the highest AGI.
Note: AGI, in general, is total income before exemptions and most deductions are subtracted.
��
APPLYing tHe rULes…
rule If the child is a qualifying child for both parents, the family can decide who claims the child.
family John and Sue are the parents of a three-year-old daughter, Missy. The three of them lived together all year. John and Sue are not married.
1. Who can claim Missy as a qualifying child?
a. John
b. Sue
c. Either John or Sue
Answer: Missy is the qualifying child of John and the qualifying child of Sue. John and Sue can decide who claims Missy.
What would irs do? If both John and Sue claim Missy, IRS would give the child to the parent that lived with the child the longer during the tax year. Since that time period is the same for both John and Sue, the IRS would give the child to whichever parent had the higher income.
rule If the child is the qualifying child of a parent and a non-parent with lower income, the child goes to the parent.
family Angela and her baby, Stevie, lived with Angela’s mother, Grace, all year. Angela’s income was $24,000 and Grace’s income was $18,000.
2. Who can claim Stevie as a qualifying child?
a. Angela
b. Grace
c. Either Angela or Grace
Answer: Only Angela, the mom, can claim Stevie.
What would irs do? If Grace claimed Stevie, the IRS could adjust Grace’s tax return to remove Stevie, even if Angela didn’t claim Stevie.
rule If the child is the qualifying child of a parent and a non-parent with higher income, the child goes to either the parent or the non-parent. The family decides.
family Helen and her baby, Ellie, lived with Helen’s father, Robert, all year. Helen’s income was $24,000 and Robert’s income was $38,000.
3. Who can claim Ellie as a qualifying child?
a. Helen
b. Robert
c. Either Helen or Robert
Answer: Either Helen or Robert can claim Ellie.
What would irs do? If both Helen and her dad claimed Ellie, IRS would apply tiebreaker rules and adjust Robert’s tax return to remove Ellie.
rule If the child is a qualifying child of two non-parents, the family can decide who claims the child.
family Baby Joey lives with his two aunts, Maude and Matilda, all year. The family can decide who claims Joey.
What would irs do? If both Maude and Matilda claim Joey, IRS would give Joey to whichever aunt had the higher income.
special rule for Divorced or separated ParentsThere is a special exception to the residency test for divorced or separated parents that applies to claiming a child as a dependent and for the child tax credit. • The child can be claimed by the noncustodial parent – even though the noncustodial parent doesn’t meet the
residency test – if the custodial parent elects to waive the right to claim the dependent.
��
• This exception only can be used when one or both parents provided over half of the child’s support and the child lived with one or both of the parents for more than half of the year.
• The custodial parent releases the dependent (waives his or her right) by signing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or an equivalent statement. The signed release must be filed with the tax return of the noncustodial parent who is claiming the dependent.
• For tax years 2008 and prior, a divorce decree stating that the non-custodial parent could claim the child could be used instead of the Form 8332.
For divorces that go into effect after December 31, 2008, the noncustodial parent must attach a signed Form 8332 to claim the child. A copy of a divorce decree is not enough.
rule The custodial parent can allow the noncustodial parent to claim their child as a dependent and for the child tax credit.
family Fred and Elizabeth divorced in 2009. They have one 10-year-old child, Johnny, who lives with Elizabeth. The divorce decree, effective February 12, 2009, states that Fred can claim Johnny as his dependent and for the child tax credit. However Fred still must depend on Elizabeth to sign a Form 8332.
What would irs do? If Fred files his tax return and just attaches a copy of the divorce decree, IRS can disallow Johnny as his dependent and for the child tax credit.
A noncustodial parent can never claim a child for the EITC, even if no one else is claiming the child.
supportTo be a qualifying child, the child cannot provide over half of his own support.
• Support includes amounts spent on general living expenses. food lodging clothing education recreation transportation medical and dental care other similar living expenses
• Scholarships received by a full-time student are not considered part of total support. • When expenses, such as utilities, are not directly related to one member of a household, the amount can be
divided to determine a portion for each person in the household.
Joint return testThe joint return test is used to determine when a married child can be claimed as a qualifying child. • If a married child files a joint return, then that child cannot be a qualifying child. • Exception: The joint return test is met if the person being claimed and his/her spouse are only filing a joint
return to get a refund and would have no tax liability if each filed as married filing separately.
there’s Always moreFor each of the five tax benefits, there are specials rules and exceptions. • Most of the exceptions are summarized in the chart “All Those Kids.” This tool is also in your “You Can Do It”
book. • Some benefits relate only to a child who is a qualifying child. Other benefits relate to both qualifying children
and qualifying relatives. This will be explained in subsequent chapters.
itinAn ITIN (individual taxpayer identification number) is a special number issued by IRS to filers who do not qualify to get an SSN. An ITIN looks like a SSN, but begins with a 9. A taxpayer with an ITIN does not qualify for the earned income tax credit.
��
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elat
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estri
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ay a
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in th
e U
.S.
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the
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ore
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f the
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year
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ome
tem
pora
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bsen
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time
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est.
E
xcep
tion:
Mar
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At t
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ll tim
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d m
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e ch
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. If t
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ial r
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ay a
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ome
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bsen
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coun
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ld d
id n
ot p
rovi
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ver 1
/2 o
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s/he
r ow
n su
ppor
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the
tax
year
.
Chi
ld T
ax
Cre
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Chi
ld m
ust b
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der a
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7 at
the
end
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ar a
nd m
ust b
e yo
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r tha
n th
e ta
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Not
e: T
here
is n
o ex
cept
ion
for
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or t
he d
isab
led.
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ld m
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ld,
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, ado
pted
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ld, f
oste
r ch
ild, s
iblin
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tep
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ing,
or
desc
ende
nt o
f any
of t
hese
. If t
he
taxp
ayer
is n
ot th
e ch
ild's
par
ent,
spec
ial r
estri
ctio
ns m
ay a
pply
.
Chi
ld m
ust l
ive
with
the
taxp
ayer
for m
ore
than
hal
f th
e ta
x ye
ar. S
ome
tem
pora
ry a
bsen
ces
coun
t as
tim
e liv
ed a
t hom
e.
Chi
ld d
id n
ot p
rovi
de o
ver 1
/2 o
f hi
s/he
r ow
n su
ppor
t for
the
tax
year
.
Not
e: C
hild
mus
t als
o be
cla
imed
as
the
taxp
ayer
's d
epen
dent
.
Hea
d of
H
ouse
hold
At t
he e
nd o
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year
, the
chi
ld
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r 19,
und
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a fu
ll tim
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t, an
d m
ust b
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r tha
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e ch
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sabl
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ld m
ust b
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xpay
er's
chi
ld,
step
child
, ado
pted
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ld, f
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r ch
ild, s
iblin
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tep
sibl
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or
desc
ende
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f any
of t
hese
. If t
he
taxp
ayer
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ot th
e ch
ild's
par
ent,
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ial r
estri
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ay a
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.
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with
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for m
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ome
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coun
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tim
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ld d
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ot p
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r ow
n su
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the
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year
. N
ote:
Tax
paye
r mus
t pro
vide
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lf th
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st o
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Cre
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ld m
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. If t
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ent,
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ial r
estri
ctio
ns m
ay a
pply
.
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ld m
ust l
ive
with
the
taxp
ayer
for m
ore
than
hal
f th
e ta
x ye
ar. S
ome
tem
pora
ry a
bsen
ces
coun
t as
tim
e liv
ed a
t hom
e.
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ld d
id n
ot p
rovi
de o
ver 1
/2 o
f hi
s/he
r ow
n su
ppor
t for
the
tax
year
.
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ning
! Th
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hart
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sum
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fer t
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All
Thos
e K
ids-
Pa
rt 2 Chi
ld m
ust
have
SSN
(not
IT
IN)?
Exce
ptio
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r di
vorc
ed/s
epar
ated
pa
rent
s ca
n be
use
d?
Qua
lifyi
ng re
lativ
e ru
les
can
be u
sed
to
get o
r inc
reas
e th
is
bene
fit?
A d
isab
led
child
ca
n be
any
age
? C
an th
e ta
xpay
er
be a
qua
lifyi
ng
child
?C
itize
nshi
p
EITC
yes
no
(The
chi
ld m
ust l
ive
with
th
e ta
xpay
er.)
no
ye
sno
Chi
ld m
ust b
e U
S c
itize
n or
a
lega
l res
iden
t of t
he U
S.
Dep
ende
nt
no
yes
yes
yes
no
Chi
ld m
ust b
e U
S c
itize
n or
a
resi
dent
of t
he U
S, C
anad
a or
Mex
ico.
Chi
ld T
ax
Cre
dit
no
yes
no
no
no
Chi
ld m
ust b
e U
S c
itize
n or
a
resi
dent
of t
he U
S a
t som
e tim
e du
ring
the
tax
year
.
Hea
d of
H
ouse
hold
no
no
(T
he c
hild
mus
t liv
e w
ith
the
taxp
ayer
.)
yes
(Mus
t be
depe
nden
ts
that
are
rela
ted.
) ye
s ye
s
Chi
ld m
ust b
e U
S c
itize
n or
a
resi
dent
of t
he U
S, C
anad
a or
Mex
ico.
Chi
ld C
are
Cre
dit
no
no
(The
chi
ld m
ust l
ive
with
th
e ta
xpay
er.)
yes
(C
erta
in d
isab
led
depe
nden
ts)
yes
yes
Chi
ld m
ust b
e U
S c
itize
n or
a
resi
dent
of t
he U
S, C
anad
a or
Mex
ico.
��
Qualifying Relatives and Personal ExemptionsC H A P t e r 5
QUALifYing reLAtiVe Qualifying relative is another way that a person can be someone’s dependent. Therefore, there are two ways that someone can qualify as a dependent. 1. Qualifying Child 2. Qualifying Relative To be a qualifying relative for dependency exemption, the following five tests must be met.
1. income test – The dependent must have gross income of less than $3,700.
2. Joint return test – In most cases, married dependents cannot file a joint tax return.
3. Citizenship or resident test – The dependent must be a U.S. citizen, a U.S. resident, or a resident of Mexico or Canada.
4. relationship/living arrangements test – The dependent must be either related to the taxpayer or live in the taxpayer’s home for the entire tax year. Acceptable relationships include the following: • Child, grandchild • Parent, grandparent • Sibling • Aunt or uncle • Niece or nephew • Step brother/sister • Step father/mother • In-laws: son/daughter, mother/father, sister/brother
Although this type of dependent is called qualifying relative, a dependent under the rules for qualifying relative does not necessarily need to be related to the taxpayer. Anyone who lives with the taxpayer all year can pass the relationship test.
5. support test – The taxpayer must provide over one-half of the dependent’s financial support for the tax year.
Example 1 Jeremy is single and earns about $45,000 a year. His father, a 70-year-old widower, lived with Jeremy all year. No one else lived in the household. Jeremy’s father’s only income was $9,000 in taxable pension. Jeremy paid for over half of his father’s living expenses. Jeremy cannot claim his father as a dependent because his father does not meet the gross income test.
Example 2 A young adult, age 20, is no longer a foster child, but he continues to reside with his former foster parents. He is no longer their dependent as a qualifying child, but could be their dependent under the rules for qualifying relative.
The rules for qualifying relative can only be used when the dependent is not the qualifying child of any taxpayer. For this purpose, a taxpayer is someone who has a tax filing requirement or files to get a refundable credit. Someone who files only to get a refund of withheld taxes is not a taxpayer for this purpose.
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Example 3: Judy is single. She and her two kids, ages 2 and 4, lived with Judy’s boyfriend, Josh, for all of 2011. Josh is not the father of Judy’s children, but he provided most of the financial support for Judy and her children. Judy worked part time and made $500 in wages, her only income in 2011. Josh made $30,000 at his job. Josh may claim Judy as his dependent under the rules for qualifying relative because she passes the five-test rule. Since Judy is not required to file a tax return, or files only to obtain a refund of income taxes withheld, Josh may also claim the children as dependents using the qualifying relative rules.
Example 4: Using the same scenario as example 3, assume that Judy worked more and made $12,000. Josh may not claim Judy as his dependent under the rules for qualifying relative because she had gross income over $3,700. Since the filing requirement threshold for a single person is $9,500, Judy is considered a taxpayer. Therefore, the kids are considered Judy’s qualifying children and cannot be considered by Josh under the rules for qualifying relative.
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PersOnAL eXemPtiOns
There are two kinds of exemptions: personal exemptions and exemptions for dependents. For tax year 2011, each
exemption reduces the client’s taxable income by $3,700. Dependency exemptions are determined by the rules for
qualifying child and qualifying relative.
• A client typically claims himself/herself as a personal exemption.
• On a joint return, two personal exemptions are claimed: one for each spouse.
• No boxes need to be checked for personal exemptions. TaxWise calculates these entries based on other
information on the return.
• Question 13 in Part I of Form 13614-C asks if the client can be claimed by someone else. If someone else, such
as the client’s parents, can claim the client as a dependent, then the client is not eligible to claim a personal
exemption for himself/herself. In this case, check the special box on TaxWise.
• A person who qualifies as a dependent may not claim himself or herself – even if he/she is not actually claimed
on someone else’s tax return.
• When someone cannot claim the personal exemption, his/her standard deduction may be reduced. Once the
qualified dependent box is checked, TaxWise makes this computation.
• A taxpayer can never claim his/her spouse as a dependent.
• A client filing married filing separately may claim his/her spouse as a personal exemption if the following are all
true.
o The spouse is not filing a tax return.
o The spouse had no gross income.
o No one else can claim the spouse as a dependent.
Teens and young adults often want to claim themselves. But parents may still be eligible to claim them,
particularly if the son or daughter was a student during the tax year. It is not a choice.
Preparation Hint
Failure to indicate being claimed by someone else may cause the tax return to be rejected by the IRS. It may also
cause significant filing problems for the taxpayers who are eligible to claim that person’s dependency exemption.
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fiLing reQUirements—WHO sHOULD fiLe?Taxpayers are not required to file a tax return until gross income reaches certain levels based on filing status, age and income. These filing requirements can be found in Publications 17 and 4012. However, these requirements are rarely an issue for CEP. Virtually all CEP clients should file a tax return. Any client who has earned income probably should file.
Generally, CEP clients file to claim: • A refund of withheld taxes; • The earned income tax credit; and/or, • The additional child tax credit.
There are three situations when a taxpayer is required to file a tax return, even with very low income: • Taxpayers who received the first-time homebuyers credit for a home purchased in 2008. These taxpayers must
file to repay the credit. • Taxpayers who have more than $400 in self-employment income must file. This income is usually reported
to the client on Form 1099-MISC in box 7, nonemployee compensation. However, any earned income that is not reported as wages on a W-2 is probably self-employment income.
• A taxpayer that can be claimed as a dependent on someone else’s tax return has special filing requirements. For example, the dependent must file if he/she has over $950 in unearned income.
fiLing stAtUs
Filing status is important.
• Filing status affects availability and/or amount of many deductions and credits, as well as the amount of tax.
• In most cases, marital status and living arrangements dictate the filing status.
• With rare exceptions, such as the married couple that can decide joint or separate, filing status is not a choice.
There are five different possibilities for filing status.
(1) singLe – This is used when the client is not married or is legally separated or divorced before the end of 2011.
• Marital status refers to the marital status on the last day of the tax year.
• Exception: If the client’s spouse died during the tax year, the surviving spouse can generally file a joint return
for that tax year.
example: Gus and Gail were married in 1988 and their divorce was final on November 12, 2011. Due to financial
restrictions, they still share their house together. They both are considered unmarried for tax year 2011, and cannot
choose to file jointly.
Filing Requirements and Filing StatusC H A P t e r 6
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Another example: On New Year’s Eve, Pat and Patty decided to fly down to Las Vegas and tie the knot. If they
marry before midnight, they are considered married for the entire year. If they get married after midnight, they must
both file as single one more time.
(2) mArrieD fiLing JOintLY – The couple must be legally married at the end of 2011.
• Exception: If the client’s spouse died during 2011 and the client has not remarried, joint status can be used.
• Illinois does not have common law marriage.
• Any refund check will be made out to both husband and wife, and any balance due will be billed to both.
• Both the husband and wife must sign a joint return. If filing a paper return, they both sign the Form 1040. If
filing electronically, they both sign the Form 8879, IRS e-file Signature Authorization.
• Any married couple can choose to file married filing jointly or married filing separately.
A joint return cannot be filed electronically without both spouses present to sign the 8879 forms. If only one
spouse is present, the client can return with his/her spouse on another day to file the return. Otherwise they
may take a printed copy of the return, have the spouse sign the return, and mail the return to the IRS.
example: John and Jane were married on Christmas Day 2011. Since they did not move in together and combine
households until after the New Year, they would like to each file as single. They must, nonetheless, file as either
married filing jointly or married filing separately for tax year 2011.
(3) mArrieD fiLing sePArAteLY – Any legally married person may choose to use this status instead of married
filing jointly; however, it is rarely advantageous.
• Married filing separately restricts many benefits, is the highest tax rate, and prohibits many credits, such as the
earned income tax credit.
• The spouse’s name and SSN must appear on line 3 of Form 1040, and must, therefore, be entered on the
TaxWise Main Information Sheet. The return cannot be filed electronically without this information.
• If a client does not know the spouse’s SSN, the client can come back with the information another day or take a
printed return, write in the correct information later, and mail the paper return to the IRS.
• The mirror rule states that when a husband and wife file separately, the deductions or their returns must mirror
each other. Either they both take the standard deduction or each takes his/her own itemized deductions.
example: Mack and Missy have been married for five years. Mack wants to file a joint return, but Missy told him
that she has already filed separately, using itemized deductions. Mack must file as married filing separately, also
using itemized deductions.
Sometimes a client who could file jointly wants to file separately, even though it means a smaller refund.
Often, this will be a client with a spouse who has a balance due to the government and wants to avoid losing
his/her refund to pay that balance due. This client could possibly benefit from injured spouse provisions. Form
8379, Injured Spouse Claim, can be filed with the joint tax return to request special allocation of the refund.
The client’s refund will be issued to that client and the refund of the spouse with a balance due will be offset
to pay the amount owed. Talk to your site manager if you encounter this situation.
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(4) HeAD Of HOUseHOLD – This is a special filing status for taxpayers who are single and pay more than half the
cost of keeping up a home for a qualifying person. The head of household filing status has lower tax rates and a
higher standard deduction than single or married filing separately, so generally someone who qualifies should use
head of household filing status.
To be eligible for head of household filing status, a client must meet two requirements:
Requirement 1 – be unmarried (or considered unmarried based on a special exception)
Requirement 2 – provide a home for a qualifying child or a qualifying relative
Note: For head of household filing status, the qualifying relative must actually be related to the taxpayer.
requirement 1 – must Be Unmarried
The taxpayer must be single, divorced, legally separated or qualify as unmarried under a special exception.
Special Exception To qualify as unmarried, a married taxpayer must meet all of the following requirements.
• Taxpayer does not file jointly with spouse,
• Taxpayer paid over half the cost of keeping up his/her home,
• Taxpayer and spouse did not live together for the last six months of the tax year (gone by June 30),
• Taxpayer’s child lived with the taxpayer for more than half of the tax year, and
• Taxpayer claims the child as a dependent. NOTE: There is an exception when the child is not claimed due to
the special rules for a noncustodial parent.
For this special exception, child means only son, daughter, step child, foster child or adopted child. It does not include grandchildren, siblings, or their descendents.
requirement 2 – must maintain a Household
The taxpayer must have paid over half the cost of maintaining a home for at least one qualifying person. Household
expenses include items like rent, utilities and food consumed in the home.
Qualifying Person There are three categories of persons that may qualify an unmarried taxpayer for head of
household filing status. Each has its own set of requirements.
Category 1 – taxpayer’s Child – Qualifying Child rules • If the child is not married, use the qualifying child rules: o Age – The child must be under age 19 at the end of the tax year or under age 24 if the child is a full-time
student. A disabled child can be any age. o Relationship – The child must be the taxpayer’s child, stepchild, adopted child, foster child, sibling,
stepsibling or a descendent of any of these relatives, such as a nephew or niece. o Residency – The child must live with the taxpayer for more than half of the tax year. o Support – The child cannot provide more than half of his/her own support for the year. • If the child is married, the above rules apply, plus the child cannot file a joint income tax return. Exception: The
dependent can file a joint return if the couple would have no tax liability if each filed married filing separately. • The child must be a U.S. citizen or a resident of the U.S., Canada or Mexico.
For divorced or separated parents, the child can only be the custodial parent’s qualifying child for head of household. This is true even if the noncustodial parent claims the child as a dependent and for the child tax credit.
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Category 2 – taxpayer’s Parent • A parent does not need to live with the taxpayer. • Must be the taxpayer’s dependent under rules for qualifying relative.
Category 3 – Other relatives • Includes grandparents, siblings, in-laws, uncles, aunts, nieces and nephews. Also includes siblings and children
who do not meet the qualifying child definition. • Must live with taxpayer at least six months of the tax year. • Must be taxpayer’s dependent under the rules for qualifying relative.
The person used to qualify for head of household filing status must be related to the taxpayer, even if that person lived with the taxpayer all year. Unrelated persons who qualify as a dependent cannot be used to claim head of household filing status.
example 1: Marion’s son, John, age 28, lived with her all year. John worked full time and earned $35,000, which he spent on his clothes, dates and entertainment.
Can Marion claim head of household filing status?Answer: No. Marion provided over half of the cost of maintaining the household, but Marion cannot claim head of household filing status. John is too old to be her qualifying child and makes too much money to be her qualifying relative.
example 2: Tony and Theresa have been married for five years. He moved out in July 2008. Their two small children live with Theresa. They have not taken steps to legally separate or divorce. Tony occasionally sends Theresa money to help with the kids – approximately $1,500 during 2011. Theresa earned $28,000 in 2011.
Can Theresa claim head of household filing status?Answer: Yes. Theresa would qualify for head of household filing status. Tony would file as married filing separately.
example 3: Karen is single and earned $32,000 in 2011. Her widowed mother lives in Wisconsin and receives $300 per month in social security – her only income. Karen pays her mother’s rent, utilities, and repairs on the home, as well as other living expenses. Karen spends well over $3,600 per year ($300 X 12 months) on her mother.
Can Karen claim head of household filing status?Answer: Yes. Karen may use head of household filing status.
example 4: Sidney and his girlfriend, Ann, lived together all year. They are both single. Ann had no income. Sidney provided all of Ann’s support and paid the entire cost of maintaining the household.
Can Sidney claim head of household filing status?Answer: No. Since Ann is not related to Sidney, she is not his qualifying relative for head of household. His filing status is single and he can claim Ann as his dependent. example 5: Sherri and Mark were divorced in 2009. Their five-year-old son lived with Sherri all year and Sherri provided all of the cost of maintaining the household. Sherri allows Mark to claim their son as a dependent and for the child tax credit.
Can Sherri claim head of household filing status?Answer: Yes. Sherri can claim head of household filing status.
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(5) QUALifYing WiDOW(er) a special filing status is available to certain widows or widowers with dependent children for two years after a spouse has died. To qualify, the widow(er) must meet all of the four following criteria/ tests:
• Was entitled to file a joint return in the year of spouse’s death
• Has not remarried
• Has a child or stepchild that qualifies as his/her dependent
• Paid more than half the cost of upkeep of the home that was the widow(er)’s residence and the residence of
the dependent child
example: Alice’s husband died in 2010. She has not remarried. Her 8-year-old daughter, who qualifies as her dependent, lives with her. Alice filed married filing jointly for 2010 and can use qualifying widow(er) for tax years 2011 and 2012, as long as she has not remarried and her daughter continues to be her dependent and lives with her.
Grandchildren and foster children cannot qualify a taxpayer for this filing status.
Preparation HintWhen filing status QUALIFYING WIDOW(ER) is selected, TaxWise prompts for the spouse’s year of death. Enter this information only when this filing status is used.
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Quiz - Basic Tax Preparation 1C H A P t e r 7
Use volunteer training materials, such as the “All Those Kids” chart, and IRS resources, such as Publications 17 and
4012, to answer the following questions.
1. Gina and Peter are married and have two children. They want to file a joint return. Gina’s W-2 shows that she
earned $49,000 and Peter’s W-2 shows that he earned $38,000.
Will CEP’s tax site serve these clients?
a. Yes
b. No
2. Lila just had her tax return completed and she is getting a big refund. Lila has lots of questions about how she
could possibly put some of it in savings. The volunteer preparer doesn’t know much about savings products.
What should the preparer do?
a. Advise the client to Google “savings” and see what she can find out.
b. Tell the client that she needs to wait for her refund and then go to a bank.
c. Suggest that Lila talk to the on-site bank partner.
d. Go ask the site manager.
3. The preparer noticed that a client answered “Unsure” to lots of questions on the intake sheet, Form 13614-C.
The preparer should advise the client to come back another day when he knows the answers.
a. True
b. False
4. Jeffery is single with no children. He has a W-2 showing that he earned about $500 last year. He had $90
withheld from his wages.
He should file a tax return.
a. True
b. False
5. The following people lived together in the U.S. for all of 2011. They all have SSNs. Tom and Teresa are married. They both worked. Tom earned $12,000 and Teresa earned $14,000. They have three children: Tammy, age 18, Teddy, age 14, and Tory, age 10. All three kids were full time students and none of them had any income. Tom and Teresa are going to file a joint return.
Who are Tom and Teresa eligible to claim? Dependents? Qualifying child for EITC? Qualifying child for child tax credit? Qualifying child for child care credit? Qualifying person for head of household?
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6. The following people lived together in the U.S. for all of 2011. They all have SSNs. Harriet, age 52, is a single mom with one son, Alan, age 33. Alan is totally disabled and received Form SSA-1099 showing social security disability benefits of $9,400 for 2011. Harriet worked part time and earned $4,100. She received about $3,000 in food stamps. They pooled all their resources and spent it all on support for both of them.
Who is Harriet eligible to claim? Dependents? Qualifying child for EITC? Qualifying child for child tax credit?
