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SaveFirst: A Tax Preparation and Financial Literacy Initiative

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Title: SaveFirst: A Tax Preparation and Financial Literacy Initiative


1
SaveFirst A Tax Preparation and Financial
Literacy Initiative
  • Intermediate
  • Tax Training

2
Intermediate Tax Training Outline
  • Itemized Deductions
  • Self-Employment Income
  • Retirement Plans
  • Adjustments to Income
  • Intermediate Credits

3
Intermediate Tax Training Outline
  • Itemized Deductions
  • Self-Employment Income
  • Retirement Plans
  • Adjustments to Income
  • Intermediate Credits

4
Itemized Deductions
  • Every taxpayer can take a specific amount for a
    standard deduction, which reduces taxable
    income.
  • There are certain designated expenses that a
    taxpayer can choose to list out separately, and
    if they total more than the standard deduction,
    the taxpayer will itemize his deductions, which
    reduces his taxable income by a greater amount.

5
Itemized Deductions When to Itemize
  • On the federal level, a taxpayer generally needs
    to have a home mortgage payment or a large number
    of medical bills to be better off itemizing.
  • On the state level, the standard deduction is
    much lower, and itemizing may be beneficial at
    the state even when it is not at the federal.

6
Itemized Deductions When to Itemize
  • If a taxpayer has answered yes to the itemized
    deductions questions on the interview sheet,
    complete the Schedule A to see if it is
    beneficial to itemize at the state or federal
    level.
  • If the Alabama A appears with a green check,
    complete the Schedule A fully.

7
Itemized Deductions
  • The main expenses that are itemized
  • Unreimbursed Medical Expenses
  • Charitable Contributions
  • Taxes
  • Home Mortgage Interest
  • Miscellaneous Deductions

8
Itemized Deductions Unreimbursed Medical Expenses
  • A taxpayer can claim unreimbursed medical
    expenses for
  • Himself/Herself
  • Spouse
  • Dependents

9
Itemized Deductions Unreimbursed Medical Expenses
  • Taxpayers can only deduct the amount of expenses
    that exceeds 7.5 of AGI.
  • At the Alabama level, taxpayers can deduct the
    amount of expenses that exceeds 4 of AGI.

10
Itemized Deductions Unreimbursed Medical Expenses
  • Deductible expenses
  • Prescription drugs
  • Health insurance premiums
  • Long-term care insurance premiums (cap on amount
    based on age)
  • Co-pays to doctor, dentist, eye doctor
  • Cost of glasses, hearing aids
  • Cost of medical equipment
  • Cost of surgery, operations
  • Miles to and from doctor

11
Itemized Deductions Unreimbursed Medical Expenses
  • Nondeductible expenses
  • Life insurance policy premiums
  • Nonprescription drugs
  • Funeral, burial, cremation costs
  • Unnecessary cosmetic surgery

12
Itemized Deductions Charitable Contributions
  • Contributions must be made to organizations that
    are organized for religious, charitable,
    educational, scientific, or literary purposes.
  • Nonqualifying organizations include businesses,
    civic or political organizations, social clubs,
    foreign organizations, homeowners associations.

13
Itemized Deductions Charitable Contributions
  • Deductible items
  • Monetary donations
  • FMV of clothing, furniture
  • Uniforms required to be worn during service
  • Unreimbursed transportation expenses
  • Must subtract FMV of any good received in
    exchange for the donation.
  • Taxpayer must keep receipts!

14
Itemized Deductions Charitable Contributions
  • Nondeductible expenses
  • Raffle, bingo, lottery tickets
  • Tuition
  • Value of time of service
  • Blood
  • Contributions to individuals

15
Itemized Deductions Taxes
  • Deduct taxes imposed on and paid by the taxpayer.
  • Taxpayers cannot deduct a tax they pay for
    someone else, their own tax someone else pays, a
    tax not paid in 2008.

