Volunteer Income Tax Assistance (VITA) Tax Preparation Training For Tax Year 2004

1. Prince William Area Family Economic Success Partnership Volunteer Income Tax Assistance (VITA) Tax Preparation Training For Tax Year 2004

2. Topics Basic Tax Law Wage Earner Topics

3. Tax Law - Basic • Personal & Dependency Exemptions • Filing Status & Filing Requirement • Income • Adjustments to Income • Deductions – Standard & Itemized • Miscellaneous Credits

4. Exemptions • Personal • Taxpayer • Spouse • Dependency • 5 tests • All must be satisfied

5. Pub 17 p 28 Personal Exemptions Taxpayer • Unless can be claimed on another’s return Spouse • If not claimed on another’s return • Married by Dec 31 • Not divorced or legally separated by Dec 31 • If deceased, taxpayer can claim • if not remarried by Dec 31 • If not divorced or legally separated when died • If MFS, taxpayer can claim only if spouse had no income & spouse was not another’s dependent, even if not claimed

6. Dependency Exemptions Pub 17 p 29 Resource Guide p 10 Tests – Must pass all 5 1 - Member of household or relationship test 2 - Citizen or resident test 3 - Joint Return test 4 - Gross Income test 5 - Support test Still a dependent if died during the year, if the 5 tests are met • even if child lived for only a moment

7. 1 - Member of Household OR Relationship Test Pub 17 p 29 • Live with taxpayer for the entire year – except temp absences • Temp absences include school, hospital stays, military, vacations, business OR • Be related to taxpayer • May not need to live with taxpayer • “Grandnephew?”

8. 2 - Citizen or Resident Test Pub 17 p 29 • US citizen or resident • Children usually are citizens or residents of the country of their parents • Foreign born children need either parent to be a citizen • Resident of Canada or Mexico

9. 3 – Joint Return Test Pub 17 p 29 • Not allowed an exemption for your dependent who files a joint return • Exception • N/A if joint return filed to claim a refund & • If no tax liability would exist if they filed separately

10. 4 – Gross Income Test Pub 17 p 29 • Dependent’s gross income must be under $3,100 • Exception for your child if • Under 19 at end of tax year • A student under 24 at end of tax year • Gross Income Defined

11. Pub 17 p 30 Resource Guide p 13 5 – Support Test • Provide more than half the person’s support for the tax year • Total support person received less what you provided (see worksheet p32) • Special Rules • Multiple Support Agreement (p33) • Two or more provide support, but not more than half - Use Form 2120 • Child of divorced or separated parents (p35, RG p 14 • General rule is the custodial parent • Unless released by custodial parent (form 8332)

12. Pub 17 p 23 Resource Guide p 7 Filing Status Married or Unmarried?

13. Pub 17 p 23 Marital Status - Unmarried If on last day of tax year you • are not married, or • are legally separated under a divorce or separate maintenance decree or • marriage annulled by court decree …then you are “Single” But: consider Head of Household or qualifying widow(er) w dependent child

14. Pub 17 p 23 Marital Status - Married For whole year, if married • & living together as husband & wife • in common law marriage, if recognized • In state you now live (not VA) • In state where marriage began • & living apart, but not legally separated under a divorce or separate maintenance decree • & separated under a decree of divorce that is not final (interlocutory decree) Note: Any one test satisfies

15. Pub 17 p 23 Marital Status - Married Spouse died during the year (not remarried) • you are considered married for the whole year • can file a joint return with deceased spouse (if not remarried) • may have special benefits if qualifying widower with child

16. Married Filing Joint Pub 17 p 24 • Both must sign • Both must be present at tax site • Exceptions • For spouse in combat zone • Need signed statement • Other reasons • Need power of attorney

17. Pub 17 p 24 Married Filing Separately • Usually done to be responsible only for your own tax • Usually the least favorable tax treatment • If one itemizes, other spouse must also itemize (first who files determines) • Splitting itemized deductions • Cannot claim several tax credits • See special rules

