Deductions Standard Deduction vs Itemized Deductions
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1 Deductions Standard Deduction vs Itemized Deductions Qualified Business Income (QBI) Deduction
2 Standard DeductionStandard Deduction is based on the following factors:Filing StatusBlindnessAgeDependency
3 Pub. 4012 F-1 & F-2 Filing Status Standard Deduction 2018 Single or MFS12,000Married Filing Jointly /Qualifying Widower24,000Head of Household18,000Additional Standard DeductionsAge > or = to 65BlindMFJ1,300All other taxpayers1,600
4 Standard Deduction for Dependents If person can be claimed as a dependent by another taxpayer, their Standard deduction is limited to greater of:$1, OR Earned Income + $350But cannot exceed the base standard deduction amount for a single individual (= $12,000 in )For a worksheet, see F-2 in 4012.No worries, TaxSlayer calculates this for you!
5 Itemized DeductionsThere 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” deductionsReduces taxable income by a greater amountPrior to this year, IRS estimated that 30% of taxpayers itemized deductions.NOW with the Tax Cuts and Jobs Act (TCJA), IRS estimates that roughly 10% will benefit from itemizing deductions.Every taxpayer can take a specific amount for a “standard” deduction as mentioned—this amount 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—thus reducing taxable income by a great amount.
6 When to Itemize Deductions A taxpayer can receive a larger deduction by itemizing if the following expense add up to be higher than the standard deduction:Large amount of medical billsLarge home mortgage paymentLarge real estate and personal property taxesLarge charitable contributionsNow that the standard deductions are twice as large, very very few of our clients will itemize.BUT, you still need to understand this topic because those who used to itemize will need to understand why they are no longer itemizing deductionsA taxpayer can receive a larger deduction by itemizing on the federal level if he/she has a large number of medical bills/home mortgage payment—the federal return has a higher standard deduction, so it takes a fairly large amount of expenses for itemizing to be beneficial.A taxpayer can receive a larger deduction by itemizing on the state level if he/she has expenses that may/may not have been sufficient to justify itemization on the federal level—the state return has a lower deduction, so it doesn’t take as many expenses for itemizing to be beneficial.NOTE: If a taxpayer is MFS and his/her spouse itemizes, the taxpayer must also itemize, regardless of whether the standard deduction would be higher.Note: If a taxpayer is MFS and his/her spouse itemizes, the taxpayer must also itemize, regardless of whether the Standard Deduction would be higher
7 Qualifying Expenses Unreimbursed Medical Expenses Taxes (real estate taxes, personal property taxes, income taxes or sales tax) – Limited to $10,000Home Mortgage Interest – Limited to certain debtsCharitable ContributionsMiscellaneous Deductions – Temporarily RepealedGambling LossesThere are several categories of qualifying expenses for itemizing we will discuss. They are: unreimbursed medical expenses, charitable contributions, taxes, home mortgage interest, and miscellaneous deductions.
8 Unreimbursed Medical Expenses A taxpayer can claim expenses forHim/HerselfSpouseDependentsCovered Medical ExpensesUnreimbursed medical and dental expensesEligible long-term care premiumsA taxpayer can claim expenses for him/herself, spouse, and dependentsMedical & dental expenses and eligible long-term care premiums MUST be unreimbursed to be itemizable.Verify that the expenses were not paid with pre-tax dollars or reimbursed by an insurance company before itemizing.Medical bills have to be in excess of 7.5% of the taxpayers AGI before they provide any benefit towards total itemized deductions.
9 Be sure the expenses were not paid with pretax dollars or reimbursed by an insurance company. Why can a taxpayer not itemize expenses paid with pretax dollars?NO DOUBLE BENEFITS!Expenses that were deducted pretax from pay have already given the taxpayer the benefit of a lower taxable incomeCannot use these expenses a second time to lower taxable income againWhy can a taxpayer not itemize expenses paid with pretax dollars?NO DOUBLE BENEFITS!Expenses that were deducted pretax from pay have already given the taxpayer the benefit of a lower taxable incomeCannot use these expenses a second time to lower taxable income again
10 Deductible Unreimbursed Medical Expenses Medical and Hospital insurance premiumsAlways enter even if not itemizing – doing so has benefits on MO returns for Seniors and the disabledEligible long-term care premiumsUnreimbursed medical expensesUnreimbursed dental expensesMedical mileageSmoking cessation programsPrescription medicines [not over the counter]Prescription eyeglasses and hearing aidsYou can refer to Publication 502 on the IRS website for a more complete listing, but here are a few of the most common deductible medical expenses:Co-pays to doctor, dentist, eye doctorPrescription drugsCost of glasses or hearing aidsCost of medical equipmentHealth insurance premiumsLong-term care insurance premiums (cap on amount based on age)Cost of surgery, operationsMiles to and from doctorSee F-5 in Pub 4012 for full list ofincludable expenses.
11 Unreimbursed Medical Expenses Cont. Nondeductible Medical ExpensesLife insurance policy premiumsFuneral, burial, cremation costsUnnecessary cosmetic surgeryNonprescription drugsThere are some nondeductible medical expenses as well. Here are the most common:Life insurance policy premiumsFuneral, burial, cremation costsUnnecessary cosmetic surgeryNonprescription drugs
12 Charitable Contributions Deductible Expenses:Monetary donationsDues, fees, and assessmentsFair market value (FMV) of clothing, furnitureUniforms required to be worn during serviceUnreimbursed transportation expensesTransportation expenses, including bus fare, parking fees, tolls, and standard mileage deduction of 14 cents per mileLimited to 60% of AGI – rest is a carryforward for up to 5 years.There are certain deductible and nondeductible items that can be itemized.Some deductible items include monetary donations, dues, fees, and assessments, the fair market value of clothing, furniture, etc., uniforms required to be worn during service, and unreimbursed transportation expenses including tolls, bus fare, parking fees, and the cost of gas at 14 cents per mileIt’s really important to note that the taxpayer MUST keep receipts! We don’t have to see every receipt to itemize, but the taxpayer needs to be advised that they need to have receipts for everything they itemize.IMPORTANT: The taxpayer must keep receipts!
