Individual Taxation and 1040 Preparation

2 “In this world nothing is guaranteed but death and taxes”—Benjamin Franklin

3 Main Sections of 1040 Return Part I- Income (Lines 7-22) Part II - Adjustments to Income (Line 23-37) Part III – Deductions (Line 40) Part IV – Taxable Income and Tax Calculation (Lines 43-44) Part V – Credits (Lines 47-57) Part VI – Tax Payments Withheld (Lines ) Part VII– REFUND/PAYMENT (LINE 73)

4 Bhattarai Family (4 People) Gross income $60,000 Deduct. for AGI Adj. Gross Income 60,000 Less: 1a. Standard Ded. 10,300 1b. Itemized Ded. 12,000 (12,000) 2. Exemptions 3,400 13,600(13,600) Taxable Income 34,400 Tax Before Credits $5,160 Less Credits(1,000) Less Taxes Withheld(5,000) Refund 840

5 Filing Status Single Individuals Married Filing Joint (MFJ) Married Filing Separate (MFS) Head of Household (HH)- pay more than 50% of the household costs for a qualifying dependent living with you, or parent not living with you. Qualifying Widower- Death within two years, and support child. File Married filing jointly the year of death.

6 Gross Income Includes: Wages and Salary (Form W-2) Interest Income (Form 1099-INT) Dividends from Stock (Form 1099-DIV) Alimony Tips and Cash bonuses Capital Gains / Losses Unemployment compensation

7 Compensation – Wages

8 Adjustments to Gross Income (to Calculate AGI) Adjustments to AGI are (mainly) deductions, to reduce your income when the government recognizes that they should not tax someone for a given reason Common deductions are: 1. 10% early IRA withdrawal penalties 2. Moving expenses (if the move is job required, more than 50 miles away from original home, and have stayed at the place for more than 9 months): can deduct direct moving costs such as truck rental or motel expenses Example of when taxpayer needs to keep documentation 3. Business Expenses (Schedule C) – Beyond Scope 4. Self-employment tax (50% deductible) 5. Student loan interest deduction (Form 1098-E) Up to $2500 max

9 Standard Deduction and Exemption Standard Deduction amount depends on FILING STATUS and changes every year. For 2007: 1. Single and MFS - $ MFJ - $10,700 (double of Single) 3. Qualified Widow/Widower - $10,700 (same as MFJ) 4. Head of Household - $ Dependent - $850 to $ Additional if blind or if age 65 or older - $1050

10 Standard Deduction and Exemption Exemptions 1. Note that the number of exemptions allowed per taxpayer is determined on the first page of the Per taxpayer and dependent, exemption amount for 2007 is $3400 (note that a dependent cannot claim an exemption unless the taxpayer claiming him/her did not take it)

11 Qualifying Child Requirements Definition of a qualifying child for purposes of the dependency exemption, child tax credit, EIC, dependent care credit and HOH filing status. Support Test- provided more than one-half of his or her support Citizenship/Resident Test-Must be a citizen/resident of US, Mexico, Canada Joint Return Test Relationship Test- Must be taxpayers child or a descendent of the taxpayers child or taxpayers sibling

12 Itemized Deductions NOTE: The GREATER of the Standard Deduction or Itemized Deduction should be taken. Itemized deductions usually exceed the Standard when the taxpayer has significant home mortgage interest; this greatly increases the taxpayer’s annual expense, and the government takes that into account. A limited number of items are allowed in the calculation of Itemized Deductions, including: 1. Charitable Contributions 2. Theft and Casualty 3. Property and/or State/Local taxes 4. Personal interest (includes mortgage)

13 Taxable Income and Tax Rates Married Rates Single Rates

14 Credits Tax Credits mainly reflect government’s equity, social, and economic considerations. All of them use AGI as a benchmark to determine the amount of allowable credit. Credits directly reduce the amount of tax owed by a taxpayer. For the purposes of the VITA program, we will be focusing on the following credits: 1. Credit for child and dependent care expenses (line 48) –Child Under 13 years 2. Education credits (line 50); includes: Hope Credit ($1650 $/$), OR Lifetime Learning Credit (20% up to $2000) 3. Child tax credit (line 53) –Under 17 child ($1000) 4. Earned Income Credit (line 66a) –For working poor even if you didn’t pay tax 5. Additional child tax credit (line 68)

15 Payment or Refund Compare taxes after credits to: Taxes withheld during the year Difference is Payment or Refund

Economic Stimulus Must file a tax return to qualify Most individuals will receive $600 ($1200 for joint filers) Another $600 per each additional child

17 Nepali Specific Issues Students must file 1040NR for first five years of residence in U.S. Not allowed to take standard deductions Only allowed to take certain itemized deductions

18 When to File Due April 15 th Automatic 4 month extension (file Form 4868) No impact if you are getting refund Will get charged interest if you have to pay Additional 2 month extension available

19 Simple Tax Planning Ideas 401ks and Retirement Accounts provide tax deferral Defer paying off student loans as long as possible Invest in Stocks: LT Gains taxed at maximum of 15%, losses deductible up to $3000 Interest income taxed at ordinary tax rates, try to convert to dividend income taxed at 15% Start a business, more deductions possible Rental Properties—Depreciation will provide income buffer

20 Free Resources AccountAbility MN: Free tax preparation to individuals with income of $30,000, families with an annual income of $40,000 IRS Free Efile if you make less than $54K tml tml