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Introduction to Tax Preparation
VITA Training Session 12012-2013
What is VITA?O Volunteer Income Tax Assistance
O People from around Lancaster who hold low income jobs (less that $50,000 per year) come to us to prepare their tax returns for free
O There are many VITA sites in Lancaster County and around the country
O The United Way of Lancaster County
Last Year at the VITA Site
O Last year at our VITA siteO We saw 418 clientsO We saved them $620,388
O Last year all throughout Lancaster CountyO We saw 2,676 clientsO We saved them a grand total of
$2,921,327
1040 (THE Document)
W-2 (Wages)
Filing StatusO There are 5 filing statuses
O SingleO Married filing jointlyO Married filing separatelyO Head of householdO Qualifying widow(er) with dependent
child
Filing Status: SingleO Use single filing status if taxpayer:
O Was never marriedO Was legally separated under a decree
of divorce or separate maintenanceO Was widowed before January 1 of that
year, was not remarried, and has no dependents
Filing Status: Married Filing Jointly
O Use married filing jointly status if taxpayers:O Live together in a common-law
marriageO Live apart but are not legally
separatedO …whose spouses have died during
the year have not remarriedO The lowest tax rates apply to the
married filing jointly status
Filing Status: Married Filing Separately
O Each spouse prepares a separate tax return that reports his or her individual income and deductions
O Tax rates are highest for the married filing separately status
O Some taxpayers choose the married filing separately filing status so that one spouse will not be responsible for the other spouse’s tax liability
Filing Status: Head of Household
O Tax rates are lower than those for single taxpayers
O Taxpayers are head of household if they:O Are unmarried or considered
unmarried as of the end of the yearO Provide more than half the cost of
keeping up a home for a qualified person for more than half of the year
Filing Status: Qualifying Widow(er) with Dependent Children
O Taxpayers can claim this filing status if:O The spouse died within two years before the tax
year in which the taxpayer is claiming this filing status
O The surviving spouse has not remarriedO In the year of death, the taxpayers were eligible
to use the married filing jointly filing statusO A child qualifies as a dependent for the
surviving spouseO The surviving spouse furnished over half the
cost of keeping up a home that was the principal home of the child for the entire year
Pop Quiz!
Answer: SINGLE
O Select the appropriate filing status:O Andrew and Fiona were divorced on
December 31O SingleO Married Filing Jointly
Pop Quiz!O Select the appropriate filing status:
O Eleanor and Garrett were married on December 31O SingleO Married filing jointly
O Answer: MARRIED FILING JOINTLY
Pop Quiz!O Select the appropriate filing status:
O Susan’s husband died on July 12 of this year. Susan has not remarried.O SingleO Married filing jointly
O Answer: MARRIED FILING JOINTLY
Pop Quiz!O Select the appropriate filing status:
O Samuel’s wife died on November 25, 2009. Samuel has no children and has not remarried.O SingleO Married filing jointly
O Answer: SINGLE
Pop QuizO Select the appropriate filing status:
O Which filing status has lower tax rates?O Single O Married filing jointly
O Answer: MARRIED FILING JOINTLY
Pop Quiz!O A taxpayer has dependent children. The
taxpayer’s spouse died in 2009. Prior to the death of the spouse, the taxpayer was eligible to use the married filing jointly filing status. Which filing status with the taxpayer probably use this year?O Married filing separatelyO Married filing jointlyO Head of householdO Qualifying widow(er) with dependent child
O Answer: QUALIFYING WIDOW(ER) WITH CHILD
Pop Quiz!O Peter and Anne are married and live together,
but they are experiencing difficulties caused by Anne’s financial problems. Peter wants to be responsible for his own taxes, but he doesn’t want to have anything to do with Anne’s tax troubles. Which filing status should Peter and Anne use?O SingleO Married filing jointlyO Married filing separatelyO Qualifying widow(er) with dependent child
O Answer: MARRIED FILING SEPARATELY
Pop Quiz!O Which of the following filing statuses
has the lowest tax rates?O SingleO Married filing separatelyO Head of householdO Qualifying widow(er) with dependent
childO Answer: QUALIFYING WIDOW(ER)
WITH DEPENDENT CHILD
DependentsO What is a dependent?