13 Proof of Cash DonationA bank record, such as a canceled check, a copy of the canceled check, or a bank statement containing the name of the charity, the date, and the amountA written communication from the charity, which includes the name of the charity, date of the contribution, and amount of the contribution
14 Proof of Non-Cash Donation Receipt or other written communication from the organization or the taxpayer's own reliable written records for each item, showing:Name and address of organizationDate and location of the contributionReasonably detailed description of the donated propertyFair market value of the donated propertyRefer taxpayers with noncash contributions exceeding $500 to a professional tax preparerFor noncash contributions less than $250, written communication, a description, and the fair market value is sufficient. For each contribution between $250 and $500, written communication, a description, the FMV, and an acknowledgement of any goods received in return is needed.Remember, any contributions above $500 are out of scope for VITA, and if the taxpayer wants to take the full amount, they must be referred to a professional preparer.
15 Charitable Contributions Nondeductible Expenses:Raffle, bingo, lottery ticketsTuitionValue of time of serviceBloodContributions to individualsThe FMV of any good received in exchange for a donation (i.e. t-shirts, cds, tote bags, etc.)Some nondeductible charitable contribution expenses include raffle, bingo, and lottery tickets, tuition, value of time of service, blood, contributions to individuals, and the FMV of any good received in exchange for a donation (e.g., a t-shirt received for signing up for a charity race).
16 Nondeductible Contributions Business organizations, such as the Chamber of CommerceCivic leagues and associationsPolitical organizations and candidatesSocial clubsForeign organizationsHomeowners' associationsCommunist organizationsSome non-qualifying organizations include business, civic/political, social, foreign, and homeowners’ associations.
17 Julia’s Contributions Julia made the following contributions last year:$600 to St. Martin's Church (The church gave her a letter verifying the amount.)$32 to Girl Scouts with receipt (not for cookies!)$40 to a family whose house burned$50 for lottery tickets at a fundraiser$100 for playing bingo at her churchFurniture with a fair market value of $200 to GoodwillThe amount that Julia can claim as deductible cash contributions is $____ .= 632 The $200 value of furniture given to Goodwill will go under non-cash contributions.
18 Taxes – State and Local “SALT” is limited to $10,000 under TCJA! DeductibleState and local income taxes OR sales taxesTaxSlayer pulls income tax figures from W-2s and other forms for you. No manual entries necessary.TaxSlayer will make an estimate of sales tax paid based on incomeReal Estate TaxesPersonal Property TaxesThese taxes must have been paid in the tax yearNondeductibleTaxes the taxpayer pays for someone elseTaxes someone else pays for the taxpayerTaxes not paid during the tax yearThe next category of itemizable deductions is Taxes.Deductible taxes include taxes imposed on and paid by the taxpayer in the tax year.Nondeductible taxes include taxes the taxpayer pays for someone else, taxes someone else pays for the taxpayer, and taxes not paid in the tax year.“SALT” is limited to $10,000 under TCJA!
19 Home Mortgage Interest Any interest paid on a home acquisition loan secured by the home, line of credit, or a home equity loan. TCJA suspends the deduction for interest on certain types of home equity indebtedness.TCJA: Interest paid on home equity loans and home equity lines of credit are NOT deductible UNLESS the loans are used to buy, build, or substantially improve the taxpayers home that secures the loan.Debt Consolidation: Taxpayers may have more than one mortgage or may have refinanced and have multiple statements.This is where it gets tricky, and preparers will have to ask questions to ensure extensions of debt were only to improve the home (and not pay off credit cards or other uses).The next category of itemizable deductions is Home Mortgage Interest.During the TCJA period, a taxpayer may treat no more than $375,000 as acquisition indebtedness ($750,000 for MFJ).Only taxpayers who are legally liable for the debt can deduct the interest.Taxpayers may have more than one mortgage or may have refinanced and have multiple statements—they can be added up an entered on the return.Only points paid as a form of interest (for the use of money) can be deducted.Home mortgage interest is generally reported on Form 1098
20 Janet and CoreyJanet and Corey are married and they file joint returns every year.In 2018 they take out a HELOC on their primary residence and use the funds to add a deck to their house and remodel the kitchen.The outstanding mortgage on their home is $300,000 and the HELOC is $80,000.During 2018 they paid $4,700 on the HELOC. Is this amount deductible?
21 Janet and CoreyYes!! The entire $4,700 of HELOC interest is deductible because they used the funds to substantially improve their home, and the total amount of acquisition debt is less than $750,000.What if they used the HELOC to purchase a vacation home?The interest would not be deductible since the HELOC was secured by the primary residence.Now they could buy a vacation home, and as long as that mortgage is secured by the home it is used to purchase, they can deduct that 2nd mortgage’s interest too as long as the combined acquisition debt is below $750,000.What if they had used the funds to pay off Corey’s student loans?No – Not deductible.Second homes must be used for personal purposes for the greater of 14 days or 10% of the days it is rented at fair value during the year.
22 Form 1098: Mortgage Interest Statement Here is the Form 1098, Mortgage Interest Statement.You may see amounts for Mortgage Interest Received in Box 1, points paid in Box 2, mortgage insurance premiums in box 4, and real estate taxes in box 5 (these should be entered on the Schedule A, line 6 in the Taxes You Paid section)
23 Form 1098: Mortgage Interest Statement Boxes 10 or 11 may also report real estate taxesThese amounts can be included as an itemized deductionBoxes 4 or 5 MAY also report real estate taxes, which can be included as an itemized deduction
24 Nondeductible Interest Personal interestpersonal loanscar loanscredit cardsetc.Any kind of personal interest is nondeductible. This includes personal loans, car loans, credit cards, etc.
