Having Fun With Taxes: Filing Status and Earned Income WASFAA Conference 2018

Transcription

1 Together We Rise 2018 Having Fun With Taxes: Filing Status and Earned Income WASFAA Conference 2018 Robert Weinerman, Director of Training Iron Bridge Resources, LLC

2 2 Disclaimer and Distribution This PowerPoint slide deck is part of a presentation and is not designed to be used as a stand alone study document. The information cited in this presentation is based on IRS publications, forms, and form instructions for 2016 Department of Education publications for the academic year including The PDF FAFSA Completing the FAFSA The Application and Verification Guide The ISIR Guide and SAR Comment Codes and Text The Program Integrity Website and announcements including all updates through April 15 th, 2018 Participants in this program may share this PowerPoint slide deck and other materials provided with colleagues who work for the same educational institution as they do. No other redistribution is allowed.

3 3 You Are Obligated to Know Whether a person is required to file a tax return What the correct filing status for a person should be That an individual cannot be claimed as an exemption by more than one person IRS Publication 17, Your Federal Income Tax, 2016 Who is required to file?: Pages 4-6 Which form should a person file?: Pages 6-8 Filing status requirements: Pages 20-25

4 4 What the correct filing status for a person should be Filing Status

5 Conflicting Information You must review any application if you learn that both of a student s married parents have used the Head of Household filing status Application and Verification Guide, , page 115

6 6 Conflicting Information You must review any application if you learn that a student s married parent has used the Head of Household filing status

7 7 Filing Status - Need to Know The taxpayer s marital status on the last day of the tax year If the taxpayer is supporting a person other than their spouse If the taxpayer paid more than half of the costs of keeping up a home Whether a qualifying person lives in the home If the taxpayer, if married, has lived apart from their spouse for non-temporary reasons for the last six months of the tax year If the taxpayer s spouse is a nonresident alien

8 8 Filing Status Not Relevant The taxpayer s or taxpayer s spouse s documentation status The IRS is concerned about residency status, not immigration status Whether the taxpayer or spouse have an SSN or ITIN Taxpayers and spouses are required to obtain an ITIN if they are going to be listed on a tax return Whether the taxpayer or spouse is paid accountably or under the table

9 9 IRS Marital Status Definitions Married Unmarried See for a list of states that recognize common law marriages IRS Publication 17, Your Federal Income Tax, 2016, page 20

10 Do not use this flowchart without referring to the footnotes that accompany it in Publication Filing Status Flow Chart IRS Publication 4012, VITA/TCE Volunteer Resource Guide, 2016, page B-1 (page 47)

11 11 Unmarried Taxpayers (1) Recent Widow(er)s Widow(er)s use the married statuses in the year their spouse died 2.The qualifying widow(er) status requires a dependent child or stepchild to live in the home It is available in the two years following the loss of the spouse

12 12 Unmarried Taxpayers (2) 3 4 Head of Household 3. The taxpayer paid more than ½ of the cost of keeping up a home 4. A qualifying person lived in the home for more than ½ of the year (a parent does not have to live in the home)

13 13 Married Taxpayers Head of Household Did you and your spouse live apart all of the last six months of the year for reasons that were not temporary or Was your spouse a nonresident alien? 5. The HoH-specific rule: considered unmarried 6. The taxpayer paid more than ½ of the cost of keeping up a home 7. A qualifying child lived in the home for more than ½ of the year

14 14 Temporary Absences An absence does not count if it is temporary An absence is temporary if it is reasonable to assume the absent person will return to the home and The taxpayer in the home maintains the home in anticipation of the person returning to it IRS Publication 17, Your Federal Income Tax, 2017, page 24

15 15 Who is a Nonresident Alien? An alien who does not pass the substantial presence test is a nonresident alien An individual s documentation status is not relevant See

16 16 Exempt Individuals These people are not considered resident aliens even if they pass the substantial presence test Your married students with children who are married to international students or visiting professors may be able to use the head of household filing status

17 17 Summary Unmarried HoH They paid more than ½ the cost of keeping up their home for the year A qualifying person lived with the taxpayer in their home for more than ½ the year If the qualifying person is outside of the home due to a temporary absence (for example, attending college), they are treated as being in the home AND OR They paid more than ½ the cost of keeping up a the home of a parent that they can claim as a tax dependent

18 18 Summary Married HoH They lived apart from the spouse for the entire last half of the year, for nontemporary reasons OR Their spouse is a nonresident alien who does not elect to file their US taxes as a resident alien AND ALL OF THESE CRITERIA ARE MET They did not file a joint return with their spouse They paid more than ½ the cost of keeping up their home for the year Their home is the main home for their child, stepchild or foster child for more than ½ the year They can claim an exemption for the child, even if their child s other parent actually claims them

19 Case Study Absent Spouse Your dependent student s mother is married to the student s father, who is serving a five year sentence for financial aid fraud in a federal prison. The student s mother visits the father once a week. The student was selected for verification and the mother provided a tax return transcript showing she filed using the Head of Household filing status.

20 Case Study Foreign Spouse Your student has been married since However, she reported that she filed a tax return using the Single filing status. In an exchange, she reported that her spouse is a Chinese citizen who lives in China, who will not return to the United States until she graduates in two or three years.

