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Accounting Aid Society 2006 Tax Season Michigan Tax Training

Accounting Aid Society 2006 Tax Season Michigan Tax Training. January 2006. Overview. Our training is designed to provide you with the skills to prepare taxes for the clients of Accounting Aid Society.

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Accounting Aid Society 2006 Tax Season Michigan Tax Training

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  1. Accounting Aid Society2006 Tax SeasonMichigan Tax Training January 2006

  2. Overview • Our training is designed to provide you with the skills to prepare taxes for the clients of Accounting Aid Society. • Our clients are individuals with household income less than $20,000, or families making less than $38,000. • Check with the state publications and/or your tax supervisor whenever you encounter something unusual.

  3. Quality • Our number one priority is quality! • We are not going to do complicated returns which exceed our training or capability. • Don’t guess if you are not sure how to handle a particular situation. • Consult the instructions and/or your tax supervisor for help. • All returns should be reviewed by a tax supervisor.

  4. What’s New for Tax Year 2005? • New tax rate amount: 3.90% • New exemption amounts: $3,200/$2,000. • Car donation credit (nonrefundable). • Donation must be to a charity (other than a church) • Car is to be provided to an individual to allow them to work. • Donor must have a “Donor Tax Credit Certificate for Donated Vehicle” form from the charity. • Limitation: smaller of 50% of the donation or $100/$200(MFJ)

  5. Who Must File? • Many low-income people do not have to file federal returns, but may need to file state or city returns. • People who file federal returns should generally file state returns as well. • Some clients should file to recover withholding or collect refundable credits, even if they are not required to file by the gross income guidelines. • People should file if their Adjusted Gross Income (AGI) exceeds their exemption allowance.

  6. Starting the Forms • TaxWise carries most information from the federal return directly to the Michigan return. • You’ll need to add the school district code. School district codes are listed in a table at the back of the MI-1040 instructions booklet. TaxWise: Press F1 when you are on Form MI-1040 and select MI Codes for a list of school district codes.

  7. TaxWise Help – MI Codes

  8. State Campaign Fund • This is similar to the Federal Election Campaign Fund. • $3 can go to the fund if the taxpayer (or spouse) checks “Yes”. • The taxpayer’s tax or refund will not change by checking “Yes.” • TaxWise does not assume that the taxpayer will make the same choice on Federal and State forms.

  9. Mini-Quiz 1 • What is the School District Code for Detroit? • What is the School District Code for Warren Consolidated?

  10. Mini-Quiz 1 – Answer • The School District Code for Detroit is 82010. • The School District Code for Warren Consolidated is 50230. TaxWise Hint: Pressing F1 when on Form MI-1040 and selecting MI Codes will bring up a list of School District Codes.

  11. Filing Status • Michigan has three filing statuses: Single, Married Filing Jointly, and Married Filing Separately. • If you filed your federal return as Head of Household or Qualifying Widow(er), you must file the Michigan return as Single.

  12. Residency • Most of our clients are full-time Michigan residents. • Part-year and non-residents must complete Schedule NR which apportions income and adjustments between Michigan and other states. • Reciprocal States: Residents of Illinois, Indiana, Kentucky, Ohio, Minnesota and Wisconsin do not have to pay Michigan income tax on salaries and wages earned in Michigan. Michigan residents pay only Michigan income tax on their salaries and wages earned in any of these states. See the instructions for further details. TaxWise: Full-year residency of MI will be defaulted on the Main Information Sheet. This section should be changed by the preparer if taxpayer is a part-year or non-resident.

  13. TaxWise State Designation

  14. Exemptions and Dependents • The Michigan definition of a dependent is identical to that of the federal law. Personal and dependency exemptions carry over from the federal return in TaxWise. • The personal exemption amount is $3,200 for 2005. • If someone else claims the taxpayer, the personal exemption maximum is $1,500.

  15. Special Exemptions • An extra $2,000 for taxpayers and dependents age 65 or older as of 12/31/2005. • An extra $2,000 for taxpayers and dependents who are deaf, blind, hemiplegic, paraplegic, quadriplegic, or totally and permanently disabled. • If you claim a 65 or older exemption, you may not claim an exemption for totally and permanently disabled. • An extra $600 for dependent children ages 18 and under as of 12/31/2005. • An extra $2,000 if unemployment compensation is 50% or more of your Adjusted Gross Income (AGI).