25 Joe and AngelaJoe and Angela file a joint return. During the year, they paid:$2,180 to the bank for interest on their home mortgage that was reported to them on Form 1098$400 in credit card interest$1,500 paid to a lender for specific services connected to a loan (e.g. appraisal fee, notary fee, and preparation costs for the mortgage not points)$2,000 in interest on a car loan
26 How much can Joe and Angela report as deductible interest? $2180 in mortgage interest is the only allowable deduction. Fees paid to the lender to obtain a loan are not deductible as interest – See page 157 in Pub 17.
27 Miscellaneous Deductions Union duesUniforms (that cannot be worn in any other circumstance)Professional books, journalsSmall tools and supplies, used for businessTemporarily suspended.The last category is miscellaneous itemizable deductions. These are entered on the Schedule A, linesSome miscellaneous deductions include union dues, uniforms (that cannot be worn in any other circumstance), professional books and journals, small tools and supplies used for business…
28 Miscellaneous Deductions Employment-related educational expensesIncludes educator expenses > $250 (after the adjustment)Expenses for looking for a new jobTax preparation fee from last yearSafe deposit boxGambling losses AND expenses incurred in connection with the conduct of that individual’s gambling activity.Up to the amount of the gains reported on line 21TCJA clarifies that the loss limitation applies not only to actual cost of wagers but to other expenses incurred in connection with the gambling activity.Losses must be substantiatedNot subject to the 2% AGI miscellaneous limitationRemember, gambling winnings have to be reported on line 21. Substantiated losses up to the amount of reported gains only when itemizing
29 Nondeductible Expenses Burial or funeral expensesWedding expensesFees and licensesFines, penalties, traffic ticketsHome repairs and insuranceRentInsurance premiums (except health and mortgage)Losses from sale of homeHere are some common nondeductible expenses that you will be asked by taxpayers about: burial or funeral expenses, wedding expenses, fees and licenses, fines, penalties, or traffic tickets, home repairs and insurance, rent, insurance premiums (except health and mortgage), and losses from sale of home.
30 Example Are the following expenses deductible? Medical insurance premiumsVitaminsFederal income taxInterest on car loanChurch contributionTax preparation fee from last year
31 Example – Answer Are the following expenses deductible? Medical insurance premiums - YESVitamins - NOFederal income tax - NOInterest on car loan - NOChurch contribution - YESTax preparation fee from last year - YES
32 Standard Deduction vs Itemized Deductions Choose the higher amount of Standard Deduction versus Itemized Deductions for the client. [TaxSlayer will select the larger amount.]Do NOT waste time entering itemized deductions if they are NOT greater than the standard deduction. Use an “eye test” to approximate the amount of the itemized deduction.It is a client’s responsibility to present receipts for itemized deductions in an organized manner.If a client is disabled, 65 years or older, or 60 years old and retired military, you can enter the real estate taxes paid on the Schedule A of the Federal 1040 and it will carryover to the MO 1040 for the Circuit Breaker in TaxSlayerQualified medical insurance premiums should always be entered on Sch A even if using the standard deduction. Missouri gives a deduction for qualified Health Insurance premiums and Long Term Care Insurance.Do NOT waste time entering itemized deductions if they are NOT greater than the standard deduction. Use an “eye test” to approximate the amount of the itemized deduction. For taxpayers eligible for the MO PTC credit, enter real estate taxes paid on the Schedule A to have it carry forward to the Missouri return. Also, always enter qualified medical insurance premiums on the Schedule A to carry forward to the Missouri 1040.
33 Judy’s Standard Deduction Judy is legally separated from her husband.Her three children lived with her for the entire year.She provided more than half the support for her children.Judy is not 65, and neither blind nor disabled.
34 What filing status will Judy use on her tax return? What is the standard deduction for Judy?1.) Judy is allowed to choose the HOH status.2.) $18,000
36 What is the QBI Deduction? QBI is a new deduction for pass-through businesses (S-corps, partnerships, sole proprietors, etc.).Self-employed taxpayers filing a schedule C are sole proprietors and are able to deduct up to 20% of qualified business income (QBI).The income and tax calculations on Schedules C and SE are not affected by this deduction. This is a completely separate calculation of a deduction based on net business income from Schedule C.Taxable income cannot be reduced below zero by the deduction.
37 CreditsFound on the 2nd page of 1040, Schedule 3, and Schedule 5
38 Tax Credit vs Deductions A deduction reduces income subject to tax.A tax credit is a direct reduction of Federal Income Tax. Similar to a tax payment. Reduces tax dollar for dollar.$100 Tax Credit$100 Tax DeductionAGI = $5,000- $0 Deduction= $5,000 taxable incomeX 15% tax rate= $750 total tax liability- $100 tax credits= $650 tax liability- $100 Deduction= $4,900 taxable income= $735 total tax liability- $0 tax credits= $735 tax liability.Thus credits are more valuable than deductions.
