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Having Fun With Taxes:Filing Status and Earned IncomeWASFAA Conference 2018Robert Weinerman, Director of TrainingIron Bridge Resources, LLC
Together We Rise 2018
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Disclaimer and DistributionThis PowerPoint slide deck is part of a presentation and is not designed to be used as a stand alone study document. The information cited in this presentation is based on
IRS publications, forms, and form instructions for 2016 Department of Education publications for the 2018-2019
academic year including The PDF FAFSA Completing the FAFSA The Application and Verification Guide The ISIR Guide and SAR Comment Codes and Text
The Program Integrity Website and announcements including all updates through April 15th, 2018
Participants in this program may share this PowerPoint slide deck and other materials provided with colleagues who work for the same educational institution as they do.No other redistribution is allowed.
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You Are Obligated to Know Whether a person is required to file a tax return What the correct filing status for a person should be That an individual cannot be claimed as an exemption
by more than one person
IRS Publication 17, Your Federal Income Tax, 2016 Who is required to file?: Pages 4-6 Which form should a person file?: Pages 6-8 Filing status requirements: Pages 20-25
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Application and Verification Guide, 2018-2019, page 115
Conflicting Information
• You must review any application if you learn that both of a student’s married parents have used the Head of Household filing status
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https://ifap.ed.gov/qadocs/FSAVeriModule/activity1verif1718.doc
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Conflicting Information You must review
any application if you learn that a student’s married parent has used the Head of Household filing status
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Filing Status - Need to Know The taxpayer’s marital status on the last day of the tax
year
If the taxpayer is supporting a person other than their spouse
If the taxpayer paid more than half of the costs of keeping up a home
Whether a qualifying person lives in the home If the taxpayer, if married, has lived apart from their
spouse fornon-temporary reasons for the last six months of the tax year
If the taxpayer’s spouse is a nonresident alien
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Filing Status – Not Relevant The taxpayer’s or taxpayer’s spouse’s documentation
status The IRS is concerned about residency status, not
immigration status
Whether the taxpayer or spouse have an SSN or ITIN Taxpayers and spouses are required to obtain an ITIN if
they are going to be listed on a tax return
Whether the taxpayer or spouse is paid accountably or “under the table”
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Married Unmarried
IRS Publication 17, Your Federal Income Tax, 2016, page 20
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IRS Marital Status Definitions
See http://www.ncsl.org/research/human-services/common-law-marriage.aspxfor a list of states that recognize common law marriages
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IRS Publication 4012, VITA/TCE Volunteer Resource Guide, 2016, page B-1 (page 47)
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Filing Status Flow ChartD
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Unmarried Taxpayers (1)1. Widow(er)s use the
married statuses in the year their spouse died
2.The qualifying widow(er) status requires a dependent child or stepchild to live in the home It is available in the
two years following the loss of the spouse
1
2
Recent Widow(er)s
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Unmarried Taxpayers (2)
3. The taxpayer paid more than ½ of the cost of keeping up a home
4. A qualifying person lived in the home for more than ½ of the year (a parent does not have to live in the home)
3
4
Head of Household
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Married Taxpayers
Did you and your spouse live apart all of the last six months of the year for reasons that were not temporary or
Was your spouse a nonresident alien?
5. The HoH-specific rule: “considered unmarried”
6. The taxpayer paid more than ½ of the cost of keeping up a home
7. A qualifying child lived in the home for more than ½ of the year
Head of Household
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IRS Publication 17, Your Federal Income Tax, 2017, page 24
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Temporary Absences An absence does not
“count” if it is temporary An absence is temporary
if it is reasonable to assume the absent person will return to the homeand
The taxpayer in the home maintains the home in anticipation of the person returning to it
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Who is a Nonresident Alien?