7. The following people lived together in the U.S. for all of 2011. They all have SSNs. Hank is a single dad with one child, Max, age 14. Hank earned $30,000 – his only income. Max’s only income was from his summer job where he earned $450.
Who is Hank eligible to claim? Dependents? Qualifying child for EITC? Qualifying child for child tax credit? Qualifying child for child care credit? Qualifying person for head of household?
How many exemptions can Max claim on his tax return?
8. The following people lived together in the U.S. for all of 2011. They all have ITINs. Juanita and Alex are married and have two children, Sam and Hector. Sam is 3 and Hector was born in November 2011.
Who are Juanita and Alex eligible to claim? Dependents? Qualifying child for EITC? Qualifying child for child tax credit? Qualifying child for child care credit?
9. Franklin and Mona, both age 26, lived together in the U.S., with Mona’s sons, Bobby, age 3, and Billy, age 4, for all of 2011. They all have SSNs. Franklin and Mona are not married and Franklin is not the father of Bobby or Billy. Franklin earned $39,000 and provided most of the support for the family. Mona earned $11,000 in 2011. This was their only income.
Who is Franklin eligible to claim? Dependents? Qualifying child for EITC? Qualifying child for child tax credit? Qualifying child for child care credit? Qualifying person for head of household?
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10. Ethel and Don got divorced in November of 2011. Ethel and their son, Donnie Jr., age 10, have lived on their own together since Don moved out in the summer of 2009. They all have SSNs. In 2011 Ethel earned about $4,000, Don earned $41,000 and Don paid Ethel $9,000 in child support. Don was supposed to pay her more child support, so she decided she does not want Don to claim Donnie Jr. on his taxes this year. The divorce decree says that Don can claim Donnie Jr. as his dependent and as his qualifying child for the child tax credit.
Ethel can claim Donnie for which tax benefits? dependency / EITC / child tax credit child care credit / head of household
Don can claim Donnie for which tax benefits? dependency / EITC / child tax credit child care credit / head of household
11. Julia, age 38, Grandma Grace (Julia’s mother), and Rory, Julia’s 16-year-old daughter, are all single and lived together in the U.S. for all of 2011. They all have SSNs. Grandma Grace worked part time and earned $8,000 and received $14,000 in social security retirement. Julia worked full time and earned $32,000. Rory had no income.
Who is Grandma Grace eligible to claim? Dependents? Qualifying child for EITC? Qualifying child for child tax credit? Qualifying child for child care credit?
12. The following people lived together in the U.S. for all of 2011. They all have SSNs. Jonathon is single and has no children. He earned $25,000 in 2011, his only income. In 2008, his old college roommate, Tony, lost his job and moved in with Jonathon. Tony has not been able to find a job and he had no income in 2011. Jonathon feels sorry for Tony and let him live with him all year. Jonathon provided all of the financial support for both himself and Tony. Tony ate chips, drank beer and watched TV. Jonathon and Tony are both 28 years old.
Who is Jonathon eligible to claim? Dependents? Qualifying child for EITC? Qualifying child for child tax credit? Qualifying child for child care credit? Qualifying person for head of household?
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AnsWers tO QUiz QUestiOns
1. Gina and Peter are married and have two children. They want to file a joint return. Gina’s W-2 shows that she earned $49,000 and Peter’s W-2 shows that he earned $38,000.
Will CEP’s tax site serve these clients? a. Yes b. no their combined income of $87,000 is well over CeP’s $50,000 limit.
2. Lila just had her tax return completed and she is getting a big refund. Lila has lots of questions about how she could possibly put some of it in savings. The volunteer preparer doesn’t know much about savings products.
What should the preparer do? a. Advise the client to Google “savings” and see what she can find out. b. Tell the client that she needs to wait for her refund and then go to a bank. c. suggest that Lila talk to the on-site bank partner. d. Go ask the site manager.
3. The preparer noticed that a client answered “Unsure” to lots of questions on the intake sheet, Form 13614-C.
The preparer should advise the client to come back another day when he knows the answers. a. True b. false the preparer needs to ask questions to help the client determine the correct answers.
4. Jeffery is single with no children. He has a W-2 showing that he earned about $500 last year. He had $90 withheld from his wages.
He should file a tax return. a. true He is not required to file, but he should file to get his withholding back. He may also qualify for the
earned income credit. b. False
5. The following people lived together in the U.S. for all of 2011. They all have SSNs. Tom and Teresa are married. They both worked. Tom earned $12,000 and Teresa earned $14,000. They have three children: Tammy, age 18, Teddy, age 14, and Tory, age 10. All three kids were full time students and none of them had any income. Tom and Teresa are going to file a joint return.
Who are Tom and Teresa eligible to claim? Dependents? tammy, teddy, and tory Qualifying child for EITC? tammy, teddy, and tory Qualifying child for child tax credit? teddy and tory Qualifying child for child care credit? tory Qualifying person for head of household? this filing status does not apply since tom and teresa are
married and lived together all year.
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6. The following people lived together in the U.S. for all of 2011. They all have SSNs. Harriet, age 52, is a single mom with one son, Alan, age 33. Alan is totally disabled and received Form SSA-1099 showing social security disability benefits of $9,400 for 2011. Harriet worked part time and earned $4,100. She received about $3,000 in food stamps. They pooled all their resources and spent it all on support for both of them.
Who is Harriet eligible to claim? Dependents? no one. Alan provided over half of his own support. Qualifying child for EITC? Alan. there is no support test for the eitC. Alan meets the age requirement
because he is disabled. Qualifying child for child tax credit? no one. Alan provided over half of his own support and he is not
under age 17.
7. The following people lived together in the U.S. for all of 2011. They all have SSNs. Hank is a single dad with one child, Max, age 14. Max is not disabled. Hank earned $30,000 – his only income. Max’s only income was from his summer job where he earned $450.
Who is Hank eligible to claim? Dependents? max Qualifying child for EITC? max Qualifying child for child tax credit? max Qualifying child for child care credit? no one. max is not under age 13. Qualifying person for head of household? max How many exemptions can Max claim on his tax return? zero. He cannot claim himself because he is the
qualifying child of his father.
8. The following people lived together in the U.S. for all of 2011. They all have ITINs. Juanita and Alex are married and have two children, Sam and Hector. Sam is 3 and Hector was born in November 2011.
Who are Juanita and Alex eligible to claim? Dependents? sam and Hector Qualifying child for EITC? the eitC cannot be claimed because the parents have itins. Qualifying child for child tax credit? sam and Hector Qualifying child for child care credit? sam and Hector
9. Franklin and Mona, both age 26, lived together in the U.S., with Mona’s sons, Bobby, age 3, and Billy, age 4, for all of 2011. They all have SSNs. Franklin and Mona are not married and Franklin is not the father of Bobby or Billy. Franklin earned $39,000 and provided most of the support for the family. Mona earned $11,000 in 2011. This was their only income.
Who is Franklin eligible to claim? Dependents? no one. Bobby and Billy are not his qualifying children because they are not related to
him. He cannot claim then as qualifying relatives because they are the qualifying children of another taxpayer, mona. He cannot claim mona as a qualifying relative because her income is over $3,700.
Qualifying child for EITC? no one. Bobby and Billy are not his qualifying children because they are not related to him.
Qualifying child for child tax credit? no one. Bobby and Billy are not his qualifying children because they are not related to him.
Qualifying child for child care credit? no one. Bobby and Billy are not his qualifying children because they are not related to him.
Qualifying person for head of household? He must file as single because he is not providing a home to someone who is related to him.
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10. Ethel and Don got divorced in November of 2011. Ethel and their son, Donnie Jr., age 10, have lived on their own together since Don moved out in the summer of 2009. They all have SSNs. In 2010 Ethel earned about $4,000, Don earned $41,000 and Don paid Ethel $9,000 in child support. Don was supposed to pay her more child support, so she decided she does not want Don to claim Donnie Jr. on his taxes this year. The divorce decree says that Don can claim Donnie Jr. as his dependent and as his qualifying child for the child tax credit.
Ethel can claim Donnie for which tax benefits? dependency / EITC / child tax credit child care credit / head of household she can claim Donnie Jr. for all of these benefits. (However, she may not qualify for head of household
because she probably did not provide over half the cost of maintaining the household.) As the custodial parent, she can claim the child unless she chooses to let her ex-husband claim him. the divorce decree does not determine who claims the children.
Don can claim Donnie for which tax benefits? dependency / EITC / child tax credit child care credit / head of household none. He can only claim the child – as a dependent and for child tax credit - if ethel decides to give
him permission by signing form 8332.
11. Julia, age 38, Grandma Grace (Julia’s mother), and Rory, Julia’s 16-year-old daughter, are all single and lived together in the U.S. for all of 2011. They all have SSNs. Grandma Grace worked part time and earned $8,000 and received $14,000 in social security retirement. Julia worked full time and earned $32,000. Rory had no income.
Who is Grandma Grace eligible to claim? Dependents? no one. she cannot claim rory because rory is the qualifying child of her own mother,
Julia, and Julia’s income is more than grace’s. Qualifying child for EITC? no one. she cannot claim rory because rory is the qualifying child of her own
mother, Julia, and Julia’s income is more than grace’s. Qualifying child for child tax credit? no one. she cannot claim rory because rory is the qualifying child of
her own mother, Julia, and Julia’s income is more than grace’s. Qualifying child for child care credit? no one. she cannot claim rory because rory is the qualifying child
of her own mother, Julia, and Julia’s income is more than grace’s. Also, rory is not under age 13.
12. The following people lived together in the U.S. for all of 2011. They all have SSNs. Jonathon is single and has no children. He earned $25,000 in 2011, his only income. In 2008, his old college roommate, Tony, lost his job and moved in with Jonathon. Tony has not been able to find a job and he had no income in 2011. Jonathon feels sorry for Tony and let him live with him all year. Jonathon provided all of the financial support for both himself and Tony. Tony ate chips, drank beer and watched TV. Jonathon and Tony are both 28 years old.
Who is Jonathon eligible to claim? Dependents? tony qualifies as Jonathon’s dependent under the rules for qualifying relative. Although
tony is not related to Jonathon, he did live with him all year and he passes all the other tests. Qualifying child for EITC? no one. tony is not a child and is not related to Jonathon. Qualifying child for child tax credit? no one. Qualifying child for child care credit? no one. Qualifying person for head of household? no one. even though he provided a home for tony, a
dependent, tony is not related to Jonathon.
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Basic Tax Preparation 2
Learning Objectives
1. Understand refundable and nonrefundable tax credits and how they affect tax return preparation.
2. Learn the basic requirements for claiming the earned income tax credit (EITC) and be able to identify potential EITC recipients.
3. Become familiar with other tax credits, with emphasis on child care credit and child tax credit.
4. Become familiar with CEP’s emphasis on client savings.
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CreditsC H A P t e r 8
A tax credit is a dollar for dollar tax benefit that can be refundable or nonrefundable.
nonrefundable Credits
Nonrefundable credits are credits that can only be used to decrease the amount of income tax. • The taxpayer must have taxable income in order to benefit from a nonrefundable credit. This generally means
that the total income is more than the standard deduction plus exemptions. • Unused nonrefundable credits are not refunded to the client. They are, in most cases, just lost. Because many
CEP clients have no taxable income, nonrefundable credits sometimes are not beneficial. • The nonrefundable credits appear on Form 1040, page 2, lines 47 through 53.
Before considering any nonrefundable credits, such as the child care credit, complete the Main Information Sheet, and enter income amounts and adjustments. Then look at Form 1040, page 2, line 43, taxable income. If this line is zero, you do not need to enter the information for nonrefundable credits. The client has no income tax liability and receives no benefit from these credits.
refUnDABLe CreDits
Refundable credits are credits that a taxpayer receives, even if that taxpayer has no taxable income. • Refundable credits are treated like payments made to the IRS. • Refundable credits are used to reduce the client’s tax liability and any excess amount is refunded. • Since the function of these credits is similar to payments made by a taxpayer, they appear in the payment
section of Form 1040, lines 62 through 71.
sUmmArY Of CreDitsThe following credits commonly appear on CEP returns.
nonrefundable CreditsChild and Dependent Care CreditChild Tax CreditLifetime Learning CreditResidential Energy CreditRetirement Savings Contribution Credit
refundable CreditsEarned Income Tax CreditAdditional Child Tax Credit
Both nonrefundable and refundableAmerican Opportunity Education Credit
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example: Phyllis is a single mom with three kids. She is upset because she forgot to bring the receipts showing the amounts that she paid for child care. She wants to claim the child care credit. Should she go home and get the child care information? Here’s her situation.
$22,000 wage income - $ 8,500 standard deduction $13,500
$13,500 - $14,800 exemptions ($3,700 x 4) $ 0 taxable income
No, Phyllis does not need to get the child care information. The child care credit is nonrefundable. It can only be used to offset income tax. Since she has zero taxable income, she will have zero income tax. She will not benefit from the child care credit.
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Earned Income Tax CreditC H A P t e r 9
eArneD inCOme tAX CreDit
The earned income tax credit (EITC) is a refundable tax credit for low-income taxpayers who work. • Taxpayers may receive a refund even though they never paid any tax or had any tax withheld. • The EITC is available to individuals with children and those with no children. • The EITC benefits families with children more than individuals with no children. • IRS often refers to EITC as EIC (earned income credit).
For tax year 2011, the maximum EITC amount is: No children $ 464 One qualifying child $ 3,094 Two qualifying children $ 5,112 Three qualifying children $ 5,751
For tax years 2009, 2010, and 2011, the maximum number of qualifying children for EITC is three per tax return. For tax years prior to 2009, the maximum number of qualifying children for EITC is two per tax return.
Qualifying children for EITC are identified on the Main Information Sheet by checking the EIC box. This is one of the most important aspects of preparation for most CEP returns.
eitC eLigiBiLitY
Preliminary RequirementsThere are several restrictions that can prevent qualification for the EITC: • The taxpayer cannot be the qualifying child for EITC of another person. • The taxpayer must be a U.S. citizen or a documented resident of the U. S. • The taxpayer cannot file Form 2555 – related to exclusion of foreign earned income.
General RequirementsA taxpayer must meet requirements in four categories to qualify for the EITC. 1. Income 2. SSN 3. Filing status 4. Special restrictions if there is no qualifying child
1. incomeThere are three aspects regarding income that must be considered.
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Married Single or Filing Jointly Head of Household
No children $18,740 $13,660
One qualifying $41,132 $36,052 child
Two qualifying $46,044 $40,964 children
Three qualifying $49,078 $43,998 children
Earned income is anything of value received for services performed. Examples of earned income are: wages, salaries, tips and self-employment income. Examples of income that is not earned income are: unemployment compensation, interest and social security.
Adjusted gross income (AGI) is total income less adjustments and before deductions and exemptions. The AGI can be found on the Form 1040, page 1, line 37, and page 2, line 38.
(b) Earned IncomeThe taxpayer must have earned income. • Usually earned income will be wages, shown on Form W-2. • Form 1099-MISC showing income paid for providing child care is an example of self-employment earned
income. • Other 1099 income, such as 1099-INT interest income, is generally not earned income.
Income reported on Form 1099-MISC in box 7, nonemployee compensation, is earned income. (c) Disqualifying IncomeIf investment income, also referred to as passive income, exceeds $3,150, the person is disqualified from taking the EITC. Investment income includes such things as: • interest (both taxable and tax-exempt) • dividends • net capital gains
2. social security numberThe taxpayer must have a valid social security number (SSN). If the taxpayer is married, the taxpayer’s spouse must also have a valid social security number. A social security number is a number issued by the Social Security Administration that is valid for work.
If a married taxpayer qualifies as head of household, the spouse is not listed on the tax return and it doesn’t matter if the spouse has a valid SSN.
(a) Maximum Income To claim EITC for 2011, the total earned income and adjusted gross income (AGI) must each be less than the following amounts:
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The following identification numbers do not qualify for EITC: • Individual Taxpayer Identification Number (ITIN), which is issued to taxpayers who do not qualify for a social
security number by the Internal Revenue Service for tax filing purposes. An ITIN starts with number 9 as the first digit and the fourth digit is 7 or 8.
9XX-7X-XXXX or 9XX-8X-XXXX • Adoption Taxpayer Identification Number (ATIN), which is issued to a child who is being adopted and cannot get
an SSN until the adoption is final. • A social security card with “Not Valid for Employment” printed on the card issued by the Social Security
Administration. This indicates that the SSN might not qualify for EITC. o If the SSN was obtained to get a federally funded benefit, like Medicaid, it does not qualify. o If the SSN was not issued to get federally funded benefits, that SSN can be used for EITC. o If a client has a card marked “Not Valid for Employment” and the client has a revised status that permits
employment, advise the client to visit the Social Security Administration and get a new card. • A qualifying child for the EITC must also have a valid social security number.
When an immigrant is issued a valid SSN, that person may claim EITC for prior years if the use of an ITIN was the only reason that s/he did not qualify for EITC. If you encounter this circumstance, talk to your site manager. Generally, CEP will complete an amended return, Form 1040X, to claim the EITC.
3. filing statusTo qualify for the EITC, the client cannot use the married filing separately filing status. Eligible Filing Status Ineligible Filing Status
single married filing separately married filing jointly head of household qualifying widow(er)
4. special restrictionsThere are special restrictions for claiming EITC for taxpayers who do not have a qualifying child. • The taxpayer must be at least 25 years of age and under the age of 65 at the end of the tax year. • The taxpayer cannot be the dependent of another person. • The taxpayer must have lived in the U.S for more than half the tax year.
reVieW: QUALifYing CHiLD fOr tHe eitC1. Age – The child must be under age 19 at the end of the tax year or under age 24 if the child is a full-time student.
The child must be younger than the taxpayer. A disabled child can be any age.
2. Relationship – The child must be the taxpayer’s child, stepchild, adopted child, foster child, sibling, stepsibling or a descendent of any of these relatives.
3. Residency – The child must live with the taxpayer in the United States for more than half of the tax year. • If a child was born or died during the year and the client’s home was the child’s home during the part of the
year that the child was alive, the child is considered to have met the residency rule. In either case, enter 12 as the number of months lived in the home.
• Temporary absences, such as military service or going away to college, are considered time lived at home.
4. Support – There is no support requirement for a qualifying child for EITC.
Twists and Turnsmarried child A married child only qualifies if that child also is the taxpayer’s dependent. (Also, a married child qualifies if the only reason the child is not claimed as a dependent is due to a Form 8332.)
tie situations A child can be the qualifying child of more than one person. • If one of the qualified persons is the child’s parent and the other is not the child’s parent, the non-parent can
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claim the child only if that non-parent has higher adjusted gross income (AGI) than either parent. • When the nonparent’s income is higher, the family can decide which qualified person claims the child.
parent and child did not live together For EITC, a qualifying child can only be claimed by the relative that the child lived with. There is no exception for divorced or separated parents.
If a child is claimed as a qualifying child for EITC on more than one return, the IRS will disallow the qualifying child to all but one taxpayer, using IRS tiebreaker rules.
CLAiming eitC The good news: TaxWise does most of the work.The bad news: It’s easy for a preparer to make a little mistake that causes a huge EITC error.
Schedule EICA special form, Schedule EIC, is filed with the tax return for all clients claiming EITC with one or more qualifying children. • Schedule EIC provides identifying information about the qualifying children and it is generated by TaxWise
when the EIC box next to a child’s name is checked on the Main Information Sheet. • On most returns, Schedule EIC will be completed by TaxWise without any entries made directly to the
schedule by the preparer. • When a qualifying child is over age 18, TaxWise will make line 4 on Schedule EIC a required entry. Line 4 has
two parts: 4a and 4b. Only answer one of these questions!
Do not make entries on Schedule EIC unless prompted by TaxWise! If an entry is necessary, TaxWise will require the form. Only answer the questions that are required, as indicated by the red fields.
EITC WorksheetTaxWise presents an EITC worksheet (called Sch EIC Wkst.) that must be completed to claim EITC. Much of the worksheet includes calculated entries, involving information already available to TaxWise. There are several key items that must be entered by the preparer. • Is the client being claimed as a qualifying child of another person? • Did the client live in the United States for more than half of the year? • Is the qualifying child married? (Be careful! This question has tricky wording.) • Can anyone else claim the child for EITC? • Was the client’s EITC disallowed for the previous tax year? If the client reveals problems with EITC for the
prior year, see your site manager. Ignoring this issue may cause a rejected return and refund delay. • Once it is indicated that the client’s EITC was disallowed for the prior year, TaxWise will automatically open
Form 8862, Information to Claim EITC After Disallowance.
Correct answers are critical. Read each question carefully! In fact, if the EITC amount on the final return is wrong or is missing, the problem is probably related to the EITC worksheet.
EITC ComputationThe amount of EITC is based on income, filing status, and number of qualifying children. TaxWise determines the amount automatically. To see how it works, go to the EITC tables and worksheets in the 1040 Instruction Book. Having a general idea how the EITC works can help preparers catch their own mistakes.
Basically, the EITC is calculated on the AGI and also on the earned income. In general, the higher the income, the more the credit – up to a certain level, called the phase-out point. Once the income goes above the phase-out level, more income means less credit. This is reflected in the graph.
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Problem
1. Taxpayer makes a mistake
2. Taxpayer recklessly disregards the EITC rules
3. Taxpayer fraudulently claims EITC
4. Paid preparer fails to exercise due diligence
Penalty
1. No EITC the following year unless Form 8862 is submitted
2. No EITC for two subsequent years
3. No EITC for ten years
4. Paid preparer pays a $100 penalty per tax return
PenALtiesThe Taxpayer Relief Act of 1997 provided for penalties for improper EITC claims beginning with the 1998 tax year.
eitC for tax Year 2011
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Child CreditsC H A P t e r 1 0
CHiLD AnD DePenDent CAre CreDit
Parents may claim a nonrefundable credit for child care expenses that are paid so the parent can go to work. • The child and dependent care credit can be taken for expenses paid to care for children and other relatives who
are incapable of self-care and live with the taxpayer. • The credit amount is 20-35 percent of child care expenses, depending on the taxpayer’s total income. • The child care expenses used to compute the credit are limited to $3,000 for one child, $6,000 for two or more
children. • The credit is claimed by completion of Form 2441, Child and Dependent Care Expenses, which is filed with the
client’s tax return. • When the preparer marks “DC” next to a child’s name on the Main Information Sheet, TaxWise makes Form
2441 a required form. • The care must be paid for any of the following: o The taxpayer’s qualifying child under age 13. o The taxpayer’s spouse who is incapable of self-care. o The taxpayer’s dependent (under the rules for qualifying relative) who is incapable of self-care. o a person who is incapable of self-care and does not qualify as the taxpayer’s dependent only because that
person doesn’t pass the gross income test.
review: Qualifying Child for the Child and Dependent Care Credit1. Age – The child must be under age 13 at the time of the child care. A disabled child can be any age.
2. Relationship – The child must be the taxpayer’s child, stepchild, adopted child, foster child, sibling, stepsibling or a descendent of any of these relatives.
3. Residency – The child must live with the taxpayer in the United States for more than half of the tax year.
4. Support – The child cannot provide more than half of his/her own support for the year.
Qualifying expenses • Payments for child care must be made by the client. Third party payments, such as the Illinois Child Care
Assistance Program, do not qualify. • The child care must be work-related; that is, baby-sitting that enables the client to work or look for work.
For married couples, filing a joint return, both husband and wife must be working. Exception: For a married couple, if one person is working, the spouse is considered to be working if s/he is either a full-time student or is physically or mentally unable to care for himself or herself. In these cases, complete the worksheet at the bottom of the Form 2441 screen.
• Many types of care qualify, including after-school programs and day camp. Overnight camp generally does not qualify.
• Married couples must file a joint return. Exception: A taxpayer who qualifies for and files with head of household filing status.
• The child care provider cannot be the taxpayer’s spouse, the child’s parent, or someone that the taxpayer can claim as a dependent.
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examples – Child Care expenses that Qualify for the Credit: o after-school program for ten-year-old until mom and dad return from work o pay adult neighbor to watch the baby while both parents are at work o take baby to a day care center while mom and dad are at work o pay grandma (not the taxpayer’s dependent) to come in twice a week to care for toddler while single mom
is at work
examples – Child Care expenses that Do nOt Qualify for the Credit: o after school program for fourteen-year-old son who is not disabled o pay adult neighbor to watch the baby while both parents go to the movies o cost of overnight scout camp for 9-year-old daughter o pay older sister, age 16, to care for baby sister
Sometimes the client will ask if money paid to a sitter, particularly a relative like grandma, is taxable to the sitter. The answer is “yes.” It is taxable to the child care provider, whether or not the client claims the child care credit.
mandatory identification of the Child Care ProviderThe client must report the child care provider’s name, address and identifying number on the tax return. • There are two kinds of identification numbers, and either one can be used on Form 2441 as the provider’s
identification number. Employer Identification Number (EIN) – The EIN has nine digits and looks like this: 37-1234567. Social Security Number (SSN) – This is the child care provider’s own SSN. • The IRS does check to make sure that the child care provider has reported the payments for child care as
income on the provider’s tax return. • No identifying number is required for certain tax exempt organizations such as churches, YMCAs and schools.
Enter “TAXEXEMPT” - no space.
When you anticipate that the client will have a child and dependent care credit, be sure to check the DC box next to the names of the qualifying children on the Main Information Sheet. TaxWise will then make the Form 2441 a required form. If you later determine that the client will not be taking the credit, go back and remove the check from the DC box on the Main Information Sheet.
If the client’s W-2 has an entry for dependent care benefits in box 10 of Form W-2, be sure it has been entered as part of the W-2 and TaxWise will make the appropriate calculations.
CHiLD tAX AnD ADDitiOnAL CHiLD tAX CreDits
Taxpayers also may claim the child tax credit and additional child tax credit. • The credits are based on the number of qualifying children, amount of income tax and the amount and type of
income on the return. • The maximum amount – for both credits combined – is $1,000 per child.
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Child tax Credit • This is a nonrefundable credit, which appears on Form 1040, page 2, line 51. • When the full $1,000 is not needed as a child tax credit to offset income tax, then the leftover credit may be
taken as a refundable additional child tax credit.