39 Refundable vs Nonrefundable Credits Refundable credits are treated the same as tax payments. A refundable credit is subtracted from the amount of tax owed. For example, if you owe $800 in taxes and qualify for a $1,000 refundable credit, you would receive a $200 refund.Nonrefundable credit can only reduce the amount owed to zero. For example, if you owe $800 in taxes and you qualify for a $1,000 nonrefundable credit, you would not have a tax liability. You will not receive the difference as a refund.Refundable CreditsNonrefundable CreditsEarned Income CreditAdditional Child Tax CreditAmerican Opportunity CreditChild and Dependent Care ExpensesChild Tax CreditRetirement Savings Contribution CreditLifetime Learning Credit
41 Child & Dependent Care Expenses Credit: Qualified Work-Related Expenses Expenses must be paid for the care of the qualifying person to allow the taxpayer (and spouse) to work or look for workCare includes the costs of services for the qualifying person’s well-being and protectionExpenses to attend Kindergarten or a higher grade: NOT AN EXPENSEExpenses for summer day camp qualify, but those for overnight camp are not covered!Expenses must be paid for the care of the qualifying person to allow the taxpayer (and spouse) to work or look for workCare includes the costs of services for the qualifying person’s well-being and protection
42 Five Qualifying Tests for Dependent Care Qualifying Person must be under age 13 or disabledTaxpayers must have Earned IncomeWork-related expense - not volunteer workCannot file MFSProvider Identification Number (SSN/EIN) and address RequiredPayments can’t have been made to taxpayer’s spouse, dependent child or child under 19
43 Other Tests Work-Related Expense Test Filing Status Test Allows the taxpayer to work or look for workProvides for qualified person(s) careCare does not include campsCan be a payment to a relativeFiling Status TestNot allowed on MFS returnsProvider Identification TestDue diligence (address/ssn or ein)Provider refusalIf the care provider refuses to give the taxpayer the identifying information, what do you do? Report whatever information is available, enter “see page 2” for the missing information, and provide a statement at the bottom of page 2 of Form Note: The taxpayers will not be able to e-file their returns if the provider information is not shown on their returns.
44 Child & Dependent Care Expenses Credit: Notes If you had expenses that met the requirements for the previous tax year, except that you did not pay them until the current tax year, you may be able to claim them on your tax return.Taxpayer’s who cannot provide all of the provider’s information or who have incorrect information may still be able to take the credit if they can show they used due diligence in trying to obtain the info.A couple of things you should note. If you had expenses that met the requirements for 2014, except that you did not pay them until 2015, you may be able to claim them in Taxpayer’s who cannot provide all of the provider’s information or who have incorrect information may still be able to take the credit if they can show they used due diligence in trying to obtain the info.Taxpayers will not usually have a document for this credit – all they need is the name, address and EIN or SSN of the childcare provider. The taxpayer will need to call their provider or come back with this information if they do not have it.
45 Child & Dependent Care Expenses Credit: Employer Provided Benefits If a taxpayer had employer-provided benefits, they will appear in box 10 of the Form W-2
46 Child & Dependent Care Expenses Credit: Employer Provided Benefits Reported on Form W-2, box 10These are dependent care benefits the employer paid either directly to the employee or on the employee’s behalf for dependent care expenses (i.e., to daycare)Amounts paid on behalf of the taxpayer by the employer will reduce the dollar amount of the creditSometimes, and employer provides dependent care benefits paid directly to the employee or on the employee’s behalf for dependent care expenses—usually to a daycare.If there is ever an amount listed in box, an additional form must be completed—Form This form is for the Child and Dependent Care Expenses Tax CreditJus know that an amount in this box will require additional action outside of the W-2.
47 Child & Dependent Care Expenses Credit: Divorced/Separated Parents Custodial parent can claim the Child & Dependent Care Expenses Credit, even if he/she did not claim the dependency exemptionChild & Dependent Care Expenses Credit: Divorced/Separated ParentsThe Child and Dependent Care Expenses Credit is another benefit that always belongs to the custodial parent, even if he/she did not claim the dependency exemption.Reminder: This occurs with the Division of Benefits when a taxpayer signs a Form 8332.This situation is complicated to determine.SEE YOUR SITE COORDINATOR
48 Limit on ExpensesAmount of eligible expenses limited to the lowest of:Lower paid spouse’s earned income (if married)Single taxpayer’s earned incomeActual expenses paidOverall limits of$3,000 for one qualifying person$6,000 for two or more persons
49 Audrey and ScottAudrey is a stay at home mom. Her husband, Scott, works and had earned income of $48,000 for the tax year. They have a young son with autism who must be supervised at all times. Audrey volunteers 12 hours a week at an autism hotline. She and her husband pay a caregiver to care for their son during those hours.
50 Do they qualify for the Dependent Care Credit? Why? They do not qualify for the dependent care credit.The caregiver expense is not work related.They do not pass the earned income test because Audrey does not earn wages for her hotline work.
51 ExampleJulie spent the following amounts on child care for her 10-year-old daughter, Melissa. Are any of these eligible costs for the Child & Dependent Care Expenses Credit?$300 for overnight camp$1000 to her ex-husband for after school-care$1500 to her mother for after-school care$500 to her 15-year-old son for babysitting
52 Example – AnswerJulie spent the following amounts on child care for her 10-year-old daughter, Melissa. Are any of these eligible costs for the Child & Dependent Care Expenses Credit?$300 for overnight camp – NO$1000 to her ex-husband for after school care – NO$1500 to her mother for after-school care – YES$500 to her 15-year-old son for babysitting – NO
53 Child Tax Credit (CTC)$2,000 credit for each qualifying child under 17 years of age at end of 2018Son, daughter, brother, sister, or their descendantsU.S. Citizen, U.S. National or Resident of U.S.Did not provide over half of their own supportLived with taxpayer for more than half of the yearTCJA denies the CTC (both refundable and non-refundable portions) to immigrant children without a Social Security Number (SSN).However, children who would otherwise qualify for the CTC, except that they lack a SSN, ARE eligible for the new non-refundable $500 credit for other dependents.A taxpayer can claim a Child Tax Credit for a child only if they claim a dependency exemption for the child.
54 Additional Child Tax Credit If the amount of the Child Tax Credit is greater than the amount of tax owed, you may be able to claim the Additional Child Tax Credit.Form 8812, Additional Child Tax Credit, computes the credit automatically.Must have an earned income of at least $2,500It is a Refundable Tax Credit up to $1,400
55 Child Tax Credit Exception to “Time-Lived-With-You” Requirement Child born/died in 2018Kidnapped ChildSpecial Rules for Children of divorced, separated or never married parents
56 Credit for Other Dependents There is a $500 nonrefundable credit for other dependents who do not qualify for the $2,000 child tax credit.I.E. children who are age 17 and above or dependents with other relationships (such as elderly parents).The dependent must be a U.S citizen, U.S. national, or resident of the U.S.The dependent must have a valid identification number (ATIN, ITIN, or SSN).Taxpayers cannot claim the credit for themselves (or a spouse if Married Filing Jointly).
