Volunteer Income Tax Assistance Part 3. Income

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Carmel Lynch
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1 Volunteer Income Tax Assistance Part 3 Income

2 Gross Income The Tax Return Get to know the 1040 page one and two

3 Who NEEDS to file? Consider their age, filing status, and income: Filing Status Gross Income < 65 Gross Income 65+ Single $10,150 $11,700 Married $20,300 $21,500/ $22,700 Head of Household $13,050 $14,600 Widower w Dependent $16,350 $17,550

4 Who NEEDS to file? Those with incomes that exceed limits on page A-1 of Publication Took money out of a retirement plan before the age of 59 & 1/2. Received Advanced Premium Credit for Affordable Care Act (ACA). Cash income or self-employment of $400 or more. ½ Social Security benefits and all other income exceed $25,000 ($32,000 MFJ). Dependents, although with low-incomes, may be required to file: Incomes of $6,200 or more Unearned income (like interest, investments, etc) was more than $1,000. Cash income or self-employment of $400 or more Claim any federal and state taxes withheld.

5 Who SHOULD file? Although a client is not required to file - may be eligible for a refund. May be eligible for a tax credit, like Earned Income Tax Credit, Additional Child Tax Credit, American Opportunity Credit (education credits), or Premium Tax Credit (ACA). Taxes were deducted throughout the year. Some clients simply want a tax return. IT IS ALWAYS BEST TO PREPARE THE RETURN IF THE TAXPAYER HAS INCOME OF ANY SORT TO SEE IF THEY ARE ELIGIBLE FOR CREDITS. MANY TAX PAYERS ARE ONLY ELIGBLE FOR STATE OF MICHIGAN TAX CREDITS THE HOME HEATING CREDIT AND THE PROPERTY TAX CREDIT.

6 So many? And I have to know them all? Form 1040 has a line for every type of income. VITA does NOT cover all of them. The following are the most common forms of income Earned Income -W2, tips, 1099 Misc, or Cash income Investment income INT, 1099 Div, 1099B, & K-1 Retirement income SSA, 1099R Other unearned income G, Alimony, W-2G, and other income Publication 4012 is a great resource. WORK THROUGH PRACTICE PROBLEMS!

7 Sources of Support that are NOT included Most Common Non-taxable sources of support Aid to Families with Dependent Children (AFDC), Food Stamps or CalFresh Child support Federal income tax refunds Gifts, Inheritance or Bequest Insurance proceeds (Accident, Casualty, Health, Life) Interest on tax-free securities EE/I bonds for qualified higher education Social security benefits - portion may not be taxable Supplemental Security Income (SSI) ~ about $731 Temporary Assistance for Needy Families (TANF), Welfare or CalWorks The IRS does not require anyone to report these sources of support

8 How to know income amounts? Taxpayer will bring you a lot of forms: Prepared by employers, banks, etc. Received by taxpayer in mail in January 30th The payee also reports payments to tax filer Most common: W-2, 1099-INT, 1099-MISC Copy amounts from each box into TaxWise ALWAYS ASK ABOUT CASH INCOME and VERIFY THAT THE CLIENT HAS BROUGHT ALL INCOME STATEMENTS WITH THEM TO THIS APPOINTMENT

9 Types of Income: W-2 Wages Most popular type of income Every employee SHOULD receive one Reported by employer on Form W-2 Employer s Social is the Employer s Identification Number or EIN Almost always have tax withheld Found in box 2 Tax withheld = tax already paid Other taxes include Medicare, Social Security, State Disability Located on line 7 of the 1040 Add each W2 individually, TaxWise will calculate total

10 Example

11 Earned Income: Wages

12 Earned Income: Self-Employment (ADVANCE LEVEL) Many names for the same Independent contractors (1099 Misc) Business Freelancers Work for myself Side job Work for cash Job pays in cash under table Use Schedule C to report Self-Employment/business

13 Use Schedule C to report Self- Employment/Business What s out of VITA scope? More than $10,000 in expenses Has a business loss (spent more money than earned) Employees or requirement to issue a 1099 misc Inventory or the Cost of Goods Sold Property that requires depreciation Foreign income Automobile expenses as a percentage of miles driven Business use of home Business with unsubstantiated income or expenses

14 Client may receive 1099Misc for contracted work

15 CLIENT SHOULD HAVE RECORDS OF INCOME AND EXPENSES If the client is not organized, inform client they may need to reschedule their appointment or go to a paid professional.