16
Itemized Deductions Taxes
  • State and local taxes
  • Real estate taxes (Property Tax)
  • Sales taxes
  • Ad valorem tax on car tags
  • Nondeductible taxes federal taxes hunting
    licenses water/sewer taxes on alcohol, tobacco,
    or gas utilities

17
Itemized Deductions Home Mortgage Interest
18
Itemized Deductions Interest
  • Personal interest cannot be deducted (e.g.,
    interest on personal loans, car loans, or credit
    cards).

19
Itemized Deductions Miscellaneous Deductions
  • Union dues
  • Uniforms (that cannot be worn in any other
    circumstance)
  • Professional books, journals
  • Employment-related educational expenses
  • Expenses for looking for a new job
  • Tax preparation fee from last year
  • Safe deposit box
  • Gambling losses up to amount of winnings

20
Itemized Deductions Miscellaneous Deductions
  • Nondeductible Expenses
  • Burial or funeral expenses
  • Wedding expenses
  • Fees and licenses
  • Fines, penalties, traffic tickets
  • Home repairs and insurance
  • Rent
  • Insurance premiums (except health)
  • Losses from sale of home

21
Itemized Deductions Exercise 1
  • Are the following expenses deductible?
  • 1. Medical insurance premiums
  • 2. Vitamins
  • 3. Federal income tax
  • 4. Interest on car loan
  • 5. Church contribution
  • 6. Tax preparation fee from last year

22
Itemized Deductions Exercise 1
  • Are the following expenses deductible?
  • 1. Medical insurance premiums (YES)
  • 2. Vitamins
  • 3. Federal income tax
  • 4. Interest on car loan
  • 5. Church contribution
  • 6. Tax preparation fee from last year

23
Itemized Deductions Exercise 1
  • Are the following expenses deductible?
  • 1. Medical insurance premiums (YES)
  • 2. Vitamins (NO)
  • 3. Federal income tax
  • 4. Interest on car loan
  • 5. Church contribution
  • 6. Tax preparation fee from last year

24
Itemized Deductions Exercise 1
  • Are the following expenses deductible?
  • 1. Medical insurance premiums (YES)
  • 2. Vitamins (NO)
  • 3. Federal income tax (NO)
  • 4. Interest on car loan
  • 5. Church contribution
  • 6. Tax preparation fee from last year

25
Itemized Deductions Exercise 1
  • Are the following expenses deductible?
  • 1. Medical insurance premiums (YES)
  • 2. Vitamins (NO)
  • 3. Federal income tax (NO)
  • 4. Interest on car loan (NO)
  • 5. Church contribution
  • 6. Tax preparation fee from last year

26
Itemized Deductions Exercise 1
  • Are the following expenses deductible?
  • 1. Medical insurance premiums (YES)
  • 2. Vitamins (NO)
  • 3. Federal income tax (NO)
  • 4. Interest on car loan (NO)
  • 5. Church contribution (YES)
  • 6. Tax preparation fee from last year

27
Itemized Deductions Exercise 1
  • Are the following expenses deductible?
  • 1. Medical insurance premiums (YES)
  • 2. Vitamins (NO)
  • 3. Federal income tax (NO)
  • 4. Interest on car loan (NO)
  • 5. Church contribution (YES)
  • 6. Tax preparation fee from last year (YES)

28
Itemized Deductions
  • TAXWISE EXERCISE

29
Intermediate Tax Training Outline
  • Itemized Deductions
  • Self-Employment Income
  • Retirement Plans
  • Adjustments to Income
  • Intermediate Deductions
  • Intermediate Credits

30
Self-Employment Income
  • We can file a Schedule C-EZ if the taxpayer
  • Had business expenses of less than 5,000
  • Cash method of accounting
  • No inventory
  • No net loss
  • Only one business (if taxpayer owns a business)
  • No employees during the year
  • Does not want to depreciate

31
Self-Employment Income 1099-MISC
  • Income reported in Box 7 on a 1099-MISC is
    considered self-employment income and should be
    reported on a Schedule C-EZ.

32
Self-Employment Income 1099-MISC
Box 7 Nonemployee Compensation
33
Self-Employment Income Schedule C-EZ
  • Include net profit
  • Deductible expenses advertising, vehicle
    expenses, insurance, interest, legal and
    professional services, repairs, 50 of business
    entertainment, utilities
  • If deducting car expenses, you will need to
    provide additional information on the Schedule
    C-EZ.