See https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test
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An alien who does not pass the substantial presence test is a nonresident alien
An individual’s documentation status is not relevant
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Exempt Individuals These people are not considered resident aliens even if
they pass the substantial presence test
Your married students with children who are married to international students or visiting professors may be able to use the head of household filing status
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https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test
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Summary – Unmarried HoH They paid more than ½ the cost of keeping up their
home for the year
A “qualifying person” lived with the taxpayer in their home for more than ½ the year If the qualifying person is
outside of the home due to a temporary absence (for example, attending college), they are treated as being in the home
They paid more than ½ the cost of keeping up a the home of a parent that they can claim as a tax dependent
OR
AND
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Summary – Married HoH They lived apart from the
spouse for the entire last half of the year, for non-temporary reasons
Their spouse is a non-resident alien who does not elect to file their US taxes as a resident alien
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OR
They did not file a joint return with their spouse They paid more than ½ the cost of keeping up their
home for the year Their home is the main home for their child, stepchild
or foster child for more than ½ the year They can claim an exemption for the child, even if
their child’s other parent actually claims them
AND ALL OF THESE CRITERIA ARE MET
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Case Study – Absent Spouse Your dependent student’s mother is married to the
student’s father, who is serving a five year sentence for financial aid fraud in a federal prison. The student’s mother visits the father once a week.
The student was selected for verification and the mother provided a tax return transcript showing she filed using the Head of Household filing status.
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Case Study – Foreign Spouse Your student has been married since 2015. However,
she reported that she filed a tax return using the Single filing status.
In an email exchange, she reported that her spouse is a Chinese citizen who lives in China, who will not return to the United States until she graduates in two or three years.
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Case Study Your student has been married since 2015. However,
her 2018-2019 ISIR shows that she reported that she filed a 2016 tax return using the Head of Household filing status.
In an email exchange, you have learned that her spouse is an international student enrolled full-time at
your institution their two year old child lives in their home
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Case Study: Losses Your student, who is married, reported that she was
not required to file an income tax return and her spouse does not work. She reported $20,000 as the answer to the income earned from work question. She was selected for verification and reported that she had the income shown in the table below.
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Source Value
Line 7 (Wages, Salaries, Tips) $10,000
Line 12 (Business Income/Loss) $15,000
Line 18 (Farm Income/Loss) a loss of ($5,000)
Is $20,000 the correct answer for student income earned from work on the FAFSA?
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Answering “Income Earned”
If the values from lines 12 or 18, or the sum of the Schedules K-1 (Form 1065) box 14, Code A figures are negative, treat them as zero when answering the income earned from work questions
Application and Verification Guide, 2018-2019, page 14
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Your student, who is a United States citizen, has happily married parents. The student lives in the United States with Parent One, who does not work and is not required to file a tax return.Parent Two is a Saudi Arabian citizen and lives in Saudi Arabia ten months out of every year. They earn the equivalent of $750,000 per year and cover all of the expenses for the family in the United States.Parent Two supports Parent One and the student in the US financially. Saudi Arabia does not have an income tax system.
Case Study: Foreign Income
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Where should the student report Parent Two’s foreign earned income, which was not taxed by any government?
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The Simplified FormulasSimplifiedFormula
AutomaticZero EFC*
Income Earned from Work (nonfilers) Adjusted Gross Income (filers)
Less than $50,000
Less than $25,001
The dependent student’s parents or the independent student and their spouse meet one of these three criteria:• They were not required to file an IRS Form 1040• One of them is a dislocated worker as defined in the Workforce
Innovation and Opportunity Act• Anyone counted in their household size received a means-tested
federal benefit during 2016 or 2017
Application and Verification Guide, 2018-2019, pages 39-49
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*Independent students without a dependent other than a spouse do not qualify for the Automatic Zero EFC
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Reporting Nonfiler Work Income
Application and Verification Guide, 2018-2019, pages 16 and 22
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AV
G P
age
16FA
FSA
Qs
39, 4
0, 8
8, 8
9
AV
G P
age
22FA
FSA
Qs
45i,
94i
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Case Study – One Nonfiler Parent
Your dependent student’s parents are married and deeply in love, but they don’t like living togetherParent One lives in the U.S. and earned $85,000 in 2016Parent Two lives in the Bahamas and is a citizen of that country. Parent Two is a nonresident alien of the United States, because they never spend more than a couple of weeks at a time in the US.Parent Two earned US$100,000 as a doctor in the Bahamas.The Bahamas does not have an income tax system.