  16. Special Exemptions – Deaf, Blind or Disabled • See the MI-1040 instructions for the criteria of meeting the definitions for the deaf and blind exemptions. Totally and permanently disabled means disabled as defined under Social Security Guidelines. TaxWise: In the Taxpayer Information section of the Main Information Sheet there are fields to check for Blind, and Totally and Permanently Disabled. • The exemption for Blind will carry forward to the federal, state and city returns. • The exemption for Disabled will carry forward to the city return, and prompt red fields on the MI-1040 and MI-1040CR. It is important to capture the disability exemption on the return – not doing so will reduce the refund or increase the tax due for clients who do qualify for this special exemption.

  17. TaxWise – Main Information Sheet Blind/Disabled

  18. TaxWiseMI-1040 Exemptions

  19. TaxWiseMI-1040CR Exemptions

  20. Mini-Quiz 2 • John and Mary are married. They have two dependent children: Ralph, aged 22, and Sara, aged 17. John is 66 and totally and permanently disabled. Mary (52) works at a pharmacy. What are their total exemptions?

  21. Mini-Quiz 2 – Answer Their total exemptions, personal and special, is 6: • Four personal exemptions at $3,200 each equals $12,800. • Two special exemptions: • A special exemption for John of $2,000 because he is 65 or older. (Note: Because he is 65 or older, he cannot also get the special exemption for totally and permanently disabled.) • A special exemption of $600 because their daughter Sara is 18 or under as of 12/31/05. • Their total exemption allowance is $15,400, which is subtracted from their AGI.

  22. Income • Michigan starts with the federal Adjusted Gross Income (AGI) and then makes several Additions and Subtractions to AGI to determine Taxable Income. • Additions and Subtractions are shown on MI-1040 Schedule 1. TaxWise: Adjusted Gross Income and most Additions and Subtractions to income carry over from the federal return.

  23. Additions to Income • Interest from municipal bonds issued outside of Michigan. This is rare for our clients. • Self-employed taxpayers subtract one-half of their self-employment tax on the federal 1040. This is added back into income for Michigan. • Other additions are not common to our clients – see the MI-1040 instructions for the complete list.

  24. TaxWise – MI-1040 Schedule 1 Additions to Income

  25. Subtractions from Income • Income from U.S. Government bonds. • Military pay. • Pension benefits up to certain limits. • Interest, dividends, and capital gains for senior citizens up to certain limits. • Social Security benefits which were taxable on the federal return. • Miscellaneous subtractions: Bingo winnings (from a State of Michigan regulated game), political contributions (deduction is limited), and the amount used to determine the credit for elderly or totally and permanently disabled from the federal return (TaxWise will calculate). • See the MI-1040 instructions for a complete list of subtractions.

  26. TaxWise – MI-1040 Schedule 1 Subtractions from Income

  27. Mini-Quiz 3 • Which of the following are taxable in Michigan? • Wages • Unemployment compensation • Gifts received • Series E Bond Interest • Bingo Winnings • Casino Winnings • Lottery Winnings • Self-employment income

  28. Mini-Quiz 3 – Answer • Wages are taxable • Unemployment is taxable • Gifts received are not taxable • Series E Bond Interest is not taxable. • Bingo Winnings are not taxable, if won in a state regulated game. • Casino Winnings are taxable. • Lottery Winnings are taxable. • Self-employment income is taxable.

  29. Taxable Income and Tax Rate • Adjusted Gross Income (AGI) plus Additions and less Subtractions to AGI determine income subject to tax. • Exemption allowance is subtracted from this to determine Taxable Income. • The 2005 tax rate is 3.90%.

  30. Nonrefundable Credits Some of the Michigan nonrefundable credits include: • Income tax paid to Michigan cities. The MI-1040 instructions has a worksheet to calculate this. See the next slides for TaxWise instruction. • Contributions to certain community foundations, homeless shelters, food banks and other public institutions. • College Tuition and Fees Credit: Only tuition paid to certain schools qualifies for this credit -- see the list on the back of Schedule CT which is located in the MI-1040 instruction booklet. • Vehicle Donation Credit (new in 2005): Credit is received if donated vehicle was subsequently transferred to an individual for employment purposes.

  31. Nonrefundable CreditsIncome Tax Paid to Mich. Cities • TaxWise will calculate the credit from city withholding information on the W-2. TaxWise: There are fields on Page 2 of the MI-1040 to enter city tax paid or city refund received during 2005.

  32. TaxWise – MI-1040 Page 2Credit for Income Tax Paid to MI Cities

  33. Use Tax • Taxpayers who purchase items from out of state sellers or from catalogues or the internet must pay a 6% use tax if sales tax of that amount was not collected by the seller. • This is entered on Line 31 on Page 2 of Form MI-1040. • Note: Due to our clients’ low income this is almost never an issue, but should be part of the interview process.

