BASIC TAX INFORMATION

Transcription

1 BASIC TAX INFORMATION

2 Who Individuals - In General What File Federal Taxes WHO, WHAT, WHEN, WHERE AND WHY? OH, AND SOMETIMES MAYBE. When By April 15 th or sometimes later than that Where All 50 states and some residents of Puerto Rico Why It is a Federal Law Sometimes Maybe Not everyone needs to or has to file taxes.

3 If you are a United States citizen or resident, Whether you must file, a return depends on three factors. 1. Your gross income 2. Your filing status 3. Your age

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10 Nonresident alien spouse. If your spouse is a nonresident alien, your spouse must have either an SSN or an ITIN if: You file a joint return, You file a separate return and claim an exemption for your spouse, or Your spouse is filing a separate return. If your spouse isn't eligible for an SSN, see the following discussion on ITINs. Individual taxpayer identification number (ITIN). The IRS will issue you an ITIN if you are a nonresident or resident alien and you don't have and aren t eligible to get an SSN. This also applies to an alien spouse or dependent. To apply for an ITIN, file Form W-7 with the IRS. It usually takes about 7 weeks to get an ITIN. Enter the ITIN on your tax return wherever an SSN is requested. Make sure your ITIN hasn t expired. If you haven't used your ITIN on a U.S. tax return at least once for tax years 2014, 2015 or 2016, or if your ITIN has the middle digits 70, 71, 72, or 80 (9NN-70-NNNN), it will expire at the end of 2017 and must be renewed if you need to file a U.S. federal tax return in You don't need to renew your ITIN if you don't need to file a federal tax return. You can find more information at IRS.gov/ITIN. If you are applying for an ITIN for your

11 JUST AN INTERESTING FACT Until 1959 there were 48 states in America, but the admission of Alaska and Hawaii that year brought the number to 50. Other than these 50 states, there are some areas which are dependent on the United States for administration. These include the American Samoa, Puerto Rico, Virgin Islands, Navassa Island, and the Northern Mariana Islands. Even though the number of states is 50, only the 9 most populous states in the country house more than half of the total population.

12 Nonresident alien spouse. If your spouse is a nonresident alien, your spouse must have either an SSN or an ITIN if: You file a joint return, You file a separate return and claim an exemption for your spouse, or Your spouse is filing a separate return. If your spouse isn't eligible for an SSN, see the following discussion on ITINs. Individual taxpayer identification number (ITIN). The IRS will issue you an ITIN if you are a nonresident or resident alien and you don't have and aren t eligible to get an SSN. This also applies to an alien spouse or dependent

13 To apply for an ITIN, file Form W-7 with the IRS. It usually takes about 7 weeks to get an ITIN. Enter the ITIN on your tax return wherever an SSN is requested. Make sure your ITIN hasn t expired. If you haven't used your ITIN on a U.S. tax return at least once for tax years 2014, 2015 or 2016, or if your ITIN has the middle digits 70, 71, 72, or 80 (9NN-70-NNNN), it will expire at the end of 2017 and must be renewed if you need to file a U.S. federal tax return in You don't need to renew your ITIN if you don't need to file a federal tax return

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16 TAXABLE INCOME TAX INFORMATION CENTER : INCOME : OTHER INCOME Taxable And Tax Free Sources Of Income Most types of income are taxable. However, you might not have to pay tax on some types of income. Taxable income The most common types of taxable income are: Wages, salaries, and tips By law, your employer must send you a W-2 that shows how much you were paid in: Salary Tips To learn more, see the Tip Income tax tip. Commissions Bonuses Vacation pay Sick pay Severance pay, taxable in year paid

