SaveFirst: A Tax Preparation and Financial Literacy Initiative

1. SaveFirst: A Tax Preparation and Financial Literacy Initiative Intermediate Tax Training

2. Itemized Deductions Self-Employment Income Retirement Plans Adjustments to Income Intermediate Credits Intermediate Tax Training Outline

3. Itemized Deductions Self-Employment Income Retirement Plans Adjustments to Income Intermediate Credits Intermediate Tax Training Outline

4. Every taxpayer can take a specific amount for a “standard” deduction, which reduces taxable income. There are certain designated expenses that a taxpayer can choose to list out separately, and if they total more than the standard deduction, the taxpayer will “itemize” his deductions, which reduces his taxable income by a greater amount. Itemized Deductions

5. On the federal level, a taxpayer generally needs to have a home mortgage payment or a large number of medical bills to be better off itemizing. On the state level, the standard deduction is much lower, and itemizing may be beneficial at the state even when it is not at the federal. Itemized DeductionsWhen to Itemize

6. If a taxpayer has answered “yes” to the itemized deductions questions on the interview sheet, complete the Schedule A to see if it is beneficial to itemize at the state or federal level. If the Alabama A appears with a green check, complete the Schedule A fully. Itemized DeductionsWhen to Itemize

7. The main expenses that are itemized: Unreimbursed Medical Expenses Charitable Contributions Taxes Home Mortgage Interest Miscellaneous Deductions Itemized Deductions

8. A taxpayer can claim unreimbursed medical expenses for Himself/Herself Spouse Dependents Itemized DeductionsUnreimbursed Medical Expenses

9. Taxpayers can only deduct the amount of expenses that exceeds 7.5% of AGI. At the Alabama level, taxpayers can deduct the amount of expenses that exceeds 4% of AGI. Itemized DeductionsUnreimbursed Medical Expenses

10. Deductible expenses: Prescription drugs Health insurance premiums Long-term care insurance premiums (cap on amount based on age) Co-pays to doctor, dentist, eye doctor Cost of glasses, hearing aids Cost of medical equipment Cost of surgery, operations Miles to and from doctor Itemized DeductionsUnreimbursed Medical Expenses

11. Nondeductible expenses: Life insurance policy premiums Nonprescription drugs Funeral, burial, cremation costs Unnecessary cosmetic surgery Itemized DeductionsUnreimbursed Medical Expenses

12. Contributions must be made to organizations that are organized for religious, charitable, educational, scientific, or literary purposes. Nonqualifying organizations include businesses, civic or political organizations, social clubs, foreign organizations, homeowners’ associations. Itemized DeductionsCharitable Contributions

13. Deductible items: Monetary donations FMV of clothing, furniture Uniforms required to be worn during service Unreimbursed transportation expenses Must subtract FMV of any good received in exchange for the donation. Taxpayer must keep receipts! Itemized DeductionsCharitable Contributions

14. Nondeductible expenses: Raffle, bingo, lottery tickets Tuition Value of time of service Blood Contributions to individuals Itemized DeductionsCharitable Contributions

15. Deduct taxes imposed on and paid by the taxpayer. Taxpayers cannot deduct a tax they pay for someone else, their own tax someone else pays, a tax not paid in 2008. Itemized DeductionsTaxes

16. State and local taxes Real estate taxes (Property Tax) Sales taxes Ad valorem tax on car tags Nondeductible taxes: federal taxes; hunting licenses; water/sewer; taxes on alcohol, tobacco, or gas; utilities Itemized DeductionsTaxes

17. Itemized DeductionsHome Mortgage Interest

18. Personal interest cannot be deducted (e.g., interest on personal loans, car loans, or credit cards). Itemized DeductionsInterest

19. Union dues Uniforms (that cannot be worn in any other circumstance) Professional books, journals Employment-related educational expenses Expenses for looking for a new job Tax preparation fee from last year Safe deposit box Gambling losses up to amount of winnings Itemized DeductionsMiscellaneous Deductions

20. Nondeductible Expenses: Burial or funeral expenses Wedding expenses Fees and licenses Fines, penalties, traffic tickets Home repairs and insurance Rent Insurance premiums (except health) Losses from sale of home Itemized DeductionsMiscellaneous Deductions

21. Are the following expenses deductible? 1. Medical insurance premiums 2. Vitamins 3. Federal income tax 4. Interest on car loan 5. Church contribution 6. Tax preparation fee from last year Itemized DeductionsExercise 1

22. Are the following expenses deductible? 1. Medical insurance premiums (YES) 2. Vitamins 3. Federal income tax 4. Interest on car loan 5. Church contribution 6. Tax preparation fee from last year Itemized DeductionsExercise 1

23. Are the following expenses deductible? 1. Medical insurance premiums (YES) 2. Vitamins (NO) 3. Federal income tax 4. Interest on car loan 5. Church contribution 6. Tax preparation fee from last year Itemized DeductionsExercise 1

24. Are the following expenses deductible? 1. Medical insurance premiums (YES) 2. Vitamins (NO) 3. Federal income tax (NO) 4. Interest on car loan 5. Church contribution 6. Tax preparation fee from last year Itemized DeductionsExercise 1

