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Having Fun with Taxes –Part 2New York State Financial Aid Administrators Association (NYSFAAA)2020 –2021 Academic Year EditionRobert Weinerman, Director of Training
Iron Bridge Resources, LLC
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Today’s Webinar September 18th Webinar
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Agendas
▪ Verifying Non-filers
▪ Who is Required to File a Tax Return?
▪ What is the Correct Filing Status for a Person?
▪ 2020-2021 Key Concepts
▪ Verifying Tax Filers
▪ Verification Requirements
▪ The 2018 Form 1040 and the 2020-2021 FAFSA
▪ Schedule 1 and the Simplified Formula/Automatic Zero EFC
▪ Rollovers
▪ Verification Documentation for Non-Filers
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Disclaimer and Distribution▪ This 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 2018
▪ The most recent versions of each Department of Education publication▪ The most recent draft of the PDF FAFSA (June 24, 2019)
▪ Completing the FAFSA, 2019-2020
▪ The EFC Formula Guide, The ISIR Guide and SAR Comment Codes and Text, 2020-2021
▪ Application and Verification Guide, 2019-2020
▪ The Program Integrity Website and announcements including all updates through September 18, 2019
▪ This presentation has been prepared for the New York State Financial Aid Administrators Association (NYSFAAA) membership. Distribution of this document to non-members is prohibited.
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Verifying Non-filers and Who Must File a Tax Return?
Whether a person is required to file a tax return
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Non-filers Who Should File per the AVG
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Application and Verification Guide, 2019-2020, page 115 and 116
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Finding Conflicting Information
The ISIR Guide, 2020-2021, page A-6
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Reminder – Required Documents▪ A statement signed by the non-filer (students may sign for their
spouse)
▪ Listing the sources of 2018 income earned from work and the amount of income from each
▪ Certifying that the person
▪ has not filed and is not required to file a tax return
▪ From U.S. based non-filers
▪ IRS W-2 forms for each source of income or an equivalent document
▪ From Residents of the Freely Associated States
▪ A copy of the wage and tax statement from each employer
▪ A Verification or Nonfiling Letter (independent students, spouses, or a dependent student’s parents unless you have waived it)
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Suggested Verification Text▪ We need
▪ The names of every employer
▪ Whether a W-2 or an equivalent document is provided
▪ The amount the employer paid the non-filer
Suggested Verification Text, 2020-2021, page 6
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Example – Verification of Income▪ Your dependent undergraduate student completed the FAFSA and
reported there that they earned $11,000 in 2018
▪ They were selected for verification and provided the information above on their Verification of 2018 Income form
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Example – Verification of Income
▪ Does the student need to file a tax return?
▪ Why or Why Not?
▪ Is $11,000 the correct answer to FAFSA question 38,How much did you earn from working in 2018?
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Step One – Gross Income▪ Compare the income you know about to the income thresholds
that trigger a filing requirement based on earned, unearned, or gross income
▪ These are listed in IRS Publication 17 in Tables 1-1 and 1-2 orin the instructions for IRS Form 1040 in Charts A and B
▪ If the figure is greater than the threshold, the person must file
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Who Must File? – Non-dependents
IRS Publication 17, Your Federal Income Tax, 2017 page 5 and 2018 page 6
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Look
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Spouse of Non-filer Used the Standard Deduction
Spouse of Non-filer Itemized, or You Don’t Have Their Return
IRS Publication 17, Your Federal Income Tax, 2018, page 154
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Really? $5.00?
▪ If you have the spouse’s tax return and they used the standard deduction, the individual does not have to file a return if their gross income is less than▪ $12,000 – if they cannot use
the Head of Household filing status
▪ $18,000 – if they can use the Head of Household filing status
▪ $18,000.00 – if the individual is “considered unmarried for Head of Household” purposes
▪ $12,000.00 – if you are certain the spouse is a non-filer
▪ $5.00 – otherwise
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What is “Gross Income”?