57 Qualified Retirement Savings Contributions Credit This “Savers” tax credit amount is either 50 percent, 20 percent or 10 percent of your retirement plan or IRA contributions depending on your adjusted gross income:Introduce the “Credit for Qualified Retirement Savings Contributions,” a non-refundable tax credit meant to encourage taxpayers to save.Point out the chart in Publication 4012, Page G-7Discuss eligibility— To be eligible for this saver’s credit, a taxpayer:Must be age 18 or older by the end of the tax year,Cannot be claimed on another person’s tax return, andCannot be a full-time student.Refer to Exhibit 6 (Form 8880) that has a table for the credit rate based upon Filing Status and AGI.The Credit for Qualified Retirement Savings Contributions is figured by multiplying the credit rate by the lesser of the:Maximum allowable contribution ($2,000), orEligible contributions.If the taxpayer is filing Married Filing Jointly, both the taxpayer and the spouse are eligible for a credit on the maximum annual contribution amount of $2,000.
58 Retirement Savings Contributions Credit: General Eligibility Requirements A contribution to an IRA or other qualified plan for the tax year (up to $2,000 of contributions eligible).Age 18 or olderNot claimed as a dependent on someone else’s tax returnNot a full-time student during the tax yearWithin certain AGI limits based on filing status.This is a Non-refundable credit. Requires Form [See 4012 Tab G Nonrefundable Credits pg G-9]To be eligible for this saver’s credit, a taxpayer:Must be age 18 or older by the end of the tax year,Cannot be claimed on another person’s tax return, andCannot be a full-time student.Refer to Exhibit 6 (Form 8880) that has a table for the credit rate based upon Filing Status and AGI.The Credit for Qualified Retirement Savings Contributions is figured by multiplying the credit rate by the lesser of the:Maximum allowable contribution ($2,000), orEligible contributions.If the taxpayer is filing Married Filing Jointly, both the taxpayer and the spouse are eligible for a credit on the maximum annual contribution amount of $2,000.
59 Retirement Savings Contribution Credit: Form W-2
60 Retirement Savings Contribution Credit: Contributions Record How do I know if the taxpayer has made a qualifying contribution?Form W-2, Box 12 and one of the codes: D, E, F, G, H, S, AA or BBForm W-2, Box 14 and codes for military personnel: Q or ECAUTION: Entries in box 14 that are treated as employer contributions are NOT eligible for the creditIndicators to look for to see if a taxpayer made a qualifying retirement contribution can be found on:Form W-2, Box 12 and one of the codes: D, E, F, G, H, S, AA or BBForm W-2, Box 14 and codes for military personnel: Q or E
61 Retirement Savings Contributions Credit: Eligible Contributions Some retirement distributions reduce the eligible contributions for the creditIn addition to retirement distributions made during the current tax year, the taxpayer must also reduce eligible contributions for distributions taken during the previous two tax yearsSince this credit is meant to encourage retirement saving, the credit must be reduced by any amount that the taxpayer withdrew during the tax year and the two preceding years.
62 ExampleBob, age 48, contributed $600 to an IRA during the tax year. During the year, he worked full-time and had an AGI of $24,000. He is not a student. Is Bob eligible to claim the Retirement Savings Contribution Credit?
63 Example – AnswerYes: Bob contributed to an IRA, meets the age and AGI limits, is not a dependent and is not a full-time student.
65 Education CreditsEducation credits help to offset the cost of higher education expenses paid during the yearTwo education credits available:American Opportunity CreditLimit to $2,500 PER STUDENT (not per return)Partially refundable – up to $1,000 PER STUDENTLifetime Learning CreditLimit to $2,000 PER RETURN (not per eligible student)Entirely nonrefundableAlways begin by determining if the taxpayer qualifies for the AMERICAN OPPORTUNITY Credit since it is larger and partially refundable.The purpose of education credits is to offset higher education expenses paid during the year for the taxpayer, the spouse, or a dependent.There are two types of education credits—the American Opportunity Credit, which is up to 40% refundable, and the Lifetime Learning Credit, which is nonrefundable.
66 American Opportunity (Hope) Credit Lifetime Learning Credit Up to $2,500 per eligible student ($1,000 is refundable)Up to $2,000 credit per returnAvailable only for 4 tax years per eligible studentAvailable for all years of post secondary education and for course to improve job skillsStudent must be pursuing a degree or recognized education credentialStudent does not need to be pursuing a degree or credentialStudent must be enrolled at least half timeAvailable for one or more coursesNo felony drug conviction on student’s recordFelony drug conviction does not applyExpenses include tuition, fees, and course materialsExpenses include only tuition and feesThis chart shows the differences between the two education credits, the American Opportunity (Hope) Credit and the Lifetime Learning Credit[read through each line and point out differences between the two]
67 Other General Eligibility Filing status cannot be Married Filing SeparatelyCannot be claimed as a dependent on someone else’s returnAccredited institutionCAN claim on the basis of expenses paid with student loansThere are several eligibility requirements a taxpayer must meet to take an education credit:A taxpayer’s filing status cannot be MFSThey cannot be claimed as a dependent on someone else’s returnQualified expenses include tuition and fees required for enrollmentThey must have paid tuition to an accredited institutionCAN claim the credit on the basis of expenses paid with student loan
68 Dependents When the student is claimed as a dependent: A dependent cannot claim education credits for themselves.The taxpayer who claims the dependents exemption must claim the education credits.If the taxpayer claims the dependency exemption, any amount paid by the student is considered to have been paid by the taxpayerWhen a student can be claimed as a dependentThe taxpayer must claim the credit if the taxpayer claims the exemption for the dependentThe student must claim the credit if the taxpayer does NOT claim the exemptionIf the taxpayer claims the dependency exemption, any amount paid by the student is considered to have been paid by the taxpayer.
