INDIANA UNIVERSITY VOLUNTEER INCOME TAX ASSISTANCE GUIDE BOOK (FOREIGN STUDENT)

Transcription

1 INDIANA UNIVERSITY VOLUNTEER INCOME TAX ASSISTANCE GUIDE BOOK (FOREIGN STUDENT) Charles Gray IU VITA (Created 2014)

2 Table of Contents Introduction to VITA... 2 Documents you ll see Important decisions to make Example 1 Bob the Indian Student... 7 Basic Information... 8 The W The 1040-NR Treaty Benefits 1040NR / Schedule OI Form The Indiana return (state return) Indiana Basics the Renter s Deduction Finishing Touches Example 2 Bob the Chinese Student Introduction Treaty Benefits what s different? Finishing Touches Example 3 Bob the Chinese Student with two W-2s Introduction What s different? Adding another W Important Notes Finishing Touches Appendix Additional W Page 1

3 INTRODUCTION: WHAT IS THIS? In this production book, we will explore various scenarios that you ll encounter in your Volunteer Income Tax Assistance experience. We appreciate the time and effort commitment that VITA entails; you are providing a vital service to the Indiana University community by volunteering your time and expertise to assist low-income and student taxpayers with their taxes. This production book is designed to walk you through a variety of common VITA scenarios. There are sections for foreign student. Branched under the foreign student sections are selections for Indian students and Chinese students our two most common groups of student population at VITA. There is also a section for students who have income sourced from two separate states. Properly followed, this guide should be able to walk you through approximately eighty (80) percent of the situations that you ll likely face. Should you run into a scenario that is not covered in this book, please feel free to inquire with one of VITA s fantastic quality reviewers or site coordinators. They have been trained by the IRS in reviewer and coordinator procedures and have been required to pass all relevant IRS certification levels. However, the goal is that you will use this as a template for other, similar scenarios. For example, this guide walks you through an Indian student and a Chinese student return. However, with a few small tweaks, you will be able to use the information for students from other countries as well. Note: Resident returns (1040s) covered in an additional document. DISCLAIMER As you know from your training, these numbers will change between each tax year. For example, the standard deduction amount was $5950 in 2012 and $6100 in The aim of the guide is to guide you through the concepts and software. You ll need to use a small amount of common sense in substituting the current year s numbers, if this guide has not been updated. The updated date is present on the top of this document and is intended simply for informational purposes. Moreover, no part of this guide should be construed as legal advice in any sense whatsoever. It is solely intended to assist you with common VITA scenarios and nothing more. No attorney-client relationship is formed. Page 2

4 COMMON DOCUMENTS Publication 4011 assists with treaty information. It is worth its weight in gold at VITA. This is a sample 1098-T that we will use with our fake taxpayer, Bob K. Taxpayer. The next page holds Bob s W-2. An additional W-2s will be used with our advanced scenarios, and it will be present in the appendix. Page 3

5 This is Bob s sample W-2. We will be referring to it later. Page 4

6 IMPORTANT DECISIONS YOU LL FACE We will be looking here at the decision of what filing status to take. There is some important information here, so be sure to pay attention! Filing Status o Nonresident Taxpayer (1040-NR) or Resident Taxpayer (1040)? Step 1: is the taxpayer a United States resident? i.e., has she been born in the United States or has she otherwise taken affirmative steps to obtain residency status? YES Taxpayer will be a resident taxpayer and use form Please see the additional guide (if present). NO Continue to step 2. Step 2: If the taxpayer is a nonresident, determine Visa status; most of our clients are on a F or J visa. For clients on a F or J visa, we must first ask if the taxpayer has been in the United States for more than five years. NOTE: The five years test looks at any time that the taxpayer was in the country. For example, Bob, our taxpayer, entered the U.S. on a F-1 visa on Aug. 1, For the 2013 tax year, Bob has been present for four years (part of 2010, 2011, 2012, and 2013). He will be classified as a nonresident taxpayer. WHAT IF: Assume instead that Bob entered the U.S. on a F-1 visa on Aug. 1, For the 2013, Bob has been present for six years (2008, 2009, 2010, 2011, 2012, 2013). In most instances, this scenario will result in the taxpayer filing as a resident taxpayer. o However, be sure to apply the Substantial Presence Test, shown in the Publication 4011 booklet, if the taxpayer has been present in the U.S. for more than 5 years. o Single, married, married filing separately, etc.? The majority of taxpayers will be single filers. Married filers? Generally, it s pretty self-evident. Page 5