IRS Publication 17, Your Federal Income Tax, 2018, page 5
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▪ Income reported on the non-filer statement that is not supported by a W-2 may be net of expenses
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Who Must File? – Dependents▪ Even though the
exemption is now worth $0, people who can be claimed on another taxpayer’s tax return are subject to different rules from those who cannot
▪ The old rules remain in place with higher thresholds for filing
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IRS Publication 17, Your Federal Income Tax, 2017 page 7 and 2018 page 7
These are just portions of Tables 1-2
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Step One – Gross Income – Answer
▪ Remember, thestudent reportedthat they were anon-filer and earned$11,000 in 2018
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unearned
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What Do We Mean by Earned Income?
IRS Publication 17, Your Federal Income Tax, 2018, page 7
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▪ Salaries
▪ Wages
▪ Tips
▪ Professional Fees
▪ Taxable Scholarships and Fellowship Grants
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▪ Scholarships are tax-free to the extent that they can be used to pay for
▪ Tuition and required enrollment fees
▪ Required course related materials
▪ Scholarships are taxable if they pay for
▪ Room, Board, Travel, Personal Expenses, Discretionary Bookaand Supplies, etc.
IRS Publication 970, Tax Benefits for Education, 2018, page 6
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Taxable Scholarships
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Taxable Scholarship – Example▪ Your student is applying for financial aid for 2020-2021, which will
be her senior year at your institution. For her first three years at your school, she had grants and scholarships that paid for her tuition, fees, and room and board. In 2018, scholarships and grants covered these costs:
▪ In this example, this means that the student had $15,000 in taxable scholarships in 2018 – the base year▪ The scholarships and grants that covered tuition and fees are
tax free
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Nature of Institution Private Four Year Public
Tuition and Fees $53,000 $14,000
Room and Board $15,000 $15,000
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Taxable Scholarship – Example▪ The student was selected for verification
▪ They reported $10,000 in income earned from work
▪ They submitted a non-filer statement for verification as follows:
▪ Is this Person Required to File a Tax Return?
▪ Do you have conflicting information?
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Original FAFSA Corrected FAFSA
AGI $25,000
Income earned from work $10,000 $10,000
Taxable income $10,000 $25,000
Total additional financial Information $15,000
Total Income $10,000 $10,000
2018 U.S. income tax paid $3,910
State and other tax allowance (MA) $400 $400
Social security tax allowance $765 $765
Income protection allowance $6,840 $6,840
Total Allowances $8,005 $11,915
Available Income $1,995 $0
Student Contribution from Income $998 $0
Taxable Scholarships – The EFCOriginal FAFSA
AGI
Income earned from work $10,000
Taxable income $10,000
Total additional financial Information
Total Income $10,000
2018 U.S. income tax paid
State and other tax allowance (MA) $400
Social security tax allowance $765
Income protection allowance $6,840
Total Allowances $8,005
Available Income $1,995
Student Contribution from Income $998
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Required to File: Other Reasons
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IRS Publication 17, Your Federal Income Tax, 2018, page 8
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Step Two – Self-employment Income
▪ Eliminate any unearned income that the student reported
▪ Go line by line through the Verification of Income statement looking for earned income not supported by a W-2
▪ You only need to review income for which no W-2 was provided*
▪ Identify self-employment income among the remaining lines
*Technically, if you have W-2 from an employee of a church and no FICA taxes were withheld, the person is requiredto file a return if their wages exceeded $108.27. Ministers must file if their wages exceeded $433.13 .
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-2
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Employee Self-employed Person
Note: The definition of employee is one of the most contested aspects of the United States tax law. This slide is an oversimplification of a challenging issue. Financial aid officers are not tax experts and cannot be expected to define for a student whether they are an employee.
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Employee or Self-employed?
