Helpful Tips. for Out of Scope Topics. on the 2014 IRS Advanced Certification Exam

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1 Helpful Tips for Out of Scope Topics on the 2014 IRS Advanced Certification Exam

HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS ADVANCED CERTIFICATION EXAM (Out Of Scope For SaveFirst Intermediate Volunteer Preparation At Site) Some topics on the IRS s VITA Volunteer Advanced

3 HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS ADVANCED CERTIFICATION EXAM (Out Of Scope For SaveFirst Intermediate Volunteer Preparation At Site) Some topics on the IRS s VITA Volunteer Advanced Certification will remain out of scope for SaveFirst Intermediate volunteers. The certification exam is open-book and open-note. You should consult the information below to aid you in responding to questions and scenarios in the IRS Advanced Certification exam. As a reminder, a SaveFirst Advanced certified volunteer or Impact Alabama Staff member will prepare the topics below at the SaveFirst tax sites. SALE OF STOCK Sale of stock is reported as a capital gain on a 1099-B Brokerage Statement. GAIN = amount realized adjusted basis (Gain = money you get money you paid) ADJUSTED BASIS: original cost of the shares of stock increased or decreased to account for commissions, fees, depreciation, etc. Increase adjusted basis per share for commissions and fees. GAIN: amount realized is GREATER than adjusted basis LOSS: amount realized is LOWER than adjusted basis If any of this information is missing from the 1099-B Brokerage statement or other relevant paperwork, contact the stockbroker; if the basis cannot be determined, the basis is zero. HOLDING PERIOD: Period starts the day after the property is acquired and continues through the day it is sold. Short-term: held for one year or less Long-term: held for more than one year; inherited property is always considered long-term Inherited property: Basis is Fair Market Value of property on date of decedent s death. Holding period is always long-term. A taxpayer may own multiple blocks of shares with different holding periods and basis. If the taxpayer sells a portion of their shares but did not indicate before they sold them which shares they were selling, use the First-In-First-Out (FIFO) method. In this case, you assume that the shares that were sold were the shares earliest acquired by the taxpayer. When a taxpayer receives a dividend distribution, this is considered taxable income, even if that distribution amount is used to invest in additional shares of stock. Reporting Sale of Stock in TaxWise: Short-Term Holding Period Form 1040 Line 13 Link to Sch D Pg 1 Line 1b, 2 or 3 Link to 8949 Pg 1 (A, B, or C) Line 1a Link to Cap Gn Wkt Enter Description, Code A (short-term reported on a 1099-B with basis reported to the IRS), Code B (short-term reported on a 1099-B with basis not reported to the IRS), or Code C (short-term not reported on a 1099-B), Dates Acquired and Sold, Basis, and Sale Price

4 Long-Term Holding Period Form 1040 Line 13 Link to Sch D Pg 1 Line 8b, 9 or 10 Link to 8949 Pg 1 1a Link to Cap Gn Wkt Enter Description Code D (long-term reported on a 1099-B with basis reported to the IRS), Code E (long-term reported on a 1099-B with basis not reported to the IRS), or Code F (long-term not reported on a 1099-B), Dates Acquired and Sold, Basis, and Sale Price Form 1040 Line 13 Sch D Pg 1 (for Short-Term) 8949 (Short-term) 2 HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM

5 OR Sch D Pg 1 (for Long-Term) 8949 (Long-Term) HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM 3

6 Capital Gain Worksheet (Short Term and/or Long Term) CAPITAL LOSS CARRYOVER If a taxpayer had a capital loss more than the allowable loss for the tax year, they can carry that loss over to subsequent tax years and report the remaining loss in later tax years. Allowable loss that can be claimed in one year is the lesser of: - The total loss OR - $3,000 ($1,500 if MFS) The unused portion of a loss can be carried over from year to year until total loss is claimed. Remains long-term or short-term, as determined the year that the loss was experienced. If not claimed in some year, unused loss is decreased by the amount that could/should have been claimed. Reporting Carryover Losses in TaxWise From 1040 Line 13: " Enter short-term capital loss carryovers (from Schedule D Worksheet 2, Line 8) on Schedule D, Part I, line 6 " Enter long-term capital loss carryovers (from Schedule D Worksheet 2, Line 14) on Schedule D, Part II, line 14 Short-Term Carryover Loss, Sch D Pg 2 4 HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM

