State Tax Preparation Training Tax Year 2017 (From VITA WestMI modified by VITA UWWC) (Updated from TaxWise to TaxSlayer)
Who Must File A State of Michigan Tax Return? Refer to the federal information regarding earnings. Income greater than the MI personal exemption amount: $4,000. Three refundable credits in the MI portion all critical to most of our clients: - Earned income credit 6% of the federal amount - Homestead Property tax credit (HPC) - Home Heating Credit (HHC) Many of our clients will not have to file federal taxes but will file MI taxes due to the lower exemption, and the HPC and HHC often apply even if no MI income tax. 2
Starting a Michigan Tax Return The information from the federal return will transfer directly to the state return. Make sure disabilities are marked correctly on the federal return because Michigan provides special benefits. 3
Michigan Filing Status There are three statuses to file in the State of Michigan: married filing jointly, married filing separately, or single. If filing married filing jointly on the federal return, this must be the status on the state return. If on the federal return the taxpayer is filing single, head of household, or qualifying widower they will file single for Michigan. THE PROGRAM AUTOMATICALLY COMPLETES THIS SECTION. 4
Exemptions and Dependents The exemptions and dependents carry over from the federal to the state tax forms. If someone is claimed as a dependent on another return, their personal exemption on the Michigan return is reduced to $1,500 (Note: There is no exemption amount on the federal return). 5
Special Exemptions An additional $ 2,600 exemption will be available to a person if they are paraplegic, quadriplegic, hemiplegic, blind, deaf, or totally and permanently disabled. If a person has more than one disability, only one exemption should be checked. If the taxpayer, spouse, or dependent is 66 or over, then the totally and permanently disabled exemption (only) does not apply. An additional $400 exemption is available for a qualified disabled veteran (veteran disabled because of injury sustained while in service) for each of the dependents on the return. TaxSlayer (TS) is straightforward in gathering this information. 6
Income Federal adjusted gross income carries over and you don t have to enter anything again. Most subtractions will also flow from the federal information to state in TS. Care should be taken with entries for tax exempt interest or dividends from State bonds in federal Schedule B. If there are pension benefits from the federal tax return, the state tax return now requires Form 4884 to be present. The form will automatically generate. If there is income from another state, TS will ask and this is subtracted from Michigan income. Taxable income is taxed at the rate of 4.25 % 7
MI NEW FOR 2016 Michigan Amended Return Explanation of Change, Schedule AMD This is a new form that will replace the MI-1040X-12 starting with tax year 2017. This form must be completed and include when amending a 2017 MI-1040. Note: MI-1040X-12 should only be used for tax years 2012 through 2016 Schedule 1 Additions and Subtractions: Line 24 - Michigan Standard Deduction. Taxpayers who were born during the period January 1, 1946 through January 1, 1951, that reached age 67 on or before December 31, 2017 may be eligible for a subtraction of $20,000 for single filers or $40,000 for joint filers against all income, rather than solely against pension and retirement income. 8
MI AND TAXSLAYER Suggest the Guide Me pick at the start the state return, at least for the first few state returns you do: TO BE REPLACED 9
TS and additional personal information 10
REENTERING 1099-R DATA The distribution code from the 1099R is important. It drives whether the income can be used as a subtraction on the MI1040. The retirement income at this time has to be reentered on the state side with TS solely for the potential for subtraction from income for older clients. 11
PENSIONS AND FORM 4884 12
FORM 4884 AND SUBTRACTIONS FROM INCOME TS will enter the data automatically based on the age of the taxpayer, but you still need to re-enter the 1099-R data in the state section of TS. 13
SUBTRACTIONS OF RETIRMENT INCOME IN TS 14
SUBTRACTIONS OF RETIRMENT INCOME IN TS 15
SUBTRACTIONS OF RETIRMENT INCOME IN TS 16
SUBTRACTIONS OF RETIRMENT INCOME IN TS 17
SUBTRACTIONS OF RETIRMENT INCOME IN TS 18
SUBTRACTIONS OF RETIRMENT INCOME IN TS 19
SUBTRACTIONS OF RETIRMENT INCOME IN TS 20