▪ Work is controlled by the person who hired them
▪ They are told what to do, when to do it, and how to do it
▪ The employer provides the tools necessary to get the job done
▪ The worker did not represent themselves as a business
▪ Work is controlled by the person who does the work
▪ The worker controls when and how the work is done
▪ The worker provides the tools necessary to get the job done
▪ The worker represented themselves as a business when they entered the work agreement
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▪ Calculated on Schedule SE when the taxpayer files their return
▪ Self-employed person acts as both the employer and employee and pays 100% of the tax
▪ Owed by all self-employed people with more than $400 of net earnings from self-employment
EmployeesPay Taxes under FICA*
Self-employed PeoplePay Taxes under SECA+
*FICA – Federal Insurance Contributions Act+SECA – Self-Employed Contributions Act
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Social Security and Medicare Taxes
▪ Withheld by their employer from each paycheck
▪ Employee pays ½ of the tax
▪ Employer pays ½ of the tax
▪ Some employees are exempt from paying this tax
▪ College students employed by their institution
▪ Some household employees
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Self-employment Income subject to the $400 threshold
Wage income or unearned income not subject to SECA
*Professional “lab rats” – people for whom participating in medical research is a significant portionof their income or who spend a lot of time as medical research subjects may be considered self-employed
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Self-employment Tax Filers
▪ 1099-MISC box 7 income(most of the time)
▪ Earned income not paid as wages or reported at the end of the year on a W-2
▪ Income earned by partners in a partnership
▪ Ministers paid as employees
▪ Certain church employees
▪ Household employee income
▪ Wages from which FICA taxes were withheld
▪ Wages earned by FICA exempt employees(like your students working for your school)
▪ Form 1099-MISC box 3 income(Payments to research subjects are not earned income*)
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▪ Unfortunately, the safe-harbor for net earnings fromself-employment remains $400 and was not changed in 2018
▪ As we will see in a few slides, if the nontax filer reports $433.13 or less of net income from self employment, they will have less than $400 of net earnings from self employment
Who Must File? – Self-employment
IRS Publication 17, Your Federal Income Tax, 2017 page 8 and 2018 page 8
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Step Two – Self-employment – Answer ▪ Which of the income figures in the student’s Verification of Income
form are from self-employment?
▪ If the sum of these figures is greater than $433.13, then they may have to file a tax return
▪ Are they required to file?
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Household Employee Income
W-2
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Gross Income vs. Net Income
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Line 7Gross Income
Tables 1-1 and 1-2
Line 29Net Income
Table 1-3 (Almost)
Minus Expenses
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Net Income vs. Net Earnings
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Net Earnings
Net Income
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Net Income vs. Net Earnings
In prior years, the figure used in this example on line 3 was $433. The software I used to create this image in2018 rounded numbers differently than programs I have used in the past. The difference is a rounding error.
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Net Earnings
Net Income
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▪ Employees who receive wages
▪ that are subject to social security and Medicare taxes
▪ but whose employers did not withhold these taxes must file a tax return
must file a tax return to pay these taxes
Unpaid Social Security Taxes
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IRS Publication 926, Household Employer’s Tax Guide, 2018, page 3
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Household Employees▪ Casual workers
▪ who do household work for neighbors and friends
▪ in and around their employer’s home
▪ who did not represent themselves as a business when they were hired
▪ whose work is defined and controlled by their employer
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Household Employee Self-employed
IRS Publication 926, Household Employer’s Tax Guide. 2018, page 3
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Employee vs. Self-employed
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Exempt from FICA TaxesExempt from Receiving a W-2*
Do Owe FICA TaxesShould Receive a W-2
*If the household employer withheld any taxes from the worker’s paycheck, they are required to provide them with a W-2
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Household Employees and W-2s
▪ Under the age of 18 at any time during the tax year and a studentor
▪ Received less than $2,100 from their household employer in the tax yearor
▪ Worked for their parents as household employees and were under the age of 21
▪ Turned 18 on or before January 1st, 2018and
Earned $2,100 or more from any one household employer in 2018
Was $2,000in 2017
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Example 1 – Household Employees
▪ Your student, who is 21 years old, reported having the following sources of income:
▪ Are they required to file a tax return?▪ Did their gross income exceed $12,000 (Table 1-2)?