7 Exemptions? o In general, you will be working on clients who have only one exemption. This typically will be the taxpayer herself. For married clients, the exemption number will generally be two plus the number of children under 24 that the parents provide care for. For students under 24, they cannot claim the exemption if they can be claimed as a dependent on their parents return. The most likely scenario here is a 20-year-old resident student whose parents claim her. In general, most foreign students will be able to claim the exemption, as their parents live in foreign countries and do not file a U.S. tax return. o Special rules exist for citizens of South Korea, India, Canada and Mexico for claiming dependents / spouses as exemptions. Refer to the VITA foreign student PowerPoint. Deductions? o For residents, everyone is entitled to the standard deduction or to itemize deductions. Clients should only itemize deductions if the total of the itemized deductions is greater than that of the standard deduction amount. o For Indian student nonresident taxpayers, due to the U.S. India tax treaty, indian students can take the standard deduction amount. o For all other nonresident taxpayers, we must itemize deductions. For the majority of cases, this will only be the amount of state income taxes paid. Taxwise will calculate this amount automatically. Page 6

8 SCENARIO 1 BOB THE INDIAN STUDENT In this hypothetical, we assume that Bob is an Indian student. He is twenty-four years old and was born on January 1, He first entered the U.S. on August 1, 2010, to pursue his bachelor s at IU. He comes to the VITA site with the two documents shown above his W2 from IU and his tuition statement from IU. These are the only two documents that he has. STEP 1 Logging into Taxwise Open Internet Explorer and navigate to twonline.taxwise.com. You will be presented with the login shown below. Our site ID never changes it is Once you have logged-in, you will be presented with the Taxwise desktop. You will select new return in the far upper-left corner of Taxwise. Once you input the client s social security number under new return, you will be asked if you wish to proceed to forms or interview. Please select FORMS. After you have done so, please join me on the next page. Page 7

9 STEP 2 ADDING THE INFORMATION Now, we re on the Main Information Sheet. It is the first thing you should see when you open a new return. For this hypothetical return, I have already entered in Bob s relevant information. Notice that we have selected form 1040NR. This is because Bob is filing as a nonresident Note the proper filing status here! Residents use The remainder of this form is simple data entry. Be sure to correctly identify the state return you ll be filing. With Bob, it s just an Indiana return. Quick note except for very limited circumstances, you will not enter anything on the Foreign Address lines. Your coordinators will know more. Page 8

10 STEP 3: THE W-2 Adding the W-2 Notice where the W-2 is. It is highlighted here. The next page details the W-2 page on Taxwise. It is where you will report the client s W-2 income! If you cannot locate the W-2 on the side panel (highlighted above), select ADD (highlighted by the red box). Be sure to enter amounts on the W-2 exactly as they appear in the client s W-2. This is very important. W-2 income will automatically transfer over into the 1040NR main page; moreover, if you have multiple W-2s, they will all aggregate together in the 1040NR Pg 1. Next page Page 9

11 FILLING OUT THE W-2 For foreign students, Social Security and Medicare should NOT be withheld. Checking the box shown removes the automatic calculation on Taxwise. HOWEVER, be sure to type exactly as shown on the W-2. If the client has SS and Medicare taxes withheld and is a foreign student, contact a reviewer! Notice here how Taxwise s W-2 view resembles the paper W-2 form. Further notice how the boxes match (e.g., Wages is Box 1 for both). Remember to input state tax information! Page 10

