NCASFAA 2015 Fall Pre-Conference New Aid Officers Training Workshop

Understanding a Tax Return Transcript

What is a Tax Return Transcript? It is a copy of an applicant’s original federal tax return in a typed format. It’s free and can be requested: Online at www.irs.gov By calling 1-800-908-9946 By mailing form 4506T-EZ Schools may accept transcript from Income Verification Express Service (IVES) Small fee, which cannot be passed onto student GEN 14-05 No one should be charged for obtaining an IRS TRT. Applicants should receive the transcript within 5-10 calendar days after their request. They can request the TRT be sent directly to a 3rd party via mail. Use form 4506T-EZ to request TRT via mail. TRT does not have to be signed by tax filer.

Verification Items Adjusted gross income (AGI) U.S. income tax paid Untaxed portions of IRA distributions Untaxed portions of pensions Tax-exempt interest income Education Credits IRA Deductions and Payments

2015-2016 FAFSA Verification- IRS Tax Return Transcript Matrix 2015–2016 FAFSA Information Requiring Verification 2015–2016 FAFSA Q# (Student and Parent) 2014 IRS Tax Return Transcript Item 2014 IRS 1040 Line # 2014 IRS 1040A Line # 2014 IRS 1040EZ Line # Adjusted Gross Income 36 and 85 Adjusted Gross Income Per Computer 37 21 4 Income Tax Paid 37 and 86 For IRS Form 1040 Transcripts: —Income Tax After Credits Per Computer For IRS Form 1040A Transcripts: —Total Tax Liability TP Figures Per Computer For IRS Form 1040EZ Transcripts: —Total Tax Liability TP Figures Per Computer 56 10 Education Credits 44a and 93a Education Credit Per Computer 50 33 N/A IRA Deductions and Payments 45b and 94b KEOGH/SEP Contribution Deduction + IRA Deduction Per Computer 28 plus 32 17 Tax Exempt Interest Income 45d and 94d Tax-Exempt Interest 8b Untaxed Portions of IRA Distributions Excludes Rollovers 45e and 94e Total IRA Distributions – Taxable IRA Distributions 15a minus 15b 11a minus 11b Untaxed Portions of Pensions Excludes Rollovers 45f and 94f Total Pensions and Annuities – Taxable Pension/Annuity Amount 16a minus 16b 12a minus 12b Notes The 2015–2016 FAFSA Verification-IRS Tax Return Transcript Matrix is applicable only to IRS tax filers (IRS Form 1040, 1040A, and 1040EZ) and includes only the income information for tax filers required by the Department to be verified for 2015–2016. IRS Tax Return Transcript—Shows most line items from a tax filer's original tax return (Form 1040, 1040A or 1040EZ). An IRS Tax Return Transcript does not include any information from an amended tax return. Per Computer—A value calculated by the IRS that is present on certain items of an IRS Tax Return Transcript. The Per Computer amount must be used for verification even if it is different than what was reported by the tax filer to the IRS. Married Filing Separately—An applicant or an applicant's parent(s) who filed or will file his or her income tax return as "Married Filing Separately" or who is married to someone other than the individual included on a joint income tax return must provide separate IRS Tax Return Transcripts for each person whose information is included on the FAFSA.

What the TRT Doesn’t Show Amended information Signed copy of 1040X form IRS transcript that includes all required verification information Rollovers Signed and dated documentation from the tax filer

Other Items to Check Type of return Eligibility to file 1040A/EZ Year Filing Status Exemptions Wages, salaries, tips, etc. Although these are not required verification items, if you have information in hand, you should also check the following for conflicting information as they are questions on the FAFSA.

1040EZ

1040EZ

1040EZ

1040EZ

1040A

1040A

1040A

1040

1040

1040

1040

Eligible to file 1040A/EZ?

Eligible to file 1040A/EZ?

Eligible to file 1040A/EZ?

Eligible to file 1040A/EZ?