Refundable Credits and Payments With the exception of the Homestead Property Tax Credit, all the other credits on the state 1040 will automatically calculate. The only other credit on the state return that VITA taxpayers receive is the MI Earned Income Tax Credit (6% of the federal amount), and that is calculated automatically off the federal return. 21
Use Tax Use tax is on Line 23 of the MI 1040 form. Use tax is sales tax that should be paid for out-of-state purchases. While many of our clients will have zero use tax, you should ask the question about out-of-state purchases where sales tax was less than 6%, especially online purchases where sales tax was not collected THIS SHOULD BE RARE NOW). There is a Use Tax formula the client can use that provides a use tax estimate based on AGI. TS deals with USE Tax in a straightforward manner, giving the preparer all of the options. 22
MI 1040-USE TAX FORMULA 23
...NOW, last two parts of the state returns: Michigan State Credits Homestead Property Tax Credit (HPC) and Home Heating Credit (HHC) Both the HPC and the HHC also take the relevant data from entries made on the federal return. These 2 credits, however, are based on a unique income philosophy termed Total Household Resources or THR. 24
Total Household Resources (THR) THR includes all income (taxable and nontaxable) received by all adult household members during the year, including items that might be exempt from federal adjusted gross income. Here are useful link: http://www.michigan.gov/documents/taxes/checklistdet erminethr_444822_7.pdf Household includes taxpayer and spouse. Note that if a dependent child is getting Social Security payments, these are not included in THR. See discussion on slide 47 regarding Special Living Situations. 25
TOTAL HOUSEHOLD RESOURCES EXCLUSIONS THR does NOT include: Inheritance or life insurance benefits from spouse. Food benefits like food stamps or bridge cards. Government payments made directly to educational institution, landlord, or nursing home. Income tax refunds, EITC, HPC and HHC credits. First $ 300 of total gifts received, and first $ 300 of total prizes, awards, lottery, bingo or other winnings. 26
Adjustments to Total Household Resources Line 30 is called Other Adjustments, and includes: Student loan interest These will carry over Half of the self employment tax from federal. Line 31 is for Medical Insurance/HMO premiums paid note those taken out of SS check are automatically accounted from federal entries that carry down to MI-CR. Also, dental and vision insurance counts but long term care insurance does not. An adjustment that you will want to ask the client about is out of pocket premiums paid for auto insurance. If a person has full auto insurance coverage, the taxpayer may claim $130 that can be counted toward a medical insurance premium. They can count more if they know it was higher and have documentation, or have more than one insured vehicle. 27
Total Household Resources Checklist Enter THR items on page one of the MI-CR form (Property Tax Credit) form Lines 14 to 27. All relevant data from the interview and federal taxes will enter automatically, but you should review list with client for other items. Line 27: Enter the total payments made to the household by DHS and all other public assistance payments. The 2017 Client Annual Statement (DHS-1241) mailed by DHS in January 2018 will show the total DHS payments. The statement(s) may include the following: Family Independence Program (FIP) assistance, State Disability Assistance (SDA), Refugee Assistance, Repatriate Assistance, and vendor payments for shelter, heat, and utilities. Add gifts received over $300. Note that TS is user friendly to the preparer and asks for relevant data for each THR line item. 28
Homestead Property Tax Credit (HPC) Is the taxpayer eligible? Both homeowners and renters are eligible. There are different criteria for homeowners and renters. For Home Owners: The home must be in the name of the taxpayer. Property taxes must have been charged (payment is not necessary). Taxpayer can only claim one credit, for their principal residence. Client must have property tax statements; the pieces of information needed from that form are the taxable value of the home as well as the property taxes billed. In our area, two billing statements occur, either July and December or February and October. Total Household Resources must be below $50,000, and the taxable value of the home must be below $135,000 to be eligible. 29
Homestead Property Tax Credit Eligibility Different rules for renters: If a person is renting a home or apartment, there are some additional rules that apply: The person needs to have their name on the lease. THERE IS NO EXCEPTION! The rent is counted for the number of months paid within each unit during 2017 and a credit is generated by the amount of rent paid and the client s income. 30