12 STEP 4: THE 1040NR 1040NR PAGE 1 Next, we ll move on to the main 1040 form. Taxwise splits it up into 5 different pages. We primarily use pages 1, 2, and 5. Pages one and two contain the 1040NR itself and page 5 contains information about the nonresident taxpayer. The first thing you ll do on page 1 is enter the taxpayer s filing status. Notice all of the various filing statuses. Status 2 is the most common; we occasionally use status 5 when it is applicable. As referenced previously, Canadian, Mexican and South Korean taxpayers receive special treatment as a result of tax treaties. Selecting the applicable button automatically applies the treaty benefits. For Bob, we select status #2 other single nonresident alien. The remainder of 1040NR page 1 deals with other sources of income that a taxpayer may have. Most of this is outside of scope for our site. Our reasoning is that taxpayers who have some of these sources of income (e.g., business income / capital gains / interest) typically cannot be classified as low-income and, therefore, are not the most desirable clientele to assist with our limited resources. Our aim is to maximize the number of people to help and also to help the people most in need of our services. Clients with capital gains or other similar character income typically are able to afford pay services, even if the income cap is not strictly applicable. Page 11

13 1040NR PAGE 2 This is page 2 of the 1040NR. It is where the magic happens. Notice Bob s AGI from page 1 at the top here. Bob s AGI is reduced by the standard deduction of $6100 (for 2013) because Bob is an Indian Student. The checkbox outlined is where we indicate on Taxwise that the client is taking the standard deduction amount. For all nonresidents who are not Indian, this amount will be the taxpayer s itemized deductions that you will calculate. Further down we have the exemptions line; for nonresident taxpayers, most are able to take this. However, if you are assisting a resident student taxpayer, make certain that (s)he is not claimed on another return (e.g., her parents return). Often, students under 24 will unknowingly take the exemption, when their parents have also claimed their exemption. This is NOT allowed. If you run into this and the taxpayer disputes it (either because (s)he doesn t believe it or feels as though (s)he provides more financial support than his/her parents, contact a reviewer for assistance. Line 42 is figured automatically; values from the IRS tax tables are tabulated to get the taxpayer s owed tax for the year. Many, if not most, of these credits (and deductions if the taxpayer itemizes) are unavailable to nonresident taxpayers. The most common allowed deductions for nonresident taxpayers is the state and local taxes paid deduction and the charitable contribution deduction. These are found on Pg. 3 in taxwise. The state/local taxes paid deduction is tabulated automatically from inputted W-2 data; if the taxpayer has charitable contributions, you will need to add that manually on Pg. 3, provided the taxpayer has sufficient documentation. Finally, this selection looks at payments made throughout the year. The most common form of payment you will encounter is income tax withholding. It is on box 2 of the W-2. MAKE SURE TO PROPERLY INPUT WITHHOLDING! (Double check it now!) If total payments are greater than the tax owed, the taxpayer will receive an income tax refund. If the total payments are less than tax owed, the taxpayer will owe the IRS an additional amount Remember direct deposit info if the taxpayer elects to have his/her return direct deposited.. Page 12

14 STEP 5 TREATY BENEFITS 1040NR PAGE 5 (SCHEDULE OI) This page is very important for treaty purposes. You should enter all relevant information in the proper box. Here, I have filled everything out with Bob s hypothetical information. This section is relevant for purposes of the Substantial Presence Test (SPT). If the taxpayer has been in the U.S. for five or fewer years, these dates do not need to be exact. If they have been in the U.S. for greater than five years, it is imperative that they are accurate. Nonresidents can typically find this info in their passport. This bottom section is quite important as well. For Bob, an Indian nonresident, his exempt income and W-2 income is both zero here. It is because the Indian-U.S. treaty does not exempt income; it instead grants taxpayers the standard deduction. Be sure to accurately enter this information. Example 2 the Chinese student example will deal more with boxes c, d, and W-2 income. For Indian students, don t worry too much about it. Page 13