▪ Does their net earnings from self-employment exceed $433.13?
▪ Do they have wages from which an employer failed to withhold required social security and Medicare taxes?
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Example 2 – Household Employees
▪ Your student, who is 21 years old, reported having the following sources of income:
▪ Are they required to file a tax return?▪ Did their gross income exceed $12,000 (Table 1-2)?
▪ Does their net earnings from self-employment exceed $433.13?
▪ Do they have wages from which an employer failed to withhold required social security and Medicare taxes?
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Employment Taxes Owed?
ShouldGet W-2*
Household employees who earned less than $2,100 in 2018 No No
Household employees who were under the age of 18 at any time in 2018, who were students
No No
Household employee who worked in his/her parents’ home before they turned 21
No No
Household employees who were 18 or over in 2018 and earned $2,100 or more from one household employer
Yes Yes
Children under the age of 18 who worked for their parents’ Schedule C Business or Partnership (not LLC)
No Yes
Students enrolled at least half-time who work for their college (but whose primary relationship to the college is the student relationship)
No Yes
Employment Taxes and W-2s
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Employment Taxes Owed?
ShouldGet W-2*
Household employees who earned less than $2,100 in 2018 No No
Household employees who were under the age of 18 at any time in 2018, who were students
No No
Household employee who worked in his/her parents’ home before they turned 21
No No
Household employees who were 18 or over for all of 2018 and earned $2,100 or more from one household employer
Yes Yes
*If the household employer withheld any taxes from the worker’s paycheck, they are required to provide them with a W-2
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IRS Free File
https://www.irs.gov/individuals/free-tax-return-preparation-for-you-by-volunteers
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▪ The IRS sponsors two programs that provide free tax assistance forlow income and elderly taxpayers
▪ This is available year-round in some parts of the country
▪ See https://irs.treasury.gov/freetaxprep
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IRS Publication 17, Your Federal Income Tax, 2018, pages 18
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The Failure to File Penalty▪ Taxpayers who file their
returns more than 60 days late face a minimum failure to file penalty of the smaller of $210 or 100% of their tax owed
▪ When telling students or family members they need to file, remind them to file not only their base year taxes, but subsequent years’ taxes
Filing Status
What is the Correct Filing Status for a Taxpayer?
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Filing Status per the AVG
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Application and Verification Guide, 2019-2020, page 115 and 116
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Conflicting Information
Application and Verification Guide, 2019-2020, page 116https://ifap.ed.gov/qadocs/FSAVeriModule/activity1verif1718.doc
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New text in the 2019-2020 AVG
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SAR Comment Codes and Text, 2020-2021, page 116The ISIR Guide, 2020-2021, page 31
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Marital Status SAR and ISIR Codes
IRS Display Flag Codes
361 - 368
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Filing Status Flow Chart
IRS Publication 4012, VITA/TCE Volunteer Resource Guide, 2017, page B-8 (page 44)Do not use this flow chart without the accompanying footnotes.