16 Earned Income: self-employment, what expenses can clients take? Advertising Standard Mileage Deduction (Direct car expenses as a % of miles is out of VITA scope) $0.560/mile, see Sch C page 2 for Vehicle Worksheet Only miles driven from job to job, school to job, etc. Never count mileage starting at or returning to home. Commissions Insurance Usually for malpractice or industry-specific insurance Car insurance is part of the Standard Mileage Deduction rate Health insurance is not deductible here (deductible on 1040 out of VITA Scope) Interest on loans Non-mortgage interest Legal or Professional services Office Expenses Rent or lease under 30 days (more than 30 days is out of VITA scope) General Supplies Taxes and Licenses Travel/Meals and Entertainment meals are limited to business-related & at 50% Utilities first phone line and personal expenses cannot be included Other- Any other expense necessary for business only. Use page 2 of Sch C

17 Earned Income: Self-Employment Mileage: Schedule C page 2 Client has written proof or at least be able to come up with this proof if audited

18 Earned Income: Self-Employment Other Expenses: Schedule C page 2 What to include in Self-Employed Mileage? Travel to and from the following places Traveling from one job to another job Visiting customers Attending a business meeting away from the regular workplace. Getting from home to a temporary workplace when the taxpayer has one or more regular places of work. Clients can reconstruct this data. Must include date, starting mileage, ending mileage, total mileage, and trip purpose.

19 Earned Income: Self-Employment Clients should keep a log like this, most don t but recommend that clients do keep some sort of log with this information

20 Earned Income: Self-Employment Other Expenses: Schedule C page 2 Isn t there an alternative method? This is out of scope for VITA. Clients can take Standard Mileage Rate at the VITA site or see a paid preparer to take actual expenses.

21 Investment Income Investment, Unearned, or Passive It s all the same! Interest Form 1099-INT (Basic) Dividends Form 1099-DIV (Basic) Ordinary and qualified Capital gains & losses Form 1099-B (Advance) Includes gains on sale of stock - Partnerships Form K-1 (Advance) ONLY IF VERY SIMPLE DO NOT COMPLETE IF YOU ARE NOT COMFORTABLE If Capital Gains and Losses or Partnerships are confusing refer to site coordinator, the client may need to go to a paid preparer

22 Investment Income Taxable Interest 1099 INT line 8a & 8b Savings Accounts, Certificates of Deposit (CD s) & Money Market Accounts

23 Investment Income Taxable Interest 1099 INT line 8a & 8b Savings Accounts, Certificates of Deposit (CD s) & Money Market Accounts

24 Investment Income Taxable Interest 1099 INT line 8a & 8b Nontaxable interest includes interest from municipal bonds and tax exempt bond mutual funds. It is still reported.

25 Investment Income Dividend & Distributions 1099-DIV line 9a & 9b

26 Investment Income Dividend & Distributions 1099-DIV line 9a & 9b Ordinary Dividends Qualified Dividends

27 Investment Income Dividend & Distributions 1099-DIV line 9a & 9b What are ordinary dividends? Ordinary dividends are corporate distributions paid out of the earnings and profits of a corporation. Qualified dividends Qualified dividends are ordinary dividends that are eligible for a lower tax rate than other ordinary income. Enter all amounts on Dividend Worksheet Schedule B.

28 Investment Income: Capital Gains & Losses Capital Gains Form 1099B or 1099S on 1040 line 13 Report profit or loss from sale of assets Usually stocks, bonds, mutual funds (1099B) & sale of a home (1099S) Terms to know: Basis - Original Cost of the asset Adjusted Basis- Original cost of the asset plus increases or decreases due to commission, fees, or major improvements. Holding Periods: Short-term- Less than a year Long-term- More than a year (taxed a lower rate than income tax) All inherited assets are considered long-term and its basis is the FMV of the dates of death.

29 Investment Income: Capital Gains & Losses Capital Gains Form 1099B or 1099S on 1040 line 13

30 Investment Income: Capital Gains & Losses Capital Gains Form 1099B or 1099S on 1040 line 13

31 Investment Income: Capital Gains & Losses Enter purchase/ sale information on Capital Gains Worksheet

32 Investment Income Capital Gains Form 1099B or 1099S on 1040 line 13 Importance of documentation Clients that have no information on purchase price will include no purchase price and be taxed on the full sale. Any expenses related to purchase or sale will affect basis or gain. For example, if your purchased 100 shares for $2,000 in shares and had to pay $50 to complete the transaction. Your basis is now $1,950. Your basis is now $19.50 per share. Also, stock splits, when a corporation lowers the market price of shares, will turn your 100 shares into 200. The basis will be half of what you paid. Now, you own 200 shares and your basis is $9.75.