15 STEP 6: ADDING FORM 8843 This page is once again very important for treaty purposes. You should enter all relevant information in the proper box. Here, I have filled everything out with Bob s hypothetical information. Form 8843 will be filled out for ALL nonresident taxpayers who have been in the United States for five years or less (or, in other words, are excluded from the substantial presence test. To add the form 8843, you will first press the green add symbol on the sidebar. Next, you will type 8843 without the quotation marks into the box and press add. Page 14

16 FORM 8843 Much like Page 5 of the 1040NR, Form 8843 provides the IRS with basic information about the nonresident taxpayer. Particularly, Form 8843 gives passport information and information about the taxpayer s academic institution. Note here that we have excluded all 365 days from the SPT. This is because Bob has been in the U.S. for five or fewer years, the SPT s exclusion period. F F F All of this information is available from the University and is provided by the taxpayer. It is all dependent on the taxpayer. For Bob, we would type in F for years 2010, 2011, and We would select no for the remaining two options. NOTE: you will NOT use 8843 pg. 2. Ignore it. Page 15

17 STEP 7: THE INDIANA STATE RETURN First thing s first. Let s navigate to the Indiana state return. FORM IN-PNR This is how we navigate to the Indiana state return. Its title, for Bob and for all other nonresident taxpayers, is IN-PNR. REMEMBER, if the taxpayer is a nonresident, you MUST file IN- PNR! If the form reads IN-40, you have told Taxwise that you wish to prepare a full-year resident Indiana form. If this is the case, see Step 2 (Page 8) for information on how to properly add a nonresident state tax form. Let us begin with IN PNR Pg. 1 Page 16

18 FORM IN-PNR Pg. 1 Pg. 1 is relatively simple. Taxwise automatically pulls information from other parts of the return. You MUST remember to type the school corporation number and county of residence. For Bob s return, I have typed Bloomington s numbers, since he lives and works in Bloomington. For >95% of taxpayers, these are the numbers you will input. Notice the exemptions box once again. The proper number of exemptions is pulled from the Federal form. BE SURE IT IS CORRECT. Page 17

19 FORM IN-PNR Sch. H (Residency Information) Schedule H provides the Indiana Department of Revenue (DOR) information about the nonresident taxpayer. NOTE: the taxpayer s resident status is OC for the entire year. This is because the IN DOR classifies foreign student taxpayers as residents of their home country. NOTE: For page 2, you will press YES for question 1. All of our clients will be filing federal and state returns. NOTE: Select NO here. The vast majority of our clients do not have a personal representative. Page 18

20 FORM IN-PNR Sch. C (Deduction Information) Schedule C provides the Indiana Department of Revenue (DOR) information about the nonresident taxpayer s deductions. For VITA, the first portion is the most relevant. This is Indiana s renter s deduction. It has a cap of $3000, meaning if the taxpayer spent $5000 on rent for the year, only the first $3000 is deductible The remainder is typically not seen at VITA. If the taxpayer has any one of the remaining applicable deductions, see a reviewer. This is where your new renter s deduction information will appear. To the left is a snip of IN40 PNR Pg. 1. You should remember it from just a bit earlier. Notice how taxwise has automatically pulled Schedule C s deduction information and made all necessary and supporting calculations? Page 19

21 FORM IN-PNR Pg. 2 This is the second page of form IT-PNR. It is where the taxpayer learns how large his refund is or how much he owes. Bob fortunately is getting a $133 refund from Indiana! Be sure that you are not filing electronically; nonresidents are not permitted to file electronically Be sure to correctly enter direct deposit information into this form. If the numbers are wrong, the taxpayer will not get his refund! Page 20