17 TAXABLE INCOME Extra cash The IRS considers extra money you make for side jobs as self-employment income. Report this income on Schedule C. If you make more than $400 from your side job, you ll need to file a Schedule SE and pay Social Security and Medicare taxes on the income. Alimony received If you get alimony as a result of a divorce decree or separation agreement, the payments you receive are fully taxable. If you paid alimony during the year, you can deduct it even if you don t itemize deductions. Unemployment benefits Unemployment compensation benefits are fully taxable. To learn more, see the Unemployment Income tax tip. Jury duty pay Jury duty payments are taxable. However, you can deduct any part of the payment you give to your employer in exchange for continuing your salary. Pension and annuity payments Pension and annuity payments are taxed. However, a portion might be tax-free. Ex: After-tax contributions to an annuity are considered tax-free when withdrawn. Awards If you receive an award from your employer for your job performance, it s usually taxable. The award s fair market value (FMV) is included in your W-2 income. This can include an all-expenses-paid trip or some other type of goods or services. However, gifts of property you receive for your length of service or other achievement are tax-free (Ex: a gold watch). The tax-free amount is limited to your employer s cost. Also, the gift s value can t be more than $1,600.

18 TAXABLE INCOME Barter The FMV of property or services you receive or provide in exchange for work done is taxable income. Report this income on Schedule C. You can use another form or schedule if you barter property items instead of services.if you re a member of a barter exchange, you should receive a Form 1099-B. This shows the FMV of all property and services you traded during the year. Disability payments If your employer pays the premiums for your disability insurance, disability payments you receive are usually fully taxable. However, if you pay the premiums, the payments you receive are tax-free. Veterans disability benefits and workers compensation are also tax-free. Gambling winnings Gambling winnings are fully taxable and include: Lottery payouts Sweepstakes payouts Bingo winnings Raffle winnings Casino winnings Prizes All prizes are taxable. If you win a prize, you must include the FMV of the prize in your income.

19 NON TAXABLE INCOME Tax-free income These are the most common types of tax-free income: Auto rebates A rebate is actually a reduction in price of the auto. It isn t taxable income. However, a rebate reduces your basis in the auto. Carpool receipts If you drive a carpool to and from work, you don t need to report payments you receive from passengers. These payments are considered reimbursement for your expenses, not income. Child support payments The payer can t deduct child support, and payments are tax-free to the recipient. To learn more, see the Alimony and Child Support tax tip. Casualty insurance proceeds If you re reimbursed for a loss, like a car accident or house fire, you usually don t have to report the income on your return. However, you should include the payment when you figure any gain or loss from the casualty or theft. Some of these payments might be taxable. Combat pay Your pay is tax-free if you serve in a combat zone and you re one of these members of the military: Enlisted member Warrant officer Commissioned warrant officer If you re a commissioned officer who served in a combat zone or was hospitalized as a result of your service, the amount you can exclude is limited to the total of: Highest rate of enlisted pay Imminent-danger pay Hostile-fire pay This doesn t apply to commissioned warrant officers. To learn more, see Publication 3: Armed Forces Tax Guide at

20 NON TAXABLE INCOME Damages Some types of compensation are usually tax-free. This includes compensation you received for: Damages for a personal physical injury or sickness Emotional distress suffered as a result of the personal physical injury or sickness However, if you receive compensation for these types of damages, the income is taxable: Lost wages or profits Punitive damages To learn more about other situations where the amount received might be taxable, see Publication 525 at Dividends on a life insurance policy Premiums are usually paid with after-tax dollars. So, dividends you receive are considered to be an overpayment of your premium. These are usually tax-free. If the dividends you receive is more than the premiums you paid, the excess amount is taxable. Coverdell education savings accounts (ESAs) Withdrawals from these accounts are tax-free if: You use the money to pay for qualified education expenses (Ex: tuition, books, and fees). The money is for the designated beneficiary enrolled at an eligible educational institution. To learn more, see the Education Savings Accounts (ESAs) tax tip.

21 NON TAXABLE INCOME Gifts If federal gift tax is owed on the gift, the giver owes the tax. So, you don t usually need to report the receipt of gifts. Health and accident insurance benefits If you re reimbursed for medical expenses you paid out of pocket, the money you receive isn t taxable. You also don t have to pay tax on compensation received for the: Permanent loss of the use of part of the body Permanent disfigurement Health savings accounts (HSA) Withdrawals from an HSA are tax-free if they re used to pay qualifying medical expenses. Inheritances Any money or property you inherit is tax-free unless the item is considered to be income in respect of a decedent (IRD). Items like retirement accounts are usually considered to be IRD. If you inherit a traditional IRA or company retirement benefits, you must pay tax on the income just as the deceased would have had to do. For inheritances, your basis is usually the property s FMV on the day the person who gave it to you died. You need to know the basis of the property. This is so you can figure the amount of capital gain or loss you ll have when you dispose of the property. For property you inherited from someone who died in 2010, your basis will be the FMV on the date of death. This is true unless the executor of the estate made a special election. If so, your basis will be the deceased individual s basis in the property. The Tax Relief Act of 2010 created a special election that estate executors could make to allow the use of either of these: Modified-carryover-basis rules FMV rules Consult with the executor of the estate for individuals who died in 2010 for your basis.