MI-CR: PAGE 1 LINES 9 AND 10 Line 9 is for home owners, but Line 10 is for both home owners and some renters and special housing. Line 9 is the taxable value for Principal Residence Exemption or PRE 100%. If the taxpayer shows a separate property tax bill for an undeveloped adjacent lot, and the bill says PRE 100%, the lot qualifies for part of the homestead. Line 10 is for home owners and is the property tax levied or billed in the tax year, not paid (often one in the same). Line 10 is for service fee and special housing, and mobile home owners, the value comes from a calculation on page 3. Page 3, Part 4 is for renters. Page 3, Part 5 is for Alternate Housing Facilities. TS is user friendly to the preparer with its step by step approach to entering needed data. 31
MI-CR PAGE 1 - LINES 8 TO 13 Line 13 is an important number in determining the HPC, and either comes from property taxes actually billed for home owners (Line 10) or derived from rent (Line 12) or a combination of the 2 (rare). 32
HPC LOOKING AT PROPERTY TAX BILLS Assuming PRE is 100%, add winter & summer property tax bills on homestead, billed in 2017. Amounts NOT Eligible for inclusion in Line 10: Property Taxes Levied: - Property taxes on cottages, second homes, or extra lots not listed as homestead. - Taxes paid in tax year, but levied (billed) in a previous year. - Penalty and interest on delinquent payments. - Delinquent water or sewer bills. - Special assessments for drains, sewers, a street light, etc.; not based on taxable value or not applied to entire jurisdiction. These are more common in townships than in cities. 33
HPC-PROPERTY TAX Special Problem: Property tax on homestead is paid through mortgage company. The owner will probably show you Form 1098, which reports mortgage interest paid by the owner; it may also indicate the amount of property taxes paid in the course of the year. But it does not reveal the property s PRE status; it does not show the taxable value, which you need to report; it does not indicate zero-millage items, if any; and the amount paid may not equal the amount billed during the year. Unless the owner can show you 2017 property tax bills, you will need to search the city or township s website https://secure.ewashtenaw.org/ecommerce/property/pstart. do. [This link will be on each computer desktop.] 34
HPC SAMPLE PROPERTY TAX BILL 35
HPC PART 4 - RENTERS Rent entered here must be in a property tax paying (20%) complex, which means it is unsubsidized housing. Most of our clients that are renters will be in 20% property tax paying housing. If subsidized, you use Part 5 of the MI-CR form. Rent must not include additional services (cleaning, meals) but can include utilities (including water) and pet fees. If water is metered and charged separately, it cannot be included in rent. If rent or dwelling changed during the year, use the additional lines as necessary. 36
HPC PART 5- ALTERNATE HOUSING FACILITIES- Line 54.a. Suggest you fill out Line 58 first so this is not forgotten. Check box 54.a. if a) the landlord is paying regular property taxes on the property; b) the filers rent is government subsidized (i.e., the renter pays only part of the rent, the rest is paid by HUD under Section 8; and c) the rent does not include extra services (meals, etc.). 20% of your clients rental payments will be deemed to be for property taxes. 37
HPC PART 5- ALTERNATE HOUSING FACILITIES-Line 54.b. Part 5, box 54.b. is for Service Fee Housing. This is for landlords that pay service fees and not property taxes. There are many such subsidized or limited income senior housing complexes in our area. 10% of the client s rental payments are credited as going to pay for service fees. In most cases (but not always), clients in these facilities are paying less that 3.5% of their THC for rent and will not be eligible for HPC. Here is the state link: http://www.michigan.gov/documents/taxes/service_fee_housing_2-17- 17_552319_7.xlsx 38
HPC PART 5- ALTERNATE HOUSING FACILITIES-Line 57 Note that subsidized-taxpaying and service fee housing share Lines 55 and 58, but go their separate ways thereafter. SPECIAL HOUSING, or Line 57, groups cooperative housing and facilities where a single monthly bill includes both rent and such things as meals, cleaning, and perhaps medical care. A letter from management is required to determine property tax paid. 39