21 Case Study Your student has been married since However, her ISIR shows that she reported that she filed a 2016 tax return using the Head of Household filing status. In an exchange, you have learned that her spouse is an international student enrolled full-time at your institution their two year old child lives in their home

22 Income Earned from Work 22

23 23 Case Study: Losses Your student, who is married, reported that she was not required to file an income tax return and her spouse does not work. She reported $20,000 as the answer to the income earned from work question. She was selected for verification and reported that she had the income shown in the table below. Source Value Line 7 (Wages, Salaries, Tips) $10,000 Line 12 (Business Income/Loss) $15,000 Line 18 (Farm Income/Loss) a loss of ($5,000) Is $20,000 the correct answer for student income earned from work on the FAFSA?

24 24 Answering Income Earned If the values from lines 12 or 18, or the sum of the Schedules K-1 (Form 1065) box 14, Code A figures are negative, treat them as zero when answering the income earned from work questions Application and Verification Guide, , page 14

25 25 Case Study: Foreign Income Your student, who is a United States citizen, has happily married parents. The student lives in the United States with Parent One, who does not work and is not required to file a tax return. Parent Two is a Saudi Arabian citizen and lives in Saudi Arabia ten months out of every year. They earn the equivalent of $750,000 per year and cover all of the expenses for the family in the United States. Parent Two supports Parent One and the student in the US financially. Saudi Arabia does not have an income tax system. Where should the student report Parent Two s foreign earned income, which was not taxed by any government?

26 26 The Simplified Formulas Income Earned from Work (nonfilers) Adjusted Gross Income (filers) Simplified Formula Less than $50,000 Automatic Zero EFC* Less than $25,001 The dependent student s parents or the independent student and their spouse meet one of these three criteria: They were not required to file an IRS Form 1040 One of them is a dislocated worker as defined in the Workforce Innovation and Opportunity Act Anyone counted in their household size received a means-tested federal benefit during 2016 or 2017 *Independent students without a dependent other than a spouse do not qualify for the Automatic Zero EFC Application and Verification Guide, , pages 39-49

27 AVG Page 22 FAFSA Qs 45i, 94i AVG Page 16 FAFSA Qs 39, 40, 88, Reporting Nonfiler Work Income Application and Verification Guide, , pages 16 and 22

28 28 Case Study One Nonfiler Parent Your dependent student s parents are married and deeply in love, but they don t like living together Parent One lives in the U.S. and earned $85,000 in 2016 Parent Two lives in the Bahamas and is a citizen of that country. Parent Two is a nonresident alien of the United States, because they never spend more than a couple of weeks at a time in the US. Parent Two earned US$100,000 as a doctor in the Bahamas. The Bahamas does not have an income tax system.

29 29 Case Study One Nonfiler Parent Parent One filed the tax return at right using the head of household filing status What should the student report on the FAFSA as Parental AGI? A) $85,000 B) $85,050 C) $185,000 D) $185,050

30 30 Filer Married to Nonfiler Tax Filers Nonfilers Core Figure in Total Income AGI Income Earned from Work Relevant Allowances FICA Allowance Employment Allowance If the student or the student s family member is a tax filer and an AGI is reported (even if the AGI is $0), the income earned from work figures will only be used to determine allowances (and generate error flags if relevant) Application and Verification Guide, , page 16

31 31 Puerto Rico Earned Income: Filers Application and Verification Guide, , page 23

32 32 Exempt Puerto Rico Earned Income: Nonfilers Application and Verification Guide, , page 23

33 33 Puerto Rico Unique Form, Page 2 Most Puerto Rico Taxpayers must file their returns electronically. An English version of the Forma Unique can be found at the link below.

34 Case Study Combat Pay You have received an ISIR with a 400 Comment Code. Upon review, you notice that question 93e (parents combat pay) is $98,665 After talking with the student, you receive a copy of their parent s W-2, shown at left* Their leave and income statement shows $110,176 in total combat pay Which of these numbers should the student report on their FAFSA, and where? $12,511 Q $98,665 *Only data relevant to the case is included on the W-2

35 35 US Military Combat Zone Pay Some combat pay is exempt from income and employment taxes All combat pay of an enlisted member, warrant officer, or commissioned warrant officer is exempt The exemption is capped for commissioned officers Untaxed combat pay is reported on the W-2 in box 12, with a Code of Q IRS Publication 3, Armed Forces Tax Guide, 2016, pages 12-13

36 Taxable Combat Pay Exclusion FAFSA Qs 44e and 93e Taxable Combat Pay Taxable combat pay is an exclusion reported in the Additional Financial Information section of the FAFSA Collect the serviceperson s leave and earnings statement Subtract W-2, box 12, code Q from the total combat pay to determine the taxable amount to report in these questions Application and Verification Guide, , page 21

37 37 Tax-exempt Combat Pay FAFSA Qs 45i and 94i Other Untaxed Income Untaxed combat pay is listed as an item not to include as untaxed income The AVG tells us not to report untaxed combat pay as income earned from work Application and Verification Guide, , page 14

38 In Closing 38

39 39 Useful Publications Publication 3 Publication 17 Publications 590a and 590b Publication 970 Armed Forces Tax Guide Your Federal Income Tax Contributions to and Distributions from Individual Retirement Arrangements (IRAs) Tax Benefits for Education Publication 4012 Instructions for All Forms VITA/TCE Volunteer Resource Guide The instructions for each tax form has line-by-line explanations

40 40 DoE and Other Tools Program Integrity Website (Verification) ation.html Completing the FAFSA GEN Summary of Changes Video from the FSA Conference, Open Forum 03 Please listen to Craig Munier s comments that begin at about the 13 minute mark Cheryl Hunt s Tax Transcript Decoder (Click on the download icon at the upper left hand side of this web page to download the doc.)

41 Together We Rise Thank You WASFAA! Robert Weinerman, Director of Training Iron Bridge Resources, LLC