25. Are the following expenses deductible? 1. Medical insurance premiums (YES) 2. Vitamins (NO) 3. Federal income tax (NO) 4. Interest on car loan (NO) 5. Church contribution 6. Tax preparation fee from last year Itemized DeductionsExercise 1

26. Are the following expenses deductible? 1. Medical insurance premiums (YES) 2. Vitamins (NO) 3. Federal income tax (NO) 4. Interest on car loan (NO) 5. Church contribution (YES) 6. Tax preparation fee from last year Itemized DeductionsExercise 1

27. Are the following expenses deductible? 1. Medical insurance premiums (YES) 2. Vitamins (NO) 3. Federal income tax (NO) 4. Interest on car loan (NO) 5. Church contribution (YES) 6. Tax preparation fee from last year (YES) Itemized DeductionsExercise 1

28. TAXWISE EXERCISE Itemized Deductions

29. Itemized Deductions Self-Employment Income Retirement Plans Adjustments to Income Intermediate Deductions Intermediate Credits Intermediate Tax Training Outline

30. We can file a Schedule C-EZ if the taxpayer: Had business expenses of less than $5,000 Cash method of accounting No inventory No net loss Only one business (if taxpayer owns a business) No employees during the year Does not want to depreciate Self-Employment Income

31. Income reported in Box 7 on a 1099-MISC is considered self-employment income and should be reported on a Schedule C-EZ. Self-Employment Income1099-MISC

32. Self-Employment Income1099-MISC Box 7 “Nonemployee Compensation”

33. Include net profit Deductible expenses: advertising, vehicle expenses, insurance, interest, legal and professional services, repairs, 50% of business entertainment, utilities If deducting car expenses, you will need to provide additional information on the Schedule C-EZ. Self-Employment IncomeSchedule C-EZ

34. Itemized Deductions Self-Employment Income Retirement Plans Adjustments to Income Intermediate Credits Intermediate Tax Training Outline

35. Pension: series of payments for past work Annuity: series of payments from a contract with company, trust, individual 401(k) Plan: employer contributes part of employee’s cash wages to a retirement plan on a pre-tax basis (not subject to income tax when deferred) Pensions & Retirement Plans

36. Pensions & Retirement Plans

37. A retirement plan is fully or partially taxable depending on whether the employee contributed to the plan. The cost of the pension is the amount that the employee contributed. Pensions & Retirement Plans

38. If the taxpayer did not contribute to the cost of the pension plan (e.g., all of the contributions came straight from the employer), the plan is fully taxable. If the taxpayer contributed to the plan with “before-tax” dollars, the plan is fully taxable. Pensions & Retirement Plans

39. If the taxpayer contributed to the plan with “after-tax” dollars, the plan is only partially taxable. Part of the pension income received has already been taxed. Therefore, only part of the pension plan is taxable. Roth IRAs are not taxable because all contributions were made with after-tax dollars. Pensions & Retirement Plans

40. If the taxpayer contributed to the pension with “after-tax” dollars (has a “cost to recover”), he can exclude part of each pension payment from income until all of the cost has been recovered. Tax-free portion remains the same each year. Pensions & Retirement Plans

41. You can prepare returns for retired individuals if the taxable amount of the retirement distribution has been determined. Pensions & Retirement Plans

42. RRB-1099: treat like SSA-1099 (e.g., social security benefits) RRB-1099-R: treat like 1099-R (e.g., pension) Pensions & Retirement PlansRailroad Retirement

43. Defined Benefits Plan: Employee receives a specific amount of money based on salary history and years of service. Contributions from employee, employer, both. Employer bears investment risk. Defined Contributions Plan (e.g., 401(k) or 403(b): Employee chooses to defer part of salary into plan. Employee bears investment risk. Pensions & Retirement PlansAlabama Tax Rules

44. Defined Benefits Plans are not taxable at the Alabama level. We have a list that covers most plans that are not taxable, but if your taxpayer’s plan is not listed, you must contact the plan administrator to determine if it is a defined benefits plan. BE SURE TO CLICK BOX 1 IN TAXWISE IF IT IS A DEFINED BENEFITS PLAN. Pensions & Retirement PlansAlabama Tax Rules

45. Pensions & Retirement PlansAlabama Tax Rules

46. 1099-R issues can get complicated when the taxpayer does not have enough information regarding his/her retirement plan. You may need to call the IRS or the company that administers the retirement plan to find out if it is a defined benefits or defined contributions plan. Pensions & Retirement PlansAlabama Tax Rules

47. Itemized Deductions Self-Employment Income Retirement Plans Adjustments to Income Intermediate Credits Intermediate Tax Training Outline

48. Adjustments decrease taxable income. Lines 23-37 on Form 1040. Adjustments to Income

49. K-12 teachers, counselors, administrators who work at least 900 hours in the year Deduct $250 of classroom expenses, including books, supplies, or equipment Must reduce if reimbursed, had tax-free interest on savings bonds, or non-taxable earnings from QTP, ESA Adjustments to IncomeEducator Expenses

50. TaxWise will automatically calculate if you have completed a Schedule C-EZ. Adjustments to Income½ of self-employment tax