HPC PART 5- ALTERNATE HOUSING FACILITIES- Line 57.a. Cooperative Housing The letter should state the percentage of carrying charges that may be counted as property taxes. Or, it may indicate monthly property tax for each unit size (# of bedrooms). If the letter also indicates taxable value (or state equalized value ) for the resident s unit size, report this Line 9. TS is user- friendly for that various situations described here and in the previous slides. 40
SAMPLE COOPERATIVE HOUSING LETTER 12/16/17 41
HPC PART 5- ALTERNATE HOUSING FACILITIES-Line 57- Adult Care Homes This category includes any facility whose monthly bill includes not only rent but such items as meals, cleaning, and perhaps medical care. This includes Nursing Homes (box 57c) and Adult Foster Care Homes (box 57d), and also most Independent Living and Assisted Living facilities (check box 57b: Home for the Aged). Any private Room & Board arrangement (combined monthly bill) is treated similarly box (57e). A letter from management will show the share of the facility s property tax bill attributable to the given resident s room or apartment. (This may be on a per day basis.) In the absence of a letter, resident s share = (resident s sq. footage facility s sq. footage) x facility s property taxes; or divide the facility s property tax by the licensed # of residents 42
HPC PART 5- ALTERNATE HOUSING FACILITIES-Line 57-Adult Care Homes-Cont d If the resident s stay is government subsidized (Section 8, Medicare or Medicaid), prorate for the portion the resident pays. If the government is paying the full amount, the resident may not claim Homestead Credit. 43
HPC PART 5- ALTERNATE HOUSING FACILITIES-Line 57- Adult Care Homes-Cont d Special case #1: The facility is non-profit, and pays no property taxes. There will be no share-of-taxes letter from management. The resident may not claim Homestead Credit. Special case #2: Room and board are billed separately. There will be no share-of-taxes letter from management. If this is a for-profit facility, go to Part 2: Renters (Lines 52-53 & Line 11). However, if your client claims $2000/mo. just for rent, be suspicious. Check with management as needed. 44
HPC PART 5- ALTERNATE HOUSING FACILITIES-Line 57- Adult Care Homes-Cont d Special case #3: MFJ couple have a homestead, but one spouse lives in an adult care home. You may claim both the tax for the homestead and the spouse s share of the facility s property tax. Write SEE STATEMENT 1 on Line 10 dotted line, and attach a letter of explanation. Return cannot be e-filed. Special case #4: Single filer maintains a homestead (not rented out) while living in an adult care home. Claim either the tax for the homestead or your share of the facility s property tax (whichever is bigger), but not both for the same period. 45
HPC SPECIAL SITUATIONS - MOBILE HOME PARK Owner-residents are treated as renters (they pay land rent), but with a few special twists. Put $ 3 per month of specific property tax on Line 10, and the rent per month less $ 3 on line 52 D. In addition to the $3/mo. ($36 if full year) that goes to Line 10, add any structures tax billed separately (by some jurisdictions) for a deck, shed or carport. TS is user-friendly for mobile home renters. 46
HPC SPECIAL SITUATIONS-SHARING ABODE SINGLE ADULTS SHARING AN APARTMENT (cooccupants, each must be on the lease). Each may file an individual claim, based on his/her THR, but rent is split evenly and differences in amount actually paid are accounted for in THR as a gift from payer to nonpayer.. INDIVIDUAL WHO HAS MOVED IN WITH FAMILY. Your client may contribute more or less regularly to expenses. But unless there is a lease contract with the home-owning relative, your client may not file for Homestead Credit as a renter. Moreover, if there were such a contract, the landlord-relative would need to file Federal Schedule E to report rental income, and could not claim the full property taxes for Homestead Credit. 47
HPC AND TS 48
HPC AND TS 49
HPC AND TS 50
HPC AND TS 51
HPC AND TS 52
HPC AND TS Once THR entries are made, go to top to click on EDIT 53
HPC AND TS 54
HPC AND TS TS makes the mobile home adjustment easy. 55