Additional Child tax Credit • The additional child tax credit is a refundable credit that is claimed on Form 8812, Additional Child Tax Credit,
and appears on Form 1040, page 2, line 65. • A client may receive the additional child tax credit when: o The full child tax credit, $1,000 per child, is not used to offset income tax; and, o Either or both of the following is true: the client has taxable earned income over $3,000, or the client has
three or more qualifying children.
Although the software makes it seem easy, the relationship and computation of the child tax credit and additional child tax credit can be rather complex.
review: Qualifying Child for the Child tax and Additional Child tax Credits1. Age – The child must be under age 17 at the end of the tax year. There is no exception.
2. Relationship – The child must be the taxpayer’s child, stepchild, adopted child, foster child, sibling, stepsibling or a descendent of any of these relatives.
3. Residency – The child must live with the taxpayer in the United States for more than half of the tax year.
4. Support – The child cannot provide more than half of his/her own support for the year.
The way TaxWise handles the complexities of these credits is a beautiful thing. Because all information needed to determine the credit amounts is entered once the Main Information Sheet is prepared and the income is entered, both credits are automatically calculated and the Form 8812 is fully prepared. However, you should always check the final return to see if the expected credit(s) have appeared. Remember, never override. If tempted to override, talk to your site manager.
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Other CreditsC H A P t e r 1 1
resiDentiAL energY CreDit
Residential energy credits are available for certain improvements to a personal residence that is owned by the taxpayer. • The credits are nonrefundable. • The credits are claimed on Form 5695, Residential Energy Credit, and appear on Form 1040, line 52. • Manufacturers are allowed to certify their products as qualifying for the credits. • The nonbusiness energy property credit is generally limited to $500 total for tax year 2011 and can be
computed on the cost of high-efficiency items such as: o Heat pumps o Water heaters o Windows and doors o Insulation and roof materials
• The residential energy efficient property credit is generally 30% of the cost and is based on the purchase of items such as:
o Solar water heaters o Wind energy property o Geothermal heat pump property
• The 2011 credit may be reduced by an energy credit taken in a prior year. In some cases, unused credits can be carried forward to tax year 2012.
rePAYment Of 2008 first-time HOmeBUYer CreDit
Taxpayers who received a first time homebuyer credit based on a home purchased in calendar year 2008 began credit repayment with their 2010 tax return. • The credit is repaid in equal payments with Form 1040s over a 15 year period. • The maximum credit for 2008 was $7,500. Therefore, most taxpayers will pay back $500 each tax year. • The repayment appears on Form 1040, line 59, as an additional tax. • Taxpayers can choose to pay more than the required amount.
Taxpayers who received the first-time homebuyer credit for 2008 and still own and live in the home must file a tax return every year for 15 years in order to make repayment – even if they have no income or other reason to file.
A taxpayer who received a homebuyer credit for a home purchased in any year and who no longer owns and lives in the home, must file Form 5405.
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retirement sAVings COntriBUtiOn CreDit
Low-income taxpayers can receive a credit related to amounts contributed to certain retirement plans, including IRAs, 401(k)s and 403(b)s. • The taxpayer’s income must be less than the following amounts: Single or married filing separately $28,250 Head of household $42,375 Married filing jointly $56,500 • The credit is nonrefundable and appears on Form 1040, page 2, line 50. • The credit is computed on Form 8880, Credit for Qualified Retirement Savings Contributions. • When the taxpayer’s contribution to a retirement plan is reflected on the W-2 and all the amounts and codes
from the W-2 have been entered, TaxWise will generate the Form 8880. • To qualify for the credit, the taxpayer cannot be a full-time student, cannot be claimed as a dependent, and
must be 18 or older. • For more rules and restrictions, see the Form 1040 instruction book and Form 8880 instructions. • For most tax return situations, there are only two items to complete on Form 8880 and both will be red
required fields. o It will ask if the taxpayer was a full-time student. o It will ask how much was distributed from retirement plans. In most cases the answer is zero. The preparer
must use the F3 key to make this field zero. (Use the control key and spacebar when using the practice lab.)
This credit is more commonly referred to as the saver’s credit.
NOTE: The making work pay credit was a refundable credit available on tax returns for the 2009 and 2010 tax years. This credit - which was generally worth $400 per taxpayer - has expired.
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Savvy SavingsC H A P t e r 1 2
Once the tax return is finished, the preparer is well-established in the role of trusted advisor. This relationship can be used to encourage savings and progressive financial habits.
rOLe Of tHe tAX PrePArer
1. Promote Direct Deposit • The client can avoid the delay of waiting for a paper check. • Direct deposit increases the security of the refund for the client. • There will be no check-cashing fees. • By avoiding check-cashers, the client will not be exposed to offers for predatory financial products. • It is safer for the client to have money in the bank or credit union rather than carry a large amount of cash.
All clients receiving a tax refund can use direct deposit, even if the client is not filing electronically and does not have a bank account.
2. Encourage savings • CEP recommends clients put a portion of the refund into savings. • Point out that the tax refund is a prime opportunity to set aside money for a rainy day. • Putting money into savings can be useful in an emergency and help the client avoid expensive alternatives,
such as a payday loan. • Discuss how savings can be an important step towards realizing a dream, such as a college education or
buying a home. • Ask the client about financial plans, such as buying a car or getting new furniture, to promote thinking about
the future.
Ways to save • Have all or part of the refund directly deposited to client’s existing savings account. • Open an account with an on-site financial partner and have all or part of the refund directly deposited to that
account. CEP scrutinizes the basic financial products of financial institutions located close to the tax sites to determine appropriate financial products and partners.
• Buy one or more U.S. Savings Bond(s) via the Form 8888, Allocation of Refund. • If a client does not want a bank account, you can get the client a prepaid debit card and the tax refund can
be directly deposited to the debit card account. Specific instructions will be provided when they become available.
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QUiz – BAsiC tAX PrePArAtiOn 2
Use volunteer training materials, such as the “All Those Kids” chart, and IRS resources, such as Publications 17 and 4012, to answer the following questions.
1. A refundable credit increases a client’s refund, even if that client pays no income tax. a. True b. False
2. Any client with income under $25,000 ($50,000 for families) will get at least some EITC (earned income tax credit).
a. True b. False
3. A parent must support his or her child in order to claim that child for the EITC. a. True b. False
4. The EITC is refundable. a. True b. False
5. A married couple is retired and their income was $15,000 taxable pension, $4,000 unemployment, and $5,000 social security. They have one grandchild, age 5, who lived with them all year. Do they qualify for the EITC?
a. Yes, because their pension is taxable. b. Yes, because receipt of unemployment compensation means they were trying to work and earn
income. c. Yes, because their granddaughter is a qualifying child for the EITC. d. No, because they have no earned income.
6. A 19-year-old college student lived with his parents all year and they provided most of his support. He earned $4,000 wages in his part-time summer job. Does he qualify for the EITC on his tax return?
a. Yes, he will get a small EITC. b. No, he is his parent’s qualifying child for EITC. c. No, his income is too high. d. No, he only worked part time.
QuizC H A P t e r 1 3
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7. A single mom with two children, ages 7 and 9, worked full time and earned $50,000. She paid $5,000 for after-school care for the children. How could this expense affect her tax return?
a. She can claim the additional child tax credit. b. The cost increases her EITC. c. She can file Form 2441 and claim the child care credit. d. This has no effect on her tax return.
8. A single dad earned $18,000 wages in 2011. He lived all year with his three sons, ages 5, 7 and 8. His standard deduction and exemptions are more than his income so his taxable income is zero. Since he will pay no income tax, he cannot get any additional child tax credit.
a. True b. False
9. A married couple bought their first home in February 2010. They claimed and received the first-time homebuyer credit when they filed their 2009 tax return. They still own and live in the home. How does this get reported on their 2011 tax return?
a. Nothing gets reported on their 2011 tax return. b. They need to continue repaying the credit with their 2011 tax return. c. They need to reapply for the credit, Form 5405, with their 2011 tax return. d. They must attach proof of purchase documents to their 2011 tax return.
10. Savings bonds may be purchased by a client using the tax return as a gift for a family member. a. True b. False
11. In order to directly deposit a tax refund the client must file electronically. a. True b. False
12. The process of getting clients a prepaid debit card is handled by the: a. site manager b. assistant site manager c. site’s financial partner d. tax preparer
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AnsWers tO QUiz QUestiOns
1. A refundable credit increases a client’s refund, even if that client pays no income tax. a. true Any credit amount not used to offset tax is added to the refund.
b. False
2. Any client with income under $25,000 ($50,000 for families) will get at least some EITC (earned income tax credit).
a. True b. false there are many qualifications. for example, the client must have earned income
and an ssn. the income maximum depends on the filing status and number of
qualifying children.
3. A parent must support his or her child in order to claim that child for the EITC. a. True b. false there is no support requirement for eitC.
4. The EITC is refundable. a. true
b. False
5. A married couple is retired and their income was $15,000 taxable pension, $4,000 unemployment, and $5,000 social security. They have one grandchild, age 5, who lived with them all year. Do they qualify for the EITC?
a. Yes, because their pension is taxable.b. Yes, because receipt of unemployment compensation means they were trying to work and earn
income.c. Yes, because their granddaughter is a qualifying child for the EITC.d. no, because they have no earned income. A taxpayer must have earned income – either
wages or self-employment – to qualify for the eitC.
6. A 19-year-old college student lived with his parents all year and they provided most of his support. He earned $4,000 wages in his part-time summer job. Does he qualify for the EITC on his tax return?
a. Yes, he will get a small EITC.b. no, he is his parents qualifying child for eitC.
c. No, his income is too high.d. No, he only worked part time.
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7. A single mom with two children, ages 7 and 9, worked full time and earned $50,000. She paid $5,000 for after-school care for the children so that she could finish her work day. How could this expense affect her tax return?
a. She can claim the additional child tax credit. b. The cost increases her EITC. c. she can file form 2441 and claim the child care credit. After school care qualifies for the
child care credit and both children are under age 13.
d. This has no effect on her tax return.
8. A single dad earned $18,000 wages in 2011. He lived all year with his three sons, ages 5, 7 and 8. His standard deduction and exemptions are more than his income so his taxable income is zero. Since he will pay no income tax, he cannot get any additional child tax credit.
a. True b. false Additional child tax credit is refundable. since he has three qualifying children
under age 17 and earned income he qualifies for the credit.
9. A married couple bought their first home in February 2010. They claimed and received the first-time homebuyer credit when they filed their 2009 tax return. They still own and live in the home. How does this get reported on their 2011 tax return?
a. nothing gets reported on their 2011 tax return.
b. They need to continue repaying the credit with their 2011 tax return. c. They need to reapply for the credit, Form 5405, with their 2011 tax return. d. They must attach proof of purchase documents to their 2011 tax return.
10. Savings bonds may be purchased by a client using the tax return as a gift for a family member. a. true Beginning with tax year 2010, a taxpayer can use form 8888 to use the refund to
purchase a bond for someone else.
b. False
11. In order to directly deposit a tax refund the client must file electronically. a. True b. false A taxpayer who files a paper return using regular mail can choose direct deposit.
the two processes are independent.
12. The process of getting clients a prepaid debit card is handled by the: a. site manager b. assistant site manager c. site’s financial partner d. tax preparer
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Basic Tax Preparation 3
Learning Objectives
1. Review and clarify knowledge acquired in Basic Tax Preparation 1 and 2.
2. Prepare and understand one basic tax return using TaxWise software.
3. Be able to enter and understand basic types of income.
4. Be able to enter and understand basic tax adjustments and deductions.
2
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nOtes
Getting StartedC H A P t e r 1 4
Classroom discussion of: site operations, client intake, qualifying child, qualifying relative and the quiz.
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WOrDs tO tHe tAXWise
Opening a New Tax Return File
• At the tax site, always make sure that your computer is opened to the username for the current week. Sunday dates are used. For example, if you are working at the downtown Chicago site at Harold Washington College on February 7, the user name should be: HWC 020512.
• Click on START A NEW RETURN. • The pop-up window will ask for the client’s social security number (SSN). • Enter the SSN (or ITIN) twice then click OK. o An ITIN (individual taxpayer identification number) is a special number issued by IRS to filers who do not
qualify to get an SSN. (An ITIN looks like a SSN, but begins with a 9.) o When a client has an ITIN, always use the ITIN to start the return. This is true even if the client has W-2s that
show the client’s number as an SSN. The SSN only appears on the W-2s. The ITIN will appear on all pages of the federal and state returns.
o When a client has neither an SSN nor an ITIN, suggest that the client attend a clinic ITIN event. To find a schedule of ITIN events where a client can apply for an ITIN, go to: www.economicprogress.org and search keyword: ITIN.
• Whenever possible, copy the SSN directly from the client’s social security card. ITINs are found in a letter from the IRS.
• For married clients filing together, enter either person’s SSN/ITIN to start the tax return. • TaxWise will enter the dashes and will generate a file name. • If CEP prepared the prior year return, a message will pop up that carry forward information is available. Always
accept the carry forward data.
Just because information was used on last year’s tax return does not mean that it is correct. Always double check the carry forward data to make sure that is correct and still applies for the current tax year.
meet Paul Waters, your first tax client. Paul’s ssn is 567-36-5008.
Tree Document List
The smaller part on the left, called the tree, lists all of the forms and worksheets that are to be completed for the current return. • Most of these screens relate directly to tax forms that will be filed as part of the tax return. • The other screens are worksheets for entry of pertinent information that TaxWise needs to complete the tax
return. • You will not make changes or entries directly to the tree. • You can click on any form or worksheet on the tree and it will open in the workspace to the right. The tree
serves as a reference point during preparation. You can see which forms are finished, which forms have to be completed, and which forms you are likely to need.
Each item listed on the tree is preceded by a symbol: • red exclamation point indicates a form that is required but has not yet been fully completed. • Blue check mark indicates that the form is complete according to TaxWise, based on the information that has
been entered to that point. • Black and white paper indicates a form that is needed for some returns, but is probably not required for this
particular return.
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Work Space
The large space to the right is the workspace. This is the current form or worksheet on which you are working. The empty fields on the worksheets and the text inside are color coded. • red space points out where entry is required • gray space indicates optional entry • blue space identifies the cursor location in an optional space • yellow space indicates a calculated entry by TaxWise • red text on a gray background is an overridden entry • yellow text is an entry calculated by TaxWise • green text is an entry copied by Tax Wise
Just because all of the red exclamation marks on all of the forms listed in the tree have been changed to blue check marks, the tax return is not necessarily complete or correct. It just means that, based on the information you have entered, TaxWise considers that the minimum entries have been made on the minimum required forms.
TaxWise Hints
• never override an entry! If you think that you need to override an entry to complete the return, discuss this with your site manager. Once one entry has been overridden, many seemingly unrelated (and unpredictable) TaxWise operations are disturbed.
• Generally, you will not be entering data directly to a form that is part of the tax return. You will enter data to supporting forms and screens. TaxWise then processes the data and generates the entry to the tax return.
• Date Format – Enter dates as six digits. Do not enter the slash marks. So for May 8, 1992, type: 050892. • Do not use punctuation when entering information in TaxWise. If punctuation is necessary, TaxWise will provide
it automatically. • When all required entries have been made for a form, the symbol next to that form on the screen will change
from a red exclamation mark to a blue check mark. • The tax return is not complete until all of the red exclamation marks on all of the forms listed in the tree
have been changed to blue check marks and all information provided by the client has been entered into the appropriate place in the software.
A form called “RO Disclose” will show as a required form with a red exclamation mark. Open the form and check the red box(es) indicated and enter the appropriate dates.
Moving Around
• Tab Key - Move to the next space. • Control E - Find the next required entry (red field). • F1 HELP - This key is used to go to TaxWise help information. • <Shift>F1 - IRS help section, assistance with tax law issues. • F9 LINK - This is used to make sure that TaxWise properly carries entries to and from the correct lines on the tax
forms. • Opening a form or move back to a form: — Click the form in the tree — Click any folder in the tree to display the Find a Form screen — Click the Add Form/Display Form tab to open the Find a form screen — Press control F10 to open the Find a Form screen — In the Find a Form screen, you can enter the form number in the blank space at the top or select the form
from the list
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Client Diary
If there is any unusual or interesting aspect to the return, enter your notes in the client diary. These notes may be used later by a variety of CEP staff, including your site manager, the electronic filing specialist, CEP’s customer service staff and CEP’s tax clinic. A note in the client diary can clarify a reject issue and allow correction and electronic filing, therefore speeding the receipt of refund by several weeks. o Go to the TOOLS menu to open the client diary. o Click on the clock icon to start a new entry. o Enter your comments and your name at the end. o When finished, click on the floppy icon to save, and then click the file icon to close the diary. Taxpayer Reminder Field
When there is any information that may affect the tax year 2012 return, make an entry in the taxpayer reminder field on the Preparer Use Form. This information wil display automatically when the 2012 return is started.For example, if a client mentioned he would soon sell some stock, you could put a note in the reminder field to ensure the sale is reported on the 2012 reutrn.
PAUL WAters
During your first class, everyone will complete Paul’s return together. This process will be discussed in excruciating detail. That’s because it’s the first tax return! Moreover, Paul’s issues are all matters that are commonly encountered at the sites and that you will undoubtedly come across during the filing season.
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BAsiCs
The TaxWise Main Information Sheet is for basic information about the client. • Most of the information is critical to the accuracy of the tax return. • One missed “X” in a box can mean thousands of dollars difference in the refund amount. • An incorrect digit in a social security number can delay a refund by several weeks.The Main Information Sheet must be accurate!
The top of the Main Information Sheet offers a choice of tax forms. Ignore it. CEP always uses Form 1040 and that choice will be preset on the software.
nAmes AnD sOCiAL seCUritY nUmBersCopy the SSN from the person’s social security card – or the IRS letter if the person has an ITIN. The other information is on page one of Form 13614-C. • first name • last name • date of birth • relationship • For married clients, enter the spouse’s SSN or ITIN. • Enter the client’s first name, middle initial and last name. (Suffix and salutation are optional.) • For married clients, enter the spouse’s first name and middle initial. If the last name is different, also enter the
last name.
For a married couple, be sure that the name entered first on the Main Information Sheet goes with the SSN that was entered to start the return.
• This data must be entered correctly! If there is an error in the name or SSN/ITIN, the return will be rejected by the IRS when the return is transmitted electronically.
• If the client previously had an ITIN and has been issued his/her SSN within the last four years, talk to your site manager. CEP may be able to prepare original or amended tax returns for prior years using the new SSN to claim the earned income tax credit (EITC).
Name Hints
The IRS verifies that the name and SSN on every tax return to make sure that they match the records of the Social Security Administration. Always use the name on the social security card – or IRS letter if the client is using an ITIN. • If the last name is two names with a hyphen, use the full hyphenated name, not just the second half.
example: If a client’s name on her social security card is Joan Ann Cedar-Smith, she cannot use Joan Smith to file her return, even if Joan Smith is the name on her W-2 or other tax document.
• If there seem to be multiple last names, check with the client to see which name has been successfully used in the past.
Main Information SheetC H A P t e r 1 5
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role Play—Paul’s Address
teLePHOne nUmBersEnter all numbers available.
BirtH DAte – OCCUPAtiOn • When the birth date is entered, TaxWise generates the age. • Enter the occupation that correlates with the client’s primary job during the tax year.
tAXPAYer infOrmAtiOnIn most cases, you can skip this part. • Complete this section if the client is blind or disabled. • If the client has income from the special sources listed, or from Puerto Rico; or if the return is for a deceased
taxpayer, talk to your site manager.
PresiDentiAL eLeCtiOn CAmPAign fUnDTaxpayers can elect to designate $3 of their income taxes to the Presidential Campaign Fund. • The funds are used to pay for the next presidential election. • This designation does not change the outcome of the tax return; that is, it does not decrease the amount of the
refund nor increase any balance due. • The question about this designation is on Form 13614-C, page 2.
DePenDents/nOnDePenDentsA person is the taxpayer’s dependent if all of the following are true: • The person is the taxpayer’s qualifying child or qualifying relative. • The person is not filing a joint return. (There is an exception when there is no filing requirement.) • The taxpayer himself cannot be claimed as dependent. • The person is a U. S. citizen, or a resident of the U. S., Canada or Mexico.
Choose one of the codes from the drop-down menu.
Code 1 – Dependent child that lived with the client. This is the most common situation and applies to most dependent children.
Code 2 – Dependent child who did not live with the client.This would happen when a noncustodial parent claims a child as a dependent and for the child tax credit under the special rules for divorced/separated parents. When code 2 is used, a Form 8332 must be sent to IRS.
ADDress AnD OtHer CLient infOrmAtiOn
Enter the street address in the space PRESENT MAILING ADDRESS. • Include an apartment number (when relevant) after the street address. If the client did not write an apartment
number on the Form 13614-C, ask if there is one. The U.S. Postal Service might otherwise refuse to deliver the tax refund.
• You cannot use the “#” character, so enter apartment numbers as “APT 111.” • Next enter the zip code. The city and state will appear.
Clients often move around a lot. Make sure that the address is current and will be in effect for at least eight weeks.
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Code 3 – Any dependent that is not the client’s child. This would be someone who is related to the taxpayer in another way, other than child, or who lived with the taxpayer all year.
Code 0 – Any child who lived with the client and does not qualify as the client’s dependent. This would generally be used when the child meets the EITC requirements of age, relationship and residency; but provided more than half of his/her own support.
TaxWise may carry forward dependent data from a prior year. Family situations often change from year to year. Always check and see if the dependents who qualified last year also qualify for 2011.
Code DC – Child and Dependent Care Credit
Check this box if both are true. 1. The child is a qualifying child for the child and dependent care credit. Remember, the child must be the
taxpayer’s qualifying child and be under age 13 at the time the child care was provided – or any age if disabled. 2. The taxpayer paid for day care to go to work. The taxpayer must have the name and identification number of
the child care provider.
When a taxpayer has zero taxable income on Form 1040, line 43, there is no benefit to claiming this credit.
Preparation HintChecking the DC box will cause a new form, Form 2441, Child and Dependent Care Expenses, to become a required form. If the client is not going to claim this credit, come back to the Main Information screen and uncheck this box.
Code eiC – earned income tax Credit
Check this box when the child is a qualifying child for the earned income tax credit. All of the following must be true. • The child is the taxpayer’s qualifying child. Remember, there is no support test for qualifying child for EITC. • The child must have lived with the taxpayer in the United States for more than half the year. • The child must have a valid social security number. An ITIN will not work to claim the EITC. • If the child is married, the child must also qualify as a dependent. (The child may not actually be claimed as a
dependent because the exception for divorced/separated parents is used.) • A taxpayer cannot claim the EITC if he/she is the qualifying child of another taxpayer.
Preparation Hints • When the client qualifies for the EITC, TaxWise will generate a required form called the Schedule EIC
worksheet, which asks more questions about the client and the children. Read and answer these questions carefully!
• A parent who does not live with a child cannot claim that child for EITC. • When there is a qualifying child for EITC, an additional form, Schedule EIC, must be filed with the return.
TaxWise will generate this form automatically. • If the EITC was previously disallowed, Form 8862, Information to Claim EITC After Disallowance, must be filed
with the return. • A maximum of three children can be claimed for the EITC. However, check the EIC box for all that qualify.
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State Information A state return is usually prepared. • If the client lived in Illinois for the entire tax year, ensure IL appears after FULL YEAR RESIDENT. Illinois will
already be entered by FULL YEAR RESIDENT. • If the client lived in another state or has any income from another state during the tax year, see your site
manager.
Type of Return E-FILE ONLY will already be checked. • E-file means that the federal tax return will be transmitted electronically to the IRS by the tax site staff. This
means that the client does not mail anything to the IRS. There is a separate section on page two of the Illinois return to indicate whether the state return should be electronically filed or mailed.
• Some clients will not e-file and will file by mailing a paper return to the IRS. In these cases check PAPER. Generally this will happen when there is missing data or signature that the client needs to add to the return later. In these cases, the site will print the returns and give the paper returns to the client to mail.
Select Your Bank – Audit Field – Fee Collect Never check any of these boxes.
Direct Deposit Information Encourage the client to have the refund directly deposited to a bank account. • Point out the benefits of direct deposit and saving. • The money is available at the earliest possible date. • Taxpayers who use direct deposit avoid check-cashing fees. • Direct deposit is much more secure than receiving a check in the mail. • Two numbers must be entered to set up a direct deposit: account number and the bank routing number. • The client can choose to have the entire refund go to one account, or have it split between accounts. • Form 8888, Allocation of Refund, is used to divide the client’s refund into separate accounts or to purchase a
U.S. savings bond.
The sample check to the left shows where to find the ROUTING NUMBER of the financial institution and the ACCOUNT NUMBER.
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Sometimes a client wants to direct deposit, but does not bring a check or other document that shows the proper numbers. Do not guess! An incorrect number will result in significant delay of the refund and may mean that the client will never get the refund.
Preparation Hints • When the client is depositing the entire refund to one account, enter the bank information on the main
information screen. • When the client is depositing the refund into more than one account, do not enter any bank information on the
Main Information screen. Enter all bank information on Form 8888.
Self-Select and Practitioner PINs – Taxpayer PINs – Third Party Designee These sections will already be completed and will require no entry.
Preparer Information Enter your first initial and last name in the Preparer ID box and the current date in the next box.
This is used as a way for site staff to identify who did which return. The Preparer ID name does not print on the tax return. Name: Alan Mitchell Preparer ID: AMitchell (no spaces!) Name: Gertrude Brown Preparer ID: GBrown (no spaces!)The other information for this section will be preset. Do not make any other entries.
Preparer Use form
This form includes the Preparer Use Fields which must be completed for every tax return. Use the drop-down menus to enter the answers to the general information questions on the Supplemental Intake Sheet.
The answers in the preparer use fields, as well as the replies to the language and disability questions, are not critical to preparation of the tax return, but they are very important to CEP. Many different interests anxiously await this data each year, including the financial services department, tax advocates that represent low- income families, and organizations that fund free tax preparation.