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Case Study – One Nonfiler Parent
Parent One filed the tax return at right using the head of household filing status
A) $85,000 B) $85,050 C) $185,000 D) $185,050
What should the student report on the FAFSA as Parental AGI?
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• If the student or the student’s family member is a tax filer and an AGI is reported (even if the AGI is $0), the income earned from work figures will only be used to determine allowances (and generate error flags if relevant)
Filer Married to Nonfiler
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Core Figure in Total Income
RelevantAllowances
Tax Filers AGIFICA Allowance
Employment AllowanceNonfilers Income Earned
from Work
Application and Verification Guide, 2018-2019, page 16
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Application and Verification Guide, 2018-2019, page 23
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Puerto Rico Earned Income: Filers
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Application and Verification Guide, 2018-2019, page 23
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Exempt Puerto Rico Earned Income: Nonfilers
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Puerto Rico Unique Form, Page 2
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http://www.hacienda.gobierno.pr/sites/default/files/planilla_individuos_2016_must_be_filed_with_form_483.20_0.pdf
Most Puerto RicoTaxpayers must file theirreturns electronically.An English version of theForma Unique can be found at the link below.
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*Only data relevant to the case is included on the W-2
Case Study – Combat Pay
You have received an ISIR with a 400 Comment Code. Upon review, you notice that question 93e (parents’ combat pay) is $98,665
After talking with the student, you receive a copy of their parent’s W-2, shown at left*
Their leave and income statement shows $110,176in total combat pay
Which of these numbers should the student report on their FAFSA, and where?
$12,511
$98,665Q
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IRS Publication 3, Armed Forces’ Tax Guide, 2016, pages 12-13
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US Military Combat Zone Pay Some combat pay is
exempt from income and employment taxes All combat pay of an
enlisted member, warrant officer, or commissioned warrant officer is exempt
The exemption is capped for commissioned officers
Untaxed combat pay is reported on the W-2 in box 12, with a Code of Q
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Taxable Combat Pay Exclusion FAFSA Qs 44e and 93e – Taxable Combat Pay
Taxable combat pay is an exclusion reported in the “Additional Financial Information” section of the FAFSA
Collect the serviceperson’s leave and earnings statement
Application and Verification Guide, 2018-2019, page 21
• Subtract W-2, box 12, code Q from the total combat pay todetermine the taxable amount to report in these questions
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Tax-exempt Combat Pay FAFSA Qs 45i and 94i – Other Untaxed Income
Untaxed combat pay is listed as an item not to include as untaxed income
The AVG tells us not to reportuntaxed combat pay asincome earned from work
Application and Verification Guide,2018-2019, page 14
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Useful PublicationsPublication 3 Armed Forces’ Tax Guide
Publication 17 Your Federal Income Tax
Publications590a and 590b
Contributions to and Distributions from Individual Retirement Arrangements (IRAs)
Publication 970 Tax Benefits for Education
Publication 4012 VITA/TCE Volunteer Resource Guide
Instructions for All Forms
The instructions for each tax form hasline-by-line explanations
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DoE and Other Tools Program Integrity Website (Verification)
https://www2.ed.gov/policy/highered/reg/hearulemaking/2009/verification.html
Completing the FAFSA – 2018 – 2019 https://studentaid.ed.gov/sa/sites/default/files/2018-19-completing-
fafsa.pdf
GEN-17-05 – Summary of 2018 – 2019 Changes https://ifap.ed.gov/dpcletters/GEN1705.html
Video from the FSA Conference, Open Forum 03 http://www.webcastregister.live/2017fsatc_records/viewv2/306/ Please listen to Craig Munier’s comments that begin at about
the 13 minute mark Cheryl Hunt’s Tax Transcript Decoder
https://adobe.ly/2EHkgPb (Click on the download icon at theupper left hand side of this web page to download the doc.)
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