HPC CALCULATION ALTERNATIVES The standard HPC calculation begins with the amount by which the property taxes levied or the 20 % of the rent paid exceed 3.5 % of THR up to the maximum THR of $ 50,000. The HPC is 60 % of this amount. MI calls the 3.5 % the amount not refundable. Several special situations are allowed for other claimants -senior citizens or people who are paraplegic, hemiplegic, quadriplegic, deaf, or totally and permanently disabled or unremarried spouse of an individual 65 or older.. If the other claimant s THR is $ 6,000 or less, the percent age declines all the way to 0 % with THR at $ 3,000 and below. This is shown in Table 2 of the CR instruction book. There are special calculations for claimant is 65 or older, and for 65 and older who rent, and TS makes all of these calculations automatically based on entries made in the software. All claimants, once THR is reaches $ 41,000, the credit starts to phase out see Table B of the instruction book. TS does this automatically. 56
HPC-HEADING OFF CREDIBILITY ISSUES If rent is close to or more that THR, MI Treasury will likely reject the claim, e.g., client claims $8,000 THI (all Soc. Security) and $600/mo. rent. Michigan won t believe your client can live on $800/yr. ($8,000-$7,200). Ask: Was anyone helping you out financially? or paying some of your bills? or providing food, etc.? (Such income would go on HP Line 24.) Is anyone living with you and paying part of the rent? How much of the rent did you pay? You may find that a daughter helped with $250/mo. (Line 24); or that the US govt. (Section 8) paid $400/mo. of that rent, and the client only $200/mo. (Lines 54a, 55). Often the claimant is living off savings, or is borrowing to pay, in which case documentation with a paper filing (no e-file) will be required showing withdrawals from a savings account or loan information. 57
Michigan Home Heating Credit Created to help low income individuals pay for heat. Only available to the homeowner or person with both the lease AND bill in their name. Not available to students who have a lease in their name but are a dependent of another person. 58
MI HOME HEATING CREDIT 59
HHC BASICS ELIGIBILITY: All six needed: Homestead (permanent home) is in Michigan. Claimant owned or was a tenant in the home (with a lease agreement), and lived therein. Claimant did not live in college- or university-operated housing. Claimant is Not a full-time student claimed as another person s dependent. Claimant is Not a full-year resident of a licensed care facility. (adult foster care homes, homes for the aged, nursing homes, and substance abuse treatment centers). Claimant s income is within limits (which depend on number of exemptions- shown on previous slide). Filing Deadline for the 2016 HHC is September 30 of 2018 and there is no provision for failure to file for past years. Can be e-filed with Michigan 1040 returns or as credit-only return. 60
HHC-PERIOD FOR HEAT COST HPC is for heating costs from November 2015 through October 2016. DTE and Consumers bills mailed in Dec. 2016-Feb. 2017 should have a footnote giving the correct annual amount. Note that this does not include amounts billed for electricity. The residential heat total is of interest only if it is >11% of total household resources (THR). 61
HHC-CONSUMERS ENERGY Page 2 of the November to January bills will show this: 62
HHC- DTE ENERGY P2 of November to January DTE Energy bills also have the home heating amount for the HHC: 63
HHC-LICENSED CARE FACILITIES Full-year residents of a care facility are not eligible for HHC. DO NOT FILE! (includes nursing home, home for aged, adult foster care home, substance abuse center- CR-7, Line 12). Part-year residents of a facility do not check a box, but must prorate their standard allowance by days of residence. If Married Filing Jointly, and only one spouse lived in a care facility, do not check a box. 64
HHC-FILING AND PAYMENT Once you enter the heating cost, TS automatically calculates the HHC using the appropriate standard credit or alternate credit calculation based the the heating cost entered. Note that if the heating cost is not known, you can leave line blank and TS will still generate a credit. Clients with the bill in their name will receive a voucher that typically goes directly to the utility provider but not necessarily at the same time they receive their refund. Clients may receive a voucher that is mailed to them that they have to provide to the utility provider. Sometimes, for example if the heat is included in the rent, the client may receive a separate check in the mail or direct deposited to their bank account. 65
MI TAXES- CONCLUSION MI income taxes are straightforward and largely derived from data entered for federal taxes. The HPC and HHC will be important refundable credits to many of our clients and for some will be the only forms filed. Both the HPC and HHC rely on a unique income calculation the THR. For many clients this will not be difficult and will be a fallout from data in the TS interview, but care must be taken for both additions and subtractions from THR. 66