Preparation Hints • When the Main Information Sheet is finished, look at the tree at the left of the page. There should be a blue
check mark in front of Main Information Sheet. If there is still a red exclamation point, go back to the Main Information Sheet and press Ctrl-E to find out what is missing.
• The general information, including the preparer identification and data in the preparer use fields, is part of the electronic client file kept by CEP. This is not, however, part of the paper tax returns or electronic tax return files that is sent to the IRS and Illinois Department of Revenue.
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WAge inCOme
Most clients have wage income, reported on Form W-2, Wage and Tax Statement. • Wage income is earned income. • The taxable income amount appears in box 1 of Form W-2 and is reflected on line 7 of Form 1040. When the
client has several W-2s, TaxWise adds up all the box 1 amounts and enters the total on line 7 for total wages. • If a married couple is filing a joint return, the W-2s for both the husband and wife are entered. • Be sure to double check that the client has brought all W-2s. If not, the return should not be completed. • If a client has not been able to secure a W-2 from an employer, see your site manager. In some unusual cases,
a Form 4852, Substitute W-2, may be needed. To open Form 4852, first open a new W-2, then link (F9) to the Form 4852 from box 1 of the W-2.
• If the client received tips that were not reported to the employer and, therefore, are not included on the W-2, consult your site manager. An additional step, Form 4137, may be required to compute social security and Medicare taxes.
Some clients will have earned income reported on Form 1099-MISC, which looks similar to a W-2. The earnings will appear in box 7, “Nonemployee Compensation.” This income is self-employment income. It is not handled the same way as wage income from a W-2 and will be covered later in training.
Income FundamentalsC H A P t e r 1 6
a Employee’s social security number
OMB No. 1545-0008
Safe, accurate, FAST! Use
Visit the IRS website at www.irs.gov/efile
b Employer identification number (EIN)
c Employer’s name, address, and ZIP code
d Control number
e Employee’s first name and initial Last name Suff.
f Employee’s address and ZIP code
1 Wages, tips, other compensation 2 Federal income tax withheld
3 Social security wages 4 Social security tax withheld
5 Medicare wages and tips 6 Medicare tax withheld
7 Social security tips 8 Allocated tips
9 10 Dependent care benefits
11 Nonqualified plans 12a See instructions for box 12Co d e
12bCo d e
12cCo d e
12dCo d e
13 Statutory employee
Retirement plan
Third-party sick pay
14 Other
15 State Employer’s state ID number 16 State wages, tips, etc. 17 State income tax 18 Local wages, tips, etc. 19 Local income tax 20 Locality name
Form W-2 Wage and Tax Statement 2011 Department of the Treasury—Internal Revenue Service
Copy B—To Be Filed With Employee’s FEDERAL Tax Return. This information is being furnished to the Internal Revenue Service.
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entering tHe W-2
All of the information on the W-2s must be entered correctly. • Taxpayers who file electronically do not send a paper W-2 to IRS. TaxWise creates an electronic version of the
W-2 which is sent to the IRS when the return is transmitted. • Incorrect entry of data can result in the IRS rejecting the tax return for electronic processing, thus delaying the
client’s refund by several weeks. • See your site manager if the W-2 involves military pay, statutory employment, ministerial pay, or wages paid in
another state.
Step One • Open Form W-2 on TaxWise. The W-2 will be available in the tree on the left. You could also link from Form
1040, line 7, using the F9 key. • On a joint return, put an “X” in the appropriate box to indicate whether the W-2 is for the TAXPAYER (the
first person entered on the Main Information Sheet) or the SPOUSE (the second person entered on the Main Information Sheet).
Step Two – Check any of the appropriate six boxes at the top of the TaxWise W-2. • If a client has a hand-written W-2, discuss it with your site manager. • TaxWise will automatically enter the client’s home address from the Main Information Sheet. In many cases,
there will be a different address for the client on one or more of the W-2s. If the address is the same, check the second box.
• If the address on the paper W-2 is different, check the third box and enter the address from the paper W-2. • If boxes 1, 3, and 5 on the paper W-2 are not the same, check the box that says: “Check to take calculations off
3, 4, 5, and 6.” This will prevent the automatic calculation and allow direct entry of the correct amounts. • The amount of state wages is usually the same as box 1. If the state wage amount is different from box 1,
check this box so the correct amount can be entered in box 16.
Step Three – Enter items a – f. a. control number Skip this space. b. employer id Enter nine-digit employer identification number (EIN). In some cases, TaxWise will recognize the
EIN and enter the other employer information. c. name code Skip it. This field will be generated by TaxWise after the employer name is entered. d. employer’s name/address Enter employer’s name and address. e. employee’s ssn Generated by TaxWise. f. employee’s name Generated by TaxWise. g. employee’s address Generated by TaxWise.
If you are preparing a tax return for a client with an ITIN, TaxWise will prompt you to enter the SSN that is on the paper W-2.
Step Four – Enter items 1 – 20. • Boxes 1 – 6 and 15 – 17 will almost always have an entry. Many of these are generated by TaxWise. Always
ensure that the generated amounts match what is on the paper W-2. • The other boxes may or may not have an entry. Make sure that every item on the paper W-2 is entered in
TaxWise. This information can significantly affect the accuracy of the tax return.
Not all W-2s look alike. In fact, there is a wide variety in size, style and the way that they are organized. Look carefully at the box numbers, not just the placement of figures on the W-2.
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Step Five • Look at the W-2 in the tree to see if the red exclamation mark has changed to a blue check mark. • To enter a new W-2, click on the “Copy W-2” tab at the top of the existing W-2.
If there is a carry forward W-2 from the prior tax year and the client did not work for the same employer, open that W-2 and click on the “Remove Form” tab.
UnemPLOYment COmPensAtiOn
Unemployment compensation is reported to the client on Form 1099-G, Certain Government Payments, and is entered on TaxWise on the 1099G worksheet. • Unemployment is reflected on line 19 of Form 1040. • Unemployment compensation is not considered earned income. • Federal and state tax may be withheld from unemployment compensation.
entering fOrm 1099-g
• The unemployment 1099G worksheet will be available on the tree. Alternately, it can be accessed by linking from Form 1040, line 19. Never enter the unemployment income directly on the Form 1040.
• Enter the following fields. 1 – payer’s name and EIN 2 – unemployment benefits received 3 – (If the client has repayment of unemployment, see your site manager.) 5 – federal tax withheld 6 – state abbreviation and tax withheld (This space is tricky. After entering the amount, use the mouse to move
up and click into another field.) Only enter the state abbreviation when state tax was withheld.
Form 1099-G is also used to report state tax refunds.Unless the client itemized deductions for the previous year, the state tax refund is not reported on the tax return.
sOCiAL seCUritY inCOme
• Social security benefits are rarely taxable to low-income taxpayers. • Always enter the SSA-1099 income, even if it is obvious that it is not taxable. Sometimes the nontaxable social
security affects the credit for the elderly computation, which is a credit designed for seniors who do not receive social security.
• Supplemental Security Income (SSI) is never taxable and it is not reported on the tax return. Do not enter this income. If it is reported on an SSA-1099, it is not SSI.
• In general, social security is not taxable until other income, plus half of the social security benefits, totals more than $25,000 ($34,000 married filing jointly). TaxWise will calculate the taxable portion.
• Social security is reported to the client on Form SSA-1099. The income is reflected on Form 1040, line 20. • If the client received social security income attributable to a prior year, it will be indicated in the description
section of Form SSA-1099. All the income for the current and prior years must be reported on the tax return for the year that it was received. This total will be in Box 5 of the Form SSA-1099. The client may benefit from a special lump sum calculation. To use this calculation, the client needs a copy of the tax return for the prior year for which the income is attributable.
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entering fOrm ssA-1099 • Social security income is entered on Form 1040 worksheet number 1. Link from Form 1040, line 20, to 1040
WKT1. • social security received this year - Enter the amount from SSA-1099, box 5 (the pink one). • medicare to schedule A - In the SSA-1099 section “Description of amounts in Box 3,” enter the amount
for “Medicare part B payments deducted from your benefits.” This will carry forward to Schedule A medical expenses and may provide a benefit if the client itemizes deductions.
• federal tax withheld - Enter the amount from SSA-1099, box 6. • If the client is using the lump-sum calculation, complete the section at the bottom of 1040 WKT1.
interest inCOmeInterest income is taxable and is reported to the client on Form 1099-INT. • Often interest income will be reported to the client in a letter marked “in lieu of Form 1099-INT.” • Interest income appears on Form 1040, line 8a. • There is no minimum amount for reporting interest. The client is not required to have the actual 1099-INT form
if there is no tax withholding. Often the client will just have a letter or other document from the bank or will just remember the amount.
entering fOrm 1099-int • Interest income must be entered on the interest statement worksheet, which is available on the form tree. If the
interest statement is not in the tree, link first from Form 1040, line 8a, to Schedule B; then link from Schedule B (interest section) to the interest statement.
• Use the interest statement to enter these items from Form 1099-INT: o interest income (box 1) o early withdrawal penalty (box 2) o federal income tax withheld (box 4) o Don’t bother looking for Form 1099-INT on TaxWise. It doesn’t exist. Enter directly to the interest statement.
Form SSA – 1099 DO NOT RETURN THIS FORM TO SSA OR IRS
FORM SSA-1099 – SOCIAL SECURITY BENEFIT STATEMENT
2011 PART OF YOUR SOCIAL SECURITY BENEFITS SHOWN IN BOX 5 MAY BE TAXABLE INCOME SEE THE REVERSE FOR MORE INFORMATIONBox 1. Name
Box 2. Beneficiary’s Social Security Number
Box 3. Benefits Paid in 2011 Box 4. Benefits Repaid to SSA in 2011 Box 5. Net Benefits for 2011 (Box 3 minus Box 4)
DESCRIPTION OF AMOUNT IN BOX 4
Box 6. Voluntary Federal Income Tax Withheld
Box 7. Address
DESCRIPTION OF AMOUNT IN BOX 3
Paid by check or Direct deposit
Medicare premiums deducted From you benefit
Total Additions
(simulated form)Box 8. Claim Number (Use this number if you need to contact SSA)
2
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Be sure to enter any early withdrawal penalty. This amount will carry to Form 1040 as an adjustment.
CAnCeLLeD DeBt inCOme
There are basically two cancelled debt situations that are encountered at tax sites: home foreclosure and cancellation of credit card debt. In either case, the client will have a Form 1099-C, Cancellation of Debt. The IRS expects the amount of the cancelled debt to be reported as ordinary income on 1040, line 21. However, there are exceptions that provide relief to taxpayers with cancelled debt income. When a taxpayer meets any of the exceptions, a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is filed with the return to explain why the cancelled debt is not included in income.
foreclosure On A Personal residenceFor foreclosure on a personal residence, special relief is provided by the Mortgage Forgiveness Debt Relief Act of 2007. If the lender forgives the balance of the mortgage, then that amount is cancellation of debt income. That amount is not taxable; however, if it meets certain requirements. See Form 982 instructions for more information.
Other Cancelled Debt For cancelled debt other than home foreclosures, there is no automatic exception available. There is relief that allows taxpayers to exclude the income from their tax return in certain situations. • For low-income taxpayers, insolvency is the most common exception. • Insolvency simply means the taxpayer’s liabilities exceeded assets at the time the debt was cancelled. • Determining insolvency can be rather complex and it is unlikely that a client would have sufficient information
at the tax site to make the appropriate determination regarding insolvency. • When a client appears to qualify for insolvency relief – and particularly when reporting the cancelled debt
income would result in substantial tax that would be a serious hardship – the client should be referred to a paid preparer.
Always talk to your site manager when you have a client who has a foreclosure or may qualify for the insolvency exception. Additional information is included in the IRS Link and Learn online training.
WAge inCOme nOt On A W-2
Sometimes a client is paid as an independent contractor, but it appears that the client really was an employee. • The income usually has been reported as nonemployee compensation on Form 1099-MISC. • When the worker clearly should have been considered an employee, this income can be reported on Form
8919, Uncollected Social Security and Medicare Tax on Wages. o On TaxWise, open Form 8919 using the Add Form tab. o From the 8919, link to Form 1099-MISC. o After the Form 1099-MISC is complete, return to the Form 8919 and enter the requested information. • There are several advantages to using Form 8919: o The client can correctly report the income as wages. The Form 1099-MISC income is not reported on
Schedule C-EZ or C. It will appear on line 7 of Form 1040. o The client will pay just the employee’s half of social security and Medicare tax that the employer should have
withheld. The client does not have to pay self-employment tax. o The income will be considered earned income for the purposes of determining EITC and the additional child
tax credit. • In most cases, the client needs to file Form SS-8, Determination of Worker Status for Purposes of Federal
Employment Taxes and Income Tax Withholding, in order to use Form 8919. o When filing Form SS-8, the worker is required to provide his own name, address, SSN and phone number. o The worker cannot report these employment issues to IRS anonymously! If a client needs to file an SS-8,
refer the client to the tax clinic.
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Be sure that there is a great likelihood that the client actually should have been treated as an employee. A general rule is that anyone who performs services for a company is an employee if the company can control what will be done, when it will be done and how it will be done. For information on who is an employee, see Publication 15-A, Employer’s Supplemental Tax Guide, or research key words “employee independent contractor” at www.irs.gov.
seLf-emPLOYment
Earned income that is not reported as wages is self-employment income and must be reported on Schedule C or C-EZ.
Self-employment income is earned income for purposes of the EITC, additional child tax credit, and the making work pay credit.
enter Paul’s income
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Adjustments and deductions both reduce the amount of income that is taxed. • Adjustments are subtracted on the front of the Form 1040, lines 23 – 35. This is known as “above the line.” • Deductions are subtracted on the back of Form 1040 on line 40. Taxpayers have a choice of taking an automatic
standard deduction or listing itemized deductions on Schedule A.
Some adjustments are referred to as deductions. But if they are subtracted on the front of the 1040, they are actually being used as adjustments.
ADJUstments
Adjustments to income are items that are subtracted from total reportable income to arrive at adjusted gross income (AGI). • A lower AGI results in less federal and state taxes paid. • AGI is used in the computation of various deductions and credits on the tax return, including EITC and some
itemized deductions.
student Loan interest This adjustment is for taxpayers who are paying interest on student loans. • The adjustment is limited to $2,500 per tax year. • The loan must have been taken out to pay for qualified education expenses. • This adjustment requires preparation of a worksheet and cannot be entered directly on Form 1040. Link from
Form 1040, line 33, to the Student Loan Education Worksheet. • The student loan interest adjustment is not available to taxpayers who file as married filing separately or to a
taxpayer who can be claimed as a dependent. • The student loan cannot be funds borrowed from a relative.
self-employment taxA self-employed taxpayer can take an adjustment for self-employment tax paid on Schedule C or C-EZ income. • The adjustment is 57% of the self-employment tax. • TaxWise computes this automatically when a schedule C or C-EZ has been entered (Form 1040, line 27).
Penalty On early Withdrawal When a taxpayer is charged a penalty for making an early withdrawal from savings, that amount can be taken as an adjustment on Form 1040, line 30. • The penalty amount can be found in box 2 of Form 1099-INT. • On TaxWise, enter the penalty on the Interest Statement worksheet in the column far to the right side marked
“Early penalty.”
irA Contributions • IRA adjustments are generally limited to $5,000 per taxpayer, $6,000 if age 50 or older. • Link from Form 1040, line 32, to the IRA worksheet. • IRA contributions are not deductible when the taxpayer is age 70½ or older. • Contributions to a Roth IRA are not deductible.
Reducing Taxable IncomeC H A P t e r 1 7
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tAX Benefits reLAteD tO eDUCAtiOn
educator expense Adjustment
The educator expense adjustment is available to school teachers and is based on out-of-pocket expenses. • The adjustment is limited to $250 per educator. • Eligible educators include: teachers, instructors, counselors, principals, or aides for grades K – 12. • The educator must have worked at least 900 hours during the school year. • Qualified expenses must be ordinary and necessary expenses. Examples of qualifying expenses include: books,
supplies, equipment, computers and software, and general materials. • Expenses for home schooling do not qualify. • On TaxWise, link from Form 1040, line 23, to Worksheet 2.
Other AdjustmentsThe following adjustments occur less frequently at CEP sites: • Moving expense adjustment is available for certain employment-related moves of more than 50 miles (Form
1040, line 26). • Alimony paid (Form 1040, line 31) is deductible. The client must have the recipient’s SSN.
stAnDArD DeDUCtiOn
The standard deduction is an automatic deduction that is primarily based on filing status.
Basic standard DeductionThe standard deduction for most taxpayers for tax year 2011:
single $5,800head of household $8,500married filing jointly $11,600qualifying widow(er) $11,600married filing separately $5,800
There are two situations where the basic standard deduction may be different than the amounts listed above. 1. If the client or spouse is 65 or older or blind, the standard deduction will be increased. The standard deduction
is calculated by TaxWise, based on information entered on the Main Information Sheet. 2. A client who can be claimed as a dependent may have a lower standard deduction. The standard deduction
is correctly calculated by TaxWise once the “claimed as a dependent” box has been checked on the Main Information Sheet.
itemizeD DeDUCtiOns
Itemized deductions are various amounts paid by the taxpayer that can be deducted on Schedule A, Itemized Deductions, instead of the standard deduction. • The total itemized deductions must exceed the total amount of standard deductions to provide a benefit. • To itemize, complete Schedule A by linking (F9) from Form 1040, page 2, line 40.
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Deductible expenses These are the most common items that a CEP client might deduct. • medical and dental expenses (not reimbursed by insurance) • sales tax • state and local income taxes o TaxWise will fill this in automatically based on the state and local income taxes withheld in 2011. o Also, look at the 2010 state return, if available, to see if there was a balance due that was paid in 2011. • real estate taxes paid on personal residence • home mortgage interest • charitable contributions • casualty or theft loss (such as a loss related to flooding) not reimbursed by insurance • certain job-related expenses • gambling losses (limited to the amount of gambling winnings) • cost of tax return preparation for a previous year’s tax return, paid in 2011
A taxpayer can claim a deduction for sales tax or state income tax but not both. To determine the sales tax deduction amount, go to www.irs.gov and search for “sales tax calculator.”
things to Know About itemized Deductions: • Clients who are homeowners are more likely to benefit from itemizing because they pay real estate taxes and
mortgage interest. • When a client is self-employed, the expenses related to running the business are not itemized deductions and
are not deducted on Schedule A. • In some unusual cases, an employee can take a miscellaneous deduction for a home office. The requirements
are quite restrictive. See Pub. 17, Miscellaneous Deductions, for more information. • Some foster parents who are not planning to adopt their foster child can claim expenses related to the care of
the foster child as charitable contributions. • The deductions for taxpayers who are married filing separately must mirror their spouse’s return. Both must take
his/her own itemized deductions or both must take the standard deduction. • For a taxpayer who has a casualty or theft loss, see your site manager. • Many deductions must be reduced by a percentage of AGI. For example, 7.5 percent of AGI is subtracted from
total medical expenses. TaxWise does these computations automatically. • More detailed information on itemized deductions is included in Publication 17, the 1040 instructions, and
www.irs.gov . • Remind the client that the IRS may request verification of itemized deductions claimed.
itemizeD Or stAnDArD DeDUCtiOns?
When a client thinks they might want to itemize, take these steps. 1. Prepare the tax return up through Form 1040, line 55, net income tax. 2. If the taxpayer is paying income tax on line 55, go ahead and enter the deduction figures on Schedule A – even if
you have to use estimates. TaxWise will quickly calculate the approximate total itemized deductions. 3. Compare the total itemized deductions to the client’s standard deduction. If the Schedule A total is more than
the standard deduction, proceed to determine and enter the deduction amounts.
Only about 5% of CEP clients itemize deductions; however, it’s OK to check – particularly if the client is a homeowner. Always enter the property tax on Schedule A - even for a homeowner taking the standard deduction.
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example John and Joan are filing a joint return. They are homeowners and paid the following deductible expenses in 2011.
state income tax $ 760 doctor and dentist $ 1,500 home mortgage interest $ 2,550 real estate taxes $ 1,820 donation to church $ 610 work expenses $ 150
total itemized deductions $ 7,390
John and Joan will not itemize because the base standard deduction for married filing jointly, $11,600, is more than their total itemized deductions.
should Paul itemize deductions?
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COUnseLing CLients
Once the tax return is finished, take a few minutes to counsel the client about related topics. • Tax Strategies for the Future • Financial Services
tax strategies for the future
Refund Returns
Remind the client that direct deposit to a bank account is more secure and can result in getting the refund one week sooner. Explain approximate length of time to receive the refund. e-filed with direct deposit……… 2 weeks e-filed, paper check…………….. 3 – 4 weeks mailed, direct deposit…………… 5 – 6 weeks mailed, paper check……………. 6 – 8 weeks
Emphasize the IRS automated refund inquiry system. The client can call (800) 829-4477 to access the automated system or go to www.irs.gov to check on the refund status. To talk to an IRS customer service representative, call (800) 829-1954, 7AM to 10PM.
Balance Due returns
Some CEP clients do not get a refund. They end up owing IRS or the state of Illinois. • Payment in full is due by April 17, 2012. This is true whether the client files in January or April. • When a client has a federal balance due, TaxWise will print a 1040-V payment voucher. When the client has a
state balance due, TaxWise will print a Form IL-1040-V. The payment voucher should be sent with the client’s payment, whether the payment is sent with the return or made at a later date.
• If the client cannot pay the amount due before April 17th, talk to your site manager about a referral to CEP’s tax clinic.
Even if the client can’t pay the balance due, the client should still file the return, along with a portion of the balance due, by April 17. There is a penalty for late payment, but there is also an additional, larger penalty for late filing.
Preventing a Balance Due
Talk to the client about ways to avoid a balance due on subsequent tax returns. The two main issues for CEP clients are withholding and estimated taxes.
Wrap It UpC H A P t e r 1 8
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1. WitHHOLDing ALLOWAnCes: fOrm W-4 Some CEP clients owe because too many withholding allowances were claimed on a W-4.
• When too many withholding allowances are claimed, not enough income tax was withheld. • Employees can give employers a new W-4 at any time. They do not need to wait until the end of the year. • Offer to assist the client in completing a new Form W-4, Employee’s Withholding Allowance Certificate. o On TaxWise, go to Find a Form and open the W-4, which provides a worksheet to help determine the
appropriate number of withholding allowances for tax year 2012. o If it is an e-filed return, and you complete a W-4 after printing the return, you must re-run Diagnostics and re-
create the e-file by clicking the E-file button. • IRS offers an online withholding calculator. Go to www.irs.gov and search for “IRS withholding calculator.”
2. estimAteD tAXes: fOrm 1040-es Taxpayers who anticipate a tax liability not covered by withholding are expected to pay quarterly estimated tax payments during the tax year. • Estimated taxes should be considered by clients who are self-employed or have substantial investment income. • Taxpayers do not need to make estimated tax payments unless they expect to owe more than $1,000. • The 2012 Form 1040-ES, Estimated Tax for Individuals, is available on TaxWise. This can be printed, including
the four payment vouchers. The Form 1040-ES is also available on www.irs.gov.
Some clients always get a big refund and could better use some of that money during the year. Adjusting withholding to increase allowances or decreasing estimated tax payments could accomplish this. Be sure to explain that the bigger pay checks mean a smaller refund at tax time.
financial services
Every year CEP becomes more aware of our clients’ desire and need for additional financial services to assist in their pursuit of financial security. Client testimonials and academic research have shown that tax time is an ideal moment to help connect clients to the additional services and products that are necessary to pursue this goal.
Once the tax return is finished, the preparer is well-established in the role of trusted advisor. This relationship can be used to encourage savings and constructive financial habits.
services and Products at tax sites
Checking or Savings AccountsClients can open an account with an on-site financial partner and have all or part of the refund directly deposited to that account.
Savings BondsClients can use part of their refund to buy one or more U.S. Series I Savings Bond(s) via the Form 8888, Allocation of Refund (Including Bond Purchases). • There is a $50 minimum purchase and bonds are available in $25 increments. ➢ • Series I bonds grow over a period of 30 years, paying both a fixed rate and an inflation rate. A savings
bond can be redeemed for principle and accrued interest after it has been held at least one year. • The client must split the refund in order to buy a savings bond. o The refund can be divided between a bond purchase and a bank account or between a bond purchase and
a paper check. o The refund could also be split three ways, among a bond and two bank accounts. • Couple filing a joint return can receive bonds in both names.
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• In addition to making bond purchases for themselves, taxpayers can now: o make bond purchases and add beneficiaries or co-owners; and, o make bond purchases for someone other than themselves. • Lines 4 – 6 of Form 8888 are used to purchase bonds. When an entry is made on any of those lines,
TaxWise will automatically complete the routing number and account number.
Prepaid Debit CardThe debit card provides an alternative to traditional checking accounts for clients who don’t qualify for a bank account or are hesitant to work with a bank. Instructions on how to assist the client in getting a prepaid debit card will be provided as soon as they become available.
FAFSA AssistanceStudent aid is available to help clients pay for their education. Many sites have tax preparation volunteers who are dual trained to help clients complete the Free Application for Federal Student Aid. • Federal student aid can help pay for much or all of our clients’ education costs. • Student aid is available on a first-come, first-served basis, so early birds are most likely to receive aid. • Much of the information on the FAFSA application flows from the tax return. • Refer students, clients interested in going back to school, or clients with graduating high school seniors
to FAFSA advisors on-site or to CEP’s FAFSA referral number: 312-630-0248. FAFSA referral cards will be
available at the sites.
QUALitY reVieW PrOCessThere are four levels of review. 1. Return Diagnostics 2. Quality Review 3. Client Review 4. Sorting
return DiagnosticsGo to TOOLS and select RUN RETURN DIAGNOSTICS. TaxWise will review the return.