O A person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption (either a qualifying child or a qualifying relative)
O Every dependency exemption decreases income subject to tax by the exemption amountO For 2011, the exemption amount was $3700
O Taxpayers cannot claim a dependency exemption for a person who can be claimed as a dependent on another taxpayer’s return
DependentsO http://www.youtube.com/watch?v=b
2Py__B4jFA&feature=relmfu
Dependents: Qualifying Children
O To claim a dependency exemption for a qualifying child, all of the following dependency tests must be metO Dependent taxpayer test Joint return
testO Citizen or resident test O Relationship testO Age test O Residency testO Support test
Dependents: Qualifying Relatives
O To claim a dependency exemption for a qualifying relative, the person must meet the following tests:O Dependent taxpayer testO Joint return testO Citizen or resident testO Not a qualifying child testO Member of household or relationship testO Gross income testO Support test
Dependency TestsO Dependent taxpayer test
O Taxpayer is not claimed as dependent on any other return
O Joint return test O Person is unmarried or married and not filing
jointlyO Citizen or resident test
O Person is a U.S. citizen or residentO Relationship test
O Person is taxpayer’s son, daughter, stepchild, foster child, adopted child, brother, sister, or any descendant of any of them
Dependency Tests cont.O Age test (Qualifying Child ONLY)
O Child is under age 19 or under age 24 AND full time student
O Person is permanently disabled (any age)O Residency test
O Person has lived with tax payer for more than half the year
O Support testO Person must not have provided more than half of
his or her own supportO Gross income test (Qualifying Relative ONLY)
O Person must have a gross income of less than the dependency exemption
Support Test ExampleO Ms. Hernandez is 72 years old and lives in an
apartment. Last year she received $3,000 in nontaxable Social Security benefits and $400 in taxable interest income, all of which was used for her support. Ms. Hernandez's daughter, Theresa, paid $4,800 during the year toward her mother's support. Total support includes taxable and nontaxable income. Ms. Hernandez's total support is $8,200 ($3,000 + $400 + $4,800). Theresa paid more than half of her mother's support ($4,800/$8,200 = 59%). Theresa can claim a dependency exemption for Ms. Hernandez.
Comprehensive Example
O Beatrice is a single 18 year old Canadian citizen, who lives in Vancouver with her mother the entire year. In 2011, Beatrice earned $2,450. Beatrice's mother provided 60 percent of Beatrice's total support. Beatrice's mother is not the dependent of anyone else. Can Beatrice's mother claim a dependency exemption as a "qualifying child" for her?
O The dependent taxpayer test is met—Beatrice's mother is not the dependent of anyone else
O The joint return test is met—Beatrice is singleO The citizen or resident test is met—Beatrice is a Canadian citizenO The relationship test is met—Beatrice is the child of the taxpayerO The age test is met—Beatrice is under 19O The residency test is met—Beatrice lived with her mother the entire
yearO The support test is met—Beatrice did not provide more than half of her
own supportO Beatrice's mother can claim a dependency exemption for her.
Pop Quiz!O Matthew’s cousin lived with him all
yearO RelationshipO Member of householdO BothO Neither
O Answer: MEMBER OF HOUSEHOLD (A cousin does not meet the relationship test)
Pop Quiz!O Rebecca’s daughter lived at college
for nine months during the yearO RelationshipO Member of householdO BothO Neither
O Answer: BOTH (Going to school is considered a temporary absence)
Pop Quiz!O Tammy’s best friend lived with her all
year.O RelationshipO Member of householdO BothO Neither
O Answer: MEMBER OF HOUSEHOLD
Pop Quiz!O Jackie’s cousin visited every
weekend during the year.O RelationshipO Member of householdO BothO Neither
O Answer: NEITHER
Dependency Simulations
O http://www.irs.gov/app/understandingTaxes/hows/mod04/sim_mod04a_01.jsp
O http://www.irs.gov/app/understandingTaxes/hows/mod04/sim_mod04b_01.jsp
O http://www.irs.gov/app/understandingTaxes/hows/mod04/sim_mod04c_01.jsp
O Filing Status/Dependency Simulation: http://www.irs.gov/app/understandingTaxes/hows/mod05/sim_mod05_01.jsp
ExemptionsO Exemption: amount that taxpayers can
claim for themselves, their spouses, and eligible dependents.
