Accounting Aid Society 2006 Tax Season City Tax Training January 2006

Overview Our training is designed to provide you with skills necessary to prepare taxes for the clients of Accounting Aid Society. Our clients are individuals with income less than $20,000 or families making less than $38,000. Check with the individual city instructions and/or your tax supervisor whenever you encounter something unusual.

Quality Our number one priority is quality! We are not going to do complicated returns which exceed our training or capability. Don’t guess if you are not sure how to handle a particular situation. Consult the instructions and/or your tax supervisor for help. All returns should be reviewed by a tax supervisor.

What’s New for Tax Year 2005? (All changes below are for the City of Detroit Only) Personal exemptions are reduced from $750 to $600. A non-resident taxpayer will be required to submit documentation from their employer to support an allocation of income earned outside the city. New mailing addresses.

Cities 22 Michigan Cities have income taxes including;  Detroit  Hamtramck  Highland Park  Pontiac  And Albion, Battle Creek, Big Rapids, Flint, Grand Rapids, Grayling, Hudson, Ionia, Jackson, Lansing, Lapeer, Muskegon, Muskegon Heights, Port Huron, Portland, Saginaw, Springfield and Walker.

Good News TaxWise makes city income tax returns very easy for most of our clients. Detroit forms and the Common Forms accepted by Pontiac and Hamtramck are in TaxWise. Highland Park forms must be prepared manually. Make sure that you entered the city withholding from the W-2’s. In TaxWise the proper name of the city must be entered (no abbreviations).

Residents and Non-Residents Residents are taxed on income from all locations. Non-residents are taxed only on income from within the city.

Who Must File? Some low-income people do not owe tax on federal or state returns, but may owe tax on, and must file, city returns. This is because the amount for an exemption is considerably lower on city returns. However, many people who file state and federal returns do not have to file city returns. This is because items such as pensions, unemployment compensation, and Social Security are not taxable on city returns.

Filing Status Married can file jointly or separately, but the cities do not have “Head of Household”. TaxWise defaults federal Head of Household filers to Single. Single status will carry over from the federal.

Exemptions Most exemptions carry over directly from the federal return. Detroit - $600 Pontiac, Highland Park, Hamtramck - $600 All cities allow an additional exemption if 65 or older. All except Highland Park allow an additional exemption for blind. Detroit and Hamtramck allow an additional exemption for deaf or totally and permanently disabled.

Exemptions Individuals who can be claimed as a dependent by someone else cannot claim an exemption for themselves. If taxable income is less than the exemption amount, no tax is due and the tax withheld will be refunded.

Dependents Dependent exemptions carry over from the federal. Some cities want them listed uniquely; TaxWise will prompt for this.

Detroit Form - Dependents

Taxable Income – Residents Wages, bonuses, etc. from Form W-2 Business and Rental Income Gambling winnings, including the Lottery. Early IRA and 401K distributions Interest, Dividends and Capital Gains In TaxWise, most income will carry over from the federal return. The Detroit return starts with wages and then has schedules to make additions or deductions to income. The MI Cities Common Form has lines on Page 1 for most types of income.

Taxable Income Non-Residents Wages, bonuses etc. from Form W-2 which are earned in the city Business and Rental Income from the city If part of the work is done outside the city, then the income is apportioned. For example, if John works in Detroit, but 10% of his days are spent at an office in Roseville, then he only needs to show 90% of the amount from his W-2 on the Detroit Non-Resident return. Complete Schedule N for John (note: employer documentation required to be attached).

Detroit Schedule N

Adjustments to Income – Additions Some common additions to income include:  Investment income (interest & dividends)  Gain (loss) on sale of property  Net income from business  Net income from rent, royalties, etc.  Pre-retirement distributions.  Gambling winnings (In TaxWise, winnings do not carry over from the federal return. The preparer must add this income on the Miscellaneous Income line of all city returns.)

Detroit Additions

Adjustments to Income – Deductions Some common deductions from income include:  IRA contributions (to the extent they are deductible on the federal return. Page 1 of Form 1040 must be attached to the return.)  Interest on U.S. Savings Bonds  Alimony

Detroit Deductions

Renaissance Zones Renaissance Zones are specially designated to promote development. Most income of taxpayers who live in a Renaissance Zone is not taxable. They must attach an Approval Letter from the City Assessor to claim the deduction.

Tax Rates – 2005 Detroit % Residents % Non-Residents Highland Park - 2% Residents - 1% Non-Residents Hamtramck, Pontiac - 1% Residents - 0.5% Non-Residents

Mini-Quiz 1 Randy is a resident of Highland Park. He earned $9,500 at his job in Warren, $500 in bank interest, $1,000 in unemployment compensation, a pension for $2,000, and $6,000 Social Security. He has two exemptions. How much are his city taxes?

Mini-Quiz 1 – Answer Warren does not have an income tax, so we only need to worry about Highland Park. Social security, pensions and unemployment compensation are not taxable on city returns, so Randy’s income is $9,500 plus $500, or $10,000 for city purposes. Randy can subtract 2 X $600 for his exemptions, leaving $8,800 as his taxable income. The resident tax is 2%, or $176.

Credit for Tax Paid to Other Cities Some people live in one taxing city and work in another. The city of residence will give a credit based on the non-resident tax rate. The credit is the lesser of:  The taxes levied by the non-resident city (not the withholding).  What the comparable non-resident taxes would have been in the resident city.

Credit for Tax Paid to Other Cities Complete the non-resident return first. Print an extra copy to attach to the resident return. Calculate the taxes as though they were for a non-resident within the resident’s city. See resident city instructions to ensure this credit is calculated properly. Enter the result to be subtracted from the tax liability on the resident return.

Mini-Quiz 2 Suzie lives in Hamtramck and works in Detroit where she earned $10,750. She won $1,000 in the lottery. She has one exemption. What is her Hamtramck tax liability?

Mini-Quiz 2 – Answer First, we do her Detroit D-1040(NR). She has income of $10,750 for Detroit, less $600 for her exemption, leaving $10,150. Her tax liability on the Detroit Non-Resident Return is $127, using a 1.250% tax rate. Hamtramck would have taxed a non-resident ½% x ($10,750 – $600) = $51 Her Credit for Tax Paid to Other Cities on her Hamtramck return is $51, the lesser of the two ($127 vs. $51).

Mini-Quiz 2 – Answer, Part 2 Hamtramck taxable income is ($10,750 + $1,000 – $600) = $11,150 Tax = 1% X 11,150 = $112 Less the credit of $51, leaves $61 tax due on her Hamtramck Resident Return.

Amended Returns Some cities have a special form. In Detroit, you only need to check the box on Line H to indicate that it is an amended return. See city instructions for how to complete an amended city return and how to calculate the amount to be refunded or the tax due.

Taxes Due Many of our clients will end up owing money to the cities. This is typically because employers outside the city are not compelled to withhold city taxes. Please advise clients that have a large tax due that they may be required to pay estimated taxes for the next year.

Filing The cities do not offer electronic filing, so print two copies and make sure that the taxpayer mails a signed copy. Mailing envelopes are available at the tax sites. Attach copies of W-2’s to the front page of the return where indicated (usually in the middle of the page). The filing deadline is April 30 th for city returns.

Filing Following is a partial list of federal schedules that must be attached to a city return:  Schedule C or C-EZ (Business Income)  Schedule D (Gain or loss from sale of property)  Schedule E (Income from rent, royalties, partnerships, etc.)

Thanks for attending this session! A special thanks to Rich Odendahl for his work in developing this presentation.