2017 Basic Certification Study and Reference Guide

Transcription

1 2017 Basic Certification Study and Reference Guide 1 P age

2 Basic Scenario 1: Calvin and Betty Albright 1. Qualifying health insurance coverage also known as minimum essential coverage or MEC under the Affordable Care Act (ACA) (Reference: Volunteer Training Manual (Manual) page 220) What type of coverage qualifies as minimum essential coverage (MEC)? If a client has Medicare or Medicaid (often referred to as County Care in Cook County) does that meet the requirement to have qualifying health insurance? The Manual lists the coverages that are considered minimum essential coverage. Remember that verbal confirmation is acceptable, but it may be helpful to have insurance forms. 2. Shared responsibility payments under the ACA (Reference: Manual page 220 to 237) Must you have MEC minimum essential coverage for all 12 months of the year? If only one spouse does not have MEC, does the penalty show up on their joint return? The ACA requires individuals to have qualifying healthcare coverage (minimum essential coverage) for each month of the year unless they qualify for a coverage exemption. Unfortunately, taxpayers who do not obtain minimum coverage and don t qualify for one of the exemptions listed in Publication 4012 on page ACA-7 OR the Manual on page 230 will have to pay an additional tax called the Shared Responsibility Payment. This is often referred to as the penalty or the fee for not having insurance. Make sure to pay close attention to the ACA worksheets in ProSeries. If a taxpayer has to pay a Shared Responsibility Payment, it will show up on the 1040, Page 2, Line 61. Remember if a client qualifies for one of the exemptions listed on page 223 of the Manual, they can be entered on Form 8965 (Health Coverage Exemptions) and the Shared Responsibility Payment may be reduced or eliminated. 2 P age

3 Basic Scenario 2: Dana Glendale 3. American Opportunity Credit (Reference: Manual page 160 and 161) Who is eligible to claim the American Opportunity Credit if the student can be claimed as a dependent of another taxpayer s return? The Manual provides who is eligible to claim the credit and provides the other requirements. There is both a refundable portion and a non-refundable portion, with the refundable portion having a few additional requirements. This is a common question that arises for college students whether they or their parents are entitled to the American Opportunity Credit for a students college expenses. 4. Filing Status (Reference: Quick Reference Guide (QRG) pages and Manual pages 12 to 24) Which filing statuses are most advantageous? To determine filing status follow the decision tree in the Quick Reference Guide on page 23. Page 22 of the QRG ranks the standard deductions related to filing status from highest to lowest. The amounts of the standard deductions for each filing status are listed on page 29. You must have a qualifying person in order to file as Head of Household. Note that the definition of qualifying person for Head of Household filing status is different depending on whether the taxpayer is married or not. Basic Scenario 3: Bob Hillsdale 5. Earned Income Tax Credit (EITC) (Reference: QRG page 32 and Manual page ) What is the criteria to claim someone for the Earned Income Credit? The QRG contains a chart that summarizes whether a taxpayer can claim a person for the Earned Income Credit. Note that the age, relationship, and residency tests are the SAME as QUALIFYING CHILD but there is no support test. Qualifying relatives are not considered for the EITC). 6. Dependency Exemption (Reference: QRG page and manual page 28) What is the criteria to claim someone as a dependent? This situation usually shows up when a grandparent, parent, and grandchild all live in the same household, and the parent has very little income. The question becomes who can the grandparent claim as a dependent, and whose dependent is the grandchild? 3 P age

4 The simplest place to start is by determining whether or not the parent qualifies as the grandparent s dependent. If so the answer is straightforward and all you have to do is follow the chart on page 27 of the manual summarizing of Dependency Requirements to see if they qualify to be a dependent. If the parent is not the grandparent s dependent, then you have to look deeper at the rules for qualifying child. In most cases, the grandchild may be the qualifying child for both the parent and the grandparent, so then you have to look at their income. The grandparent can only claim the grandchild if the grandparent s income is higher than the parent s income. Basic Scenario 4: Will Brescia 7. Dependency Exemption for Taxpayer with Individual Taxpayer Identification Number (ITIN) (Reference: QRG page 27 and Manual pages 25 to 35) ITIN holders are not entitled to all the same benefits as a person with a valid SSN. Can a taxpayer with an ITIN claim his child as a dependent? The Manual provides the four tests for determining dependency exemptions. The QRG and Manual also provide a chart that summarizes the requirements for the dependency exemption for a child. Having an ITIN does not disqualify a taxpayer from claiming dependency exemptions. As long as the person they want to claim passes the tests for Qualifying Child or Qualifying Relative, the exemption can be claimed. 8. Earned Income Credit for ITIN Holder (Reference: Manual page ) Are ITIN holders eligible to claim the EITC credit if their dependent meets all the requirements listed in the manual? There are a lot of rules and tests to see if a taxpayer qualifies for the Earned Income Credit. One of those rules is that the taxpayer (and their spouse), and any qualifying children, must have Social Security numbers. Another rule is that everyone must be a US citizen or resident alien all year. Further, a taxpayer s status cannot be Married Filing Separate. 9. Benefits that are available to ITIN holders (Reference: Manual pages 139 to 150) What benefits can ITIN holders claim? The tax credit for child and dependent care expenses allows taxpayers to claim a credit for expenses paid for the care of children under age 13 (or dependent or spouse incapable of self-care) (for whom a dependency exemption can be claimed) when the expenses were incurred. Qualified expenses are summarized in the Manual on page 142. ITIN holders can claim the Child Tax Credit for qualifying children, if they are otherwise eligible. A child (including a child with an ITIN) can only be a qualifying child for the child tax credit if that child was a US citizen, US national, or resident alien during the tax year. For the filing status, refer to the Determination of Filing Status Decision Tree on page 23 of the QRG. 4 P age

