2010 Season City Tax Training

Accounting Aid Society 2010 Tax Season City Tax Training

January 2010

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 household income of $25,000 per year or less (regardless of age) or families with income of $50,000 per year or less.

Check with the individual city instructions and/or a tax supervisor whenever you encounter something unusual.

Quality

Our number one priority is quality! We are not going to do complicated returns which

exceed our training or capability. Don’t guess if you are not sure how to handle a

particular situation. Consult the instructions and/or a tax supervisor for

help. All returns should be reviewed by a tax supervisor.

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.

City Returns and TaxWise

TaxWise makes city income tax returns very easy for most of our clients.

Detroit forms and the Common Form 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-2’s. In TaxWise the proper name of the city must be entered (no abbreviations).

Residents and Non-Residents

Residents are taxed on income from all locations.

Non-residents are taxed only on income from within the city.

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 benefits are not taxable on city returns.

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.

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.

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.

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 GainsIn 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.

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).

Detroit Schedule N - Form D-1040NR

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 to the Detroit return. The preparer must enter this income on the Miscellaneous Income line of the return. Gambling winnings will flow through to the Michigan Cities Common Form. Note: Detroit, but not other cities, has historically allowed an offset for gambling losses).

Detroit Additions-Form D-1040R

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

Detroit Deductions-Form D-1040R

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.

Tax Rates

Detroit - 2.50% Residents

- 1.25% Non-Residents

Highland Park - 2% Residents

- 1% Non-Residents

Hamtramck, Pontiac - 1% Residents

- 0.5% Non-Residents

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?

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 Randy’s 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.

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.

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 resident’s city. See resident city instructions to ensure this credit is calculated properly.

Enter the lesser of the tax on the non-resident return or the amount calculated above as a credit to be subtracted from the tax liability on the resident return.

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?

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 Another City on her

Hamtramck return is $51, the lesser of the two ($127 vs. $51).

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, assuming there is no city income tax withholding on her W-2 .

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.

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.

Filing

The cities do not offer electronic filing, so print two copies of the city return and make sure that the taxpayer mails a signed copy. Mailing envelopes are available at the tax sites.

Attach copies of W-2’s 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.

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.)

Thanks for attending this session!