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▪ This chart does not appear in any 2018 IRS Publications
▪ It is still usable, as there were no changes to filing status rules between 2017 and 2018
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Footnotes
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IRS Publication 4012, VITA/TCE Volunteer Resource Guide, 2017, page B-8 (page 44)
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IRS Publication 4012, VITA/TCE Volunteer Resource Guide, 2018, page B-7 (page 38)
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VITA Filing Status Interview Guide▪ This interview guide
(with footnotes) can help determine a taxpayer’s available filing statuses
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IRS Publication 17, Your Federal Income Tax, 2018, page 20
Filing Status – Marital Status
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IRS Publication 17, Your Federal Income Tax, 2018, page 20
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Marital Status – Clarifications ▪ Widow(er)s who lost their
spouse in the tax year are considered married for the entire year
▪ Note – no mention of “single” here
▪ Married people cannot use the single status
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Filing Status – Married Options
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Married Filing HoH
Married Filing Jointly
Married FilingSeparately
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Considered Unmarried (HoH)
IRS Publication 17, Your Federal Income Tax, 2018, page 22
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The “abandonment” languagethat appeared in the 2017 IRS Publications is not present in the 2018 publications IRS Publication 17, Your Federal Income Tax, 2018, pages 23 and 32
IRS Publication 4012, VITA/TCE Volunteer Resource Guide, 2018, page B-7 (page 37)
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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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Nonresident Aliens▪ Citizens, permanent residents,
and resident aliens who are married to nonresident aliens may be able to use three filing statuses
▪ Married Filing Jointly
▪ If they choose to declare their spouse’s worldwide income on their joint return
▪ Married Filing Separately
▪ Head of Household
▪ If they meet the general criteria
▪ Even if living with their spouse
IRS Publication 17, Your Federal Income Tax, 2018, page 22
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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 passes the substantial presence test is resident alien of the United States subject to the same rules as citizens
▪ 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
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https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test
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Undocumented Persons▪ The IRS is only concerned with alien status. It does not
differentiate between documented and undocumented people
▪ Spouses of undocumented people who share a home cannot use the Head of Household filingstatus unless their spouse is anonresident alien
▪ A spouse cannot use the Headof Household or Single filingstatus solely because theirspouse does not have anSSN or ITIN
IRS Publication 17, Your Federal Income Tax, 2018, page 21
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Spouses Lived apart for the Last Six Months of the Year
Spouse is a Nonresident Alien
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Married Taxpayers and HoH
▪ The absence is not temporary▪ It is reasonable to assume the
spouses may live together in the future
▪ The taxpayer paid more than half the costs of keeping up a home
▪ The home is the main home of their child, stepchild, or foster child for more than half the year
▪ The spouses may live together or apart (it does not matter)
▪ The taxpayer paid more than half the costs of keeping up a home
▪ A qualifying person lived in the home for more than half of the year
▪ Or the taxpayer is paying for the home of one or both parents
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Filing Status – Recent Widow(er)s
▪ Remember, if the taxpayer’s spouse died during the tax year they are considered married for filing status purposes
▪ If the taxpayer’s spouse died during the two prior tax years
▪ and they pay more than half the costs of keeping up a home
▪ a child or stepchild lived in the home for the entire year
The taxpayer may use the qualifying widow(er) status
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QualifyingWidow(er)
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Filing Status – Single or HoH?
▪ Head of Household
▪ Paid more than half the cost of keeping up a home
▪ A qualifying person lived in the home for more than half of the year
▪ Or the taxpayer paid more than half the costs to keep up one or more parent’s homes
▪ Single
▪ Taxpayer must be unmarried
▪ There is no “considered unmarried” that applies
Unmarried Head of Household
Single
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You Need to Know Non-relevant Issues
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Filing Status Determiners
▪ The taxpayer’s marital statuson the last day of the tax year
▪ If the taxpayer’s spouse is a nonresident alien
▪ If they paid more than half of the costs of keeping up a home
▪ Whether a qualifying person lives in the home
▪ The taxpayer’s or taxpayer’s spouse’s documentation status
▪ Whether the taxpayer or spouse is paid accountably or “under the table”
▪ Whether the taxpayer or spouse have an SSN or ITIN
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Example▪ Your student lives with her mother and her daughter in the home
she grew up in. She reported the following information on her FAFSA:
▪ Is the filing status correct?
▪ Does anything else need to be addressed?
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▪ The student’s marital status is single
▪ The student has a child she pays more than ½ of the support for
▪ The student filed a tax return
▪ The household size is 2
▪ Tax return filing status is head of household
▪ AGI and income earned from work are both $12,500
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Example▪ Your dependent student reported the following information in the
parents’ section of the FAFSA
▪ Is the filing status correct?
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▪ FAFSA parents’ marital status is married
▪ Marital status date isJune 21, 2019
▪ Parents filed a tax return
▪ Tax return filing status is single
▪ Income earned from work was reported for both parent
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Example▪ Your independent student reported the following information on
his FAFSA
▪ After reaching out to the student, you learn that the student’s spouse is deployed in Afghanistan, so they based their use of the single status on this long term absense.