18. Pub 17 p 25 Head of Household (HOH) Must meet all of the following: • Unmarried or considered unmarried on the last day of the tax year • Paid more than half of home upkeep* • Qualifying person** lived with you more than half of the year • except for temporary absences • dependent parent doesn’t have to live with you • Foster child must live with you all year * Keeping up a home p 26 **“Qualifying Person” Table 2-1 p26

19. Head of Household Pub 17 p 25 Married Taxpayer can file HOH if • Files separate return from spouse • Paid more than half of home upkeep • Spouse did not live in the home during the last six months of the year • Taxpayer’s home was main home of the child for more than half of the year • Taxpayer claims the child as a dependent • Exceptions (Children of Divorced or separated Parents) p35

20. Qualifying Widow(er) with Dependent Child Pub 17 p 27 For two years following year of death of spouse • Spouse died in 2002 or 2003 • Rules • Were entitled to file a joint return • Did not remarry • Have child for whom you can claim an exemption • Paid more than half the cost of keeping up a home (p26)

21. Who Must File? Pub 17 p 7 Resource Guide p 4 But file to get a refund, the EITC, or the additional child tax credit (P9)

22. Income Resource Guide p4 Pub 17 p 50 *If itemizing in year taxes were paid

23. Selected Income Topics • Scholarships & Fellowships • Tips • Interest • US Savings Bonds • Deferred Interest Accounts • Coverdell ESA • Tax Exempt Interest

24. Tip Income Pub 17 p 58 • All is taxable • $20 more per month must be reported to employer • Included on W-2 • Amount unreported (if greater than $20/month) • File Form 4137, SS & Medicare Taxes • Allocated Tips reported unless • Credible evidence of tip record • Incomplete tip record, but actual tips more than sum of tips reported to employer and allocated tips

25. Scholarships & Fellowships W-2 Pub 17 p 99 • Tax Free if • Candidate for a degree at an eligible educational institution, AND • Used to pay qualified education expenses • Payment for services are generally taxable • Room, board, & travel are taxable • See Pub 970, Tax Benefits for Education

26. Pub 17 p 60 Interest Income 1099-INT General Rule • Interest received or credited to your account and can be withdrawn is taxable income Interest income is unearned income

27. US Savings Bonds Interest1099-INT Pub 17 p 62 Series EE & I • When bond cashed in or when matures (whichever is earlier) OR • Each year’s increase in value • Excludable interest for qualified higher education expenses Series HH • Paid twice per year Tax Tip – Be sure to ask how taxes have been paid for EE & I Bonds – Check box 3 of 1099-INT

28. Deferred Interest Accounts1099-INT Pub 17 p 61 • Interest paid in fixed intervals of one year or less • Report when received • CD’s with maturity over 1 year • Report when received • Original Issue Discount (OID) – no interest paid until maturity • Difference between redemption amount and issue price is the OID • Part of OID is taxable each year until maturity

29. Life Insurance Pub 17 p 92 • Proceeds generally not taxable • Proceeds received in installments may include interest which is taxable • Dividends generally not taxable • Dividends may include interest which is taxable • Unless on deposit with Dept of Veterans Affairs, then not taxable

30. Pub 17 p 217 Coverdell ESA 1099-Q • No tax due if qualified educational expenses are greater than the Coverdell distribution (ASK) • Qualified expenses include elementary, secondary, and higher educational expenses • Consider Hope or Lifetime Learning Credit • Gets complicated if taxable • See Pub 970 • See paid professional tax preparer

31. Tax Exempt Interest Pub 17 p 66 • Bonds issued by • Municipalities • Port Authorities • Toll Road Commissions • Utility Service Authorities • Selected Others • Still must be reported

32. Dividends 1099-DIV Pub 17 p 68 • Usually “Ordinary” or “Qualified” • Ordinary • Paid out of earnings and profits • Ordinary income • Qualified • Ordinary dividends after 2002 • 5% or 15% capital gain tax rate