5 Basic Scenario 5: John Crowder and Marsha Kent 10. Filing status for unmarried adults with children in a household (Reference: Manual pages 12 to 24) In order to file as Head of Household, you must have a qualifying person. What are the requirements to be a taxpayer s qualifying person? Follow the Determination of Filing Status Decision Tree on page 13 of the Manual to help you determine their filling status. Another helpful chart on page 20 of the Manual is Who is a Qualifying Person Qualifying You to File as Head of Household. A qualifying person for HOH purposes must meet the relationship test. An unrelated person who can be claimed as a dependent will not meet this test. Note: In any one household, only one taxpayer can claim Head of Household filing status, provided all requirements are met. 11. Earned Income Tax Credit (EITC) for unmarried adults with children (Reference: Manual page ) What is the criteria to claim someone for the Earned Income Credit? In order for an individual to be considered a qualifying child to allow the taxpayer to claim the EITC, the individual: - Must be the taxpayer s son, daughter, stepchild, adopted child, or eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendent of any of them. - Must be under the age of 19 and be younger than the taxpayer, under the age of 24 if a fulltime student, or any age if permanently and totally disabled. - Must have a SSN that is valid for work (i.e., SS card cannot say Not valid for employment ). - Cannot be claimed by another person for the EITC. - Cannot be filing a joint return with someone else. - Must have lived with the taxpayer in the US for more than half the year. The QRG on page 32 provides the maximum amount of the EITC available, ranging from $510 with no qualifying children to $6,318 with three or more qualifying children. Thus, qualifying children can significantly increase the amount of the EITC. 5 P age

6 Basic Scenario 6: Linda Findlay 12. Gambling Winnings and Losses (Reference: Manual pages and 138) Issues: Are gambling losses offset by gambling winnings? Do you have to report all gambling winnings, even if you do not have documentation? Total gambling winnings are reported on Form 1040, line 21. Certain gambling winnings are reported on Form W-2G (Certain Gambling Winnings). When a taxpayer itemizes their deductions, they have the ability to include gambling losses (to the extent of gambling winnings) as Miscellaneous Itemized Deductions not subject to the 2% limit. Taxpayers must have kept a record of their losses. 13. Educational benefits for Married Filing Separate filing status (Reference: QRG page 36) Does filing status affect Education tax benefits? When a taxpayer has a filing status of Married Filing Separate, certain educational benefits are not available as indicated in the chart in the QRG. Further, the Tuition & Fees Deduction was not extended to the 2017 tax year. Basic Scenario 7: Gordon Ferris 14. Filing Status (Reference: QRG pages and Manual pages 12 to 24) What are the requirements to file a tax return as a Qualifying Widow(er)? To determine filing status follow the Determination of Filing Status Decision Tree in the QRG page 23. Note that Qualifying Widower and Head of Household filing statuses require qualifying dependents (and generally result in lower tax than filing as single). 15. Interest Income (Reference: Manual pages 53-54) Does all income need to be reported, even if the client did not receive a document from the entity that paid the income? Interest income is generally reported on Form 1099-INT (Interest Income) and is entered using the Interest Income Smart Worksheet on Schedule B (Interest and Ordinary Dividends). Banks are not required to send a Form 1099-INT to a taxpayer if they only earned a small amount of interest usually under $10. Taxpayers often think that means they don t have to report it, but that s not the case. If it was interest received, it s considered taxable income! 6 P age