The display will show two kinds of problems: electronic filing errors and warnings.
electronic filing errors These are critical errors that will prevent electronic filing (e-filing). E-filing errors must be resolved in order for the return to be transmitted to IRS.
example: One common error message is, “You have marked children for EIC on the Main Information Sheet, but have not completed Schedule EIC, page 1.” Either complete Schedule EIC, page 1, or unmark the EIC box(es) on the Main Information Sheet if the client does not qualify for the EITC.
Sometimes electronic filing errors cannot be resolved. This usually happens when a key piece of information is missing. If it is something that the client will secure later and the client does not particularly want to e-file, passing diagnostics is not absolutely necessary. Go to the main information screen and select “paper” filing. Also indicate paper filing on page 2 of Form IL-1040. Always discuss these cases with your site manager.
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example: A client forgot to bring her child care provider’s identification number. She says that she’ll take the return home, write in the provider’s number, and then mail the paper return to IRS.
WArnings Diagnostics will also give you warnings that reveal potential problems on the tax return. These items will not prevent the return from being successfully e-filed, but may point out something that you forgot or that may cause a problem during IRS processing.
example: One warning message is, “There is a refund on the tax return and no direct deposit information has been filled in. Is this correct?” If the client just doesn’t want to do direct deposit, then no action is needed.
TaxWise cannot and does not check every aspect of return preparation. If you are not sure about some issue, talk to your site manager. Just because a return passes the diagnostic review does not mean that it is complete and correct.
e-file Button – The diagnostics page has a row of boxes at the bottom. • When there is an electronic filing error, or paper filing has been selected, the E-FILE box will appear faint gray. • When all electronic errors have been resolved (and electronic filing has been chosen on the main information
sheet), the letters in the E-FILE box will be black. • Run diagnostics and click on the E-FILE box just before closing the return every time that you open a return.
(This only applies to returns that are going to be filed electronically.)
Quality reviewThe site manager or a reviewer designated by the site manager must review every tax return and sign the Quality Review Checklist that is printed on the outside of the folder before the client leaves. • Complete Form 13614-C, Section B. • Complete the outside of the folder and give the entire file, with taxpayer’s documents, to the reviewer. • The reviewer will review the return at the computer, with the preparer and client present, before the return is
printed. • Explain to the client that a trained tax preparation expert will do a quality review to make sure everything is
correct. • Generally, the reviewer will ask the preparer some questions and may talk to the client to clarify matters. • In some cases, the reviewer will find errors or omissions and the preparer will need to change the return.
Redoing returns is normal – particularly for new preparers and in tricky tax situations. • Be sure to take this opportunity to ask questions and understand why the change is needed or how something
was missed.
If you make any changes, be sure to go back and run TaxWise return diagnostics again and click on the E-FILE box again. This will recreate the electronic return file for transmittal.
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Client reviewPrint the federal and state returns and ask the client to review the returns. • Instruct the client to pay close attention to the SSNs, spelling of names, address, bank account numbers and
birth dates. • When using direct deposit for the refund, have the client review the account number and routing number on
page 2 of the client’s copy of Form 1040. • If the client is depositing the refund to more than one account, have the client review and initial the bank
numbers on the Form 8888, Direct Deposit of Refund to More Than One Account.
sortingThe last stop for the client is the table where sorters are doing the final level of review. • The client signs the required documents. • The final client file is completed and assembled. • The client is given all appropriate documents. • The client is given an opportunity to make a donation to CEP.
The sorting process is covered in the You Can Do it handbook. Remember, you may be asked to sort on occasion. Take your turn!
WHAt HAPPeneD WitH PAUL’s retUrn?
review Paul’s tax returnWhat did TaxWise do? • income – AGI • standard deduction • worksheets and credits • general flow of tax return
How did entries flow into the 1040?Is Paul getting a refund? How much? Why?
role Play: Counseling Paul
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4 Basic Tax Preparation 4
Learning Objectives
1. Understand Illinois income tax basics and the state issues that affect clients at tax sites.
2. Be able to complete a simple Schedule C-EZ for a self-employed client.
3. Be able to prepare a return for a client claiming an education credit for expenses related to post-secondary education.
4. Become familiar with CEP’s ethical guidelines and the volunteer certification process.
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iLLinOis inCOme tAX
Illinois individual income tax is straightforward and relatively simple. • Most entries on the IL-1040 come from the federal 1040, including AGI, exemptions and filing status. • TaxWise does most of the work in preparing Illinois state income tax returns. • The preparer enters the state residency information on the Main Information Sheet. For most CEP clients, IL is
entered in the full-year resident space. • In most cases, the preparer only needs to to answer one or two questions on the Form IL-1040. • When a client has a spouse who has a government balance due and who has used injured spouse procedures
to file a federal joint return, the client should use separate filing status for the state of Illinois. This will protect the part of the state joint refund that is attributable to the spouse without the outstanding liability.
State FundamentalsC H A P t e r 1 9
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Do not write above this line.
IL-1040 front (R-12/11)
2011 Form IL-1040
Step 1: Personal Information A Social Security numbers in order they appear on your federal return
- - - - Your Social Security number Spouse’s Social Security number
B Personal information
Your first name and initial Your last name
Spouse’s first name and initial Spouse’s last name - only if different
Mailing address (See instructions if foreign address) Apartment number
City State ZIP or Postal Code Foreign Nation, if not United States
1 Federal adjusted gross income from your U.S. 1040, Line 37; U.S. 1040A, Line 21; or U.S. 1040EZ, Line 4 1 .00
2 Federally tax-exempt interest and dividend income from your U.S. 1040 or 1040A, Line 8b; or U.S. 1040EZ 2 .00
3 Other additions. Attach Schedule M. 3 .004 Total income. Add Lines 1 through 3. 4 .00
5 Social Security benefits and certain retirement plan income received if included in Line 1. Attach Page 1 of federal return. 5 .00
6 Illinois Income Tax overpayment included in U.S. 1040, Line 10 6 .007 Other subtractions. Attach Schedule M. 7 .00
Check if Line 7 includes any amount from Schedule 1299-C. 8 Add Lines 5, 6, and 7. This is the total of your subtractions. 8 .009 Illinois base income. Subtract Line 8 from Line 4. 9 .00
10 a Number of exemptions from your federal return x $2,000 a .00 b If someone can claim you as a dependent, see instructions. x $2,000 b .00
c Check if 65 or older: You + Spouse = x $1,000 c .00 d Check if legally blind: You + Spouse = x $1,000 d .00
Exemption allowance. Add Lines a through d. 10 .00
11 Residents: Net income. Subtract Line 10 from Line 9. Skip Line 12. 11 .0012 Nonresidents and part-year residents:
Check the box that applies to you during 2011 Nonresident Part-year resident, and write the Illinois base income from Schedule NR. Attach Schedule NR. 12 .00
13 Residents: Multiply Line 11 by 5% (.05). Nonresidents and part-year residents: Write the tax from Schedule NR. 13 .00
14 Recapture of investment tax credits. Attach Schedule 4255. 14 .00 15 Income tax. Add Lines 13 and 14. Cannot be less than zero. 15 .00
16 Income tax paid to another state while an Illinois resident. Attach Schedule CR. 16 .00
17 Property tax and K-12 education expense credit amount from Schedule ICR. Attach Schedule ICR. 17 .00
18 Credit amount from Schedule 1299-C. Attach Schedule 1299-C. 18 .0019 Add Lines 16, 17, and 18. This is the total of your credits. Cannot
exceed the tax amount on Line 15. 19 .0020 Tax after nonrefundable credits. Subtract Line 19 from Line 15. 20 .00
Stap
le W
-2 a
nd 1
099
form
s he
re
Stap
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our c
heck
or for fiscal year ending /
Illinois Department of Revenue
Individual Income Tax Return
(Whole dollars only)
tax.illinois.gov
Step 2:Income
Step 3: Base Income
Step 4: Exemptions
Step 5: NetIncome
Step 6: Tax
Step 7: Tax After Non-refundableCredits
C Filing status
Single or head of household
Married filing jointly
Married filing separately
Widowed
D Check if Civil Union Return
This form is authorized as outlined under the Illinois Income Tax Act. Disclosure of this information is required. Failure to provide information could result in a penalty.
DRAFT This is the total of your subtractions.
DRAFT This is the total of your subtractions.. Subtract Line 8 from Line 4.
DRAFT. Subtract Line 8 from Line 4.
xemptions from your federal return
DRAFTxemptions from your federal returnIf someone can claim you as a dependent, see instructions
DRAFTIf someone can claim you as a dependent, see instructionsCheck if 65 or older:
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k if legally blind:
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Net incomeDRAFTNet income
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Nonresidents and part-year residents: DRAFT
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Foreign Nation, if not United States
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Foreign Nation, if not United States
ederal adjusted gross income from your U.S. 1040, Line 37; U.S. 1040A, Line 21; or
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ederally tax-exempt interest and dividend income from your U.S. 1040 or 1040A, Line 8b;
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ity benefits and certain retirement plan income
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ity benefits and certain retirement plan income Page 1 of federal return.
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Check if Line 7 includes any amount from Schedule 1299-C.09/15
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21 Tax after nonrefundable credits from Page 1, Line 20 21 .00
22 Household employment tax. See instructions. 22 .0023 Use tax on internet, mail order, or other out-of-state purchases from
UT Worksheet or UT Table in the instructions. Do not leave blank. 23 .0024 Total Tax. Add Lines 21, 22, and 23. 24 .00
25 Illinois Income Tax withheld. Attach W-2 and 1099 forms. 25 .00 26 Estimated payments from Forms IL-1040-ES and IL-505-I, including overpayment applied from 2010 return 26 .00 27 Pass-through entity tax payments. Attach Schedule K-1-P or K-1-T. 27 .00 28 Earned Income Credit from Schedule ICR. Attach Schedule ICR. 28 .00 29 Total payments and refundable credit. Add Lines 25 through 28. 29 .00
30 Overpayment. If Line 29 is greater than Line 24, subtract Line 24 from Line 29. 30 .0031 Underpayment. If Line 24 is greater than Line 29, subtract Line 29 from Line 24. 31 .00
32 Late payment penalty for underpayment of estimated tax. 32 .00 a Check if at least two-thirds of your federal gross income is from farming.
b Check if you or your spouse are 65 or older and permanently living in a nursing home. c Check if your income was not received evenly during the year and you annualized your income on Form IL-2210. Attach Form IL-2210. 33 Voluntary charitable donations. Attach Schedule G. 33 .00
34 Total penalty and donations. Add Lines 32 and 33. 34 .00
35 If you have an overpayment on Line 30 and this amount is greater than Line 34, subtract Line 34 from Line 30. This is your remaining overpayment. 35 .00
36 Amount from Line 35 you want refunded to you 36 .00
37 Complete to direct deposit your refund
Routing number Checking or Savings
Account number
38 Subtract Line 36 from Line 35. This amount will be applied to your 2012 estimated tax. 38 .0039 If you have an underpayment on Line 31, add Lines 31 and 34. or
If you have an overpayment on Line 30 and this amount is less than Line 34, subtract Line 30 from Line 34. This is the amount you owe. 39 .00
Under penalties of perjury, I state that I have examined this return, and, to the best of my knowledge, it is true, correct, and complete.
Your signature Date Daytime phone number Your spouse’s signature Date
Paid preparer’s signature Date Preparer’s phone number Preparer’s FEIN, SSN, or PTIN
IL-1040 back (R-12/11)
If no payment enclosed, mail to: If payment enclosed, mail to:
ILLINOIS DEPARTMENT OF REVENUE ILLINOIS DEPARTMENT OF REVENUE PO BOX 1040 SPRINGFIELD IL 62726-0001 GALESBURG IL 61402-1040
DR AP RR DC
Step 8: Other Taxes
Step 9: Payments and Refundable Credit
Step 10: Result
Step 11: Underpayment of Estimated Tax Penalty and Donations
Step 12: Refund or Amount You Owe
Step 13: Sign and Date
Check, and complete below, if you want to allow another person to discuss this return with the Illinois Department of Revenue.
Designee’s Designee’s Name (please print) Phone number
Third PartyDesignee
We are no longer automatically mailing 1099-G forms. Instead, we ask that you get this information from our website. Check the box if you still want us to mail you a paper Form 1099-G next year. Form 1099-G Information
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DRAFTSubtract Line 36 from Line 35. This amount will be
DRAFTSubtract Line 36 from Line 35. This amount will be ou have an underpayment on Line 31, add Lines 31 and 34.
DRAFTou have an underpayment on Line 31, add Lines 31 and 34. ou have an overpayment on Line 30 and this amount is less than Line 34,
DRAFTou have an overpayment on Line 30 and this amount is less than Line 34,
act Line 30 from Line 34. This is the
DRAFTact Line 30 from Line 34. This is the
DRAFTUnder penalties of perjury, I state that I have examined this return, and, to the best of my knowledge, it is true, correct, and DRAFTUnder penalties of perjury, I state that I have examined this return, and, to the best of my knowledge, it is true, correct, and DRAFT 09
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act Line 34 from Line 30. This is your remaining overpayment
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siX mOre tHings
There are five things that a preparer needs to be aware of when preparing an Illinois state income tax return. 1. retirement income 2. property tax credit 3. education credit 4. earned income tax credit 5. use tax 6. charitable donations
1. retirement incomeIllinois does not tax retirement income. • Retirement income that is taxed on the federal return is subtracted from income on the IL-1040. TaxWise will
automatically calculate this subtraction and it will appear on IL-1040, page 1, line 5. • The following income (if included in federal AGI) will appear as a subtraction on IL-1040, line 5: o government retirement or disability plans o state or local deferred compensation plans o IRAs and self-employment plans o qualified employment benefit plans, such as 401(k)s o social security benefits o IRA to Roth IRA conversion rollovers o railroad retirement o early distributions from qualified plans and IRAs • When retirement income is excluded on the state return and the IL-1040 is being mailed as a paper return,
page 1 of the federal Form 1040 must be attached to the IL-1040.
2. Property tax CreditA nonrefundable state property tax credit is available to taxpayers who own their homes. • The credit is 5 percent of the real estate tax paid during the tax year. • The credit appears on Form IL-1040, page 1, line 17. • The credit is claimed in Section A of Schedule ICR, Illinois Credits, which must be filed with the state tax
return.
To claim the property tax credit, the Property Index Number (PIN) must be entered on line 4b of the Schedule ICR. The PIN is also known as the parcel number. The homeowner can obtain this number in several ways: • The PIN can be found on the tax bill or assessment notice. • If the property tax is paid through a mortgage, the taxpayer can request the number from the lender. • The number can be obtained from the county assessor’s office. Go to www.tax.illinois.gov and search
“property tax numbers.”
If a client has paid property tax and the PIN cannot be found, the Illinois tax return cannot be filed electronically. Go to IL-1040, page 2, and change the return to “Paper.” Tell the client to get the PIN, write it on the Schedule ICR, and mail the tax return to the Illinois Department of Revenue. The client will receive a preaddressed envelope during the sorting process.
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3. illinois education CreditAn education credit is available to parents who pay more than $250 in qualifying expenses during the tax year for the education of their children attending elementary or secondary school. • The credit is for costs associated with kindergarten through 12th grade. • The credit is 25 percent of the expenses that are in excess of $250. • The maximum credit is $500 per tax return. • The credit is nonrefundable and appears on Form IL-1040, page 1, line 17.
eligibility • Parent or legal guardian of a full-time student under the age of 21 • Parent and student must both be Illinois residents • Course of study is kindergarten through 12th grade • Paid to a public or private elementary or secondary school in Illinois
Qualifying expenses • Tuition • Book fees needed for required courses that are part of the school’s education program • Lab fees covering use of equipment, supplies and materials for required courses that are part of the school’s
education program
How to Claim • Complete Section B of Schedule ICR, Illinois Credits. Link from IL-1040, line 17. • If the taxpayer is not filing electronically and has received a Receipt for Qualified Education Expenses from the
school, that receipt can be attached to the tax return in lieu of completing Schedule ICR.
4. earned income tax CreditThe Illinois EITC is fully refundable and is based on the federal EITC. • The client must qualify for federal EITC to get the state EITC. • The state credit is 5% of the federal EITC. • The credit is claimed in Step 3 of Schedule ICR, Illinois Credits, and appears on line 28 on page 2 of the IL-
1040. • The credit is prorated for part-year residents and non-residents. • TaxWise automatically claims the credit based on the federal tax return.
5. illinois Use taxIllinois use tax is unpaid sales tax on items purchased for use in Illinois. When a seller does not collect the sales tax, the purchaser pays it directly to the state of Illinois. This generally happens when items are purchased on the internet or from mail order catalogues. • The general sales tax rate is 6.25%. • When the total sales tax due is less than $600, it can be paid with the IL-1040. (For sales tax to exceed $600,
purchases would need to be more than $9,600.) • The use tax is reported on line 23. Form ST-44 is used when a taxpayer owes more than $600. • The tax can be determined in either of two ways. See the IL-1040 instructions to access these tools. 1. Use tax Worksheet – Enter the total cost of items and complete the worksheet to determine the amount of
use tax that is due. 2. Use tax table – Determine an estimate of the tax due based on the client’s income. • All taxpayers who file an IL-1040 are obligated to complete line 23 concerning Illinois use tax. If a taxpayer
does not owe this tax, enter zero on line 23.
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IL-1040, line 23, is a required red field on TaxWise. The following procedures will be used at tax sites to complete line 23: • Explain to the client that Illinois is using income tax returns to collect sales tax that taxpayers may owe. They
are collecting sales tax that was not collected at the time of purchase. • Explain the results to the client. Suggest that the client keep records of these purchases during 2012.
This question is on the Supplemental Intake Sheet: Did you purchase items from other states, such as shopping online or from a catalogue, where you did not pay sales tax?
Here are some sample conversations.
Preparer: You indicated that you don’t shop online or buy things from catalogs. Client: No. I prefer to shop in stores. Preparer enters zero on line 23.
Preparer: You answered that you do shop online or buy things from catalogs. Client: Yes, I love to shop online. Preparer: About how much did you spend on items where they didn’t charge Illinois sales tax? Client: I have no idea. Preparer: There’s a table we can use to figure the approximate amounts. Preparer determines the tax using the Use Tax Table and enters the amount on line 23.
Preparer: You forgot to answer the question about shopping online or from catalogs. Client: I don’t usually shop online, but I did buy a laptop online for the kids. Preparer: About how much did you spend on the laptop? Client: It cost $950. Preparer: Did they charge sales tax? Client: No. Preparer determines the tax by completing the Use Tax Worksheet and enters the result on line 23.
If a client has a particularly confusing or complex situation regarding internet or mail order purchases, consult the site manager.
6. Charitable DonationsIllinois taxpayers can choose to make a donation to one of several designated charities. • The amount appears on Form IL-1040, page 2, line 32. • The donation is made by completing Schedule G, Voluntary Charitable Donations. • The amount donated is added to the state tax and will decrease the refund or increase any balance due.
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inCOme tAX fOr OtHer stAtes
CEP generally prepares only Illinois state returns. However, in some cases – particularly in locations near the state line – other state returns are also prepared.
BasicsSometimes clients have income from other states, have lived in another state during the tax year, or both. • Always check with the site manager before preparing a tax return for another state. • Returns for other states cannot be filed electronically. Print the return and have the taxpayer mail it to the
appropriate state. • Software for all states may not be available on all site computers. When another state is entered on the Main
Information Sheet, TaxWise will provide a warning if the software has not been installed. • There are two main factors regarding state tax preparation when another state – other than Illinois – is involved. 1. taxpayer residency status 2. reciprocal agreements
In most cases, it is unwise to prepare state returns for states that are unfamiliar to the preparer and site manager. Many states have tricky issues that are substantially different from Illinois and that require extensive knowledge.
residencyResidents • All taxpayers who lived in Illinois for the entire tax year are required to file an Illinois return if either of the
following is true: o The taxpayer is filing a federal return. o The taxpayer’s Illinois base income is greater than the Illinois exemption amount. • Illinois base income is federal AGI (form 1040, line 38) plus Illinois additions and minus Illinois subtractions. • In most cases, the exemption amount for Illinois for tax year 2011 is $2000 per person on the return. • Someone who generally lives in Illinois but who is gone for temporary absences including military, students and
trips away from the state, is still considered an Illinois resident.
Illinois does not tax military pay. When entering a W-2 in this case, check the appropriate box (military or National Guard) in the State Exclusion section at the bottom of the W-2.The income will be automatically subtracted.
NonresidentsSomeone who did not live in Illinois during 2011 must file an Illinois return if either of the following is true: • The taxpayer has enough income from Illinois sources to have an Illinois tax liability. • There was Illinois tax withheld in error and the taxpayer wants to file for a refund.
Part-year ResidentsSomeone who lived in Illinois for part of the tax year must file an Illinois return if either of the following is true: • The taxpayer had earned income from any source while an Illinois resident. • The taxpayer had Illinois source income while living in another state.
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reciprocal AgreementsIllinois has reciprocal agreements with 4 states. • Iowa • Kentucky • Michigan • Wisconsin
The basic rules for filing returns with reciprocal states are: • The taxpayer is taxed by the state of residency. • Reciprocal rules only apply to wage income. • For an Illinois resident who worked in a reciprocal state, if all of the withholding was paid to Illinois, a tax return
does not need to be filed for the reciprocal state. • For an Illinois resident who worked in a reciprocal state and the taxes were withheld and paid to the reciprocal
state, the taxpayer will have to file a return for both states. • If the taxpayer lived in both Illinois and the reciprocal state during the tax year, taxpayer needs to file a part-year
return for each state.
states Without reciprocal AgreementsWhen a taxpayer lived in Illinois and has income from another state with no reciprocal agreement, that taxpayer will need to file a return for both Illinois and the other state. In this case, the taxpayer should file Schedule CR, Credit for Tax Paid to Other States, and may be allowed a credit against IL taxes.
The following worksheet is useful when preparing returns for a client who was an Illinois resident and had Missouri withholding.
Credit for Tax Paid to Missouri
When a full-year Illinois resident has had income tax withheld for Missouri, that client has to file both an Illinois return and a Missouri return. Here are the five easy steps to follow to make sure the client gets credit for the Missouri tax.
steP 1 - Go to TaxWise mO nri, page1. Write down Missouri income __________ Find this on line U at the bottom. Add the columns if both husband and wife had MO income.
steP 2 - Go to TaxWise mO 1040, page 2. Write down total tax.__________ Find this on line 31.
steP 3 - Look at all the W-2’s with mO income. Write down W-2, box 19 Local Tax __________
Write down W-2, box 19 Local Tax __________
Add up the TOTAL TAX from steps 2 and 3. __________
steP 4 - On TaxWise, enter Missouri income from Step 1 on iL Cr Pg, page 1, line 1.
steP 5 - On TaxWise, enter TOTAL TAX from Step 3 on iL Cr, page 3, line 51.
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OtHer inCOme
retirementIncome from pensions, 401(k)s, annuities and IRAs are reported to the client on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
general • The Form 1099-R is entered into TaxWise similarly to other income documents. Link from Form 1040, line 16. • In most cases, the taxable amount will be indicated in box 2a of Form 1099-R. However, if the taxable amount
is not determined, see your site manager for advice. • Publication 4012, Volunteer Resource Guide, contains specific guidelines on Form 1099-R, as does TaxWise
help, accessed by opening a Form 1099-R and pressing the F1 key. • Retirement income, including early distributions, is not taxable in Illinois. • If the income reported on Form 1099-R is a disability pension paid before the client reaches mandatory
retirement age, the income is treated like wages on Form 1040, line 7. When entering the 1099-R, mark the box indicating disability that appears under box 7. This income will be considered as earned income for EITC and additional child tax credit.
• Railroad Retirement benefits, reported on Form RRB-1099, include two types of payments. o tier 1 benefits are equivalent to social security benefits. They are entered on 1040 worksheet 1. Link from
Form 1040, line 20a. o tier 2 benefits are vested dual benefits or supplemental annuity benefits which are treated like a regular
pension. These are entered on Form 1099-R. Link from Form 1040, line 16a.
Other Income and Self-EmploymentC H A P t e r 2 0
CORRECTED (if checked)PAYER’S name, street address, city, state, and ZIP code
PAYER’S federal identification number
RECIPIENT’S identification number
RECIPIENT’S name
Street address (including apt. no.)
City, state, and ZIP code
10 Amount allocable to IRR within 5 years
$
11 1st year of desig. Roth contrib.
Account number (see instructions)
1 Gross distribution
$2a Taxable amount
$
OMB No. 1545-0119
2011Form 1099-R
Distributions From Pensions, Annuities,
Retirement or Profit-Sharing
Plans, IRAs, Insurance
Contracts, etc.
Copy B Report this
income on your federal tax
return. If this form shows
federal income tax withheld in
box 4, attach this copy to your return.
This information is being furnished to
the Internal Revenue Service.
2b Taxable amount not determined
Total distribution
3 Capital gain (included in box 2a)
$
4 Federal income tax withheld
$5 Employee contributions
/Designated Roth contributions or insurance premiums
$
6 Net unrealized appreciation in employer’s securities
$7 Distribution code(s)
IRA/ SEP/
SIMPLE
8 Other
$ %9a Your percentage of total
distribution %
9b Total employee contributions
$12 State tax withheld
$$
13 State/Payer’s state no. 14 State distribution
$$
15 Local tax withheld
$$
16 Name of locality 17 Local distribution
$$
Form 1099-R Department of the Treasury - Internal Revenue Service
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individual retirement Account (irA)
• IRA income appears on Form 1040, line 15. Income from traditional IRAs is usually fully taxable. Roth IRA distributions are generally not taxable.
• Enter IRA income by linking to the Form 1099-R from Form 1040, line 15. • If a Form 1099-R is for an IRA distribution, box 7 will be checked.
early Distributions
• Amounts withdrawn from pension accounts before retirement age will generally be fully taxable income to the client.
• Taxpayers have 60 days from the date of the distribution to roll it over to another qualified plan. If the distribution is not rolled over, it is taxable as of the date of the distribution, not when the 60 days expires.
• Many workers receive distributions, particularly from 401(k) retirement plans, when they change jobs. Employers are required to withhold 20% income tax on distributions to employees that occur prior to retirement, death or disability.