O There are two types of exemptions:O PersonalO Dependency
O Each exemption reduces the income subject to tax
O In 2011, the exemption amount was $3700
Exemptions: Personal Exemptions
O Personal exemptions can be claimed for the taxpayer and spouse
O To claim a personal exemption for a spouseO The taxpayers must be married by the last day of
the yearO The spouse must have died during the year, and
the taxpayer must not have remarried during the year
O On a separate return, if married filing separately, spouse must have no gross income
O A taxpayer cannot claim a personal exemption for the taxpayer or the spouse if he or she can be claimed as a dependent on another tax return
Exemptions: Dependency Exemptions
O One exemption is allowed for each person claimed as a dependent
O To claim a dependency exemption for a qualifying child or a qualifying relative, these three tests must be metO Dependency Taxpayer TestO Joint Return TestO Citizen or Resident Test
Pop Quiz!O Omar and Nadia are married and file
a joint return. Both have gross income. Neither can be claimed as a dependent on any other tax return. How many personal exemptions can Omar and Nadia claim on their tax return?O 0O 1O 2
O Answer: 2
Pop Quiz!O Winona is 16 years old and a full-time
student. She earned $3200 during the summer. She can be claimed as a dependent on her parents’ tax return. How many personal exemptions can Winona claim on her tax return?O 0O 1O 2
O Answer: 0
Pop Quiz!O Delia and Brad are married. Delia’s filing
status is married filing separately. Brad also uses the married filing separately filing status. Neither can be claimed as a dependent on any other tax return. How many personal exemptions can Delia claim on her tax return?O 0O 1O 2
O Answer: 1
Pop Quiz!O Tonya and Charles filed a joint return
in 2010. Charles died in 2011. Tonya has not remarried. How many personal exemptions can Tonya claim on her 2011 tax return?O 0O 1O 2
O Answer: 2
Pop Quiz!O Bert and Maria are married and file a joint return. Bert
and Maria cannot be claimed as dependents on anyone else’s tax return. They have two children, ages 14 and 16 who lived with them all year in New York. They were the sole supporters of the children. Neither child had any income during the year. Assume the joint return and citizenship tests are met. How many total exemptions can Bert and Maria claim on their joint tax return?O 1O 2O 3O 4
O Answer: 4
Pop Quiz!O Dr. and Mrs. Fernandez are married, live in North
Carolina and file a joint return. The Fernandezes cannot be claimed as dependents on anyone else’s tax return. Their daughter, Nanita, is 19 years old, single, an a full-time student away at college. Nanita earned $4500 during the year, but her parents provided more than half her support. How many exemptions can Dr. and Mrs. Fernandez and Nanita claim on their tax returns?O 3, 1O 2, 1O 3, 0O 2, 0
O Answer: 3, 0
DeductionsO Standard deduction: reduces the
income subject to tax and varies depending on filing status, age, blindness, and dependency
O 2011 Standard DeductionsO Single: $5800O Head of household: $8500O Married filing jointly: $11600O Qualifying widow: $11600O Married filing separately: $5800
DeductionsO Brian and Sylvia Lyons have three
dependent children and are married filing jointly
O Their adjusted gross income is $63825
O The standard deduction is $11600O There are five exemptions. The
exemption amount is $3700. The total deduction for exemption is $18500 (3700*5)
O Taxable income is $33725
Deductions
Pop Quiz!O The standard deduction
O Increases the income that is subject to tax
O Decreases the income that is subject to tax
O Increases the number of exemptionsO Decreases the number of exemptions
O Answer: DECREASES THE INCOME THAT IS SUBJECT TO TAX
Pop Quiz!O The standard deduction…
O …determines the number of dependents
O …depends on the filing statusO …affects the amount of wage incomeO …is the same for all U.S. citizens and
residentsO Answer: THE STANDARD DEDUCTION
DEPENDS ON FILING STATUS
The End…for now!
O http://www.irs.gov/app/understandingTaxes/student/activities.jsp
O http://www.youtube.com/watch?v=LPSYHgCbrh8&feature=plcp
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