22 NON TAXABLE INCOME Life insurance Life-insurance proceeds you re paid from the deceased s policy aren t taxable. However, if you receive the proceeds in installments over a number of years, the interest earned on that account is taxable income. If your spouse died before Oct. 23, 1986, and you re receiving installment payments, you can exclude up to $1,000 a year in interest included in the installments. You can continue to claim the exclusion even if you remarry. Municipal bond interest If you receive interest on bonds issued by state and local governments, the interest is usually tax-free. However, the interest is taxable income if both of these apply: You re subject to the Alternative Minimum Tax (AMT). You receive interest on private-activity bonds. Public safety officer survivor benefits If you re a survivor of a public safety officer killed in the line of duty, you might be able to exclude certain income. Public safety officers include: Law enforcement officers Firefighters Chaplains Rescue squad members Ambulance crew members To learn more, see Publication 559: Survivors, Executors, and Administrators at

23 NON TAXABLE INCOME Profits on the sale of a home If you owned and lived in your home for at least two of the five years before you sold it, you might be able exclude up to $500,000 of profit from taxable income on a joint return. If you re single, the exclusion limit is $250,000.If you have a home office or rent out part of your home, then depreciation allowed after May 6, 1997, will be taxed at 25% on the profit made. As of 2009, you must subtract the amount of gain you can attribute to a period of nonqualified use from the exclusion of gain on your home s sale. To learn more, see the Sale of a Home tax tip. Roth IRA withdrawals Withdrawals up to your contribution amounts are always tax-free. Also, after you turn 59 1/2, all withdrawals you make including earnings are tax-free if the account has been open for at least five years. To learn more, see the Individual Retirement Accounts (IRAs) tax tip. Scholarships and fellowship grants If you use scholarship or grant money for tuition and related expenses, the money is tax-free. This includes these required expenses: Books Supplies Equipment However, if you use any of the money to pay room and board, that portion is taxable income. To learn more, see Publication 970 at

24 NON TAXABLE INCOME Social Security Depending upon your income, Social Security benefits might be entirely tax-free or partly taxable. Ex: If your income is more than $25,000 or $32,000 if married filing jointly up to 85% of your Social Security benefits is taxable. When figuring your income, include tax-free interest income and 50% of your Social Security benefits. State and local tax refunds You might have received a refund of your state or local income tax you claimed as an itemized deduction on your prior-year return. If so, usually a portion of your state or local income tax refund is taxable. However, even if you itemized, part of the refund could be tax-free. To learn more, see the State and Local Income Tax Refunds tax tip. Veterans benefits Veterans Affairs disability payments are tax-free. Workers compensation If you receive workers compensation for an injury you suffered on the job, that compensation is tax-free. However, you must receive the payment under a workers compensation statute or a similar statute. To learn more, see Publication 525: Taxable and Nontaxable Income at

25 FILING STATUS Single Married Filing Jointly; Married Filing Separately; Head of Household; Qualifying Widow(er) With Dependent Child.

26 SINGLE FILING STATUS Single tax filing status is for tax filers who at the end of the tax filing year, December 31 st are: Unmarried; Legally separated or under a separate maintenance decree; Divorced; Annulled marriages; Those who are not legally separated but can show proof of maintaining separate households (the IRS considers these tax filers as unmarried, but the FAFSA considers those who are separated with out a formal order, those who are divorced or legally separated as a separated status).

