Those Darn Taxes

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Those Darn Taxes

• Determining filing status requirements
• Using the correct lines for verification
• Handling conflicting information

Donna Taylor Assistant Director Virginia Tech
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What you need to know

• FAAs must have a fundamental understanding of
  relevant issues that can considerably affect the
  need analysis. FAAs are obligated to know
• Whether a person was required to file a tax
  return
• What the correct filing status for a person
  should be, and
• That an individual cannot be claimed as an
  exemption by more than one person.

2007-08 AVG 101
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Filing Requirementsfor Dependents

• Unearned income greater than 850
• Earned income greater than 5350
• Gross income more than the larger of
• 850, or
• Earned income (up to 5050) plus 300 5350

Single dependents under the age of 65 and not
blind
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Filing Requirementsunder 65
See IRS 2007 Publication 17 for requirements for
those over 65
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Case Study 1

• Situation
• Student earns 5500 (3500 from summer
  employment at McDonalds and 2000 in federal work
  study).
• On the W-4 the student claims exempt from
  withholdings
• Question
• Is the student required to file a tax return?

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Case Study 1 - Answer

• Yes. A dependent student must file a tax return
  if their earned income is greater than 5350.
• Claiming exempt from withholding does not exempt
  the student from filing.
• Having earnings from work study does not exempt
  student from filing however those earnings are
  reported on worksheet C of FAFSA.

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Type of Return

• 1040EZ / 1040A
• 1040
• 1040X (must also have original 1040)
• 1040 required when (not inclusive)
• Income over 100,000
• Business/Rental/Farm Income
• Alimony received
• Other Income
• Itemize deductions

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FAFSA indicated Yes, could have filed a
1040A EFC 0 (auto zero)
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Could File a 1040 EZ / A

• Family could not file a 1040EZ / A due to
• Line 21 income of 2500
• EFC 5851
• Family has 37,000 in worksheet A
• (social security benefits for father and two
  dependents)
• Loss of 4731 in Pell Grant

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Filing Status

• Single unmarried, legally divorced, or a
  widow(er)
• Married filing joint legally married
• Married filing separate legally married, but
  chose to file individual returns
• Qualifying Widow
• Head of Household

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Filing Status Qualifying Widow(er) w/ Dependent
Child

• Spouse died in the year prior to tax year (ex.
  Tax year 2007, spouse died in 2006)
• Have not remarried
• Have a dependent child

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Filing Status - HOH

• Head of Household
• Unmarried or considered unmarried
• Paid more than half the cost of keeping up a home
  
• Qualifying person lived with you for more than
  half the year

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Filing Status - HOH

• Considered Unmarried
• File a separate return
• Paid more than half the cost of keeping up your
  home
• Spouse did not live in your home during the last
  6 months of the tax year excluding temporary
  absences
• The main home of your child, stepchild, or foster
  child
• Be able to claim an exemption for the child

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Filing Status - HOH

• Keeping Up a Home
• Property taxes
• Mortgage interest expense
• Rent
• Utility charges
• Upkeep and repairs
• Property insurance
• Food consumed on premises
• Other Household Expenses

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Case Study 2

• Situation
• Both parents submit tax returns filed as Head of
  Household.
• Question
• Can you accept the tax returns?

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Case Study 2 - Answer

• Answer Maybe (unusual, but possible)
• If the parents were legally separated as of the
  last day of the calendar year AND living apart
  for the last six months of the year.
• Pay more than half the cost of the upkeep of the
  home
• Have a qualifying child but can not use the
  same child
• Have not reconciled

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Tax Exemptions

• To be claimed as a dependent the individual must
• Be a relative or live in the household the entire
  year
• Income of certain dependents cannot exceed
  threshold
• More than half of the support provided by the
  taxpayer
• Cannot be claimed by more than one person

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Example
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(No Transcript)
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Verifying Income

• Untaxed interest income
• 1040 line 8a
• Business Income
• 1040 line 12
• Farm Income
• 1040 line 18
• Untaxed Social Security Taxes
• 1040 line 20a minus 20b

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Example Untaxed Interest
Report 8b on Worksheet B
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Example Business Income
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Example Pension Taxed vs. Untaxed
73,529 disbursement - 40,195 taxable
portion 33,334 should be reported on
worksheet B
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Case Study 3
How much of the pension should be reported on
worksheet B?
ANSWER None. It is a rollover.
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Verifying Income