  34. Refundable Credits and Payments • The most common of these payments and credits for our clients is: • Michigan Tax Withheld (from Schedule W) • Homestead Property Tax Credit (from Form MI-1040CR or Form MI-1040CR-2)

  35. TaxWise – MI-1040 Page 2 Refundable Credits and Payments

  36. Schedule W – Michigan Withholding Tax Schedule • If there is state income tax withholding on Form W-2, 1099-R, 1099-G, and/or 1099-MISC, a Schedule W must be completed and attached to the return. W-2 and 1099 forms are not attached to paper copies of MI-1040 returns. TaxWise: If there is Michigan withholding on a Form 1099, Sch. W will remain red until the bottom of the schedule is completed by checking the appropriate column of R, G, or M – indicating if it was a Form 1099-R, 1099-G, or 1099-MISC. Once the appropriate column is marked, TaxWise will fill-in the rest of the information.

  37. TaxWise – Michigan Schedule W 1099 Withholding

  38. Homestead Property Tax CreditForm MI-1040CR • This credit is available to homeowners AND renters. • Residency: You have to have been a Michigan resident at least six months of 2005. • The credit is available only to those owning the homestead or to those listed on the lease. If there are multiple owners there are special rules. TaxWise: Identifying information, school district code and residency status will carry over from the Main Information Sheet and the MI-1040.

  39. Property Tax Credit – Age 65 or Blind/Deaf/Disabled • Form MI-1040CR, Line 6 – check one of these boxes if the taxpayer or spouse was: • 65 or older at 12/31/05; or an unremarried spouse of a person who was 65 or older at the time of death • Blind, deaf, hemiplegic, paraplegic, quadriplegic, or totally and permanently disabled TaxWise: 65 or older will carry over from Main Info Blind or disabled will also carry over from Main Info. Unremarried spouse and deaf or plegic must be marked directly on the credit form.

  40. MI-1040CR Line 6

  41. Property Tax Credit – Homeowners • Clients should bring all of their 2005 property tax statements – winter and summer bills – indicating the taxes levied for the year and the Taxable Value. • The Homestead Property Tax Credit is based on the taxes levied/billed. They do not have to have been paid. • Vacant lots can be included if they are adjacent to the home. Vacation property and other houses do not qualify. • Do not include penalties, interest or special assessments. • You can include the city’s administration fee.

  42. Property Tax Credit – Homeowners – Taxable Value • The Taxable Value of the homestead is listed on the property tax statements. • Be sure to use this figure on Form MI-1040CR and not the Assessed Value or State Equalized Value (SEV). The state will compare the Taxable Value and property taxes entered on the form to the School District Code entered. The credit will be delayed or denied if it is sent in without the proper Taxable Value. • Some clients have their property taxes paid by their mortgage company. They should have a year end statement showing property taxes paid. They need to contact the City Assessor’s office to learn the Taxable Value. It is also listed on the annual city assessment.

  43. Mini-Quiz 4 After reviewing the Property Tax Statement slides: • What is the Taxable Value? • How much are the property taxes levied?

  44. Property Tax Statement

  45. Property Tax Statement

  46. Mini-Quiz 4 – Answer • The Taxable Value is $ 8,230. • The property taxes levied are $ 349.

  47. Property Tax Credit – Renters • 20% of rent paid is treated as “property tax” paid indirectly through the landlord. Complete Part 2 of Form MI-1040CR. • Mobile home residents should use 20% of lot rent, but $3 per month of the rent is considered property tax and is entered on the line for property taxes levied. • It’s important to check that rent does not exceed or approach Household Income. If it does, probe for additional income such as assistance from family or friends (nontaxable – but must be included in Household Income.) Also, verify that the rent listed is only the taxpayer’s share of rent paid. • The client should have documentation such as a lease and/or rent receipts, and will need the landlord’s name and address.

  48. TaxWise – MI-1040CR Page 2Renters Section

  49. Property Tax Credit – Service Fee Housing and Co-Op Housing Service Fee Housing: • If a taxpayer lived in housing on which service fees are paid instead of taxes, 10% of rent can be claimed for credit. Complete Part 3 on the back of Form MI-1040CR. • If not sure, a client needs to ask his landlord. Cooperative Housing Residents: • These residents claim their share of the property taxes on the building and should receive a statement from management stating their share. • They cannot take 20% of their monthly payment or carrying charges. Other: • No credit is available for tax-exempt housing. • See instructions for other types of housing.

  50. Property Tax Credit – Nursing and Other Adult Care Homes • As a general rule, residents in nursing homes, homes for the aged, and adult foster care homes must claim a credit based on their share of the facility’s property tax. They may not claim rent. This also applies to residents of assisted living centers. • Complete Part 4 on the back of Form MI-1040CR. • Please consult your Taxpayer Assistance Manual and the MI-1040 instructions for special housing situations.

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