• If the client takes a pension distribution before age 59 ½, the income is fully taxable. There is a penalty of 10 percent, which is added as an additional tax on Form 1040, line 58. In such instances, 1099-R, box 7 will have a distribution code 1. TaxWise will automatically compute this penalty based on the distribution code.
• An exception to the penalty is made for people who take early distributions for special reasons. There are several possible exceptions that will allow the client to avoid the 10% penalty, such as distributions made due to disability. Go to the Form 5329 (click in the code space on line 2 and hit the F1 key) for detailed information on the exception codes.
TaxWise Help (F1) offers good information on entering pension income. Open Form 1099-R and hit the F1 key. Scroll to the very bottom of the page for links that provide specific information on RRB-1099 (Railroad Retirement) and CSA-1099 (Civil Service).
Dividend income
Dividend income is usually reported to the client on Form 1099-DIV, Dividends and Distributions. • Many investment firms will supply the 1099-DIV information in a letter or report format. Watch for references
like, “1099-DIV Box 1” or “in lieu of Form 1099-DIV.” • Enter dividend income by opening the Dividend Statement on the TaxWise tree. • Sometimes in addition to dividend income, there will be a capital gain distribution reported on the 1099-DIV.
This is also entered on the Dividend Statement and will appear on Form 1040, line 13. A Schedule D is not needed in this case.
Be sure to carefully enter all information on the 1099-DIV, which will provide a breakdown of qualified and nonqualified dividends, and capital gain distributions. Investment firms will often send statements that are several pages in length. Always review every page.
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Alimony
Alimony is taxable income to the recipient and an income adjustment to the payer. • Alimony income can be entered directly to Form 1040, line 11. • The tax law provides a specific definition of alimony. If there is any doubt as to whether the payments received
are alimony, go to Publication 17 or talk to your site manager.
Child support is not the same as alimony. For tax purposes, they are very different. Child support is not taxable income and is not reported on the tax return.
gambling Winnings
Gambling winnings must be reported as income. • Income from gambling is reported on Form 1040, line 21. Link to the worksheet from line 21, Other Income. • Gambling losses can be deducted only if the client itemizes deductions on Schedule A. • Total gambling losses deducted cannot exceed total winnings. • Gambling losses are reported on Schedule A, line 28. CEP clients often do not have enough deductions – even
including gambling losses – to itemize. That means that the gambling winnings are fully taxable and no losses can be claimed.
Watch out for gambling winnings from other states! This often means an additional state return must be filed!
miscellaneous income
Yes! It’s rare, but there really is such a thing. Occasionally there will be income reported in box 3 of Form 1099-MISC. That income is not earned and probably goes on Form 1040, line 21, miscellaneous income. See your site manager to determine the correct reporting status.
seLf-emPLOYment
Background
Self-employment income is virtually all earned income that is not wages and is not reported on a W-2. • Self-employment income is reported on Schedule C-EZ or Schedule C, Profit or Loss from Business. • Self-employed taxpayers can deduct a wide variety of business expenses without itemizing deductions. • Generally, no taxes have been withheld from self-employment income. • In addition to paying income tax when filing a tax return, a self-employed person must pay social security and
Medicare taxes. This is called self-employment tax and it applies when the net income from self-employment is more than $400. For tax year 2011, self-employment tax is about 13% of the net business income.
• If the tax liability is not covered by tax credits, the self-employed person may be responsible for making quarterly estimated tax payments.
• Self-employed taxpayers are supposed to keep records of both income and expenses. • Self-employment income qualifies as earned income for EITC and the additional child tax credit.
The following question is at the top of the Schedule C-EZ: Did you make any payments in 2011 that would require you to file Form(s) 1099?
For most CEP clients, the answer will be “No.” If you encounter a self-employed client who does issue Form 1099s, or hires independent contractors, see your site manager.
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11 12
(keep for your records)
Nonemployee compensation
CORRECTED (if checked)OMB No. 1545-0115Rents1PAYER’S name, street address, city, state, ZIP code, and telephone no.
$2 Royalties
$Other income3
RECIPIENT’S identificationnumber
PAYER’S federal identificationnumber
5 Fishing boat proceeds 6 Medical and health care payments
$ $RECIPIENT’S name Substitute payments in lieu of
dividends or interest87
$$9Street address (including apt. no.) 10 Crop insurance proceeds
City, state, and ZIP code
Gross proceeds paid toan attorney
14Excess golden parachutepayments
13Account number (see instructions)
$16 State tax withheld 17 State/Payer’s state no.
$Department of the Treasury - Internal Revenue Service
18 State income
$
$$ $
4
$ $
Payer made direct sales of$5,000 or more of consumerproducts to a buyer(recipient) for resale �
Form 1099-MISC
Form 1099-MISC
MiscellaneousIncome
$
Copy BFor Recipient
This is important taxinformation and isbeing furnished to
the Internal RevenueService. If you are
required to file areturn, a negligence
penalty or othersanction may be
imposed on you ifthis income is
taxable and the IRSdetermines that it
has not beenreported.
Federal income tax withheld
Section 409A income15bSection 409A deferrals15a
$ $
10
income
Self-employment income generally has two sources.1. nonemployee Compensation, form 1099-misC
When a client has income in box 7 of Form 1099-MISC, the income is self-employment. • This must be reported on Schedule C-EZ or Schedule C, Profit or Loss from Business, and Schedule SE, Self-
Employment Tax. • This means that the payer of the income classified the worker as an independent contractor; and therefore, did
not withhold or pay FICA (social security) or Medicare. Usually there is no income tax withholding.
Do not enter 1099-MISC box 7 income, nonemployee compensation on 1040 line 21. This income must be reported on Schedule C-EZ or Schedule C.
2. Other income
A client may also have self-employment income not reported on a Form 1099-MISC – or any other form. These clients are responsible for keeping track of their income from such activities and reporting it - even if the income is cash.
expenses • Most expenses related to the production of the self-employment income can be deducted on the Schedule C-
EZ or C. • If the client drove his/her vehicle for business purposes, the client can possibly claim business mileage. o For tax year 2011, there are two mileage rates: January 1, 2011 – June 30, 2011 – 51¢ per mile July 1, 2011– December 31, 2011 – 55.5¢ per mile o The mileage rate covers the cost of operating the vehicle (gas, oil, repairs) and the cost of the vehicle itself.
Expenses for parking, tolls, and business percentage of interest on a car loan can be deducted in addition to the mileage.
o If a client has kept receipts for car costs and wants to use actual expenses, see your site manager. • Commuting miles are not deductible. Generally, the miles from the taxpayer’s home to the first work stop of
the day, and from the last work stop of the day back home are commuting and are not deductible. Example: Simon is a bricklayer. He has no regular place of business. He goes to two or three temporary
business locations each day. Here’s a typical work day. home to first job 12 miles commuting first job to second job 4 miles business second job to third job 15 miles business return home 10 miles commuting Simon can take a deduction for 19 business miles for this day. If Simon had qualified business use of his home, all of this mileage would be considered business miles. • Meals are generally not deductible unless the self-employed person is traveling out of town.
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• Examples of expenses are as follows: o Tools for a handyman o Tires for a bike messenger o Blow dryers, sprays and shampoo for a hairdresser o License fee for cab drivers o Food for children in a day care business • If a self-employed person buys something for the business and will last more than one year, it cannot generally
be claimed as an expense, but must be depreciated. If you encounter this, talk to your site manager.
schedule C-ezMost returns for self-employed CEP clients are prepared using Schedule C-EZ, a simpler version of the Schedule C. A Schedule C-EZ can be used when all of the following are true: • total expenses are less than $5,000; • there is no business use of the home; • there is only one Schedule C-EZ (or one per person on a joint return); • client uses cash method of accounting; • the business does not carry an inventory; • the business did not have employees; • not required to complete Form 4562, Depreciation; • passive activity loss was not disallowed in a prior year; and, • business expenses do not exceed the business income.
Business use of home means most child care provides cannot use Schedule C-EZ.To prepare a Schedule C-EZ, go to Form 1040, line 12, and link (F9) to SCH C-EZ.
You will need to enter the type of business and the business activity code. These codes are in the Form 1040 instructions book and are also available on the TaxWise help function. From Schedule C-EZ click F1 for help, TaxWise help, index, business codes.
11 12
(keep for your records)
Nonemployee compensation
CORRECTED (if checked)OMB No. 1545-0115Rents1PAYER’S name, street address, city, state, ZIP code, and telephone no.
$2 Royalties
$Other income3
RECIPIENT’S identificationnumber
PAYER’S federal identificationnumber
5 Fishing boat proceeds 6 Medical and health care payments
$ $RECIPIENT’S name Substitute payments in lieu of
dividends or interest87
$$9Street address (including apt. no.) 10 Crop insurance proceeds
City, state, and ZIP code
Gross proceeds paid toan attorney
14Excess golden parachutepayments
13Account number (see instructions)
$16 State tax withheld 17 State/Payer’s state no.
$Department of the Treasury - Internal Revenue Service
18 State income
$
$$ $
4
$ $
Payer made direct sales of$5,000 or more of consumerproducts to a buyer(recipient) for resale �
Form 1099-MISC
Form 1099-MISC
MiscellaneousIncome
$
Copy BFor Recipient
This is important taxinformation and isbeing furnished to
the Internal RevenueService. If you are
required to file areturn, a negligence
penalty or othersanction may be
imposed on you ifthis income is
taxable and the IRSdetermines that it
has not beenreported.
Federal income tax withheld
Section 409A income15bSection 409A deferrals15a
$ $
11
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Finding the right business code can be tricky, but it is important to use one that is a reasonable match. Common codes used on CEP returns include:
236100 Construction – residential 236200 Construction – nonresidential 561730 Landscaping 561110 Office/Administrative Support 621619 Home Health Care 624410 Child Care Day Care Services 811490 Household Repairs and Maintenance
• Line 1a – GROSS MERCHANT CARD o If you encounter a self-employed client who has income received through merchant cards, such as credit
cards, see your site manager.
• Line 1b – GROSS RECEIPTS (total income for the business) o If this income is from a 1099-MISC, open Schedule C-EZ, line 1 and link (F9) to Form 1099-MISC. o If a client has income for this business that is not reported on a 1099-MISC, link from line 1 to a scratch pad. o TaxWise will automatically calculate the total from all sources.
• Line 2 – TOTAL EXPENSES (total expenses for the business) o Link from line 2 to a scratch pad and list all expenses. o Even if the client has added things up and can give you a total, it’s nice to list the expenses – even if just by
category – to create a record of what was actually deducted. o Include vehicle expenses on line 2.
• Part III – INFORMATION ON YOUR VEHICLE (business miles) o For clients who drove their own vehicle for business purposes, answer the questions in Part III of the
Schedule C-EZ. Enter the result on line 2 or create a scratch pad and include the deduction with all other expenses.
o Driving to and from work is commuting and does not count as business use. BUSINESS MILEAGE (business-related miles) COMMUTING MILEAGE (miles from home to first business stop and from last business stop to home) OTHER (any other personal use; for example, driving to the movies)
If the net self-employment income is more than $400, a Schedule SE, Self-Employment Tax, will be automatically completed by TaxWise and must be filed with the tax return. The self-employment tax amount (about 13 percent of net income) will appear on Form 1040, page 2, line 56, and 57% of the self-employment tax is an adjustment to income on Form 1040, line 27. TaxWise calculates all of this automatically.
Prepare mary’s return role Play: mary’s Cash income
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Volunteer standards Of ConductAll tax preparers – including volunteers – face ethical issues. Ethical issues often arise in unexpected situations that call for quick decisions and good judgment. In many cases, a preparer will face and react to a sticky situation and only realize later that it was, in fact, an ethical dilemma. Studies show that the best way to apply good ethical principles is to review basic principles in order to predict and consider possible situations before they arise.
The Form 13615, Volunteer Agreement – Standards of Conduct, is an agreement to apply ethical principles while working at a VITA tax site. These ethical principles were developed by the IRS specifically for free tax preparation operations.
When you sign the Form 13615 you are promising to:
1. follow the Quality site requirements
The following items in the IRS Quality Site Requirements apply to volunteer preparers:➢ • Volunteers will pass the IRS certification test(s) appropriate to the tax returns they prepare and the tax
questions that they answer. ➢ • Preparers will use appropriate reference materials. ➢ • Preparers will make sure that client information is kept secure and confidential. ➢ • Preparers will properly use intake sheet information.➢ • All tax returns will receive quality review before the client leaves.
Appropriate tax returns and reference materials: Research – don’t guess. Ask somebody – don’t “try things.” Most important, remember that it’s OK to say “no” for issues not covered in training. This is hard for VITA staff to do.
Example: Here are some ideas of how to say “no.” ➢ • “I’m sorry; we don’t know how to prepare a Schedule C for a business with inventory like you have in your
Avon business. You’ll have to have your return prepared somewhere else.” ➢ • “I know that you want your rental income and expenses figured correctly. We have no training or experience
with this kind of income. We cannot prepare your return.” ➢ • “I’m sorry that this wash sale issue is not familiar to me and I would probably make a mistake. This site cannot
prepare your return.” ➢ • “How lovely that you got such a good price for your farm! We do not have the expertise to assist you with your
tax return today. Let me help you wheel your records back out to your car.”
Confidentiality: Sensitive, personal information is contained on computers used for tax preparation. Some of the equipment is owned by IRS and has encryption that requires extra layers of passwords. Resist the temptation to write down sign-in information and passwords on a post-it and leave it on the computer! A laptop with lots of names and SSNs and a password attached is a mighty temptation and a dangerous security problem waiting to happen.
Example: You are preparing your first return of the day. Another volunteer arrives late, sits across the room, and yells across to you, asking for the password. Don’t shout it out across the room!
Ethical IssuesC H A P t e r 2 1
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intake and quality review: Correct use of the intake forms, doing a thorough interview, and adhering to the 100% quality review process will guard against errors.
Example: It’s 9:45 on a Tuesday night and you just finished preparing your last tax return – very basic with just one W-2. The client’s toddler is exhausted and starting to cry. The client is anxious to leave. You see that the quality reviewer is involved in a complicated situation and there are other preparers waiting for a review. Resist the temptation to just finish up and leave. The return must be reviewed by someone else before the client (and you) leave.
2. not accept payment or solicit donations for the federal or state tax return preparation.
A client may offer payment, but always refuse with a smile, “We don’t accept payment for our services.” If someone really insists, home-baked cookies for the entire site probably would be appreciated.
During sorting, clients are offered the opportunity to make a monetary donation to CEP. This request is not part of the tax preparation process. Making a donation is completely voluntary and clients are offered the opportunity to donate only after tax preparation is complete.
Example: You finish a rather time-consuming return and the client is very grateful. As she leaves your table, she tries to sneak a $20 bill in your pocket, saying, “I would have paid ten times that at the preparer across the street.” Return the money and say something like, “Talk to the volunteer at the sorting table for instructions about how to make a donation,” or, “If you want to help, go to our website and become a volunteer next year.”
3. not solicit business from taxpayers you assist or use the knowledge you gained about them for any direct or indirect personal benefit for you or any other specific individual.
Volunteers sometimes go astray because they want to help – not so much that they want to make lots of money. You cannot offer to meet a client later and prepare a tax return for money – or any other compensation. You cannot in any way take advantage of the fact that you prepared someone’s tax return.
Example: Your daughter is selling candy for a school fundraiser. You cannot invite clients to put in an order.
4. not knowingly prepare false returns.
One erroneous click in a certain box, one fudged birth date, or one false relationship and the client’s balance due becomes a nice fat refund. Don’t do it! We are here to help taxpayers prepare a correct tax return, not to get the biggest refund.
Example: The nice old lady sitting across from you will get another $3,000 if the grandkids’ correct three months’ residency is changed to 12 months. Besides breaking the law, that extra $3,000 refund can turn into a $3,000 balance due, plus penalty and interest – and become a world of trouble for that lovely old lady.
If you ever sense that a client is not telling the truth, don’t ignore it. Review the questions and answers with the client to ensure that it is not a misunderstanding. If that doesn’t resolve the matter, go get your site manager.
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5. not engage in criminal, infamous, dishonest, notoriously disgraceful conduct, or any other conduct deemed to have a negative effect on the VitA/tCe Programs.
As a VITA preparer, you are representing CEP and the federal government. This requires integrity, reliability, honesty and, of course, respectable behavior.
Example: You got off work early and decided to meet some friends and relax before going to the tax site. You may be feeling pretty good after a couple of cocktails, but this is not the right time for public service and complicated tax preparation. Call your site manager and say you can’t make it tonight.
6. treat all taxpayers in a professional, courteous, and respectful manner.
Preparers are expected to behave in a professional manner and treat clients with courtesy. Volunteers find that it is a privilege to provide assistance to the hard-working men and women that come to VITA sites for tax preparation.
Tax sites can be stressful. Clients often wait extended periods for assistance. Volunteers often come to a site after a long day at work. This situation can make patience run short. It’s important for all staff to remain calm and create a peaceful, friendly atmosphere that promotes effective communication and accurate, efficient tax preparation.
Example: You finish a difficult return for Millie who has self-employment income, lots of expenses, very few records, and her son turned 25 and moved out early in the year. She owes the IRS about $50. After you carefully explain the return Millie sputters, “I knew that you didn’t know what you’re doing. I always get a refund! My neighbor is self-employed and she got $1,900 back.” Take a deep breath, excuse yourself, go to the back room and get a cookie,
and return with a smile. If further explanation doesn’t help the situation, go get your site manager.
role Play: Does grandpa have to file?
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The mission of the VITA/TCE return preparation programs is to assist eligible taxpayers in satisfying their tax responsibilities by providing free tax return preparation. To establish the greatest degree of public trust, volunteers are required to maintain the highest standards of ethical conduct and provide quality service.
VolunteerStandards of Conduct Agreement –
VITA/TCE Programs
Department of the Treasury – Internal Revenue Service
Cat. No. 38847H Form 13615 (Rev. 10-2011)
Form 13615(Rev. 10-2011) Cat. No. 38847H
Instructions: All VITA/TCE volunteers (whether paid or unpaid workers) must complete the Volunteer Standards of Conduct Training and sign Form 13615, Volunteer Standards of Conduct Agreement prior to working at a VITA/TCE site. In addition, return preparers, quality reviewers, and VITA/TCE tax law instructors must certify in tax law prior to signing this form. This form is not valid until the site coordinator, sponsoring partner, instructor, or IRS contact confirms the volunteer’s identity and signs the form.
1) Follow the Quality Site Requirements (QSR).
2) Not accept payment or solicit donations for federal or state tax return preparation.
3) Not solicit business from taxpayers you assist or use the knowledge you gained (their information) about them for any direct or indirect personal benefit for you or any other specific individual.
4) Not knowingly prepare false returns.
5) Not engage in criminal, infamous, dishonest, notoriously disgraceful conduct, or any other conduct deemed to have a negative effect on the VITA/TCE Programs.
6) Treat all taxpayers in a professional, courteous, and respectful manner.
Failure to comply with these standards could result in, but is not limited to, the following:
••••••
Your removal from all VITA/TCE programs and designation on the IRS volunteer registry to bar future work;
Deactivation of your sponsoring partner’s site VITA/TCE EFIN (electronic filing ID number);
Removal of all IRS products, supplies, loaned equipment, and taxpayer information from your site;
Termination of your sponsoring organization’s partnership with the IRS;
Termination of grant funds from the IRS to your sponsoring partner; and
Referral of your conduct for potential TIGTA and criminal investigations.
Taxpayer Impact: Taxpayer trust in the IRS and the local sponsoring partner organization is jeopardized when ethical standards are not followed. Fraudulent returns that report incorrect income, credits, or deductions can result in many years of interaction with the IRS as the taxpayer tries to pay the additional tax plus interest and penalties. This can result in an extreme burden for the taxpayer as the taxpayer tries to resolve the errors made on his or her return.
Volunteer Protection: The Volunteer Protection Act generally protects unpaid volunteers from liability for acts or omissions that occur while acting within the scope of their responsibilities at the time of the act or omission. It provides no protection for harm caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer.
Standards of Conduct: As a volunteer in the VITA/TCE Programs, you must:
For additional information on the volunteer standards of conduct, please refer to Publication 4299, Privacy, Confidentiality, & the Volunteer Standards of Conduct -- A Public Trust.
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Education BenefitsC H A P t e r 2 2
There are three main tax benefits for families who pay for postsecondary education. • American Opportunity Credit • Lifetime Learning Credit • Tuition And Fees DeductionEducation expenses can only be used to claim one of these tax benefits per student each tax year.
generAL gUiDeLines
• It doesn’t matter if the expenses were paid out-of-pocket or with proceeds of a student loan. • Expenses paid for by tax-free assistance do not qualify. This includes a scholarship, fellowship, employer-
provided assistance, Pell grants, or any other tax-free educational assistance program. • Expenses paid for by the taxpayer’s dependent are considered to have been paid for by the taxpayer. • Expenses paid for a dependent by a third party are considered paid by the taxpayer that can claim the student as
a dependent. In some cases, when another person pays the expense, it can be considered to have been paid by a student who cannot be claimed as a dependent.
• Educational expenses paid for by tax-free distributions from an educational IRA do not qualify for the credit. • Tuition and fees amounts are reported to the student each year on Form 1098-T, Tuition Statement. • For more information about all education benefits, see IRS Publication 17, Publication 4012, or Publication 970,
Tax Benefits for Education.
AmeriCAn OPPOrtUnitY CreDit
This credit is based on expenses for college and other post-secondary education. • The credit can be claimed for expenses paid for any of the first four years of post-secondary education. • The maximum credit is $2,500. • 40% of the credit (up to $1,000) is refundable. • Qualified educational expenses include: o tuition o fees o books and other required course materials • Some education expenses do not qualify: o room and board o insurance o transportation o cost of noncredit courses, such as sports • A qualified student is one who is enrolled in any of the four years of an undergraduate program leading to a
degree, certificate, or any other recognized credential at any accredited college, university, or vocational school. • An eligible school is any accredited post secondary educational institution that is eligible to participate in a
student aid program administered by the Department of Education. • The student must be taking at least one half of the full-time course load. Parents with dependents who are
eligible students may take the credit. • The American opportunity credit is claimed in Part I of Form 8863, Education Credits. • The credit cannot be claimed if the taxpayer uses married filing separately filing status. • To be eligible, the student cannot have had a felony conviction for possessing or distributing a controlled
substance.
The cost of books is a qualifying expense only for the American opportunity credit. Even if a student’s tuition is paid for by assistance, such as a grant or scholarship, the cost of books paid out-of-pocket can be used for the credit. This is true even if there is neither taxable income nor income tax paid on the return.
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Lifetime LeArning CreDit
The lifetime learning credit is particularly useful for graduate students, students who are not pursuing a degree or who are just taking one or two courses. • The credit is based on tuition paid for any course that is: o part of a postsecondary degree program; or, o enables the taxpayer to acquire or improve job skills. • The credit is 20% of up to $10,000 tuition and fees per tax return, for a maximum credit of $2,000 per tax
return. • The entire credit is nonrefundable. • Taxpayers can take the credit for any tax year that they qualify. • The credit cannot be claimed by any taxpayer using married filing separately filing status. • The credit is claimed on Form 8863, Part II.
tUitiOn AnD fees DeDUCtiOn
Clients who paid tuition and fees for post-secondary education may qualify for the tuition and fees deduction. • The education must be for the client, the client’s spouse, or any of the client’s dependents who attended
college during the tax year. • Expenses cannot be used for the adjustment if they are also used to claim another education benefit, such as
an education credit, for the same student. • Expenses that qualify for the adjustment include required tuition and fees paid to the educational institution by
check, credit card, or with student loans. • The adjustment is limited to $4,000 each tax year. • Taxpayers who claim this adjustment must complete Form 8917, Tuition and Fees Deduction. Link to Form
8917 from Form 1040, line 34. This form must be filed with the tax return. • The tuition and fees adjustment is not available to taxpayers who file as married filing separately or who can be
claimed as a dependent.
WHiCH is Better?
Education expenses can only be used to claim one tax benefit per student. The primary challenge is determining whether the client will be better off using the education expense as an adjustment or as an education credit. The effects on both federal and state taxes must be considered.
• Full-time undergraduate: American opportunity credit will generally be more beneficial because it is a refundable credit.
• Less than half time student, graduate student, and/or not pursuing a degree: Either lifetime learning credit or tuition and fees deduction might be more beneficial, depending on income level and other tax return factors. The safest course is to prepare the return both ways and assess the overall tax benefit. After completing the rest of the tax return, Use the “What if?” mode that can be found on the TaxWise File menu.
1. Use the education expense as a tuition and fees adjustment; 2. note the amount of federal and state refunds (or balance due); 3. use the education expense to take the education credit; 4. note the amount of federal and state refunds (or balance due); and then, 5. compare the two results to determine which is better, overall, for the client.
Refer to the “Benefits Related to Education” chart on the next page (and also available in the You Can Do It handbook) to see a side-by side summary of the benefits related to post-secondary education.
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Ben
efits
Rel
ated
to E
duca
tion –
Tax
Year
201
1
Who
's li
kely
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bene
fit?
Max
imum
A
nnua
l Ben
efit
Ann
ual
Expe
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N
eede
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r M
axim
um
Ben
efit
Stud
ent
Req
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men
t
Req
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d to
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at le
ast
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Year
s A
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El
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aim
?
Am
eric
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Opp
ortu
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redi
t
Full
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unde
rgra
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a
degr
ee p
rogr
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$1,0
00 re
fund
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cr
edit
plus
$1,
500
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efun
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$4,0
00M
ust b
e pu
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e de
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.ye
sfo
ur y
ears
tuiti
on, f
ees,
bo
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cou
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Form
104
0,
lines
49
&
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ink
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Form
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3
Life
time
Lear
ning
Taki
ng ju
st 1
-2cl
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in
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uate
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efun
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Doe
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d to
be
in d
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e pr
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m if
cla
ss
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oves
job
skills
.
noun
limite
dtu
ition
and
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ly
Form
104
0,
line
49, l
ink
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orm
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63
Tuiti
on a
nd
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D
educ
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Taki
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$4,0
00 a
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oes
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eed
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ursu
ing
a de
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.no
unlim
ited
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es
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Form
104
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ink
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wor
kshe
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Form
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$2,5
00
Loan
use
d fo
r un
derg
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ate
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ed to
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: tu
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PrACtiCeWalter And Bernice rivers tax DocumentsPrepare the Rivers’ tax return. Which education benefit is better for them?