7 16. Social Security Income (Reference: Manual pages 94 to 101) Is Social Security ever considered taxable income? Social Security benefits are reported on Form SSA-1099 (Social Security Benefit Statement), and can be both nontaxable and taxable income it depends on the taxpayer s other income and their filing status. The great thing about preparing tax returns in ProSeries is that the software does the calculations for you! Make sure you finish the tax return in its entirety enter all income, complete all worksheets, etc. before answering this question. The Manual provides details on how the taxable portion of Social Security benefits is determined if needed. 17. Taxpayers Age 65 and over (Reference: Manual page 126) Do older taxpayers get any additional tax benefits? The standard deduction is increased if the taxpayer is 65 or over or considered legally blind. While the vast majority of clients utilize the standard deduction, they may opt to itemize their deductions on Schedule A (Itemized Deductions), if that produces a larger deduction. See Manual for certain taxpayers that are not entitled to a standard deduction and for statement required to claim the additional amount for blindness. The personal exemption amount is not increased for taxpayers age 65 or over or for taxpayers considered legally blind. 18. Federal Withholding Issues: Where can you find how much Federal Withholding the client had? Where is that number on the tax forms, and on the 1040? Make sure that you double check all boxes on income statements. Taxpayers usually have tax withheld on employment earnings, and may have tax withheld on unemployment income, retirement distributions, and gambling winnings. Make sure to enter all withholding so that the client s refund or balance due is properly computed. You can see the total withholding on the Form 1040, Page 2, Line Splitting a Federal Refund between two accounts (Reference: Manual pages 196 to 197) Issues: Can a client split their refund? If so, what form(s) do you use? Taxpayers receiving a refund have the ability to deposit the refund in multiple accounts (e.g., checking and savings). Additionally, taxpayers have the ability to use their refund to purchase US Savings Bonds. 7 P age

8 The Manual indicates the procedures for the form (Allocation of Refund (including Savings Bond Purchases) used for this purpose. Basic Scenario 8: Valerie Sinclair 20. Qualifying persons for Head of Household filing status (Reference: QRG - page 27 and Manual pages 12 to 24) In order to file as Head of Household, you must have a qualifying person. What are the requirements to be a taxpayer s qualifying person? The Manual on page 20 and QRG on page 27 provide charts detailing whether any of the client s children qualify the client to file as Head of Household. A qualifying person for Head of Household purposes must meet the relationship test. An unrelated person who can be claimed as a dependent will not meet this test. Note also that while married persons who lived apart from their spouse during the last six months of the year can file as Head of Household, the requirement for having a Qualifying person is much more restrictive for married persons (typically the Qualifying person has to be their child, so, for example, grandchildren, parents, siblings, and nieces/nephews are not Qualifying persons if the taxpayer is married). 21. Qualifying child for benefits (Reference: QRG page 237) Are there different requirements for each dependency benefit? The QRG on page 27 provides a chart summarizing the dependency requirements to assist in determining whether Ethan is a qualifying child for the Dependency Exemption, Child Tax Credit and/or Earned Income Tax Credit. 22. Federal income tax withholding Issues: Where can you find how much Federal Withholding the client had? Where is that number on the tax forms, and on the 1040? Refer to Question 18 above. 23. Credit for child and dependent care expenses (Reference: Manual pages 142 to 144) What are Child and Dependent care expenses, and how do they affect a tax return? If the taxpayer has qualifying children under the age of 13 (or dependent or spouse incapable of self-care) (as outlined on page 142 of the Manual), they may be able to claim a tax credit for the amounts paid to the childcare provider. In order to do so, the taxpayer must have the name, address, and identifying number for the provider, as well as the total amount paid to the provider. Further, the taxpayer is only 8 P age

9 eligible for the Credit for Child and Dependent Care Expenses while the taxpayer (and spouse) are at work or school (also, volunteers should ensure that the W-2 (Wage and Tax Statement) is coded to the correct spouse). In ProSeries, you will add the total year amount that the client paid under Part III of the Info Worksheet. When inputting the clients dependent information there is a box for Qualified child and dependent care expenses. That will bring up Form 2441 (Child and Dependent Care Expenses) in your Forms in Use section. You ll enter the provider information in Part 1 a-d. the client should have all the information requested by the program in order for it to qualify. Since the child care credit is nonrefundable, there is no need to enter DC and complete Form 2441 if the taxpayer has no taxable income; that is, if Form 1040, line 43, is zero. 24. Student loan interest (Reference: Manual page and Publication 4012 page E-8) What determines if the parent or the student takes the deduction for student loan interest paid? Taxpayers who are repaying student loans may be able to deduct all or some of the interest paid on the loan. The requirements are outlined on page of the Manual. Taxpayers will usually receive a Form 1098-E (Student Loan Interest Statement) from the bank or loan originator that lists the amount of interest paid. To enter this type of income, click on Where Do I Enter? and type in 1098E. This will help you find the 1098-E worksheet. You ll enter the information on Part 1a-e and ProSeries will compute the adjustment for you. The deduction is limited to $ Additional tax (10% penalty) on certain distributions from Section 401(k) plans (Reference Publication 4012 pages H-2 and H-3 or Instructions to Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) What is the early withdrawal penalty for retirement plans? Generally, the additional tax (10% penalty) applies if the taxpayer is under age 59 ½ years old at the time of distribution. There are exceptions if distributions are taken for certain reasons. The list of possible exceptions can be found in the instructions to Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts). If no exception applies, the 10% penalty is assessed in the Other Taxes section of Form 1040, Page 2. ProSeries will calculate the penalty automatically, but if an exception is warranted, you ll need to complete a separate form in order to ensure the penalty is excluded from the tax return. Note that tax returns with exceptions to the penalty require advanced certification, so see your site leader if this comes up. 9 P age

