Introduction to Tax Preparation

1. Introduction to Tax Preparation VITA Training Session 1 2012-2013

2. Welcome! • Welcome video!

3. What is VITA? • Volunteer Income Tax Assistance • People from around Lancaster who hold low income jobs (less that $50,000 per year) come to us to prepare their tax returns for free • There are many VITA sites in Lancaster County and around the country • The United Way of Lancaster County

4. Last Year at the VITA Site • Last year at our VITA site • We saw 418 clients • We saved them $620,388 • Last year all throughout Lancaster County • We saw 2,676 clients • We saved them a grand total of $2,921,327

5. 1040 (THE Document)

6. W-2 (Wages)

7. Filing Status • There are 5 filing statuses • Single • Married filing jointly • Married filing separately • Head of household • Qualifying widow(er) with dependent child

8. Filing Status: Single • Use single filing status if taxpayer: • Was never married • Was legally separated under a decree of divorce or separate maintenance • Was widowed before January 1 of that year, was not remarried, and has no dependents

9. Filing Status: Married Filing Jointly • Use married filing jointly status if taxpayers: • Live together in a common-law marriage • Live apart but are not legally separated • …whose spouses have died during the year have not remarried • The lowest tax rates apply to the married filing jointly status

10. Filing Status: Married Filing Separately • Each spouse prepares a separate tax return that reports his or her individual income and deductions • Tax rates are highest for the married filing separately status • Some taxpayers choose the married filing separately filing status so that one spouse will not be responsible for the other spouse’s tax liability

11. Filing Status: Head of Household • Tax rates are lower than those for single taxpayers • Taxpayers are head of household if they: • Are unmarried or considered unmarried as of the end of the year • Provide more than half the cost of keeping up a home for a qualified person for more than half of the year

12. Filing Status: Qualifying Widow(er) with Dependent Children • Taxpayers can claim this filing status if: • The spouse died within two years before the tax year in which the taxpayer is claiming this filing status • The surviving spouse has not remarried • In the year of death, the taxpayers were eligible to use the married filing jointly filing status • A child qualifies as a dependent for the surviving spouse • The surviving spouse furnished over half the cost of keeping up a home that was the principal home of the child for the entire year

13. Pop Quiz! • Select the appropriate filing status: • Andrew and Fiona were divorced on December 31 • Single • Married Filing Jointly Answer: SINGLE

14. Pop Quiz! • Select the appropriate filing status: • Eleanor and Garrett were married on December 31 • Single • Married filing jointly • Answer: MARRIED FILING JOINTLY

15. Pop Quiz! • Select the appropriate filing status: • Susan’s husband died on July 12 of this year. Susan has not remarried. • Single • Married filing jointly • Answer: MARRIED FILING JOINTLY

16. Pop Quiz! • Select the appropriate filing status: • Samuel’s wife died on November 25, 2009. Samuel has no children and has not remarried. • Single • Married filing jointly • Answer: SINGLE

17. Pop Quiz • Select the appropriate filing status: • Which filing status has lower tax rates? • Single • Married filing jointly • Answer: MARRIED FILING JOINTLY

18. Pop Quiz! • A taxpayer has dependent children. The taxpayer’s spouse died in 2009. Prior to the death of the spouse, the taxpayer was eligible to use the married filing jointly filing status. Which filing status with the taxpayer probably use this year? • Married filing separately • Married filing jointly • Head of household • Qualifying widow(er) with dependent child • Answer: QUALIFYING WIDOW(ER) WITH CHILD

19. Pop Quiz! • Peter and Anne are married and live together, but they are experiencing difficulties caused by Anne’s financial problems. Peter wants to be responsible for his own taxes, but he doesn’t want to have anything to do with Anne’s tax troubles. Which filing status should Peter and Anne use? • Single • Married filing jointly • Married filing separately • Qualifying widow(er) with dependent child • Answer: MARRIED FILING SEPARATELY

20. Pop Quiz! • Which of the following filing statuses has the lowest tax rates? • Single • Married filing separately • Head of household • Qualifying widow(er) with dependent child • Answer: QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD

21. Dependents • What is a dependent? • A person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption (either a qualifying child or a qualifying relative) • Every dependency exemption decreases income subject to tax by the exemption amount • For 2011, the exemption amount was $3700 • Taxpayers cannot claim a dependency exemption for a person who can be claimed as a dependent on another taxpayer’s return

22. Dependents • http://www.youtube.com/watch?v=b2Py__B4jFA&feature=relmfu

23. Dependents: Qualifying Children • To claim a dependency exemption for a qualifying child, all of the following dependency tests must be met • Dependent taxpayer test Joint return test • Citizen or resident test • Relationship test • Age test • Residency test • Support test

24. Dependents: Qualifying Relatives • To claim a dependency exemption for a qualifying relative, the person must meet the following tests: • Dependent taxpayer test • Joint return test • Citizen or resident test • Not a qualifying child test • Member of household or relationship test • Gross income test • Support test

25. Dependency Tests • Dependent taxpayer test • Taxpayer is not claimed as dependent on any other return • Joint return test • Person is unmarried or married and not filing jointly • Citizen or resident test • Person is a U.S. citizen or resident • Relationship test • Person is taxpayer’s son, daughter, stepchild, foster child, adopted child, brother, sister, or any descendant of any of them

26. Dependency Tests cont. • Age test (Qualifying Child ONLY) • Child is under age 19 or under age 24 AND full time student • Person is permanently disabled (any age) • Residency test • Person has lived with tax payer for more than half the year • Support test • Person must not have provided more than half of his or her own support • Gross income test (Qualifying Relative ONLY) • Person must have a gross income of less than the dependency exemption

27. Support Test Example • Ms. Hernandez is 72 years old and lives in an apartment. Last year she received $3,000 in nontaxable Social Security benefits and $400 in taxable interest income, all of which was used for her support. Ms. Hernandez's daughter, Theresa, paid $4,800 during the year toward her mother's support. Total support includes taxable and nontaxable income. Ms. Hernandez's total support is $8,200 ($3,000 + $400 + $4,800). Theresa paid more than half of her mother's support ($4,800/$8,200 = 59%). Theresa can claim a dependency exemption for Ms. Hernandez.

28. Comprehensive Example • Beatrice is a single 18 year old Canadian citizen, who lives in Vancouver with her mother the entire year. In 2011, Beatrice earned $2,450. Beatrice's mother provided 60 percent of Beatrice's total support. Beatrice's mother is not the dependent of anyone else. Can Beatrice's mother claim a dependency exemption as a "qualifying child" for her? • The dependent taxpayer test is met—Beatrice's mother is not the dependent of anyone else • The joint return test is met—Beatrice is single • The citizen or resident test is met—Beatrice is a Canadian citizen • The relationship test is met—Beatrice is the child of the taxpayer • The age test is met—Beatrice is under 19 • The residency test is met—Beatrice lived with her mother the entire year • The support test is met—Beatrice did not provide more than half of her own support • Beatrice's mother can claim a dependency exemption for her.

29. Pop Quiz! • Matthew’s cousin lived with him all year • Relationship • Member of household • Both • Neither • Answer: MEMBER OF HOUSEHOLD (A cousin does not meet the relationship test)

30. Pop Quiz! • Rebecca’s daughter lived at college for nine months during the year • Relationship • Member of household • Both • Neither • Answer: BOTH (Going to school is considered a temporary absence)

31. Pop Quiz! • Tammy’s best friend lived with her all year. • Relationship • Member of household • Both • Neither • Answer: MEMBER OF HOUSEHOLD

32. Pop Quiz! • Jackie’s cousin visited every weekend during the year. • Relationship • Member of household • Both • Neither • Answer: NEITHER

33. Dependency Simulations • http://www.irs.gov/app/understandingTaxes/hows/mod04/sim_mod04a_01.jsp • http://www.irs.gov/app/understandingTaxes/hows/mod04/sim_mod04b_01.jsp • http://www.irs.gov/app/understandingTaxes/hows/mod04/sim_mod04c_01.jsp • Filing Status/DependencySimulation: http://www.irs.gov/app/understandingTaxes/hows/mod05/sim_mod05_01.jsp