22 CONGRATULATIONS!! You have worked your way through your first return. Now what?! The first thing you ll do once you re done is check the side panel for items marked in red. Red marks indicate that something is omitted. It DOES NOT necessarily mean you have done something wrong. Sometimes, Taxwise has information that must be entered by a reviewer. Other times, you simply forgot to check a checkbox. Likewise, an all-green side panel DOES NOT necessarily mean that the entire return is correct! For example, the Indiana return will appear green even if you have failed to enter the renter s deduction. Before submitting the return, double check it for a few final items: 1) Be sure that you have correctly entered all of the taxpayer s W-2 information (federal income, federal taxes withheld, state income, state taxes withheld, etc.) 2) Be sure that all relevant treaty provisions have been correctly identified and entered. This can get complicated see the second example! 3) MAKE SURE YOU HAVE ADDED FORM 8843!!! Likewise, make sure that Form 8843 is correct! 4) Be sure that the taxpayer has received his renter s deduction. Double-checking these basic problems will correct around eighty percent of all errors that reviewers must routinely correct. Doing so will speed up review and will allow us to serve more clients! The last step is saving the return! Click save (top left) and then close. Page 21

23 SCENARIO 2 BOB THE CHINESE STUDENT Now that you have mastered our initial scenario, let s switch up to another one of our common scenarios. As you may have learned, the bulk of our site s services are provided to both Indian and Chinese students. Generally, these returns are very similar, apart from a handful of slight differences. This scenario assumes that you have fully read and understood Scenario 1, Bob the Indian student. This scenario will highlight the differences. It should be assumed that if this guide fails to highlight a particular issue that nothing has changed. For example, the Indiana renter s deduction will not be altered by the nationality of the taxpayer. Furthermore, the exemption amount will not be altered by the nationality of the taxpayer. Scenario 2: What has changed? One thing Bob s nationality. We will use the same W-2 that we did in Scenario 1. Please refer to it for the remainder of the following scenario. Page 22

24 DIFFERENCE #1: 1040NR PG. 5 The first and most important difference between Indian taxpayers and Chinese taxpayers is that Indian students are permitted to take the standard deduction, whereas Chinese students income is exempted up to a maximum amount of $5000. The first step that we take to reflect that difference is to enter in China s treaty benefits. At the bottom of 1040NR Pg. 5, there is a section for entering applicable tax treaties. It is shown below. Note the differences here. We have entered China s country and treaty provisions. We have also determined how many months Bob has previously claimed the exemption. 29 months comes from as broken down here: 5 months from 2010 (Aug. 1 when he entered the country to Dec. 31) and 12 (the whole year) in 2011 and Box D looks at the amount of income that is exempted from the treaty. Here, it is $5000 (the treaty amount). However, if the taxpayer earns less than $5000, box D will simply be the taxpayer s income. For the box labeled W-2 Income, YOU MUST TYPE THE EXACT SAME NUMBER FROM BOX D. DO NOT ENTER THE TAXPAYER S FULL W-2 AMOUNT unless the taxpayer has earned less than $5000 for the year. This is our most common (and easily-corrected) error. Page 23

25 DIFFERENCE #2: 1040NR PG. 1 AND 2 The first difference that you will notice upon entering Bob s Chinese treaty is that his Income is now $5000 (compared to $10,000 for Bob the Indian Student). This is because the Chinese treaty has exempted that income! Later, you will see where the $5000 difference went. The form shows you, when the exempted income and taxable income are combined, how much Bob the Chinese student earned. Note Bob the Chinese student s new Adjusted Gross Income and compare with Scenario 1 Finally, when we turn to page 2, note that Bob DOES NOT take the standard deduction. Indian students may, but Chinese students MAY NOT. Further, note that Bob now has a small amount of taxable income. His total 2013 tax liability is $71 dollars, more than offset by his $2000 withholding. His refund will be $1,929. However, with the standard deduction, Bob the Indian Student received his full $2000 withheld back as a refund. Page 24