33 Investment Income Capital Gains Form 1099B or 1099S on 1040 line 13 Continued Distributions are added to the basis. This will reduce any profit and reduce taxable income. Lastly, any losses more than $3,000 can be carry over losses in next years tax return. Enter this on Schedule D line 14.

34 Retirement Income IRA distributions Form 1099-R Pensions and annuities Form 1099-R Social Security Administration (SSA) Form SSA-1099 Might be taxable Completed on 1040 Worksheet 1 on Tax Wise Supplemental Security Income (SSI) Never taxable

35 Retirement Income Retirement income 1099R (lines 15 and 16) 401k, Pension, IRAs & Annuities

36 Retirement Income Retirement income 1099R (lines 15 and 16) 401k, Pension, IRAs & Annuities

Retirement Income Retirement income 1099R (lines 15 and 16) ADVANCE LEVEL Taxable Amount is not determined (1099 R box 2a is blank) Taxable portion

37 Retirement Income Retirement income 1099R (lines 15 and 16) ADVANCE LEVEL Taxable Amount is not determined (1099 R box 2a is blank) Taxable portion can be easily determined by using the Simplified Method. TaxWise calculates as long as the data is entered. Taxable Amount Taxable amount NOT determined

38 Retirement Income Social Security Administration-1099 SSA (line 20a & 20b) Amount of social security Amount of tax with held from social security

39 Retirement income Portions of Social Security Benefits will be taxable if: Single: ½ SSA benefits and all other income exceed $25,000 Married: ½ SSA + all other income exceed $32,000

40 Other Types of Income Unemployment 1099G Gambling Winnings Form W-2G Jury Duty Self report or statement Alimony payments Self report or statement Prizes/ Awards Self Report, check stub, letter or Statement Academic fellowships or scholarships that pay for non-academic expenses (housing, food, etc). Self report or income statement (1099MISC or W-2)

41 Unemployment Compensation Form 1099-G (line 19)

42 Unemployment Compensation Form 1099-G (line 19)

43 Other Income, Line 21 Line 21 and 1040 Worksheet 7 Jury duty pay Nonbusiness credit card debt cancellation (Advanced) Prizes and awards Gambling winnings (including lotteries and raffles) Medicare Payments Waiver (In-Home Supportive Services)

44 Other Income, Line 21 Jury Duty is taxable income If you receive an end of year statement stating that you receive jury duty pay you must report it as income Also, any payment directly made to you that was not turned into your employer.

Other Income, Line 21: Cancellation of Debt Certain Canceled Credit Card Debt may be assisted through VITA VITA cannot assist those with: - Debt is related to business activity - Taxpayer is has

45 Other Income, Line 21: Cancellation of Debt Certain Canceled Credit Card Debt may be assisted through VITA VITA cannot assist those with: - Debt is related to business activity - Taxpayer is has subsequently or already filed bankruptcy. - If box 3 of Form 1099-C shows any interest or was box 6 checked When is a taxpayer considered Insolvent? When the taxpayer owes more than their financial assets VITA now only covers Canceled Credit Card Debt.

46 Canceled Credit Card Debt Form 1099-C Enter the amount in box C on line 21. The description will be 1099C.

47 Example

are taken on the Schedule A Itemized Deduction Worksheet Gambling losses may be deducted

48 Gambling Winnings All gambling winnings are taxable (Other income line 21) Casinos, bingo, lottery, raffles, and all prizes - Entire amount is reported in income - Losses are taken on the Schedule A Itemized Deduction Worksheet Gambling losses may be deducted only if there are winnings, up to the earnings amount, and the tax filer is completing a Schedule A

49 Gambling Winnings All gambling winnings are taxable (Other income line 21) Casinos, bingo, lottery, raffles, and all prizes

50 Gambling Winnings All gambling winnings are taxable (Other income line 21) Casinos, bingo, lottery, raffles, and all prizes

51 THE END Next Steps: Practice example situations from Pub.4491W work with program coordinator on any questions that come up when working within these problems Watch Module 4

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