34. Exemptions • Exemption: amount that taxpayers can claim for themselves, their spouses, and eligible dependents. • There are two types of exemptions: • Personal • Dependency • Each exemption reduces the income subject to tax • In 2011, the exemption amount was $3700

35. Exemptions: Personal Exemptions • Personal exemptions can be claimed for the taxpayer and spouse • To claim a personal exemption for a spouse • The taxpayers must be married by the last day of the year • The spouse must have died during the year, and the taxpayer must not have remarried during the year • On a separate return, if married filing separately, spouse must have no gross income • A taxpayer cannot claim a personal exemption for the taxpayer or the spouse if he or she can be claimed as a dependent on another tax return

36. Exemptions: Dependency Exemptions • One exemption is allowed for each person claimed as a dependent • To claim a dependency exemption for a qualifying child or a qualifying relative, these three tests must be met • Dependency Taxpayer Test • Joint Return Test • Citizen or Resident Test

37. Pop Quiz! • Omar and Nadia are married and file a joint return. Both have gross income. Neither can be claimed as a dependent on any other tax return. How many personal exemptions can Omar and Nadia claim on their tax return? • 0 • 1 • 2 • Answer: 2

38. Pop Quiz! • Winona is 16 years old and a full-time student. She earned $3200 during the summer. She can be claimed as a dependent on her parents’ tax return. How many personal exemptions can Winona claim on her tax return? • 0 • 1 • 2 • Answer: 0

39. Pop Quiz! • Delia and Brad are married. Delia’s filing status is married filing separately. Brad also uses the married filing separately filing status. Neither can be claimed as a dependent on any other tax return. How many personal exemptions can Delia claim on her tax return? • 0 • 1 • 2 • Answer: 1

40. Pop Quiz! • Tonya and Charles filed a joint return in 2010. Charles died in 2011. Tonya has not remarried. How many personal exemptions can Tonya claim on her 2011 tax return? • 0 • 1 • 2 • Answer: 2

41. Pop Quiz! • Bert and Maria are married and file a joint return. Bert and Maria cannot be claimed as dependents on anyone else’s tax return. They have two children, ages 14 and 16 who lived with them all year in New York. They were the sole supporters of the children. Neither child had any income during the year. Assume the joint return and citizenship tests are met. How many total exemptions can Bert and Maria claim on their joint tax return? • 1 • 2 • 3 • 4 • Answer: 4

42. Pop Quiz! • Dr. and Mrs. Fernandez are married, live in North Carolina and file a joint return. The Fernandezes cannot be claimed as dependents on anyone else’s tax return. Their daughter, Nanita, is 19 years old, single, an a full-time student away at college. Nanita earned $4500 during the year, but her parents provided more than half her support. How many exemptions can Dr. and Mrs. Fernandez and Nanita claim on their tax returns? • 3, 1 • 2, 1 • 3, 0 • 2, 0 • Answer: 3, 0

43. Deductions • Standard deduction: reduces the income subject to tax and varies depending on filing status, age, blindness, and dependency • 2011 Standard Deductions • Single: $5800 • Head of household: $8500 • Married filing jointly: $11600 • Qualifying widow: $11600 • Married filing separately: $5800

44. Deductions • Brian and Sylvia Lyons have three dependent children and are married filing jointly • Their adjusted gross income is $63825 • The standard deduction is $11600 • There are five exemptions. The exemption amount is $3700. The total deduction for exemption is $18500 (3700*5) • Taxable income is $33725

45. Deductions

46. Pop Quiz! • The standard deduction • Increases the income that is subject to tax • Decreases the income that is subject to tax • Increases the number of exemptions • Decreases the number of exemptions • Answer: DECREASES THE INCOME THAT IS SUBJECT TO TAX

47. Pop Quiz! • The standard deduction… • …determines the number of dependents • …depends on the filing status • …affects the amount of wage income • …is the same for all U.S. citizens and residents • Answer: THE STANDARD DEDUCTION DEPENDS ON FILING STATUS

48. The End…for now! • http://www.irs.gov/app/understandingTaxes/student/activities.jsp • http://www.youtube.com/watch?v=LPSYHgCbrh8&feature=plcp