27 MARRIED FILING JOINTLY This status is for those who are married at the end of the tax filing year. (if they got married on December 31 st they are considered to married for the whole year); This rule applies to all married couples regardless of gender in all 50 states; If filing married filing jointly both spouses must report all income on their tax filing form (2018 tax forms, everyone will complete a 1040)even if only one spouse earned all of the money for the year); Married filing jointly does has some tax credits that other filing status are not eligible for; Tax filers spouse died during the tax year and filer did not remarry at the end of the tax year.

28 MARRIED FILING SEPARATE This status is for those who are married at the end of the tax filing year. (if they got married on December 31 st they are considered to married for the whole year); Married and living together; Common Law Marriages (if recognized in the state they reside or ) Oklahoma is a common law state; Married but do not live together, but are not legally separated by a divorce decree or separate maintenance.

29 HEAD OF HOUSEHOLD This status is for those who are unmarried at the end of the tax filing year; Can file a separate return; Provided more than half of the cost of maintaining a home for their selves and a qualifying dependent for at least half of the tax filing year; Their spouse did not live with them the last six months of the tax filing year. (If their spouse is absent due to special circumstances they are considered still married); The tax filer is able to claim an exemption due to the dependent child living with them unless the noncustodial parent can claim the child. All of the above five must be met to file head of household.

30 WHO CAN BE A QUALIFYING DEPEDENT? The child is the tax filers s child, Step child, adopted child, foster child or grandchild and does not provide over half of their own support; Siblings, including step siblings, nieces or nephews; The child is under 19 as of December 31 st. of the tax filing year; The child is a full time student who has not reached the age of 24 at tax years end (December 31 st.) The tax filer must be older than the dependent; Permanently and totally disabled any time during the tax filing year no matter what their age is.

31 Qualifying Relative; WHO CAN BE A QUALIFYING DEPENDENT? Is not the tax payers or another tax payers qualifying child ; Lived with the tax filer all year or is a relative who did not live with the tax filer; Relatives who qualify as a dependent even though they do not live with you include: child, stepchild, adopted child or a descendent of them; Siblings (including step and half); Parent, Grandparent or other direct ancestor (related through parent or grandparent). Stepparent; Niece or nephew.

32 Aunt or uncle (tax filers parent s siblings); In-laws WHO CAN BE A QUALIFYING DEPENDENT? The tax filer must be providing over half of these dependent s support.

33 QUALIFYING WIDOW OR WIDOWER WITH A DEPENDENT CHILD Should the tax fliers spouse pass away the tax filer can still file a joint tax return for that year only; Could be able to file as an eligible qualifying widow(er)for the next two years if the surviving spouse cared for a dependent child who lived with the tax filer for the full tax filing year.

34 TAX FILING STATUS TRUE OR FALSE 1. The filing status determines the number of dependents. True False 2. A tax filer can be eligible for more than one filing status. True False 3. Married tax filers must use the married filing jointly status. True False 4. A widow(er) can claim the qualifying widow(er) with dependent child filing status for five years after the spouses death. True False

35 TAX FILING STATUS SCENARIOS' Select the appropriate filing status for each situation below. 1. For the purpose of determining filing status, which of the following would be considered unmarried for the tax year? A Kris, who did not get married until December of the tax year B Torre, whose spouse died in February of the tax year C Hal, who was married until his divorce in November of the tax year 2. Jerome is married but has lived apart from his spouse for two years. Jerome pays all the costs of keeping up his home for himself and his 8-year-old daughter, who lives with him. Does Jerome s martial status prevent him from filing Head of Household? 3. Michael provided all the costs of keeping up his home for the year. Michael s son Justin lived with him the entire year. Justin is 22 and was not a full-time student during the tax year, so he cannot be Michael's qualifying child. Although Justin only worked part-time, he earned too much for Michael to claim him as a qualifying relative. Can Michael file Head of Household? 4. Nancy is single and lives alone. Nancy s mother, Maxine, lives alone in another city. Maxine receives social security, but has no other income. Nancy pay all the cost of keeping up the home her mother lives in, and provides over half her support. Can Nancy file Head of Household? 5. Jane and Todd are not married. They have on daughter together,. Jane and Amanda lived together all year in their own home. Todd lived alone. Todd earns a lot more than Jane and helps her out with living expenses. He paid over half the cost of Jane s rent and utilities. He also gave Jane extra money for groceries. Todd does not pay any expenses or support for any other family member. Can Todd file Head of Household?