33. State & Local Tax Refunds, Unemployment Comp 1099-G • Unemployment comp is taxable • Block 1 of 1099-G • State & local tax refunds are taxable only if 2003 return itemized and deduction taken • Block 2 of 1099-G

34. Pub 17 p 143 Alimony & Child Support • Alimony received is taxable • Alimony paid is an adjustment to income* (only 1040 can be used) • Child support received is not taxable • Child support paid is not an adjustment to income * Must include recipient’s SSN on 1040

35. Business Income – ScheduleC-EZ “Net Profit from Business” Use only if… And…

36. Schedule C-EZ Instructions Income • show all items of taxable income actually or constructively received during the year (in cash, property, or services) Expenses • advertising, car and truck expenses, commissions and fees, insurance, interest, legal • professional services, office expense, rent or lease expenses, repairs and maintenance, supplies, taxes, travel • the allowable percentage of business meals and entertainment, and utilities (including telephone)

37. Adjustments to Income* • Educator’s Expense • IRA’s • Student Loan Interest Deduction • Tuition & Fees Deduction • Alimony Paid • Jury Duty *Adjusted before taxable income is computed Can’t use 1040EZ

38. Educator’s Expense Pub 17 p 144 • Amount • MFJ $500, else $250 for eligible educators • Eligible Educator • K-12 teacher, instructor, counselor, principal, or aide • Work at least 900 hours during school year • Unreimbursed expenses for • Books, supplies, equip, computer equip & software used in classroom • Health & phys ed expenses related to athletics • Some restrictions

39. Traditional Individual Retirement Arrangements (IRA’s) Pub 17 p 125 • Under 70½ at end of tax year • Compensation from employment • Spousal IRA • Spouse does not need to work • Contribution limit • $3,000 ($3,500 if 50 or over) or • Compensation up to the limits • Deductible or Non deductible • Form 8606 if non deductible

40. Pub 17 p 144 Pub 970 Student Loan Interest Deduction – Up to $2,500

41. Pub 17 p 146-148 Tuition & FeesDeduction – Up to $4,000

42. Other Deductions • Penalty on early withdrawal of savings • Still report interest earned • Penalty reported on 1040 line 33 • Jury duty pay given to employer • If employer paid regular wages and if jury pay was given to employer • Enter on line 1040 line 35 & enter “jury duty” • Jury duty pay still entered on 1040 line 21 Pub 17 p 61 Pub 550 Pub 17 p 98

43. Standard Deduction Pub 17 p 152

44. Itemized Deductions • Medical & Dental - Pub 17, pg 154 • Taxes – p161 • Interest – p163 • Contributions – p170 • Casualty & Theft Losses – p182 • Miscellaneous – p207 • Unreimbursed job expenses – p184

45. Miscellaneous Tax Credits • Elderly or Disabled • Qualified Retirement Savings • Mortgage Interest • Foreign Tax Note: all are “non refundable credits”

46. Elderly or Disabled Pub 17 p 236 • Age 65 or over or • Retired on permanent & total disability • “Mandatory retirement age” • Physician’s Statement • And income limits

47. Qualified Retirement Savings Contributions Pub 17 p 269 Contributions to a retirement plan or IRA • Cannot be born after Jan 1, 1987 • Cannot be claimed on another’s tax return • Cannot be a full time student • Maximum allowable contribution is $2,000 • Reduced by certain distributions • Income Limits

48. Pub 17 p 269 Mortgage Interest Foreign Tax Credit Pub 17 p 269 Mortgage Interest • Mortgage Credit Certificate (MCC) Required Foreign Tax • Form 1116 may or may not be required • Limitations

49. Tax Law – Wage Earner • Child & Dependent Care Credit • Education Credits • Earned Income Credit • Child Tax Credit • Additional Child Tax Credit

50. Child & Dependent Care Expenses Pub 17 p 226 Resource guide p 17 Must satisfy all 6 Tests • Qualifying person • Keeping up a home • Earned income • Work related expense • Joint return • Provider identification Note: Consider combat pay election