Overview of a tax return Tax return preparation from a high level

Welcome AARP Tax Aide Education is all about: Client interaction Forms Data Calculations

Overview first Before we get lost in all the detail, let’s take an look from a high level to see the structure and flow of tax return preparation.

Tax Return Preparation is a Process

Non-refundable Credits, Payments & Refundable Credits Federal Return (1040) Deductions General Info Tax Non-refundable Credits, Payments & Refundable Credits Income Account info Adjustments Signatures

1040 General Information General Information section identifies the taxpayer(s), dependents and filing status.

Where does the “general” information come from? Social Security cards or letters Photo IDs Client Intake sheet Client interview

What does a tax aide do? Review intake sheet for completeness Ask for and verify identification Verify accuracy and applicability Ensure all necessary data is available Begin tax preparation by entering data into the TaxWise® Main Information form

TaxWise Forms TaxWise supplies forms to facilitate the entry of data We transfer information from client forms to Taxwise screens Taxwise does all calculations TaxWise Main Information form

1040 Income The Income section identifies and reports all types of income that apply to the taxpayer(s). Gross income is the sum of all taxable income sources and is shown on line 22.

Where does Income data come from? W-2; from employer 1099-INT; from bank 1099-DIV; from broker 1099-B; from broker 1099-R; from pension SSA-1099; from Soc Sec 1099-G; govt …

What do you do with Income data? TaxWise forms generally have input areas with the same labels as user IRS forms to facilitate data entry. Data must match EXACTLY!

1040 Adjustments Taxpayers may be able to subtract certain expenses, payments, contributions, fees, etc. from their total income, thus adjusting their income.

Adjusted Gross Income = Sum of all Taxable Income minus Sum of all Adjustments

Where does Adjustment data come from? Most adjustment data comes from client interview and client records. There should be reporting forms for student loans and early withdrawal penalties.

1040 Deductions Deductions reduce income that is to be taxed. Two ways to compute deductions (use the one that provides best benefit to the client) Standard Deduction Itemized Deductions

1040 Standard Deduction Standard deduction Automatically calculated by TaxWise Single or MFS = $5700 MFJ or Qualifying Widow(er)= $11,400 HH = $8,400

Schedule A for Itemized Deductions

Where does Itemizeable data come from? Client interview and client records Unreimbursed medical expenses Charity donations Bank statements for mortgage interest Property and school tax statements Payroll records for state income tax withholding

1040 Taxable Income Taxable Income = Adjusted Gross Income minus Deductions (Standard or Itemized) minus Exemption amount ($3,650 times number)

Tax liability is computed on a Graduated tax scale Filing Status 10% 15% 25% 28% 33% Single 0-$8,350 $8,351- $33,950 $33,951- $82,250 $82,251- $171,550 $171,551- $372,950 Married Filing Jointly $0-$16,700 $16,701- $67,900 $67,901- $137,050 $137,051- $208,850 $208,851- Head of Household $0-$11,950 $11,951- $45,500 $45,501- $117,450 $117,451- $190,200 $190,201- Correct Tax liability is automatically computed by TaxWise

Taxable income and Tax Liability These values, while very important in the tax preparation process, are not generally known by the tax payer. It may be useful to make the client aware of these values and explain what they mean.

1040 Credits and Payments Non-refundable credits, withholdings and refundable credits are all forms of payments. These payments work together to satisfy the tax liability.

1040 Non-refundable Credits Credits reduce tax liability dollar for dollar. Non-refundable tax credits cannot exceed tax liability.

1040 Payments Payments Payroll or Distribution Withholding Estimated (Quarterly) Payments Making work pay credits Carry-over from last year

1040 Refundable Credits Refundable credits will result in a refund if they exceed tax liability and include: Earned income credit (EIC) Additional Child tax credit Home buyers credit etc.

1040 Refund or Balance Due Balance due by April 18th 2011 Penalty may apply if balance due exceeds $1,000. If there is a large refund, it is an interest free loan; consider adjusting withholding (W-4)

1040 Signatures Signers of the return are liable for its accuracy, whether or not they paid someone else to prepare it. Tax aides do not sign and are not liable for the return.

Federal Return Summary Deductions General Info Tax Non-refundable Credits, Payments & Refundable Credits Income Account info Adjustments Signatures

Process continues for State information

New York State Considerations

NYS Income tax Based closely on Federal return. Provides Additions and Subtractions for differences in income and adjustments. Social Security, public pensions and $20,000 (per person) private retirement income is excluded! No personal exemptions, just dependents. Many obscure exceptions and credits.

General Info Copied from 1040 NY IT-201 Pg 1 General Info Copied from 1040

Additions & Subtractions Deductions NY IT-201 Pg 2 Additions & Subtractions Deductions

Tax computation, credits NY City Voluntary gifts NY IT-201 Pg 3 NY City Voluntary gifts

Payments & Refundable credits Amount due or refund Signatures NY IT-201 Pg 4 Amount due or refund Signatures