7 Long-Term Carryover Loss, Sch D Pg 2 RETIREMENT INCOME: TAXABLE AMOUNT NOT DETERMINED USING THE SIMPLIFIED METHOD If taxable amount is not determined, you can use the Simplified Method to calculate the taxable portion of the retirement distribution for the tax year. Use the worksheet at the bottom of the 1099-R in TaxWise. Enter in the amounts for: Line 1: Cost in plan at start date from 9b of 1099-R Line 2: Age at start date of retirement plan o o If Joint/Survivor Annuity, select combined age of taxpayer and spouse. If Joint/Survivor Annuity and taxpayer began receiving payments after 12/31/1997, mark the appropriate box. (Line 3: Will calculate automatically) Line 4: Number of months payments were received in 2014 (should be 12, unless payments began during the current tax year) Line 5: Amount recovered tax free in prior years o Obtain from taxpayer records or by multiplying Line 3 amount by the total number of months the taxpayer received payments before the current tax year o i.e. If the taxpayer received payments for 4 years and 6 months prior to 2013, you would calculate (54 months) X (Line 3 Exclusion Per Month) (Lines 6 and 7 will calculate automatically) The exclusion amount calculated in Line 6 is the amount of the distribution that is tax-free for current tax year. TaxWise will automatically pull through the taxable amount to the 1040 Line 16b. (Do NOT write in the taxable amount at the top of the 1099-R.) HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM 5

8 Simplified Method Worksheet, 1099-R 1099-C: CANCELLED DEBT Cancelled debt is reported on a Form 1099-C and if the taxpayer was solvent before the debt was cancelled, al the cancelled debt will be included on Form 1040, line 21, other income. Solvency: the condition in which assets are greater than liabilities Insolvency: the condition in which liabilities are greater than assets (out of scope for VITA) Liabilities: amounts owed including mortgages, home equity loans, vehicle loans, credit card debts, pastdue mortgage interest, real estate taxes, etc. Assets: The FMV of homes, cars, bank accounts, IRAs, 401(k)s furniture, clothes, jewelry, etc. 6 HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM

9 Advanced Scenario 1: Frodo Baggins Interview Notes Frodo sold some stock in 2014, and has come to you to prepare his tax return. BAG stock: Frodo purchased 75 shares of BAG stock for $3,750, including commissions, on October 16, Frodo sold 50 shares of BAG on June 1, His Form 1099-B shows sales price, less commissions, of $1,000. The basis is not provided on Form 1099-B. END stock: On April 16, 2014, Frodo sold 125 shares of END stock, which he purchased in Frodo does not know the basis for his END stock, and the basis is not show on the Form 1099-B he received from the broker. ELF mutual fund: On November 10, 2014, Frodo purchased 1,500 shares of ELF mutual fund for $8,000. On April 10, 2014, the fund paid a capital gain distribution of $300 that was reinvested to purchase an additional 30 shares. Frodo received Form 1099-DIV reporting the capital gain distribution. He also received a year-end statement showing $11,750 as the December 31, 2014 value of his 1,530 shares. Advanced Scenario 1: Questions 1. What is the basis of the 50 shares of the BAG stock that Frodo sold in 2014? a. $250 b. $1,250 c. $2,500 d. $5, How will Frodo report the sale of BAG stock on his 2013 tax return? a. As a short-term capital gain b. As a short-term capital loss c. As a long-term capital gain d. As a long-term capital loss 3. Frodo does not know the basis of his END stock. What can he do? a. He can use $0 as his basis. b. He can contact his broker for help calculating his basis. c. He can calculate his basis by locating and reviewing all of the relevant END stock records. d. Any of the above. HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM 7

10 4. What is the total basis of all Frodo s ELF mutual fund shares held on December 31, 2014? a. $300 b. $8,000 c. $8,300 d. $11,750 Advanced Scenario 2: Peeta and Katniss Everdeen Interview Notes Peeta retired from the local school district and began receiving retirement income in November No distributions were received prior to his retirement. Peeta and Katniss selected a joint survivor annuity for these payments. Elliot has recovered $1,531 tax free through Peeta and Katniss want to file a joint return. They provided all of the support for their son Haymitch. Peeta had Medicare Part A health coverage all year. Katniss and Haymitch had health insurance all year through Katniss s employer. The policy qualifies as minimum essential coverage. 8 HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM

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16 XYZ INVESTMENTS 123 Fire Plaza Birmingham, AL TAX REPORTING STATEMENT Peeta and Katniss Everdeen 145 Mockinjay Lane Birmingham, AL Account No Recipient ID No. 314-XX-XXXX Payer s Fed ID Number: 41-3XXXXXX Form 1099-DIV* 2014 Dividends and Distributions Copy B for Recipient (OMB NO ) 1a Total Ordinary Dividends b Qualified Dividends a Total Capital Gain Distributions (Includes 2b-2d) b Capital Gains that represent Unrecaptured 1250 Gain c Capital Gains that represent Section 1202 Gain d Capital Gains that represent Collectibles (28%) Gain Nondividend Distributions Federal Income Tax Withheld Investment Expenses Foreign Tax Paid Foreign Country or U.S. Possession Cash Liquidation Distributions Non-Cash Liquidation Distributions Exempt Interest Dividends Specified Private Activity Bond Interest Dividends State State Identification No State Tax Withheld Form 1099-MISC* 2014 Miscellaneous Income Copy B for Recipient (OMB NO ) 2 Royalties Federal Income Tax Withheld Substitute Payments in Lieu of Dividends or Interest State Tax Withheld State/ Payer s State No State Income Form 1099-INT* 2014 Interest Income Copy B for Recipient (OMB NO ) 1 Interest Income Early Withdrawal Penalty Interest on U.S. Savings Bonds and Treas. Obligations Federal Income Tax Withheld Investment Expenses Foreign Tax Paid Foreign Country or U.S. Possession Tax-Exempt Interest Specified Private Activity Bond Interest Tax-Exempt Bond CUSIP No.... Summary of 2014 Proceeds from Broker and Barter Exchange Transactions Sales Price of Stocks, Bonds, etc....6, Federal Income Tax Withheld Gross Proceeds from each of your security transactions are reported individually to the IRS. Refer to the Form 1099-B section of this statement. Report gross proceeds for each security on the appropriate IRS tax return. Do not report gross proceeds in aggregate. Page 1 of 2 14 HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM

17 XYZ INVESTMENTS 123 Fire Plaza Birmingham, AL TAX REPORTING STATEMENT Peeta and Katniss Everdeen 145 Mockinjay Lane Birmingham, AL Account No Recipient ID No. 314-XX-XXXX Payer s Fed ID Number: 41-3XXXXXX FORM 1099-B* 2014 Proceeds from Broker and Barter Exchange Transactions Copy B for Recipient (OMB NO ) Short-term transactions for which is reported to the IRS Report on From 8949 with Box A checked and/or Schedule D, Part I (This Label is a Substitute for Boxes 1c & 6) 8 Description, 1d Stock or Other Symbol, CUSIP (IRS Form 1099-B box numbers are show below in bold type) Action 1a Date of Sale or Exchange 1b Date of Acquisition 1e Quantity Sold 2a Sales Price of Stocks, Bonds, etc. (a) 3 Cost or Other Basis (b) Gain / Loss (-) Collins Co. Common Stock Sale 03/01/14 08/01/ , , TOTALS 3, , Wash Sale Loss Disallowed 4 Federal Income Tax Withheld 13 State 15 State Tax Withheld FORM 1099-B* 2014 Proceeds from Broker and Barter Exchange Transactions Copy B for Recipient (OMB NO ) Long-term transactions for which is not reported to the IRS Report on From 8949 with Box E checked and/or Schedule D, Part II (This Label is a Substitute for Boxes 1c & 6) 8 Description, 1d Stock or Other Symbol, CUSIP (IRS Form 1099-B box numbers are show below in bold type) Action 1a Date of Sale or Exchange 1b Date of Acquisition 1e Quantity Sold 2a Sales Price of Stocks, Bonds, etc. (a) 3 Cost or Other Basis (b) Gain / Loss (-) Panem Co. Common Stock Sale 03/01/14 05/10/ , , TOTALS 2, , Wash Sale Loss Disallowed 4 Federal Income Tax Withheld 13 State 15 State Tax Withheld This is important tax information and is being furnished to the Internal Revenue Service. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if this income is taxable and the IRS determines that it has not been reported. Page 2 of 2 HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM 15

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19 Advanced Scenario 2: Questions Directions Complete Form 1040 and the appropriate forms, schedules, and worksheets to answer each of the following questions. 5. The total interest income shown on Line 8a of Form 1040 is $. 6. How does the Code Q on Peeta s Form 1099-R from Essex Bank affect the return? a. The entire $4,500 distribution is taxable. b. Half of the $4,500 distribution is taxable. c. There is a 10% additional tax on the distribution. d. The entire $4,500 is not taxable. 7. What is the amount shown on Form 1040, Line 13 Capital Gain or Loss? a. A gain of $957 b. A gain of $1,017 c. A gain of $1,407 d. A gain of $1, How much of the $19,500 gross distribution reported on Form 1099-R is taxable in 2014? $. 9. Where is the cancelled debt on Form 1099-C reported on Peeta and Katniss s tax return? a. On Form 1040, line 7 as wages b. It is not reported on the return c. On Schedule A as a miscellaneous deduction d. On Form 1040, line 21 as other income HELPFUL TIPS FOR OUT OF SCOPE TOPICS ON 2014 IRS CERTIFICATION EXAM 17

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