69 Qualified Expenses for American Opportunity Credit American Opportunity (Hope) CreditQualified tuition and related expenses up to $4,000 per eligible studentCredit Calculation =(2,000*100%)+(2,000*25%) = 2, This means the first $2,000 of expenses the taxpayer gets the full dollar benefit.Includes expenses for course materials – books, supplies, and equipment needed for a course of study, whether or not they were purchased from institutionCOMPUTERS CAN ONLY BE INCLUDED IF THEY ARE A REQUIRMENT FOR ENROLLEMNT OR ATTENDANCE.For the American opportunity credit, qualified tuition and related expenses up to $4,000 per eligible student can be used to calculate the credit.These qualified expenses include any expenses for course-related materials (books, supplies, and equipment needed for a course of study, whether or not they were purchases from the institution)
70 Qualified Expenses for Lifetime Learning Credit Expenses include only tuition and feesCourse-related books, supplies and fees are included ONLY if they must be paid to the institution as a condition of enrollmentCOMPUTERS CAN ONLY BE INCLUDED IF THEY ARE A REQUIRMENT FOR ENROLLEMNT OR ATTENDANCE.Can claim up to $10,000 in tuition and fees.Credit Calculation = $10,000 * 20% = $2,000Can you see why the American Opportunity credit is better?For the Lifetime learning credit, expenses include ONLY tuition and fees.Course-related books, supplies, and fees are included ONLY if they must be paid to the institution as a condition of enrollment.
71 Expenses That Do Not Qualify for either credit Room and boardInsuranceMedical expenses (including student health fees)Transportation costsPersonal, living or family expensesExpenses for a course involving sports, games or hobbies, unless it is required for the degree/certificateRoom and boardInsuranceMedical expenses (including student health fees)Transportation costsPersonal, living or family expensesExpenses for a course involving sports, games or hobbies, unless it is required for the degree/certificate
72 Form 1098-T: Tuition Statement See 4012, page J-6 Refer to page J-6 to view a 1098-T and for assistance in determining how to enter information into taxSlayer.Box 1 shows the total payments RECEIVED by the institution in the tax year from any source for qualified tuition and related expenses
73 No Double Benefits The taxpayer CANNOT claim: Both the American opportunity and lifetime learning credits for the same qualified tuition expensesExpenses paid with a tax-free scholarship, grant, or other assistance, including Pell grants (in other words, the taxpayer must subtract these scholarships from the total expenses before claiming either credit)The Taxpayer CANNOT claim both the American opportunity credit AND the lifetime learning credit for the same qualified tuition expenses—no double benefits!The taxpayer CANNOT claim expenses paid with a tax-free scholarship, grant, or other assistance, including Pell grants (in other words, the taxpayer must subtract these scholarship from the total expenses before claiming either credit)
74 No Double Benefits The taxpayer CANNOT claim: Both an education credit AND the tuition and fees adjustment for the same qualified tuition expensesMost taxpayers benefit more from the credit, but you should try the expenses as both an adjustment AND a credit to determine which benefits the taxpayer moreThe taxpayer CANNOT claim both a credit and the tuition and fees adjustmentMost taxpayers benefit more from the credit, but you should try the expenses as both an adjustment AND a credit to determine which benefits the taxpayer more
75 Payments for the Next Academic Year Example:Michael pays $1,500 in December 2016 for the winter semester that begins in January 2017He can use the $1,500 paid in December 2016 to compute his credit for his 2017 tax returnHowever, he cannot count the $1,500 again on his tax return
76 ExampleJames takes one course at a local community college. He received a Form 1098-T showing qualified tuition expenses of $1,000. He lives with his parents, who can claim him as a dependent. Who is entitled to claim the credit? Which credit?
77 Example – AnswerIf James’s parents claim him, they must claim the credit If James’s parents do not claim him, James must claim the credit Lifetime Learning Credit
78 ExampleMichelle is a sophomore enrolled at UMSL full-time. She provides all of her own support. She paid $10,000 in the tax year for tuition and fees for enrollment to UMSL. She received a tax-free scholarship worth $4,000, and paid the rest from a student loan in her name. Can Michelle claim an education credit? Which one? How much of her expenses are qualified expenses?
79 Yes American Opportunity Credit Qualified expenses = $6,000 ($4,000) Example – AnswerYes American Opportunity Credit Qualified expenses = $6,000 ($4,000)Go to Powerpoint Presentation 2 after this slide.
80 SCENARIO 3 Walter Rivers’ Practice Return Let’s meet the taxpayer
81 FINISHING THE RETURNMake sure we have copies of all tax forms used in preparing the return.Document anything that has been verbally obtained from the taxpayer that doesn’t have paper documentation.All returns must be Quality ReviewedPrint returns (Federal and State) for taxpayerReview return with taxpayerHave taxpayer and Spouse sign 8879 for Federal. Remind them they are responsible for their return and by signing, they are agreeing it is accurate – 1 for the taxpayer, 1 for the VITA site
84 What is the Affordable Care Act (ACA)? The federal government, state governments, insurers, employers, and individuals share responsibility for improving the quality and availability of health insurance coverage in the United StatesThe ACA also created the Health Insurance Marketplace (also known asA refundable tax credit, The Premium Tax Credit, is available through the Marketplace and helps eligible taxpayers pay for coverageThe federal government, state governments, insurers, employers, and individuals share responsibility for improving the quality and availability of health insurance coverage in the United StatesThe ACA reforms the existing health insurance market by prohibiting insurers from denying coverage or charging higher premiums because of an individuals pre-existing conditions.The ACA also created the Health Insurance Marketplace (also known as
85 Shared Responsibility Provision The Affordable Care Act requires individuals to either:Have minimum essential coverage for each month of the year,Qualify for a coverage exemptionMake a shared responsibility payment when filing their federal income tax returnsThis is essentially a tax penalty for not having coverage
86 Types of Minimum Essential Coverage Government-Sponsored Programs:Medicare Part A coverageMedicare Advantage plansMost Medicaid coverageMissouri Healthnet (Missouri-comes on yellow sheet mailed directly from the State of Missouri offices)Insurance through the ‘marketplace’Health insurance through an employerNext, government-sponsored programs include coverage from Medicare Part A, Medicare Advantage plans, MOST Medicaid coverage (**for your reference: some Medicaid plans only provide limited coverage that excludes hospital, doctor, or other basic services, which is NOT considered MEC)It also includes Missouri Healthnet.