▪ Is the filing status correct?
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▪ The student’s marital status is married
▪ Marital status date isDecember 21, 2014
▪ The student filed a tax return
▪ The household size is 2
▪ Tax return filing status is single
▪ Both the student and spouse reported earned income
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▪ These tax statuses yield the same income tax owed for taxable incomes up to $300,000 – but see next slide
Single vs. Married Filing Separately
IRS Instructions for Form 1040, 2018, page 79
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MFS Status is Permitted If▪ The taxpayer itemized their deductions (or you have their spouse’s
return as well and know they both used the $12,000 standard deduction)
▪ They did not claim any of these credits
▪ Their capital loss deduction is $1,500 or less
▪ They did not contribute to a Roth IRA
▪ See Special Rules on page 21 of the 2018 version of IRS Publication 17 for a complete list of restrictions
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▪ The education credits▪ The credit for child and
dependent care expenses ▪ The earned Income credit▪ The adoption exclusion or credit
▪ The tuition and fees deduction▪ The student loan interest
deduction▪ The U.S. savings bonds interest
exclusion for tuition and fees
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If a Married Filer Uses the Single Status
▪ IRS Publication 4491, VITA/TCE Training Guide, 2018, page 5-3 (83) contains this statement which makes it clear that the only alternative filing status available to married taxpayers filing separate returns is Head of Household
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If Two HoHs Share a Common Dwelling▪ The Tax Court has determined that the determination of “household”
cannot be limited solely to the space the household occupies▪ Two taxpayers sharing the same home may each qualify for HoH if
they meet four criteria▪ Even if there are common areas (kitchens, bathrooms, living rooms) the
adults must have exclusive use of some private space▪ Each adult must have at least one qualifying person living in the common
dwelling▪ The adults must be able do demonstrate some level of independence from
each other in non-household matters, such as meals, entertainment, vacations, independent decision making related to the children, independent ownership of cars, separate accounts for non-household costs, etc.
▪ Each adult must meet the “greater than 50%” rule for their share of the costs of their defined household
▪ See https://www.irs.gov/pub/irs-sca/1998-041.pdf
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In Closing
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Useful Links▪ Federal Register – FAFSA Information To Be Verified for the 2020-
2021 Award Year
▪ https://ifap.ed.gov/fregisters/attachments/FR052419.pdf
▪ New Documentation Guidance (January 9, 2019)
▪ https://ifap.ed.gov/eannouncements/010919Chngsto1819and1920VerificationReq.html
▪ Completing the FAFSA – 2019-2020
▪ https://studentaid.ed.gov/sa/sites/default/files/2019-20-completing-fafsa.pdf
▪ IRS Transcript Information
▪ https://www.irs.gov/individuals/tax-return-transcript-types-and-ways-to-order-them
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Useful Publications
Publication 3 Armed Forces’ Tax Guide
Publication 17 Your Federal Income Tax
Publications 590a and 590b
Contributions to and Distributions from Individual Retirement Arrangements (IRAs)
Publication 926 Household Employer’s Tax Guide
Publication 970 Tax Benefits for Education
Publication 4012Publication 4491
VITA/TCE Volunteer Resource GuideVITA/TCE Training Guide
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September 18th Webinar September 23rd Webinar
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Agendas
▪ 2020-2021 Key Concepts
▪ Verifying Tax Filers
▪ Verification Requirements
▪ The 2018 Form 1040 and the 2020-2021 FAFSA
▪ Schedule 1 and the Simplified Formula/Automatic Zero EFC
▪ Rollovers
▪ Verification Documentation for Non-Filers
▪ Verifying Non-filers
▪ Who is Required to File a Tax Return?
▪ What is the Correct Filing Status for a Person?
Conference
▪ Overview of the New Tax Code
▪ Amended Tax Returns