• Untaxed Foreign Income Exclusion
• 1040 line 21 w/ mention of form 2555
• Untaxed IRA contributions
• 1040 line 15a minus 15b
• Untaxed Pensions
• 1040 line 16a minus 16b

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Earned Income
Example Foreign Income Exclusion
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Form 2555
Not required to have for verification
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Example IRA distribution
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Verifying Income

• Untaxed SEP, SIMPLE, and qualified plans
• Adjusted Gross Income

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Example SEP and AGI
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Verifying Income

• Education Credits
• Taxes Paid
• Untaxed Earned Income Credit
• Untaxed Additional Child Tax Credit

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Example Credits and Taxes
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(No Transcript)
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Example Credits for Worksheet B
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CONFLICTING INFORMATION
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Not Conflicting

• Household size differs from tax exemptions
• Dependent for IRS vs. Financial aid definition
• Assumptions made by CPS

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Sources of Conflicting Information

• Information from the Student
• SAR or ISIR
• Another University Office
• Other Institutions

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Examples of Potential Conflicting Information

• Tax return submitted although student not
  selected for verification
• Indicates will not file a 1040, you have reason
  to believe they are required to file
• Statements or information suggests the 1040 you
  have is not the one that was filed with the IRS

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Examples of Potential Conflicting Information

• 1040 shows head of household, FAFSA indicates
  married
• -Request verification of marital status
• -Have a conversation with the parent
• -If determined filing status is incorrect
  require the parent(s) file a 1040X and provide
  you with a copy OR with a tax transcript from
  the IRS after the 1040X has been processed.

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Case Study 4

• Situation
• Duke sends in a parent tax return. When you
  review the return you notice that Duke is listed
  as the taxpayers grandchild.
• Question
• Do you have conflicting information?
• If so, what documentation do you need?

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Case Study 4 - Answer

• Yes
• Contact student or grandparent to see if
• Was student a ward of the court or orphan
• Was student adopted by the grandparents
• If not, what is the situation with the biological
  parents
• If applicable, do you consider this for a
  dependency override
• Can not use the grandparent information unless
  the grandparent(s) adopted the student.

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Examples of Potential Conflicting Information

• Receive a W-2 showing a higher amount in wages
  than reported on the FAFSA
• Request tax return and all W-2s
• Significant interest or dividend income on 1040,
  FAFSA indicates 0 or low assets
• Define significant more than
• Watch for capital gains, family could have sold
  the asset
• Request written explanation
• Check for Simple Needs Test

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Case Study 5

• Situation
• Hokie Bird is selected for verification and
  provides the information. Hokie Birds sister,
  Cavalier, is listed on the household verification
  and is also attending your institution. Cavalier
  was not selected for verification.
• Question
• Do you need to do anything else?

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Case Study 5 - Answer

• Yes
• Use Hokie Birds verification documentation to
  review Cavaliers.
• If household information was not correct will
  need to request from Cavalier.
• If parent tax information is not correct may copy
  documentation for Cavaliers file
• If parent untaxed income information is incorrect
  and not verifiable with 1040 will need to request
  for Cavaliers file
• Student documentation is optional based on
  institutional policy

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Examples of Potential Conflicting Information

• University provides enrollment information to
  Veterans Administration, FAFSA does not include
  veteran benefits
• Ask student to verify amount(s) being received
• Can rely on University certifying official for
  the amount, if known
• Student receives scholarship from military
  branch but did not report monthly veteran benefits

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Examples of Potential Conflicting Information

• Payroll Office indicates FWS earnings that do not
  match Worksheet C on FAFSA
• OR
• Students reported earnings on FAFSA are lower
  than documented FWS earnings

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Examples of Potential Conflicting Information

• Bursars office / Student Account office reflects
  receipt of a scholarship payment that has not
  been considered in EFA (estimated financial aid)
• Admissions Office / Registrars Office classifies
  student as non-degree seeking

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Resolution

• Determining the correct documentation
• Resolve the conflict
• Be consistent
• Do not disburse aid or make additional
  disbursements until conflict resolved
• Error or Fraud?

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QUESTIONS