87 Tax Forms That Show Evidence of Coverage: Form W-2, Form SSA-1099 There are a couple of tax forms you are already familiar with that shows evidence of minimum essential coverage.The Form SSA-1099, which reports social security benefits received, reports Medicare Part A premiumsThe Form W-2, which reports wages & salaries from a job, can report employer-sponsored health coverage in box 12, using code DD.
88 Evidence of Coverage: Form 1095-A If a taxpayer has health insurance through the marketplace, the Form 1095-A is REQUIRED to complete the tax returnWe will discuss this form in more detail in a moment, but the Form 1095-A is a Health Insurance Marketplace Statement reporting coverage information for insurance purchased through healthcare.gov
89 Tax Forms That Show Evidence of Coverage: Form 1095-C Some taxpayers may bring Form 1095-C, Employer-Provided Health Insurance Offer and CoverageThis form will primarily be issues by certain large employers who are subject to a specific provision laid out by the Affordable Care Act. It also shows evidence of health coverage. Not every taxpayer who has employee-sponsored coverage will receive this form
90 ACA Decision Tree Did you have health insurance during 2018? Yes No Do they qualify for an exemption? See 4012, page H-14Yes - No penaltyNo - shared responsibility paymentYesWas in through the marketplace?Did you receive a 1095-A?If they did not have other forms of insurance for the full year, exemption?If they were covered all year through other insurance forms, then they are clear of penalties.ACA Decision TreeYour Publication 4012, ACA tab and Affordable Care Act Survival Kit Guide will help you to complete any ACA portions of the tax returnIf you are ever unsure about a situation involving the ACA, please see your Site Coordinator!
91 What is a Health Coverage Exemption and Who Needs It? A reason for not having health insurance that avoids payment of the individual shared responsibility paymentAnyone without insurance coverage for any month should be screened for exemption eligibilityLet’s talk now about health coverage exemptionsHealth coverage exemptions are reasons for not having health insurance that avoids payment of the individual shared responsibility paymentAnyone without insurance coverage for any month should be screened for exemption eligibility
92 Exemptions: Granted By Healthcare.gov HomelessnessEviction in the last 6 months or facing eviction or foreclosureUtility shut-off noticeDomestic violenceRecent death of a close family memberDisaster that resulted in significant property damageBankruptcy in the past 6 monthsDebt from medical expense in last 24 monthsHigh expense caring for ill, disabled or aging relativeDetermined ineligible for Medicaid because state did not expand coverage**Will be common because Missouri did not expand coverageLet’s now discuss what hardship exemptions can be granted by healthcare.govMany of the following have very specific guidelines before they can be claimed (which is why you should have a Site Coordinator help in applying for these exemptions online)Read through list of exemptionsRefer to Publication 4012, tab ACA page 7, entire chart of exemptions listed.
93 What is a Premium Tax Credit? A Premium Tax Credit (PTC) lowers the cost of health insurance coverage purchased from healthcare.govA PTC can be either:Taken in advance (payment forwarded directly to the insurer monthly to reduce premiums), ORTaken on the tax return (payment is claimed as a lump sum when filing the return)A premium tax credit (PTC) lowers the cost of health insurance coverage purchased from healthcare.govA PTC can be either:Taken in advance (payment forwarded directly to the insurer monthly to reduce premiums), ORTaken on the tax return (payment is claimed as a lump sum when filing the return)
94 Summary of ACA INDIVIDUAL SHARED RESPONSIBILTY PROVISION Taxpayers and their dependents are required to:have minimum essential coverage, orhave an exemption, ormake a shared responsibility payment when filing a federal income tax return (a penalty).PREMIUM TAX CREDITTaxpayers who (or whose family members) enrolled in health insurance coverage through the Health Insurance Marketplace:may be eligible for PTC andmust reconcile any advance payments of PTC when filing a federal income tax return.
95 SCENARIO 4 Paul Waters Practice Return Let’s go back into Taxslayer and work on another Scenario Return.Let’s meet the taxpayer
96 FINISHING THE RETURN Ask the questions in the Prep Use Fields Make sure we have copies of all tax forms used in preparing the return.Document anything that has been verbally confirmed with the taxpayer that doesn’t have paper documentation, but is reflected in the tax returnAll returns must be Quality ReviewedPrint return for taxpayerReview return with taxpayerHave taxpayer sign 8879 for Federal and remind them they are responsible for the return
98 Tax Types Self employment tax Social Security and Medicare taxes on tip incomeAdditional taxes on IRAs and other qualified retirement plansHousehold employment taxes (out of scope)Repayment of first time homebuyer credit
99 First Time Home Buyer Credit In 2008 there was a First Time Home Buyer program. Money received must have been repaid starting inReport repayment on line 60b from Form 5405.Minimum required repayment each year is $500.Will need prior tax return information to complete.See your site coordinator!
100 Tax on Tip IncomeTips received but unreported to an employer in excess of $20 per month are taxable in regards to Social Security and Medicare taxesTips are reported on form This will come from the W-2 and the tax is calculated automatically.Taxes are calculated at 6.2% for SS and 1.45% for MedicareEnter all information on the W-2 into TaxSlayer appropriately and the software takes care of all this for you!