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generAL infOrmAtiOn
All volunteer tax preparers are required to pass, at a minimum, the standards of conduct test and the IRS basic certification exam. Volunteers who do quality review at tax sites are also required to pass the IRS intermediate test.
Volunteers can take the test by attending a CEP TaxWise Certification Lab or from the convenience of their home or office using the online access to TaxWise Practice Lab.
Here’s the basics of what you need to know about the testing process. • The entire test and retest are included in the IRS booklet, Form 6744, Volunteer Assistor’s Test/Retest. • Form 6744 will be distributed to new volunteers who attend class. It is also available online. • The test is open book and there is no time limit. • Volunteers are encouraged to use training materials, Publication 4012, Publication 17, and the 1040 instruction
book to research test questions. • The test problems provide a site identification number. Ignore this while taking the test. CEP site computers are
set up to automatically include the site identification number. • To pass, a volunteer must achieve a score of at least 80% correct answers. • Volunteers who do not pass the test on the first attempt can take the retest to certify. Only two attempts – the
test and the retest – are allowed. • There are seven certification tests: Standards of Conduct, Basic, Intermediate, and Advanced; plus three
specialty tests. Only the Standards of Conduct and Basic Tests are required to a be a tax preparer. • Any volunteer who does not pass after two tries should contact the volunteer department to discuss other
opportunities:
Volunteer Services 312-630-0288 [email protected]
step 1Answer the test questions for scenarios 1-5 and scenario 8 in the IRS booklet Form 6744, Volunteer Assistor’s Test/Retest.
step 2Using TaxWise software, prepare the tax returns for scenarios 6 and 7 and answer the questions.
step 3Once you have completed the entire test and written the answers to all the questions in the Form 6744 booklet, go to the online answer sheet and enter your answers. • Record your answers online. • Get your score. • If you pass, print your certificate. • If you did not pass, repeat steps 1, 2 and 3 to take the retest.
Getting CertifiedC H A P t e r 2 3
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Please certify as soon as possible to make certain you’re ready for tax season! If you have any problems recording the answers online, or using the IRS Practice Lab, please call the CEP help line: 312-630-0260, or send a message to: [email protected]. This help service is available October 17, 2011, through February 17, 2012. If you do not receive an immediate answer, leave a message. You will receive a reply within one business day. Leave your name, phone number, and the kind of browser and operating system that you are using.
Now the fun begins! Once you are certified, you are ready to go to the tax site. Your first time as a volunteer preparer can be intimidating, but remember that there will be experienced preparers there to help you, and you can ask as many questions as you want. Welcome!
irs tAXWise PrACtiCe LABThe IRS practice lab, a practice version of TaxWise Online, is a way to use TaxWise from home or office.
AccessTo IRS Practice Lab • Go to: www.voltaxprep.com. The password for access to the Practice Lab is: learntwo. • The first time you visit the site, follow the instructions to register as a Practice Lab user. The system will assign
a six-digit User ID. Save your User ID and remember which zip code you used to register. You will need both numbers every time you sign in.
My User ID:
ZIP Code used:
• If you lose/forget your User ID, you can register again and get a new one, but you will lose access to the tax returns that you already prepared.
• The first page of the Practice Lab offers links to various information sources. “Click here to get started” and “Tips for Linking” are particularly useful and should be reviewed before starting the first return.
The IRS Practice Lab does not work on Mac computers or with Mozilla Firefox or Google Chrome. Use Internet Explorer.
irs Practice Lab QuirksThere are some differences between the TaxWise desktop that is used in volunteer training (and most CEP tax sites) and TaxWise Online that is used by the Practice Lab. • TaxWise Online works best with Internet Explorer. Any other web browser may encounter problems that will
prevent the program from working properly. • TaxWise Online looks different, but most of that is just cosmetic. For example, where TaxWise desktop has red
fields, TaxWise online has fields with a red underline. • Since it is a web-based program, the speed of the program depends on the speed of the Internet connection. • Every SSN, ITIN and employer identification number that is used to prepare returns must contain the User ID as
the last six digits. For example, if your User ID is 123456: o A test problem says the taxpayer’s SSN is 130-XX-XXXX, then the SSN entered to start the return is: 130-12-
3456. o If the employer identification number on a W-2 is 04-2XXXXXX, the number entered would be 04-2123456. • Tax returns are not automatically saved and entries do not calculate automatically. The return should be
frequently saved (SAVE button) to generate calculated entries and ensure no data is lost.
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• Function key actions are different. o F3 (TaxWise desktop) = Ctrl and Spacebar (Practice Lab)
In TaxWise desktop, the F3 key will make a red field no longer required – not red. It is also used to confirm a “zero” entry. For example, this is used on Form 8880, line 4.
o F8 (TaxWise desktop) = Ctrl and Enter (Practice Lab) This is used to override a generated entry. See your site manager before using this function.
o F9 (TaxWise desktop) = the link icon (Practice Lab) This is used to link to another form from a selected location. For example, this would be used to open a W-2 from 1040 line 7. Clicking the link icon leads to a choice of two lists: new forms or existing forms. Choose whichever is appropriate. For example, if you wanted to change a W-2 that you already entered, you would select existing forms. If you want to start a new W-2, you would select new forms.
• TaxWise Online offers the use of the interview mode (question-directed tax preparation). CEP does not use the interview mode. DO NOT USE INTERVIEW MODE. Always use tax forms mode. You will see an icon at the top to make the selection.
• The Internet Explorer buttons and shortcuts to move around won’t work for TaxWise Online. Instead use the green arrows “Previous Form” and “Next Form.” To hide the Internet Explorer toolbar – and prevent inadvertent use of the Internet Explorer blue arrows – hit the F11 key.
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What’s New?
Learning Objectives
1. Understand changes to income tax law that affect CEP clients.
2. Be familiar with changes to TaxWise software.
3. Effectively utilize the 2012 IRS Form 13614-C and CEP intake forms.
4. Be familiar with modifications to CEP site procedures.
5. Sharpen knowledge regarding important tax law concerning family issues, education benefits, and the Illinois Use Tax.
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What’s New?C H A P t e r 2 4
tAX LAW CHAnges
There are no major changes for tax year 2010. However, there are many small changes that will affect CEP clients.
New Numbers - Tax Year 20112011
EARNED INCOME TAX CREDIT
Maximum income - Single/ or Head of HouseholdNo children $13,660One qualifying child $36,052Two qualifying children $40,964Three qualifying children $43,998
Maximum Income - Married Filing Jointly / QWNo children $18,740One qualifying child $41,132Two qualifying children $46,044Three qualifying children $49,078
Investment Income Maximum $3,150
Maximum EITCNo children $464One qualifying child $3,094Two qualifying children $5,112Three qualifying children $5,751
CHILD TAX CREDIT - ADDITIONAL CHILD TAX CREDITMaximum Credit per Child $1,000ACTC Earning Threshold $3,000
STANDARD DEDUCTIONSingle/Married Separate $5,800Married Jointly / QW $11,600Head of Household $8,500
EXEMPTION $3,700
MILEAGE RATE Jan. - June July - Dec. Business 51¢ 55.5¢ Medical/moving 19¢ 23.5¢ Charitable 14¢ 14¢
ADOPTION TAX CREDIT MAXIMUM $13,630
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expired Benefits
Two tax benefits expired and are not available for tax year 2011.
• The making work pay credit was a refundable credit available on tax returns for the 2009 and 2010 tax years. This credit – which was generally worth $400 per taxpayer – has expired. There is no making work pay credit and there is no longer a Schedule M.
• The advance EITC was a way that employees could get part of their EITC in their paychecks during the year. This option expired effective with tax year 2011. In the past, advance EITC amounts appeared on Form W-2 in box 9
first-time Homebuyer Credit repayment
Taxpayers who received a first-time homebuyer credit based on a home purchased in the calendar year 2008 must continue credit repayment with their 2011 tax return. • Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, no longer needs to be completed
in most cases. Repayment can be reported directly on Form 1040, line 59b, as an additional tax. • The maximum credit for 2008 was $7,500. Most repayments are $500 per year. • If the taxpayer no longer uses the home as a personal residence, Form 5405, Part IV, must be completed. • Taxpayers who received the first-time homebuyer credit for 2008 and still own and live in the home must
file a tax return every year for fifteen years in order to make repayment – even if they have no income or other reason to file.
• Sometimes a taxpayer might want to pay back the credit faster. The taxpayer has the option to pay more than the required amount by entering the preferred payment amount on Form 1040, line 59b.
self-employment tax
For tax year 2011, the self-employment tax rate was reduced by 2% to reflect the overall 2% reduction to payroll taxes. • The new rate is 13.3%, 2% less than the previous 15.3%. • The self-employment tax adjustment on page 1 of Form 1040 is 57% of self-employment tax. • TaxWise will automatically calculate the self-employment tax and the adjustment.
reporting Capital gains and Losses
Capital gains and losses – such as the sale of stock – are no longer entered directly on Schedule D. • Form 8949, Sales and Other Dispositions of Capital Assets, is a new form that is used to report capital
transactions. • Link from Schedule D, Capital Gains and Losses, to the Form 8949.
schedule C-ez and schedule C
There are two new items on Schedule C-EZ and C.
1. A Form 1099 question appears at the top of both schedules, Did you make any payments in 2011 that would require you to file Form(s) 1099?
For most self-employed CEP clients, the answer will be “No.” If you encounter a self-employed client who does issue Form 1099s, or hires independent contractors, see your site manager.
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2. In the income section, the first line is now, 1a Gross merchant card and third party network receipts and sales.
In most cases, self-employed CEP clients do not get paid by credit cards or other third party means. No entry would be made on this line and the self-employment income would be entered on line 1b, Gross receipts or sales. If a client does appear to have income that would be reported on line 1a, see your site manager.
form 1040 Due Date
The due date for 2011 individual income tax returns is April 17, 2012. • The usual date, April 15, is a Sunday in 2012. • Monday, April 16, 2012, is the Emancipation Day holiday in the District of Columbia.
illinois tax rate
The Illinois individual income tax rate increased from 3% to 5% effective January 1, 2011. Withholding rates also increased during 2011.
tAX Wise CHAnges
There are three additions to TaxWise:
• There is a new screen, Preparer Use Form, which will contain the preparer use fields where the demographic information from the Supplemental Intake Sheet will be entered. There are now 25 preparer use fields.
• A new feature is the Taxpayer Reminder Field, which also appears on the Preparer Use Form. This space can be used to make notes that will automatically display for the preparer of the 2012 return.
• When a return is prepared for a client who has an ITIN and wage income, TaxWise will prompt the preparer to enter an SSN on the W-2 for an ITIN client. Overrides on the W-2 are no longer necessary.
CHAnges tO intAKe fOrms AnD site PrOCeDUres
Form 13614-C, Intake/Interview & Quality Review Sheet
Although the basic content of Form 13614-C is the same as last year, there are notable changes. • Overall, pages 3 and 4 of the form have been reorganized. Questions that are not directly related to tax
preparation have been moved to page 3. The questions regarding dependency and quality review have been moved to page 4.
• Two questions (language and disability) that are entered to the preparer use fields on the TaxWise Preparer Use Form have been moved to the top of page 3.
• A new question about adoption has been added, In 2011 did you (or your spouse) adopt a child? A “Yes” answer indicates that the client might be eligible for the adoption tax credit. Tax returns claiming the adoption tax credit will not be prepared at CEP sites. Suggest that the client go to a paid preparer.
As a reminder, always complete all sections of pages 1 – 3, as well as Section B on page 4 before quality review.
Remember to always discuss and resolve all issues where the client has answered “Unsure.”
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Form 13614-C (Rev. 10-2011)
Department of the Treasury – Internal Revenue Service
Intake/Interview & Quality Review Sheet OMB # 1545-1964
Section A. You should complete Pages 1-3 Thank you for allowing us to prepare your tax return. You are responsible for the information on your return soplease provide complete and accurate information to the certified tax preparer. If you have any questions pleaseask your preparer. You will need your: • Tax information such as Forms W-2, 1099, 1098.• Social security cards or ITIN letters for you and all persons on your tax return.• Proof of Identity (such as a valid drivers license or other government issued picture ID).
Part I. Your Personal Information 1. Your First Name M. I. Last Name Are you a U.S. Citizen?
Yes No 2. Spouse’s First Name M. I. Last Name Is spouse a U.S. Citizen?
Yes No3. Mailing Address Apt# City State Zip Code
4. Contact InformationPhone: Cell Phone: E-mail:
5. Your Date of Birth 6. Your Job Title Are you: 7. Legally Blind Yes No 8. Totally and Permanently Disabled Yes No
9. Spouse’s Date of Birth 10. Spouse’s Job Title Is Spouse: 11. Legally Blind Yes No 12. Totally and Permanently Disabled Yes No
13. Can anyone claim you or your spouse on their tax return? Yes No Unsure
Catalog Number 52121E Form 13614-C (Rev. 10-2011) 1
Part II. Marital Status and Household Information 1. As of December 31, 2011, were you?
SingleMarried: Did you live with your spouse during any part of the last six months of 2011? Yes No Divorced or Legally Separated: Date of final decree or separate maintenance agreement: Widowed: Year of spouse’s death:
2. List names below of everyone who lived in your home in 2011 (other than you or spouse). Also list anyone wholived outside of your home that you supported during 2011. If additional space is needed please check here andlist on page 3.
Name (first, last) Do not enter your name or
spouse’s name below.
(a)
Date of Birth (mm/dd/yy)
(b)
Relationship to you (e.g. daughter, son, mother, sister, none)
(c)
Numberof months
lived in your home
in 2011
(d)
US Citizen or resident of the US, Canada or Mexico in 2011
(yes/no)
(e)
Marital Statusas of
12/31/11(S/M)
(f)
Full-time
studentin 2011 (yes/no)
(g)
Receivedless than
$3700incomein 2011 (yes/no)
(h)
• Volunteers assisting with preparing your return are trained to provide high quality service and uphold the highest ethical standards.
To report unethical behavior to IRS, email us at [email protected] or call toll free 1-877-330-1205.•To check the status of your REFUND visit “Where’s My Refund?” on www.irs.gov
or call 1-800-829-1954 for assistance.
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Section A. Please complete – check Yes, No or Unsure to all questions below. Please ask if you need help.Part III. Income – In 2011, did you (or your spouse) receive: Yes No Unsure
1. Wages or Salary? (Form W-2) 2. Tip Income? 3. Scholarships? (Forms W-2, 1098-T) 4. Interest/Dividends from: checking/savings accounts, bonds, CDs, brokerage? (Forms 1099-INT,
1099-DIV)5. Refund of state/local income taxes? (Form 1099-G) 6. Alimony Income? 7. Self-Employment payments (such as cash received for services, small business)? (Form 1099-MISC) 8. Income (or loss) from the sale of Stocks, Bonds or Real Estate (including your home)?
(Forms 1099-S, 1099-B)9. Disability Income (such as payments from insurance or workers compensation)? (Forms 1099-R, W-2)
10. Distributions from Pensions, Annuities, and/or IRA? (Form 1099-R) 11. Unemployment Compensation? (Form 1099-G)12. Social Security or Railroad Retirement Benefits? (Forms SSA-1099, RRB-1099) 13. Income (or loss) from Rental Property? 14. Other Income: (gambling, lottery, prizes, awards, jury duty, etc.) Specify:
(Forms W-2 G, 1099-MISC)
Part IV. Expenses – In 2011 Did you (or your spouse) pay: Yes No Unsure
1. Alimony: If yes, do you have the recipient’s SSN? Yes No2. Contributions to a retirement account? IRA Roth IRA 401K Other 3. Educational expenses paid for yourself, spouse or dependents, such as tuitions, books, fees, etc.?
(Form 1098-T) 4. Unreimbursed employee business expenses (such as teacher supplies, uniforms or mileage)?5. Medical expenses (including health insurance premiums)?6. Home mortgage interest? (Form 1098)7. Real estate taxes for your home or personal property taxes for your vehicle? (Form 1098)8. Charitable contributions? 9. Child/dependent care expenses, such as day-care?
Part V. Life Events – In 2011 Did you (or your spouse): Yes No Unsure
1. Have a Health Savings Account? (Forms 5498-SA, 1099-A, W-2 with code W in Box 12)2. Have debt from a mortgage or credit card canceled/forgiven by a commercial lender? (Form 1099-C)3. Buy, sell or have a foreclosure of your home? (Form 1099-A) 4. Have Earned Income Credit (EIC) disallowed in a prior year? If yes, for which tax year?5. Purchase and install energy efficient home items (such as windows, furnace, insulation, etc.)?6. Live in an area that was affected by a natural disaster? If yes, where? 7. Receive the First Time Homebuyers Credit in 2008? 8. Pay any student loan interest? (Form 1098-E) 9. Make estimated tax payments or apply last year’s refund to your 2011 tax? If so how much?
10. Attend school as a full time student? (Form 1098-T) 11. Adopt a child?12. File a 2010 federal tax return containing a “capital loss carryover” on Form 1040 Schedule D?
Presidential Election Campaign Fund: (If you check a box, your tax or refund will not change.) Check here if you, or your spouse if filing jointly, want $3 to go to this fund You SpouseCatalog Number 52121E Form 13614-C (Rev. 10-2011)
2
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Additional Information and Questions related to the preparation of your return
Many free tax preparation sites operate by receiving grant money. The data from the following questions maybe used by this site to apply for these grants. Your answers will be used only for statistical purposes.
Other than English what language is spoken in the home?
Are you or a member of your household considered disabled? Yes No
If you are due a refund or have a balance due:
• Ask your preparer about Direct Deposit. It is the fastest, easiest way to receive your tax refund. An e-filed returnmeans a fast refund. Taxpayers who combine e-file and Direct Deposit can get their refunds in as few as 10 days.
• Ask your preparer about purchasing Series I U.S. Savings Bonds with part or all of your tax refund. Savings bonds are a safe and secure way to invest in the future. Purchase I Bonds for yourself or others in multiples of $50 andearn interest for up to 30 years.
If you are due a refund, would you like a direct deposit? Yes No
If you are due a refund, would you like information on how to purchase U.S. Savings Bonds? Yes No
If you are due a refund, would you like information on how to split your refund between accounts? Yes No
If you have a balance due, would you like to make a payment directly from your bank account? Yes No
Additional comments:
STOP HERE! Thank you for completing this form.
Please give this form to the certified volunteer preparer for use in preparing your return.
Your Civil Rights are Protected: It is the Internal Revenue Service’s mission to provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Under no circumstances will the Internal Revenue Service tolerate discrimination by its employees, grantees, contractors, and/orsubcontractors. NO ONE shall be excluded from participating in, be denied the benefits of, or be subject to discrimination because of race, color, sex, national origin, disability, reprisal, or age in programs or activities funded by the Department ofTreasury – Internal Revenue Service. Any person who believes that he/she has been discriminated against on the basis of race,color, sex, national origin, disability, reprisal or age in programs or activities receiving financial assistance (e.g. Low-Income Tax Clinics, Tax Counseling for the Elderly) from the Department of Treasury IRS, may submit a written complaint to: NationalHeadquarters;Office of Equity, Diversity & Inclusion; Internal Revenue Service; Attn: Director, Civil Rights Division (External Civil Rights Team); 1111 Constitution Ave., NW Room 2422; Washington, DC 20224.
Paperwork Reduction Act Notice The Paperwork Reduction Act requires that the IRS display an OMB control number on all public information requests. The OMB Control Number for this study is 1545-1964. Also, if you have any comments regarding the time estimates associated with this study or suggestion on making this process simpler, please write to the Internal Revenue Service, Tax Products Coordinating Committee, SE:W:CAR:MP:T:T:SP, 1111 Constitution Ave. NW, Washington, DC 20224.
Catalog Number 52121E Form 13614-C (Rev. 10-2011) 3
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Form 13614-C(Rev. 8- 2010)
Department of the Treasury – Internal Revenue Service
Intake/Interview & Quality Review Sheet OMB # 1545-1964
Section A. Page 1 and Page 2 to be completed by Taxpayer Thank you for allowing us to prepare your tax return. It is very important for you to provide the information on this form to help our certified volunteer preparer in completing your return. If you have any questions, please ask.You will need your:• Tax information such as Forms W-2, 1099, 1098. • Social security cards or ITIN letters for you and all persons on your tax return. • Proof of Identity (such as drivers license or other picture ID).
Part I. Your Personal Information1. Your First Name M. I. Last Name Are you a U.S. Citizen?
Yes No 2. Spouse’s First Name M. I. Last Name Is spouse a U.S. Citizen?
Yes No 3. Mailing Address Apt# City State Zip Code
4. Phone Primary: Other:
5. Your Date of Birth 6. Your Occupation 7. Are you Legally Blind 8. Totally and Permanently Disabled
Yes No Yes No
9. Spouse’s Date of Birth 10. Spouse’s Occupation 11. Is Spouse Legally Blind 12. Totally and Permanently Disabled
Yes No Yes No
13. Can your parents or someone else claim you or your spouse on their tax return? Yes No Unsure
Part II. Family and Dependent Information1. As of December 31, 2010, your marital status was:
Single Married: Did you live with your spouse during any part of the last six months of 2010? Yes No Divorced or Legally Separated: Date of final decree or separate maintenance agreement:Widowed: Year of spouse’s death:
2. List the name of everyone below who lived in your home and outside your home that you supported during 2010.If additional space is needed please check here and use page 4 for additional information.
Name (first, last)Do not enter your name or
Spouse’s name below.
(a)
Date of Birth (mm/dd/yy)
(b)
Relationship to you(e.g. son, mother,
sister)
(c)
Numberof months
lived inyour
home
(d)
US Citizen or resident of theUS, Canada
or Mexico(yes/no)
(e)
Single as of
12/31/10 (yes/no)
(f)
Full-time
student(yes/no)
(g)
Receivedmore than$3650 inincome (yes/no)
(h)
• Volunteers assisting with preparing your return are trained to provide high quality service and uphold the highest ethical standards.
• To report any concerns to IRS on site operating issues please call Toll Free 1-877-330-1205 or email us at [email protected].
Catalog Number 52121E Form 13614-C (Rev. 8-2010)1
Section B. For Certified Volunteer Preparer Completion
Remember: You are the link between the taxpayer’s information and a correct tax return. Verify the taxpayer’s information on pages 1, 2 & 3 is complete. All questions must be discussed with the taxpayer and all“Unsure” responses should be changed to “Yes” or “No”. Must be completed by Certified Volunteer only if persons are listed in Part II Question 2
Check if persons are listed in Part II Question 2
Yes No 1. Can anyone else claim any of the persons listed in Part II, Question 2, as a dependent on their return? If yes, which ones:
Yes No 2. Were any of the persons listed in Part II, Question 2, totally and permanently disabled? If yes, whichones:
Yes No 3. Did any of the persons listed in Part II, Question 2provide more than 50% of their own support? If yes,which ones:
Yes No N/A
4. Did the taxpayer provide more than half the support for any of the persons in Part II, Question 2? If yes,which ones:
Yes No 5. Did the taxpayer pay over half the cost of main-taining a home for any of the persons in Part II, Question 2? If yes, which ones:
RemindersUse Publication 4012, Volunteer Resource Guide and Publication 17, Your Federal Income Tax in making tax law determinations.
Section C. For Certified QualityReviewer Completion
Confirm each item after reviewingthe tax return and verifying that itreflects correct tax law applicationto the information provided by the taxpayer.
1. Sections A & B of this form are complete.
2. Taxpayer’s identity, address and phone numbers were verified.
3. Names, SSNs, ITINs or EINs, anddates of birth of taxpayer, spouse and dependents match the supporting documents.
4. Filing Status is correctly determined.
5. Personal and Dependency Exemptions are entered correctly on the return.
6. All information shown on source documents and noted in Section A, Part III is included on the tax return.
7. Any Adjustments to Income arecorrectly reported.
8. Standard, Additional or ItemizedDeductions are correct.
9. All credits are correctly reported.
10. Withholding shown on FormsW-2, 1099 and Estimated Tax Payments are correctly reported.
All tax law issues above havebeen addressed and necessarychanges have been made.
If direct deposit or debit was elected, checking/saving account and routing information match the supporting documents.
Correct SIDN and EFIN are shown on the return.
Additional Tax Preparer Notes:
Catalog Number 52121E Form 13614-C (Rev. 10-2011) 4
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supplemental intake sheet
The basic layout and content of CEP’s supplemental intake sheet is the same as last year.
Tax Information • A new “Yes or No” question about Illinois use tax has been added. o The form asks, Did you purchase items from other states, such as shopping online or from a catalog,
where you did not pay sales tax? o When the answer is “Yes,” it means that the preparer needs to enter Illinois Use Tax (sales tax) on
the client’s IL-1040. More information on the Illinois Use Tax will be provided later in this training. • The question about adopting a child has been removed since it was added to Form 13614-C.
Any “Yes” answer in the Tax Information section may have an effect on the tax return or require additional action by the preparer. For example a “yes” answer to the question about earned income not reported on a W-2 may mean that the client needs to file a Schedule C-EZ or Schedule C to report self-employment income.
general information
The answers to the questions in the general information section supply important information to the CEP database. Carefully enter the answers to all General Information questions in the Preparer Use Fields on the TaxWise Preparer Use Form.
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This Section For Volunteer Use Only
Supplemental Intake Sheet
Tax Information We need this information so we can prepare your tax return correctly.
General Information
Your Name:
During 2011…
How many jobs did you have? How many jobs did your spouse have?
