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Accounting Aid Society 2006 Tax Season City Tax Training

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Title: Accounting Aid Society 2006 Tax Season City Tax Training


1
Accounting Aid Society 2006 Tax
Season City Tax Training
  • January 2006

2
Overview
  • Our training is designed to provide you with
    skills necessary to prepare taxes for the clients
    of Accounting Aid Society.
  • Our clients are individuals with income less than
    20,000 or families making less than 38,000.
  • Check with the individual city instructions
    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.
  • Dont 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
Whats New for Tax Year 2005? (All changes below
are for the City of Detroit Only)
  • Personal exemptions are reduced from 750 to
    600.
  • A non-resident taxpayer will be required to
    submit documentation from their employer to
    support an allocation of income earned outside
    the city.
  • New mailing addresses.

5
Cities
  • 22 Michigan Cities have income taxes including
  • Detroit
  • Hamtramck
  • Highland Park
  • Pontiac
  • And Albion, Battle Creek, Big Rapids, Flint,
    Grand Rapids, Grayling, Hudson, Ionia, Jackson,
    Lansing, Lapeer, Muskegon, Muskegon Heights, Port
    Huron, Portland, Saginaw, Springfield and Walker.

6
Good News
  • TaxWise makes city income tax returns very easy
    for most of our clients.
  • Detroit forms and the Common Forms accepted by
    Pontiac and Hamtramck are in TaxWise.
  • Highland Park forms must be prepared manually.
  • Make sure that you entered the city withholding
    from the W-2s. In TaxWise the proper name of
    the city must be entered (no abbreviations).

7
Residents and Non-Residents
  • Residents are taxed on income from all locations.
  • Non-residents are taxed only on income from
    within the city.

8
Who Must File?
  • Some low-income people do not owe tax on federal
    or state returns, but may owe tax on, and must
    file, city returns.
  • This is because the amount for an exemption is
    considerably lower on city returns.
  • However, many people who file state and federal
    returns do not have to file city returns.
  • This is because items such as pensions,
    unemployment compensation, and Social Security
    are not taxable on city returns.

9
Filing Status
  • Married can file jointly or separately, but the
    cities do not have Head of Household.
  • TaxWise defaults federal Head of Household filers
    to Single.
  • Single status will carry over from the federal.

10
Exemptions
  • Most exemptions carry over directly from the
    federal return.
  • Detroit - 600
  • Pontiac, Highland Park, Hamtramck - 600
  • All cities allow an additional exemption if 65 or
    older.
  • All except Highland Park allow an additional
    exemption for blind.
  • Detroit and Hamtramck allow an additional
    exemption for deaf or totally and permanently
    disabled.

11
Exemptions
  • Individuals who can be claimed as a dependent by
    someone else cannot claim an exemption for
    themselves.
  • If taxable income is less than the exemption
    amount, no tax is due and the tax withheld will
    be refunded.

12
Dependents
  • Dependent exemptions carry over from the federal.
  • Some cities want them listed uniquely TaxWise
    will prompt for this.

13
Detroit Form - Dependents
14
Taxable Income Residents
  • Wages, bonuses, etc. from Form W-2
  • Business and Rental Income
  • Gambling winnings, including the Lottery.
  • Early IRA and 401K distributions
  • Interest, Dividends and Capital Gains
  • In TaxWise, most income will carry over from the
    federal return. The Detroit return starts with
    wages and then has schedules to make additions or
    deductions to income. The MI Cities Common Form
    has lines on Page 1 for most types of income.

15
Taxable Income Non-Residents
  • Wages, bonuses etc. from Form W-2 which are
    earned in the city
  • Business and Rental Income from the city
  • If part of the work is done outside the city,
    then the income is apportioned.
  • For example, if John works in Detroit, but 10 of
    his days are spent at an office in Roseville,
    then he only needs to show 90 of the amount from
    his W-2 on the Detroit Non-Resident return.
    Complete Schedule N for John (note employer
    documentation required to be attached).

16
Detroit Schedule N
17
Adjustments to Income Additions
  • Some common additions to income include
  • Investment income (interest dividends)
  • Gain (loss) on sale of property
  • Net income from business
  • Net income from rent, royalties, etc.
  • Pre-retirement distributions.
  • Gambling winnings (In TaxWise, winnings do not
    carry over from the federal return. The preparer
    must add this income on the Miscellaneous Income
    line of all city returns.)