101 Tax on Retirement Plans The taxpayer must pay income tax plus an additional tax if any of the following apply:A distribution is taken before the individual reaches the age of 59 1/2 and it is not rolled over into another qualified plan or IRA, and no other exception applies [See Tab D Income pp for 1099-R box 7 codes]Minimum distributions are not withdrawn when required (out of scope)Excess contributions are not removed by the due date of the return, including extensions (out of scope)
102 Early Distribution Exceptions Form 5329 is used for calculation of additional taxes. [The program does this automatically.]Exception codes for early withdrawal from an IRA are on page H-2. For example:03 Distributions due to total and permanent disability04 Distributions due to death07 For unemployed to purchase health insurance08 Made for higher education expenses09 Made for purchase of a 1st home [$10,000 limit]This form is for tax on early distributions
103 UNIQUE FILING SITUATIONS These will likely require your site coordinator’s assistance
104 Sale of Home Sale of a home is reported on a 1099-S May exclude gains up to $250,000/$500,000 jointGenerally can not deduct a loss on sale of homeCost basis of home is determined by the following:Purchase priceClosing costsAdditions or improvements that have useful life of more than one yearExamples: additional bathroom, pool, fence, new roof, deck, etc.Repairs to maintain the home but do not prolong the life
106 Rental Income Rental Income goes on a Schedule E Requires certification at Military LevelOtherwise, this income is Out of Scope.Two people must be certified at the military level to prepare this.
107 Schedule K-1Income reported on Schedule K-1 will be included on the taxpayer's return in various places depending on the type of income:Income reported on Schedule K-1 that is within the scope of VITA/TCE includes:Interest income (Schedule B)Dividend income (Schedule B)Net short term capital gains and losses (Schedule D)Net long term capital gains and losses (Schedule D)Tax-exempt interest income (Form 1040, line 8b) from Schedule BRoyalty income (from Schedule E)
108 Foreign Tax CreditTaxes paid to a foreign government on foreign source income that is subject to U.S. tax.Entered on line 48 on the 1040If the amounts are more than $300 (or $600 for MFJ) and they do not meet an exception, then taxpayers must file Form Form 1116 is out of scope.
111 Property Tax Credit Program Gives credit to certain senior citizens and 100 percent disabled individuals for a portion of the real estate taxes or rent they have paid for the yearCredit is for a maximum of $750 for renters and $1,100 for owners who owned and occupied their homeCredit is based on the amount of real estate taxes or rent paid and total household income (taxable and nontaxable)
112 QualificationsNOTEOnce a claimant turns 65 that is their qualification status even if their qualification was disabled in the past except for disabled veteran.65 years of age or older100% Disabled Veteran100% Disabled60 years of age or older and received social security surviving spouse benefits
113 Income Limits Examples of household income that may apply: The maximum income level for claimants who rented or owned their home a portion of the year is $27,500 (after any exemptions).The maximum income level for claimants who own and occupy their home for the entire year is $30,000 (after any exemptions).Examples of household income that may apply:Social Security, wages, interest, pensions, annuities, dividends, public relief, SSI/TANF, unemployment benefits, railroad retirement, VA payments, rental income
114 FormsAnyone who is required to file or will be filing a MO-1040 must complete Schedule PTS with the MO MO-PTC is to be used when a person is not required and will not be filing a MO-1040.
115 First Time Filers to the Property Tax Credit Program Return must be filed on paper format (2D Barcode preferred)All income documents must be attached (W-2’s, 1099R’s, 1099-SSA’s, SSI for example)Paid real estate tax receipt and Form 948 (if applicable) must be attached. A mortgage statement is not acceptable as proof of paid real estate taxProof of rent paid (rent statement, signed letter from landlord, Form A lease agreement is not proof of rent paidFirst time PTC Filers:
116 MO-PTC-Important Notes Real estate tax paid on home owned and occupied by taxpayerPrimary residence only, secondary homes do not qualifyDo not include special assessments (sewer lateral) penalties, service charges and interest listed on the tax receiptMortgage statements will not workTaxpayers who rent:Printed letter head with name, address and telephone number of landlord is recommended by the stateReceipts may be denied or questionedCanceled checks may be used; however, must have checks for entire year and front and back must be readableIt is the taxpayers responsibility to make sure their items are presented in an organized manner. Do not spend valuable time sorting through their documents.
117 Now You TryPTC%20Fillable%20Calculating_2017.pdfMary P. Goodman is 67 years old, and a widowDOB 11/12/1949In 2017, she paid $1,104 in real estate taxes on her residence at 123 Happy Street St. Louis Missouri 63044Mary did NOT have a federal filing requirementHer only source of income was Social SecurityThe total benefit she received in was $9,011 (on 1099 SA)Mary does not want direct deposit
118 Now You TryRoger C. Jones is 92 years old and is singleDOB 02/15/1924In 2017, he paid $223 per month in rent for his apartment located at 429 Runaway Avenue St. Louis, MORent was paid to his daughter, Becky Jones who is the owner of the apartment. The last four digits of Becky’s social security number are The physical address of the rental is the same as Roger’s main address. Becky’s phone number is (314) and her address is 430 Runaway Avenue St. Louis, MO 63301Roger did NOT have a federal filing requirementHis only source of income was Social SecurityThe total benefit he received in was $6,011 (on 1099 SA)Roger does not want direct deposit
119 Pension ExemptionsThe military pension exemption is phased in at 100 percent of the military pensionDepending on Missouri AGI, public pension may be eligible for an exemption or partial exemption
120 Identity Verification Quiz In October the Department implemented increased security steps to protect taxpayers from identity theft and refund fraud. The Department will ask some taxpayers to confirm their identities by completing an Identity Confirmation Quiz.Taxpayers selected to take the quiz will receive a letter from the Department of Revenue following the submission of their tax return. The quiz is taken on a secure website and should only take a few minutes to complete. Taxpayershave 30 days to take the quiz.