Are you (or your spouse) in the United States on an F, M, J, or Q Visa? yes no
Did you earn any income that was not reported on a W-2? yes no
Were any of your debts or loans forgiven? yes no
Did you or anyone in your family attend college or vocational school? yes no
Did you receive a letter from the IRS? yes no
Did you purchase items from other states, such as shopping online or yes nofrom a catalog, where you did not pay sales tax?
Is anyone in your household interested in applying for a FAFSA (student financial aid) yes noto help pay for college?
1) What is your ethnicity? AA (African American) AS (Asian/Pacific Islander) CA (Caucasian)
LA (Latino) NA (Native American) OT (Other)
2) During 2011, were you enrolled at any of the City Colleges of Chicago?
1. Yes 2. No
3) As of today, about how much do you have in your savings (including retirement savings such as your pension, 401(k), IRA)?
1. None 2. less than $1,000 3. $1,000 to $5,000 4. $5,001 - $10,000
5. More than $10,000
4) What is your gender? 1. Married couple filing jointly 2. Male 3. Female 4. Transgender
5) Are you self-employed in any of these fields?
1. Yes- I’m a child care provider
2. Yes- I’m a taxi cab driver
3. Yes- I’m a home care aide
4. Yes- I’m a hairdresser
5. Yes- I’m self-employed doing other work
6. No, I’m not self-employed
6) What is the highest level of education you have completed?
1. College degree 2. Some college 3. High School/GED 4. Some High School
5. No High School
7) Other than English what language is spoken in your home?
1. None 2. Spanish 3. Chinese 4. Korean
5. French 6. Italian 7. Vietnamese 8. Japanese
9. Polish 10. Russian 11. Other
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Supplemental Intake Sheet
General Information
Center for Economic Progress // Supplemental Intake Sheet // Filing Season 2012 V.1
8) Are you or a member of your household considered disabled?
1. Yes 2. No
9) How much do you expect your total tax refund will be today (including credits like the EITC)?
(If you expect no refund, write “0”)
10) If a family of 5 people receives a check for $200, and they each split the money evenly, how much will each person get?
1. $20 2. $30 3. $40 4. $50
5. Other
11) Let’s say you have $200 in a savings account. The account earns 10% interest per year. How much would
you have in the account at the end of 2 years if you didn’t spend any of it?
1. $200 2. $220 3. $240 4. $242
5. Other
12) Imagine that you were going to receive a $95 refund but you were told that the check wouldn’t arrive for 6
months. How much would you be willing to pay to instead receive the check for $95 right now?
1. I would pay up to $10. 2. I would pay up to $20. 3. I would pay up to $30.
4. I would pay up to $40. 5. I wouldn’t pay anything.
13) When you think about saving for the future, say 10 years from now, do you think you will be mostly the
same person as now, or will you be a very different person then?
1. Exactly the same 2. Mostly the same 3.A little different
4. Very different
US Savings Bonds are a safe, easy and trusted way to save for your future. You can choose to receive a part of your tax refund today, from $50 to $5,000, as a US Savings Bond. Savings bonds are guaranteed by the United States Government so when you are ready to cash in your bond, you will receive all the money you saved, plus the interest you’ve earned. With this interest, your savings bond will grow in value over time.
Would you like to purchase a US Savings Bond with a part of your refund? 1. Yes 2. No
14) Indicate how much in US Savings Bonds you would like to purchase with your refund (multiples of $50).
1. $50 2. $100 3. $250 4. Other
15) Please enter the intake sheet code listed here: A
Financial Decisions This information will help us to better understand how you think about your finances.
Savings Information
Volunteer Use Only
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financial services Procedures
One of the main changes to site procedures is a realignment of volunteer roles. • The Money Management Assistant position that was utilized during the 2011 filing season has been
discontinued. • Tax preparation volunteers will discuss financial services and savings options with clients. This includes: o encouraging direct deposit of tax refunds; o explaining savings options; and, o referring appropriate clients for assistance preparing a FAFSA to obtain financial aid for post-secondary
education
Promote Direct Deposit • no paper check • increased security • no check-cashing fees
Clients who do not have a bank account can be referred to the site’s financial partner and immediately open an account. If a client does not want a bank account, the client can still direct deposit the refund by obtaining a prepaid debit card. Specific instructions on how volunteer preparers will enroll clients for debit cards will be provided when available.
savings Options
• The preparer can offer to have the refund deposited directly into the client’s savings account or refer the client to a financial partner on site.
• Clients can buy one or more US Savings Bonds for themselves of someone else. • Form 8888, Allocation of Refund, can be used to directly deposit the client’s refund into more than one account.
That way the client can have some of the money right away and save some.
fAfsA Assistance
The Supplemental Intake Sheet asks, Are you or anyone in your household interested in going to college? A “Yes” answer indicates that the client might benefit from FAFSA assistance to apply for funding for post-secondary education. Refer the client to an on-site FAFSA volunteer or refer the client to CEP’s financial services department, 312-630-0248, for further assistance.
Other Changes to CeP site Procedures
There are three more changes to site procedures regarding:1. ITIN applications2. donations from clients3. obtaining client signatures
1. When a client needs to apply for an ITIN (individual taxpayer identification number), the tax preparer at the site will refer the client to a CEP ITIN event to prepare the return and submit the ITIN application. • A client who needs to file a tax return and does not have – and cannot get – a social security number should
apply for an ITIN. • A client who wants to claim someone who does not have – and cannot get – a social security number, should
apply for an ITIN to claim that person. • Make sure that the client leaves with an ITIN flyer or other information about ITIN events. Go to www.
economicprogress.org or see your site manager to obtain information about ITIN events.
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2. Clients will be given the opportunity to make a monetary donation to the Center for Economic Progress by sending a text message from a cell phone or taking a paper envelope to mail a donation. • Requesting a donation is not part of the tax preparation process. • Specific donation instructions will be provided during the sorting process. The procedures are covered in the You
Can Do It handbook.
3. The signed Form 8879, IRS efile Signature Authorization, and Form IL-8453, Illinois Individual Income Tax Electronic Filing Declaration, will no longer be retained in the client folders. Specific procedures are included in the You Can Do It handbook. Here’s a summary. • Form 8879 will be printed with the return. • The client(s) will sign the forms during the sorting process. • Clients will keep the signed forms with their tax records. • A special checkbox has been added to the client folder. The volunteer that sorts the return will check this box to
indicate that the forms were signed.
tAX LAW reVieW
There were three rather last-minute changes to 2010 tax law that also apply to 2011: Illinois Use Tax, federal tax benefits related to education, and sales tax deduction on Schedule A for taxpayers who itemize. Because they were not fully covered in the last year’s regular volunteer training, the information is provided here for a review.
illinois Use tax
• Illinois use tax is unpaid sales tax on items purchased for use in Illinois. When a seller does not collect the sales tax, the purchaser pays it directly to the state of Illinois. This generally happens when items are purchased on the Internet or from mail order catalogues. The process for paying this tax changed, beginning with tax year 2010.
• The general sales tax rate is 6.25%. • The use tax is reported on IL-1040, page 2. • When the total sales tax due is less than $600, it can be paid with the IL-1040. (For sales tax to exceed $600,
purchases would need to be more than $9,600.) • When a taxpayer owes more than $600, it is reported on a separate tax return, Form ST-44. • The tax can be determined in either of two ways. See the IL-1040 instructions to access these tools. 1. Use tax Worksheet – Enter the total cost of items and complete the worksheet to determine the amount of
use tax that is due. 2. Use tax table – Determine an estimate of the tax due based on the client’s income. • All taxpayers who file an IL-1040 are obligated to complete the section concerning Illinois use tax. If a taxpayer
does not owe this tax, enter zero.
The Use Tax line on Form Il-1040 is a required red field on TaxWise. The following procedures will be used at tax sites. • Explain to the client that Illinois is using income tax returns to collect sales tax that taxpayers may owe. They
are collecting sales tax that was not collected at the time of purchase. • Explain the results to the client. Suggest that the client keep records of these purchases in the future.
There is a new question on the Supplemental Intake Sheet that will help get the conversation started, Did you purchase items from other states, such as shopping online or from a catalogue, where you did not pay sales tax?
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Here are some sample follow-up conversations.
Preparer: You forgot to answer the question about shopping online or buy things from catalogs. Client: Right. I prefer to shop in stores. Preparer enters zero on the Use Tax line.
Preparer: You indicated that you shop online or buy things from catalogs. Client: Yes, I love to shop online. Preparer: About how much did you spend on items where they didn’t charge Illinois sales tax? Client: I have no idea. Preparer: There’s a table we can use to figure the approximate amounts. Preparer determines the tax using the Use Tax Table and enters the amount on the Use Tax line.
Preparer: You forgot to answer the question about shopping online or buy things from catalogs. Client: I don’t usually shop online, but I did buy a laptop online for the kids. Preparer: About how much did you spend on the laptop? Client: It cost $950. Preparer: Did they charge sales tax? Client: No. Preparer determines the tax by completing the Use Tax Worksheet and enters the result on the Use Tax line.
educator expense Adjustment
The educator expense adjustment is available to school teachers and is based on out-of-pocket expenses. • The adjustment is limited to $250 per educator. • Eligible educators include: teachers, instructors, counselors, principals, or aides for grades K – 12. • The educator must have worked at least 900 hours during the school year. • Qualified expenses must be ordinary and necessary expenses. Examples of qualifying expenses include: books,
supplies, equipment, computers and software, and general materials. • Expenses for home schooling do not qualify. • On TaxWise, link from Form 1040, line 23, to Worksheet 2.
tuition and fees Deduction
Clients who paid tuition and fees for post-secondary education may qualify for the tuition and fees deduction. • The education must be for the client, the client’s spouse, or any of the client’s dependents who attended
college during the tax year. • Expenses cannot be used for the adjustment if they are also used to claim another education benefit, such as
an education credit, for the same student. • Expenses that qualify for the adjustment include required tuition and fees paid to the educational institution by
check, credit card, or with student loans. • The adjustment is limited to $4,000 each tax year. • Taxpayers who claim this adjustment must complete Form 8917, Tuition and Fees Deduction. Link to Form
8917 from Form 1040, line 34. This form must be filed with the tax return. • The tuition and fees adjustment is not available to taxpayers who file as married filing separately or who can be
claimed as a dependent.
Education expenses can only be used to claim one tax benefit. The primary challenge is determining whether the client will be better off using the education expense as an adjustment or as an education credit. The effects on both federal and state taxes must be considered.
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full-time undergraduate: American opportunity credit will generally be more beneficial because it is a refundable credit. Summary of the main features of the American opportunity credit.
➢ • The credit can be claimed for expenses paid for any of the first four years of post-secondary education. ➢ • The maximum credit is $2,500. ➢ • 40% of the credit (up to $1,000) is refundable. ➢ • Qualified educational expenses include: o tuition o fees o books and other required course materials ➢ • A qualified student is one who is enrolled in any of the four years of an undergraduate program leading to a
degree or certificate.➢ • The student must be taking at least one half of the full-time course load. ➢ • Parents with dependents who are eligible students may take the credit. ➢ • The American opportunity credit is claimed in Part I of Form 8863, Education Credits.
Less than half time student, graduate student, and/or not pursuing a degree: Either lifetime learning credit or tuition and fees deduction might be more beneficial, depending on income level and other tax return factors. The safest course is to prepare the return both ways and assess the overall tax benefit. Use the “What if?” mode that can be found on the TaxWise File menu.
1.Use the education expense as a tuition and fees adjustment; 2.Note the amount of federal and state refunds (or balance due); 3.Use the education expense to take the education credit; 4.Note the amount of federal and state refunds (or balance due); and then, 5.Compare the two results to determine which is better, overall, for the client.
Refer to the “Benefits Related to Education” chart in Chapter 22 (also in the You Can Do It handbook) to see a side-by side summary of the benefits related to post-secondary education.
sales tax Deduction
The sales tax deduction is available only to taxpayers who itemize deductions (Schedule A) instead of taking the standard deduction. In general, the clients who itemize are homeowners. For most tax years, only 5% of CEP clients itemized deductions.
One deduction available to itemizers is state and local income taxes paid during the tax year. Taxpayers who itemize can deduct: state and local income taxes paid, or sales taxes paid.
To properly complete Schedule A, the preparer must determine both the state and local income tax amounts and the sales tax amount, to see which amount is greater.state and local income tax➢ • TaxWise will fill this in automatically based on the state and local income taxes withheld during 2011, as
entered on the W-2s and 1099s. ➢ • The preparer should look at the 2010 state return, if available, to see if there was a balance due that was paid
in 2011. This can be added to the withheld amount.sales tax deduction ➢ • Determine the sales tax amount by using the IRS Sales Tax Calculator. Go to www.irs.gov and search for
“sales tax deduction.” ➢ • If Internet is not available, link from Schedule A, to the Sales Tax Worksheet to determine the sales tax
deduction.
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QUiz – WHAt’s neW?
This quiz covers new issues for tax year 2011, as well as providing a review of selected basic issues. Use volunteer training materials, such as the “All Those Kids” chart and IRS resources, such as Publications 17 and 4012, to answer the following questions.
1. A refundable credit increases a client’s refund, even if that client pays no income tax. a. True b. False
2. A parent must support his or her child in order to claim that child for the EITC. a. True b. False
3. Which of the following credits has expired? Select all that apply. a. EITC b. Child tax credit c. Additional child tax credit d. Making work pay credit
4. A single mom with two children, ages 7 and 9, worked full time and earned $50,000. She paid $5,000 for after-school care for the children so that she could finish her work day. How does this expense affect her tax return?
a. She can claim the additional child tax credit. b. The cost increases her EITC. c. She can file Form 2441 and claim the child care credit. d. This has no effect on her tax return.
5. A married couple bought their first home in February 2010 and they claimed and received the $8,000 first-time homebuyer credit. They still own and live in the home. How does this get reported on their 2011 tax return?
a. Nothing gets reported on their 2011 tax return because they don’t have to repay the credit. b. Nothing gets reported on their 2011 tax return because they don’t have to repay the credit until
they file their 2012 return. c. They need to make a credit repayment, using Form 5405. d. They need to make a credit repayment, by entering the payment amount on Form 1040, line
59b, with their 2011 tax return.
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6. The following people lived together in the U.S. for all of 2011. They all have SSNs. Tom and Teresa are married. They both worked. Tom earned $12,000 and Teresa earned $14,000. They have three children: Tammy, age 18, Teddy, age 14, and Tory, age 10. All three kids were full time students and none of them had any income. Tom and Teresa are going to file a joint return.
For each of the tax benefits listed below, list the names of the children who are Tom and Teresa
are eligible to claim.➢ Dependents? ➢ Qualifying child for EITC? ➢ Qualifying child for child tax credit? ➢ Qualifying child for child care credit?
7. Franklin and Mona, both age 26, lived together in the U.S., with Mona’s sons, Bobby, age 3, and Billy, age 4, for all of 2011. They all have SSNs. Franklin and Mona are not married and Franklin is not the father of Bobby or Billy. Franklin earned $39,000 and provided most of the support for the family. Mona earned $11,000 in 2011. This was their only income.
Who is Franklin eligible to claim? Dependents? ➢ Qualifying child for EITC? ➢ Qualifying child for child tax credit? ➢ Qualifying child for child care credit? ➢ Qualifying person for head of household?
8. Julia, age 38, Grandma Grace (Julia’s mother), and Rory, Julia’s 16-year-old daughter, are all single and lived together in the U.S. for all of 2011. They all have SSNs. Grandma Grace worked part time and earned $8,000 and received $14,000 in social security retirement. Julia worked full time and earned $32,000. Rory had no income.
Who is Grandma Grace eligible to claim?➢ Dependents? ➢ Qualifying child for EITC? ➢ Qualifying child for child tax credit? ➢ Qualifying child for child care credit?
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9. Jonathon lived in the U. S. for all of 2010, is single and has no children. He earned $25,000 in 2010, his only income. In 2008, his old college roommate, Tony, lost his job and moved in with Jonathon. Tony has not been able to find a job and he had no income in 2011. Jonathon feels sorry for Tony and let him live with him all year. Jonathon provided all of the financial support for both himself and Tony. Tony ate chips, drank beer and watched TV. Jonathon and Tony are both 28 years old. They both have SSNs.
Who is Jonathon eligible to claim?➢ Dependents? ➢ Qualifying child for EITC? ➢ Qualifying child for child tax credit? ➢ Qualifying child for child care credit? ➢ Qualifying person for head of household?
10. Savings bonds may be purchased as a gift for a family member by a client using their tax refund. a. True b. False
11. In order to directly deposit a tax refund the client must file electronically. a. True b. False
12. The process of enrolling clients in the prepaid debit card is handled by the: a. site manager b. CEP’s financial services department c. site’s financial partner d. tax preparer
13. You notice that a client answered “Yes” to the question, “Did you earn any income that was not reported on a W-2?” When you ask if he is self-employed, he says, “No, I just get paid a little cash for odd jobs so it doesn’t affect my taxes.” What should you do?
a. Explain that earned income not reported on a W-2 is self-employment and must be reported – even if it is cash.
b. Change the answer on the intake sheet to “No.” c. Tell the client to get a Form 1099-MISC next year so the income can be reported on the tax
return. d. Refuse to prepare a return for this client.
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14. Your client is a single mom with a dependent son who goes to college full time. He is a sophmore going for his bachelors degree in biochemistry. Form 1098-T, Tuition Statement, shows that all tuition and fees were covered by a scholarship. She says that her only expenses for his education was paying $787 for his textbooks. What should you do?
a. Enter the $787 on Form 8863 to claim the American Opportunity Credit. b. Enter the $787 on Form 8917 to claim the tuition and fees deduction. c. C. Use the TaxWise “What If” mode to determine which is a better way to use the $787 – as a
credit or as a deduction. d. Since all the tuition and fees were paid by the scholarship, the client does not qualify for any
tax education benefit.
15. When you ask the Illinois Use Tax question, your client says that she shops online frequently, but she has no details because she didn’t know that the tax site would be asking her about the sales tax. What should you do?
a. Send her home to reconstruct her records to determine the amount spent on purchases and the amount of sales tax paid.
b. Tell her that next year she should bring printouts for all online purchases. c. Suggest that she use the Use Tax table to determine an estimate of the tax due based on her
income. d. Skip the Use Tax question.
16. What item is not the responsibility of volunteer tax preparers? a. Prepare tax returns for clients who have an ITIN. b. Request donations from clients c. Help a client obtain a prepaid debit card d. Ensure that intake forms are thoroughly and accurately completed.
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AnsWers tO QUiz QUestiOns
This quiz covers new issues for tax year 2011, as well as providing a review of selected basic issues. Use volunteer training materials, such as the “All Those Kids” chart, and IRS resources, such as Publications 17 and 4012, to answer the following questions.
1. A refundable credit increases a client’s refund, even if that client pays no income tax. a. true Any credit amount not used to offset tax is added to the refund.
b. False
2. A parent must support his or her child in order to claim that child for the EITC. a. True b. false There is no support requirement for EITC.
3. Which of the following credits has expired? Select all that apply. a. EITC b. Child tax credit c. Additional child tax credit d. making work pay credit
4. A single mom with two children, ages 7 and 9, worked full time and earned $50,000. She paid $5,000 for after-school care for the children so that she could finish her work day. How does this expense affect her tax return?
a. She can claim the additional child tax credit. b. The cost increases her EITC. c. she can file form 2441 and claim the child care credit. After school care qualifies for the
child care credit and both children are under age 13.
d. This has no effect on her tax return.
5. 5. A married couple bought their first home in February 2010 and they claimed and received the $8,000 first-time homebuyer credit. They still own and live in the home. How does this get reported on their 2011 tax return?
a. nothing gets reported on their 2011 tax return because they don’t have to repay the credit.
b. Nothing gets reported on their 2011 tax return because they don’t have to repay the credit until they file their 2012 return.
c. They need to make a credit repayment, using Form 5405. d. They need to make a credit repayment, by entering the payment amount on Form 1040, line 59b,
with their 2011 tax return.
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6. The following people lived together in the U.S. for all of 2011. They all have SSNs. Tom and Teresa are married. They both worked. Tom earned $12,000 and Teresa earned $14,000. They have three children: Tammy, age 18, Teddy, age 14, and Tory, age 10. All three kids were full time students and none of them had any income. Tom and Teresa are going to file a joint return.
For each of the tax benefits listed below, list the names of the children who are Tom and Teresa are
eligible to claim.➢ Dependents? tammy, teddy, and tory
➢ Qualifying child for EITC? tammy, teddy, and tory
➢ Qualifying child for child tax credit? teddy and tory
➢ Qualifying child for child care credit? tory
7. Franklin and Mona, both age 26, lived together in the U.S., with Mona’s sons, Bobby, age 3, and Billy, age 4, for all of 2011. They all have SSNs. Franklin and Mona are not married and Franklin is not the father of Bobby or Billy. Franklin earned $39,000 and provided most of the support for the family. Mona earned $11,000 in 2011. This was their only income.
Who is Franklin eligible to claim? ➢ Dependents? no one. Bobby and Billy are not his qualifying children because they are not
related to him. He cannot claim then as qualifying relatives because they are the qualifying
children of another taxpayer, Mona. He cannot claim Mona as a qualifying relative because
her income is over $3,650.
➢ Qualifying child for EITC? no one. Bobby and Billy are not his qualifying children because they
are not related to him.
➢ Qualifying child for child tax credit? no one. Bobby and Billy are not his qualifying children
because they are not related to him. ➢ Qualifying child for child care credit? no one. Bobby and Billy are not his qualifying children
because they are not related to him. ➢ Qualifying person for head of household? no one. He must file as single because he is not
providing a home to someone who is related to him.
8. Julia, age 38, Grandma Grace (Julia’s mother), and Rory, Julia’s 16-year-old daughter, are all single and lived together in the U.S. for all of 2011. They all have SSNs. Grandma Grace worked part time and earned $8,000 and received $14,000 in social security retirement. Julia worked full time and earned $32,000. Rory had no income.
Who is Grandma Grace eligible to claim?➢ Dependents? no one. She cannot claim Rory because Rory is the qualifying child of her own
mother, Julia, and Julia’s income is more than Grace’s.
➢ Qualifying child for EITC? no one. She cannot claim Rory because Rory is the qualifying child of her own mother, Julia, and Julia’s income is more than Grace’s.
➢ Qualifying child for child tax credit? no one. She cannot claim Rory because Rory is the qualifying
child of her own mother, Julia, and Julia’s income is more than Grace’s.
➢ Qualifying child for child care credit? no one. She cannot claim Rory because Rory is the
qualifying child of her own mother, Julia, and Julia’s income is more than Grace’s. Also, Rory
is not under age 13.
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9. Jonathon lived in the U. S. for all of 2011, is single and has no children. He earned $25,000 in 2011, his only income. In 2008, his old college roommate, Tony, lost his job and moved in with Jonathon. Tony has not been able to find a job and he had no income in 2011. Jonathon feels sorry for Tony and let him live with him all year. Jonathon provided all of the financial support for both himself and Tony. Tony ate chips, drank beer and watched TV. Jonathon and Tony are both 28 years old. They both have SSNs.
Who is Jonathon eligible to claim?➢ Dependents? tony He qualifies as Jonathon’s dependent under the rules for qualifying
relative. Although Tony is not related to Jonathon he did live with him all year and he
passes all the other tests.
➢ Qualifying child for EITC? no one. Tony is not a child and is not related to Jonathon.
➢ Qualifying child for child tax credit? no one.
➢ Qualifying child for child care credit? no one.
➢ Qualifying person for head of household? no one. Even though he provided a home for
dependent Tony, Tony is not related to Jonathon.
10. Savings bonds may be purchased as a gift for a family member by a client using their tax refund. a. true Beginning with tax year 2010, a taxpayer can use Form 8888 to use the refund to
purchase a bond for someone else.
b. False
11. In order to directly deposit a tax refund the client must file electronically. a. True b. false A taxpayer who files a paper return using regular mail can choose direct deposit.
The two processes are independent.
12. The process of enrolling clients in the prepaid debit card is handled by the: a. site manager b. CEP’s financial services department c. site’s financial partner d. tax preparer
13. You notice that a client answered “Yes” to the question, “Did you earn any income that was not reported on a W-2?” When you ask if he is self-employed, he says, “No, I just get paid a little cash for odd jobs so it doesn’t affect my taxes.” What should you do?
a. explain that earned income not reported on a W-2 is self-employment and must be
reported – even if it is cash.
b. Change the answer on the intake sheet to “No.” c. Tell the client to get a Form 1099-MISC next year so the income can be reported on the tax
return. d. Refuse to prepare a return for this client.
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14. Your client is a single mom with a dependent son who goes to college full time. He is a sophmore going for his bachelors degree in biochemistry. Form 1098-T, Tuition Statement, shows that all tuition and fees were covered by a scholarship. She says that her only expenses for his education was paying $787 for his textbooks. What should you do?
a. enter the $787 on form 8863 to claim the American Opportunity Credit. The cost of
books does not qualify for other education benefits; it can only be used for the American
opportunity credit.
b. Enter the $787 on Form 8917 to claim the tuition and fees deduction. c. Use the TaxWise “What If” mode to determine which is a better way to use the $787 – as a
credit or as a deduction. d. Since all the tuition and fees were paid by the scholarship, the client does not qualify for any
tax education benefit.
15. When you ask the Illinois Use Tax question, your client says that she shops online frequently, but she has no details because she didn’t know that the tax site would be asking her about the sales tax. What should you do?
a. Send her home to reconstruct her records to determine the amount spent on purchases and the amount of sales tax paid.
b. Tell her that next year she should bring printouts for all online purchases. c. suggest that she use the Use tax table to determine an estimate of the tax due based on
her income.
d. Skip the Use Tax question.
16. What item is not the responsibility of volunteer tax preparers? a. Prepare tax returns for clients who have an ITIN. b. request donations from clients The donation request happens after tax preparation and
all other services have been completed.
c. Help a client obtain a prepaid debit card d. Ensure that intake forms are thoroughly and accurately completed.
687 E. Linton Ave.62703