36 TAX FILING STATUS SCENARIO'S Alexandra s younger brother Sebastian, is 17 years old. Sebastian lived with his grandparents for the first two months of the year. From March through July, he lived with Alexandra. On August 1 st, Sebastian moved in with some friends and stayed there for the rest of the year. Alexandria gave him money every month. Assuming Alexandra had no other dependents, can she file as Head of Household? 7. To determine if a widowed taxpayer can use the Qualifying Widow(er) status, You need to know all the following EXCEPT A The year the spouse died B If the tax payer filed a joint return for the year the spouse died C Whether the taxpayer furnished more than half the cost for keeping up the main home of a qualified child D That the taxpayer did not remarry before the end of the tax year 8. Carol and Roger were married three years ago and have no children. Although they lived apart during the entire tax year, they are neither divorced nor legally separated. Can carol and Roger use the married filing statuses? Yes No 9. Martin and Rita got divorced in December, and neither has remarried. Even though Martin supported Rita all year, is he still required to file as Single? Yes No

37 TAX FILING SCENERIOS Kathy is divorced with no children, lived with her unemployed roommate, Sandra for the entire year, Kathy had to pay more than half of the cost of keeping up their apartment. Can Kathy use the Head of Household filing status? Yes No 10. Ray and Brenda are not married but they live together all year and have two children under 10 yeas of age. Ray paid all the rent, utilities, groceries, and other household expenses. They agreed each would claim one child on their individual tax returns. What are the correct tax filing status for Ray and Brenda? A Ray can file as Head of Household and Brenda must file Single B They can choose which one files as Head of Household C Both can file as Head of Household D Both must file as Single 11. Lucy is 36 years old and single, and her gross income is $20, Is Lucy required to file a tax return? Yes No 12. Mrs. Calvin is divorced and lived with her 21-year old unmarried son, Drew all year. She paid for all of their rent and food, and provided more that half of Drew s total support. She cannont claim Drew as a dependent because he earned $5, and is not a student. Which filing status should Mrs. Calvin use. A Head of House Hold B. Married Filing Separately C Single

38 WHAT DID WE LEARN? 12. Marco and Maria are married but will not file a joint return. Both are under 65. Larry s gross income from wages is $30,150.00, and Maria s is $14, Which of the following is true? A Just Marco is required to file B Just Maria is required to file C Both Marco and Maria are required to file D. Neither Marco nor Maria must file 13. Juanita can file as a Qualifying Widow(er). She is 47 years old. Her gross income was $25, Based only on this information, she is required to file a tax return True False 14. Married Filing Jointly means that the spouses A Report their own incomes and deductions on separate returns B Combine their income and deductions on the same return 15. A student comes in to your office to complete a FAFSA. He tells you he worked under the table? What do you say to the student? 16. Which of the following is considered taxable income? A Child Support B. Insurance proceeds C Veterans benefits D Alimony

39 WHAT DID WE LEARN 17. The taxable amount, if any of a taxpayer s Social Security Benefits depends upon file status and other reportable income. Yes No 18. Generally if Social Security Benefits are the only source of income, then the benefits are not taxable. Yes No 19. Tier one rail road retirement benefits are not treated like Social Security equivalent benefits. Yes No 20. If a tax payer is filing a joint return and one spouse receives Social Security Benefits and other spouse does not, the spouse's other income does not need to be included in the tax return. Yes No 21. The taxable portion of Social Security Benefits is never more than 85% of the net benefits the taxpayer received. Yes No

40 REFERENCES irs.com IRS Publication 17 for 2016 returns IRS Publication 17 for 2017 returns IRS Interactive Tax Assistant filing status instructor presentation.pdf https// NASFAA 2017 Verification Webinst 11/1/

41 QUESTIONS Should anyone have any questions please feel free to contact me at: Kelly A. Harjo-Cox Financial Aid Officer Veterans Certifying Official Default Management Metro Technology Centers 1900 Springlake Drive Oklahoma City, OK (405) phone (405)