26 FINISHING TOUCHES When you combine this guide with Scenario 1, you will be able to tackle a Chinese student return with ease. You will also be able to utilize the framework provided to prepare a return for nonresidents hailing from other countries. For example, suppose that you are working with a South Korean student; you will use Publication 4011 to search for South Korea s (or any other country s) treaty benefits and input the information in 1040NR Pg. 5. You will also be able to assist visiting scholars who often have different treaty provisions. These are likewise provided in Publication The client will be able to tell you if they are a researcher or scholar or student. Their status is determined by the University and by Immigration and Nationalization Services (INS). Furthermore, you will be able to assist those with scholarships. Occasionally, nonresident students have large scholarships that may exceed tuition amounts that, absent a treaty, would be taxable. Some countries have tax treaties that change this! As you can probably guess, this information is found in Publication Finally, notice the current refund difference between Bob (Indian) and Bob (Chinese). Because his standard deduction helped him reduce his income more than Chinese student Bob s exemption did, Indian student Bob is receiving a larger refund, despite a larger AGI. For hypothetical purposes, assume that you are assisting a student without any treaty benefits (shown below). These treaty provisions make a real difference in our clients lives. Please be sure to get them right! It s a lot of money! Page 25

27 SCENARIO 3 BOB THE CHINESE STUDENT WITH TWO W-2s. The third of our three nonresident scenarios is, like the other two, a very common one with VITA. It is likely the most advanced scenario that you will run into in your time here, unless you choose to volunteer often or take on leadership opportunities (we hope you do both!!). This scenario is likely to arise when the student works for the university and then works at a summer internship in another state. For illustrative purposes, we will build upon Bob the Chinese student s scenario. However, it is important to note that the procedures for adding a second W-2 will not differ for Bob the Indian student. The only things that will differ, as illustrated above, are the student s treaty benefits! Without further delay, let us walk through adding a second W-2. This procedure should be somewhat familiar. It is the same process that you used to add Bob s Form You will select add and then type W2 into the search dialogue box. You will add the W2. Note here that you now have a second W-2. Clicking on it will open up the new W-2. Page 26

28 THE NEW W-2 Now that we have added the second W-2, we must go about entering all of the data. Like the first example, Taxwise s W2 is intended to mimic the paper W2, with the box numbers the same for each. The above is a screenshot of the added W-2. Notice that I have once again removed SS/Medicare calculations, as Bob is still a nonresident. Page 27

29 OTHER CHANGES Now that we have added the second W-2, the figures transfer automatically to the 1040NR. Please double-check the figures to ensure accuracy. Below is a screenshot of the updated refund monitor. Notice Bob s new AGI (30k Illinois job + 10k IU job 5k China treaty) and updated refund status. Although the federal changes were handled automatically, as you see below, it will not automatically add an Illinois return. Below, you see once again on the main page where you enter state information. In order to add the new Illinois return, you select Main Info from the side panel at the top, scroll to state information and enter IL next to where you have already entered IN for Indiana. At the bottom of the side panel, you should now see IL NR Pg. 1. This is the proper form, not IL1040. Taxwise adds both automatically, but we use the nonresident one here. Page 28

30 IMPORTANT NOTES / FINISHING TOUCHES This guide will not detail procedures for Illinois state returns. You will encounter students who have worked in a number of states. Your intrepid guide has worked with students who earned income in California, Washington, Oregon, Texas, Nevada, Montana, Michigan, Illinois, Iowa, New York, Florida, and Missouri, among others. In order to learn more about those states, I suggest that you consult with the Department of Revenue website for each state. These websites have invaluable resources to assist you. To find them, simply google Department of Revenue, replacing the blank with the desired state. Occasionally, states will have reciprocal arrangements with one another, meaning that if you earn income in one state, while living in another, the earned state will not tax, subject to certain rules and regulations. CONSULT YOUR REVIEWER! As with scenario one, please please double check your work. Page 29

31 Bob s Illinois W2 Page 30