18
Detroit Additions
19
Adjustments to Income Deductions
  • Some common deductions from income include
  • IRA contributions (to the extent they are
    deductible on the federal return. Page 1 of Form
    1040 must be attached to the return.)
  • Interest on U.S. Savings Bonds
  • Alimony

20
Detroit Deductions
21
Renaissance Zones
  • Renaissance Zones are specially designated to
    promote development.
  • Most income of taxpayers who live in a
    Renaissance Zone is not taxable.
  • They must attach an Approval Letter from the City
    Assessor to claim the deduction.

22
Tax Rates 2005
  • Detroit - 2.50 Residents
  • - 1.25 Non-Residents
  • Highland Park - 2 Residents
  • - 1 Non-Residents
  • Hamtramck, Pontiac - 1 Residents
  • - 0.5 Non-Residents

23
Mini-Quiz 1
  • Randy is a resident of Highland Park. He earned
    9,500 at his job in Warren, 500 in bank
    interest, 1,000 in unemployment compensation, a
    pension for 2,000, and 6,000 Social Security.
    He has two exemptions. How much are his city
    taxes?

24
Mini-Quiz 1 Answer
  • Warren does not have an income tax, so we only
    need to worry about Highland Park.
  • Social security, pensions and unemployment
    compensation are not taxable on city returns, so
    Randys income is 9,500 plus 500, or 10,000
    for city purposes.
  • Randy can subtract 2 X 600 for his exemptions,
    leaving 8,800 as his taxable income.
  • The resident tax is 2, or 176.

25
Credit for Tax Paid to Other Cities
  • Some people live in one taxing city and work in
    another.
  • The city of residence will give a credit based on
    the non-resident tax rate.
  • The credit is the lesser of
  • The taxes levied by the non-resident city (not
    the withholding).
  • What the comparable non-resident taxes would have
    been in the resident city.

26
Credit for Tax Paid to Other Cities
  • Complete the non-resident return first.
  • Print an extra copy to attach to the resident
    return.
  • Calculate the taxes as though they were for a
    non-resident within the residents city. See
    resident city instructions to ensure this credit
    is calculated properly.
  • Enter the result to be subtracted from the tax
    liability on the resident return.

27
Mini-Quiz 2
  • Suzie lives in Hamtramck and works in Detroit
    where she earned 10,750. She won 1,000 in the
    lottery. She has one exemption. What is her
    Hamtramck tax liability?

28
Mini-Quiz 2 Answer
  • First, we do her Detroit D-1040(NR).
  • She has income of 10,750 for Detroit, less 600
    for her exemption, leaving 10,150.
  • Her tax liability on the Detroit Non-Resident
    Return is 127, using a 1.250 tax rate.
  • Hamtramck would have taxed a non-resident ½ x
    (10,750 600) 51
  • Her Credit for Tax Paid to Other Cities on her
    Hamtramck return is 51, the lesser of the two
    (127 vs. 51).

29
Mini-Quiz 2 Answer, Part 2
  • Hamtramck taxable income is (10,750 1,000
    600) 11,150
  • Tax 1 X 11,150 112
  • Less the credit of 51, leaves 61 tax due on her
    Hamtramck Resident Return.

30
Amended Returns
  • Some cities have a special form.
  • In Detroit, you only need to check the box on
    Line H to indicate that it is an amended return.
  • See city instructions for how to complete an
    amended city return and how to calculate the
    amount to be refunded or the tax due.

31
Taxes Due
  • Many of our clients will end up owing money to
    the cities.
  • This is typically because employers outside the
    city are not compelled to withhold city taxes.
  • Please advise clients that have a large tax due
    that they may be required to pay estimated taxes
    for the next year.

32
Filing
  • The cities do not offer electronic filing, so
    print two copies and make sure that the taxpayer
    mails a signed copy. Mailing envelopes are
    available at the tax sites.
  • Attach copies of W-2s to the front page of the
    return where indicated (usually in the middle of
    the page).
  • The filing deadline is April 30th for city
    returns.

33
Filing
  • Following is a partial list of federal schedules
    that must be attached to a city return
  • Schedule C or C-EZ (Business Income)
  • Schedule D (Gain or loss from sale of property)
  • Schedule E (Income from rent, royalties,
    partnerships, etc.)

34
Thanks for attending this session!
  • A special thanks to Rich Odendahl for his
  • work in developing this presentation.
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