Joint Return for Individuals No Longer Married Collect W-2’s (or appropriate documentation) for those who filed joint and have since become widowed, divorced, or separated Any interest, business income or expenses that applies to the joint couple is assessed at 50% when determining AGI Two methods to calculate taxes paid Tax table Proportional distribution Appropriate doc: If a W-2 is not available (the filer is self-employed for example) or if a duplicate copy from the employer who issued the original W–2 is not available in a timely manner, the school may permit the filer to provide a signed statement that certifies the base year AGI and U.S. taxes paid. From the Handbook, AVG page 83: Add the income amounts from the individual’s W-2 forms to any other income that can be extracted from the joint return. Any interest or business income earned on joint accounts or investments should be assessed at 50%. The same procedure should be used to divide business or farm losses. Also, if the AGI listed on the joint return was adjusted, you should reduce the individual’s AGI by the portion of the adjustment that applies solely to him or her. For example, if an adjustment was made for moving expenses, which applies to the couple jointly, only 50% of the adjustment amount can be applied against the individual’s income. An AGI figure can be calculated for the individual filer. A signed statement from the filer certifying that the data from the joint return were accurately assessed is sufficient documentation for this method. Use one of the following methods to figure the individual’s taxes paid: • Tax table (preferred method). Using the IRS Tax Table or Tax Rate Schedule for the appropriate year, calculate the amount of tax that would have been paid if a separate return had been filed. Use the deduction and number of exemptions the individual could have claimed if he or she had filed a separate return. (If itemized deductions were taken, count only the portion of those deductions that could have been claimed on a separate tax return.) • Proportional distribution. Determine what percentage of the joint AGI was attributable to the individual, and then assess the joint taxes paid by that same percentage. Example 2: Calculating individual taxes paid from a joint return The aid administrator determines that Eddy’s part of the $48,000 AGI he and his wife reported is $20,000. Eddy and his wife claimed four exemptions on their tax return (themselves, one child, and Eddy’s nephew). Eddy’s wife has custody of the child and will claim him as her dependent when she files her tax return for 2014. Eddy’s nephew still lives with him. Therefore, Eddy would have had two exemptions (himself and his nephew), totaling $7,800. In the new situation, Eddy’s filing status is “head of household” instead of “married.” Therefore, his standard deduction is $8,950 (instead of the $12,200 for married filers). Eddy’s income of $20,000 minus the $7,800 for exemptions and the $8,950 standard deduction results in $3,250 in taxable income. The aid administrator uses the tax table to determine how much tax Eddy would have paid on this amount, taking into account any applicable credits reported on the original return. With a taxable income of $3,250, the amount of tax paid from the tax schedule would be $328. To use the proportional distribution method instead, the aid administrator figures out what percentage of the joint AGI Eddy’s income represents. The percentage is 42% (20,000 divided by 48,000 is .4167). The aid administrator then multiplies the income tax paid as reported on the tax return ($1,141 for this example) by this percentage. Therefore, Eddy’s income tax paid would be $479 (.42 x $1,141).

Example TRT shows Now separated individual W-2s = 21,067 Business Income or Loss = 10,618 AGI = 76,609 Income Tax = 3,551 Exemptions = 3 Now separated individual W-2s = 21,067 Business is a joint venture 50% = 5,309 Individual AGI = 26,376 Example 1: Calculating individual AGI from joint return example Tonya’s application is selected for verification. She and her husband filed a joint return for 2014 and have since separated. The AGI on Tonya’s FAFSA matches the AGI of $76,609 on the 2014 tax return, which means it’s wrong because it includes her husband’s income. Tonya’s W-2 shows that her income for 2014 was $21,067, and the tax return shows $10,618 in business income. Because it was a joint venture, the aid administrator adds $5309 of it to Tonya’s income and submits $26,376 as the corrected income via FAA Access.

Example Tax table Proportional Distribution Individual will continue to claim dependent, exemptions will now be 2, total of 7900 Filing status would be HOH instead of married, standard deduction is now 9100 Taxable income = 26,376 – 7900 – 9100 = 9376 Tax paid = 938 Proportional Distribution 26376/76609 = .3442 or 34% Tax paid = .34 x 3551 = 1207 Example 2: Calculating individual taxes paid from a joint return The aid administrator determines that Tonya’s part of the $76,609 AGI she and her husband reported is $26,376. Tonya and her husband claimed 3 exemptions on their tax return (themselves and one child). She will claim the child as her dependent when she files her tax return for 2014. Therefore, Tonya would have had two exemptions (herself and her child), totaling $7,900. In the new situation, Tonya’s filing status is “head of household” instead of “married.” Therefore, her standard deduction is $9,100 (instead of the $12,400 for married filers). Tonya’s income of $26,376 minus the $7,900 for exemptions and the $9,100 standard deduction results in $9,376 in taxable income. The aid administrator uses the tax table to determine how much tax Tonya would have paid on this amount, taking into account any applicable credits reported on the original return. With a taxable income of $9,376, the amount of tax paid from the tax schedule would be $938. To use the proportional distribution method instead, the aid administrator figures out what percentage of the joint AGI Tonya’s income represents. The percentage is 34% (26,376 divided by 76,609 is .3442). The aid administrator then multiplies the income tax paid as reported on the tax return ($3,551 for this example) by this percentage. Therefore, Tonya’s income tax paid would be $1207 (.34 x $3,551).

References Federal Student Aid. (2015, September). Application and Verification Guide 2015-2016. Retrieved from http://ifap.ed.gov/fsahandbook/attachments/1516AVG.pdf. Federal Student Aid. (2014, April). FAFSA Verification-IRS Tax Return Transcript Matrix. Retrieved from https://ifap.ed.gov/eannouncements/attachments/041714FAFSAVerificationIRSTaxReturnTranscriptMatrix1415.xls. USAFunds. (2015, April). Comparison of 2014 Tax Return and Tax Transcript Data. Retrieved from http://www.usafunds.org/USAFunds%20ResourceLibrary/2014TaxTranscriptComparison.pdf NASFAA. (2014, February). Using Federal Tax Returns in Need Analysis. Retrieved from http://www.nasfaa.org/Using_Tax_Returns_in_Need_Analysis. IRS. (2015, February). 2014 Publication 17. Retrieved from https://www.irs.gov/pub/irs-pdf/p17.pdf.

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