10 25B. Illinois Taxable Income Is all income taxable at the Federal level also taxable at the state level (Illinois)? There are some differences in the type of income taxed at the state level versus the Federal level. In Illinois, retirement income is untaxed. This includes Social Security retirement benefits and distributions from qualified retirement plans, even in the case of an early distribution from a qualified retirement plan. Basic Scenario 9: Justin Reedley and Jenna Washington 26. Itemized Deductions (Reference: Manual pages 127 to 131) What items are included in Itemized Deductions? Sometimes taxpayers have enough eligible expenses that their itemized deductions exceed their standard deduction and they would benefit from itemizing those deductions on Schedule A (Itemized Deductions). In most cases, they will be taxpayers who own their own home and have paid mortgage interest and real estate taxes. Itemized deductions are listed on Schedule A (Itemized Deductions), and each type of deduction has its own line or section on the Schedule A. Qualifying expenses include unreimbursed medical expenses doctor or hospital bills, eyeglasses, prescription drugs but not over the counter medications or supplements. Mortgage interest and real estate taxes paid on the principal residence are also deductible. Charitable donations made to registered 501(c)(3) organizations or churches can also be listed. Donations to individuals or political campaigns are not generally deductible. IRS Publication 502 (Medical and Dental Expense) indicates the following related to health club dues: - You can't include in medical expenses health club dues or amounts paid to improve one's general health or to relieve physical or mental discomfort not related to a particular medical condition. - You can't include in medical expenses the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. Certain categories of itemized deductions (e.g., Medical, Casualty Loss and Most Other Miscellaneous Deductions) are deductible only to the extent they exceed a specific percentage of the taxpayer s Adjusted Gross Income. The general rule of thumb is to enter all qualifying expenses and let ProSeries do the math. 10 P age

11 27. State Refunds (Reference: Manual page ) When should state refunds be included in income? As outlined in the Manual on page 194 and 195, state refunds received in 2017 (for the 2016 state return) are not taxable if the client claimed the standard deduction on the 2016 Form 1040 (Individual Income Tax Return). State refunds may be taxable if the client itemized deductions for 2016 and deducted state and local income taxes. While not relevant for answering this question, the State of Illinois Federal ID Number is located on page 88 and 91 of the Manual for purposes of preparing the Form 1099-G (Certain Government Payments) Worksheet within Proseries. 28. Lifetime Learning Credit (Reference: QRG - page 36 and Manual pages 157 to 160) What items should be included when calculating the Lifetime Learning Credit? The QRG on page 36 summarizes the rules related to the Lifetime Learning Credit. The Manual on page 159 indicates the qualifying expenses. Note that these are not identical to qualified expenses for the American Opportunity Tax Credit. 29. Earned Income Tax Credit (EITC) (Reference: QRG pages and Manual pages 151 to 156) What line item on the 1040 indicates the EITC amount? The Manual on pages 218 & 219 have a sample The Manual on pages 151 and 136 summarizes the rules for determining if a client is eligible for the EITC, as well as summarizes the rules for determining if a client has children that may qualify them for a higher amount of the EITC. The QRG on page 32 provides the maximum amount of the EITC available, ranging from $510 with no qualifying children to $6,318 with three or more qualifying children. This is a significant benefit for many of our clients. 30. Adjustments to Income (Reference: Manual pages 112 to 125) What adjustments to income can taxpayers make even without itemizing their deductions? The Manual on page 112 summarizes common adjustments to income for purposes of determining Adjusted Gross Income. These adjustments are deductible, regardless of whether the client itemizes. Note that educator expenses are only deductible for work in a school that provides education in grades K- 12. Work in a separate pre-school or after-school program does not generally qualify the employee for the adjustment. 11 P age

12 31. Illinois Tax Credits (Reference: Manual pages 177 to 182) What Illinois tax credits might a taxpayer be eligible for? The Manual explains several tax credits found on the Illinois return. The Illinois K-12 Education Expense Credit and Illinois Property Tax Credits are non-refundable and do not appear on the Federal return. Note that all credits for post-secondary education are found only on the Federal return. 32. Illinois Taxable Income Is all income taxable at the Federal level also taxable at the state level (Illinois)? See hints for 25B 12 P age