34
Intermediate Tax Training Outline
  • Itemized Deductions
  • Self-Employment Income
  • Retirement Plans
  • Adjustments to Income
  • Intermediate Credits

35
Pensions Retirement Plans
  • Pension series of payments for past work
  • Annuity series of payments from a contract with
    company, trust, individual
  • 401(k) Plan employer contributes part of
    employees cash wages to a retirement plan on a
    pre-tax basis (not subject to income tax when
    deferred)

36
Pensions Retirement Plans
37
Pensions Retirement Plans
  • A retirement plan is fully or partially taxable
    depending on whether the employee contributed to
    the plan.
  • The cost of the pension is the amount that the
    employee contributed.

38
Pensions Retirement Plans
  • If the taxpayer did not contribute to the cost of
    the pension plan (e.g., all of the contributions
    came straight from the employer), the plan is
    fully taxable.
  • If the taxpayer contributed to the plan with
    before-tax dollars, the plan is fully taxable.

39
Pensions Retirement Plans
  • If the taxpayer contributed to the plan with
    after-tax dollars, the plan is only partially
    taxable.
  • Part of the pension income received has already
    been taxed. Therefore, only part of the pension
    plan is taxable.
  • Roth IRAs are not taxable because all
    contributions were made with after-tax dollars.

40
Pensions Retirement Plans
  • If the taxpayer contributed to the pension with
    after-tax dollars (has a cost to recover), he
    can exclude part of each pension payment from
    income until all of the cost has been recovered.
  • Tax-free portion remains the same each year.

41
Pensions Retirement Plans
  • You can prepare returns for retired individuals
    if the taxable amount of the retirement
    distribution has been determined.

42
Pensions Retirement Plans Railroad Retirement
  • RRB-1099 treat like SSA-1099 (e.g., social
    security benefits)
  • RRB-1099-R treat like 1099-R (e.g., pension)

43
Pensions Retirement Plans Alabama Tax Rules
  • Defined Benefits Plan Employee receives a
    specific amount of money based on salary history
    and years of service. Contributions from
    employee, employer, both. Employer bears
    investment risk.
  • Defined Contributions Plan (e.g., 401(k) or
    403(b) Employee chooses to defer part of salary
    into plan. Employee bears investment risk.

44
Pensions Retirement Plans Alabama Tax Rules
  • Defined Benefits Plans are not taxable at the
    Alabama level.
  • We have a list that covers most plans that are
    not taxable, but if your taxpayers plan is not
    listed, you must contact the plan administrator
    to determine if it is a defined benefits plan.
  • BE SURE TO CLICK BOX 1 IN TAXWISE IF IT IS A
    DEFINED BENEFITS PLAN.

45
Pensions Retirement Plans Alabama Tax Rules
46
Pensions Retirement Plans Alabama Tax Rules
  • 1099-R issues can get complicated when the
    taxpayer does not have enough information
    regarding his/her retirement plan.
  • You may need to call the IRS or the company that
    administers the retirement plan to find out if it
    is a defined benefits or defined contributions
    plan.

47
Intermediate Tax Training Outline
  • Itemized Deductions
  • Self-Employment Income
  • Retirement Plans
  • Adjustments to Income
  • Intermediate Credits

48
Adjustments to Income
  • Adjustments decrease taxable income.
  • Lines 23-37 on Form 1040.

49
Adjustments to Income Educator Expenses
  • K-12 teachers, counselors, administrators who
    work at least 900 hours in the year
  • Deduct 250 of classroom expenses, including
    books, supplies, or equipment
  • Must reduce if reimbursed, had tax-free interest
    on savings bonds, or non-taxable earnings from
    QTP, ESA

50
Adjustments to Income ½ of self-employment tax
  • TaxWise will automatically calculate if you have
    completed a Schedule C-EZ.

51
Adjustments to Income Penalty on early withdrawal
of savings
  • TaxWise will automatically calculate if you have
    included this on the Interest Statement.

52
Adjustments to Income Alimony Paid
  • Deduct alimony paid (be sure to calculate for
    year, not for one month)
  • Must have recipients SSN
  • Child support is NOT considered alimony

53
Adjustments to Income IRA Deduction
  • IRA Individual Retirement Arrangement
  • Personal savings plan that offers tax advantages
    to set aside money for retirement.

54
Adjustments to Income IRA Deduction
  • Contributions to a traditional IRA can be
    deductible or nondeductible.
  • Earnings and gains on the contributions are not
    taxed until withdrawn from the IRA account.

55
Adjustments to Income IRA Deduction
  • Anyone under 70 ½ years of age who has taxable
    compensation can contribute to a traditional IRA.
  • Contribution limit is the lesser of
  • 4,000 (5,000 if age 50)
  • Taxable compensation

56
Adjustments to Income IRA Deduction
  • If the taxpayers file a joint return and one
    spouses compensation is greater than the
    others
  • Married taxpayers combined contributions cannot
    exceed combined compensation
  • Neither spouse can contribute more than 4,000
    (5,000 if age 50)

57
Adjustments to Income IRA Deduction
  • Contributions for 2008 can be made up until the
    due date of the return (e.g., April 15, 2009).
  • An excess contribution above these limits and any
    earnings on it will be taxed.
  • Nondeductible IRA contributions should still be
    reported on Form 8606.
  • If the taxpayer has made excess contributions,
    refer them to a paid preparer.

58
Adjustments to Income IRA Deduction
  • The allowable deduction may be adjusted based on
    filing status, whether or not the taxpayer/spouse
    is covered by an employer retirement plan, and
    income.

59
Adjustments to Income IRA Deduction
  • Taxpayers may incur penalties for
  • Excess contributions
  • Early withdrawals
  • Too little withdrawals

60
Adjustments to Income Student Loan Interest
  • Can deduct up to 2,500 of interest paid
  • Taxpayer
  • Spouse
  • Dependent (when the loan was obtained)
  • Student must have been enrolled at least
    half-time in a program leading to a degree,
    certificate, or other credential.

61
Adjustments to Income Student Loan Interest
  • Filing status cannot be MFS.
  • Taxpayer cannot be claimed as dependent.
  • Qualified expenses include tuition and fees, room
    and board, books, supplies, and other necessary
    expenses.
  • Must be reduced by scholarships,
    employer-provided benefits, or tax-free
    educational assistance.

62
Adjustments to Income Student Loan Interest
  • Eligible schools are those that qualify to
    participate in student aid program or conduct
    internship/residency programs leading to a degree
    or certificate.
  • Must be accredited.

63
Adjustments to Income Tuition Fees Deduction
  • Deduct up to 4,000 of higher education expenses
    for taxpayer, spouse, or dependent whom taxpayer
    claims.
  • Cannot be MFS
  • Cannot be a dependent
  • Cannot also claim Hope and Lifetime Learning on
    same student

64
Adjustments to Income Tuition Fees Deduction
  • Eligible expenses include tuition, fees, and
    other expenses required for enrollment
  • Non-eligible expenses include transportation,
    room board, insurance, medical expenses, living
    expenses

65
Adjustments to Income Tuition Fees Deduction
  • Institution must be able to participate in
    student aid programs administered by Dept of
    Education (almost all accredited schools)
  • Must reduce if receive tax-free scholarship
  • Can claim if paid with loan

66
Adjustments to Income Jury duty pay given to
employer
  • Jury duty pay is taxable income.
  • But, if that pay were given to employer, it can
    be deducted as an adjustment.
  • On TW, find the line for Other under line 35.

67
Intermediate Tax Training Outline
  • Itemized Deductions
  • Self-Employment Income
  • Retirement Plans
  • Adjustments to Income
  • Intermediate Credits

68
Intermediate Credits Foreign Tax Credit
  • Take if a taxpayer paid income to a foreign
    country U.S. possession or political
    subdivision, agency, or instrumentality of a
    foreign country.
  • We may see some foreign tax reported on a
    1099-DIV. See the student training guide for
    requirements for reporting directly on Form 1040.
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