Welcome & Happy New Year Refresher Training 5-8 Jan 2016 Part 2 1
Review of Tax Laws and TaxWise Use 2
Elements of Fed 1040 & MA Form 1 Tax Returns Taxpayer information (incl health ins.) Dependents Filing status Income Adjustments to income (reduces taxes) Deductions & exemptions (reduces taxes) Credits (reduces taxes) Taxes owed, refund due, no taxes 3
Before Entering Data into TWO Organize taxpayer information Intake/Interview and Quality Review form Review prior year return Does taxpayer have to file return? Fed - Pub 4012 pages A-1 to A-3 (Test Q#2) MA see next chart When should taxpayer file a return to get refund? Fed Pub 4012 page A-3 MA Circuit Breaker and EIC carryover from Federal 4
Who Needs to File In MA? Criteria is income based Full year resident with gross income > $8000 from sources inside or outside of MA Part-Year resident with gross income > $8000 from sources inside or outside MA Nonresident with MA source income See Form 1 instructions, pages 4-5 5
What is MA Gross Income? (Form 1 Instructions, page 4) Wages, salaries, tips, bonuses, fees Taxable pensions and annuities Pension income from another state or political subdivision before any deduction Taxable IRA and Roth IRA distributions Alimony, unemployment and gambling winnings Taxable interest & dividends & capital gains Taxable portions of scholarships/fellowships Interest from obligations of non MA states/subdivisions Foreign income (out-of-scope) Other income not specifically exempt 6
Interview Mode Option Taxwise provides an interview option to start a return Asks questions to help determine filing status, dependents (goes to irs.gov); answers do not come back to TWO Partially fills in forms like W-2, 1099 s Slower than filling out forms directly Each person should decide which is best when preparing returns Not a substitute for Intake/Interview sheet 7
Personal & Dependency Exemptions Pub 4012, Tab C Personal exemption Dependent exemption Qualifying child dependents Qualifying relative dependents Each Exemption reduces taxable income by $4000 for 2015 Exemptions can also determine filing status 8
Personal Exemptions One for taxpayer & one for spouse when filing jointly Taxpayer is ineligible if another can claim him/her as a dependent (Test Q#1) Widow(er), if not remarried by 12/31, can claim spouse in year of death Use 4012, page C-2 to determine if personal exemption is allowed 9
Requirements To Claim Dependent Exemptions (Test Q#3) Overview of rule for claiming exemption for dependent - page C-3 Dependency evaluation for qualifying child - page C-5, Table 1 Tie-breaker rules for qualifying child - page C-4 Dependency evaluation for qualifying relative - page C-6 & C-7, Table 2 Special case of divorced, separated, or never married parents - page C-8, Table 3 10
Entering Dependents on Main Info Sheet in TaxWise 11
Filing Status Comparison (Lowest to Highest Tax) Married Filing Jointly* Qualifying widow(er) with dependent child* Head of Household Single Married Filing Separately *same lowest tax 12
How to Determine Filing Status Use Pub 4012, pages B-1 to B-3 Read Pub 4491, Part 2 on filing status. Examples help reinforce rules Suggestion: Do exercises in 4491 using 4012 charts for practice 13
Married Filing Separately Taxpayer or spouse chooses to file MFS Spouse location unknown or has already filed MFS Disadvantages Highest tax rate/lower standard deduction Must file return if income > $4000 Cannot claim many tax credits (e.g., EIC, dependent care...) Cannot deduct student loan interest Capital loss offset limited to $1,500 14
Entering Income Into TaxWise Pub 4012, Tab D Social security (SSA-1099) line 20a Wages (W-2) line 7 Interest and dividends (1099 INT/DIV) lines 8, 9 State refunds (1099G) sometimes line 10 Alimony (Taxpayer must provide info) line 11 Pensions, IRA s (1099R) lines 15, 16 Unemployment (1099G) line 19 Gambling (W2G) line 21 Capital gains/loss (1099B) line 13 Business line 12 Royalties from K-1 line 17 15
SSA-1099 Social Security Statement SS Benefit Medicare payments Federal Withholding 16
Enter Social Security on TaxWise 1040 Worksheet 1 17
Example W-2 18
Example W-2 20XX 19
Example of Mandatory MA Retirement Must be manually entered for MA in lieu of SS 20
Entering Wages in TaxWise Check SS# and tax year on paper W-2 s Fill out TaxWise W-2 form (on Forms Tree) See 4012, page D-6, 7 Identify whose W-2 it is; i.e., taxpayer or spouse Enter data from every box on paper W-2 (ex control number) Use boxes at top to prevent TaxWise auto entry into boxes 3, 4, 5, 6 and 16 if necessary See 4012, Page D-7 for Box 12 codes 21
Interest and Dividends Interest is reported on 1099-INT Entered on TaxWise interest statement-see 4012, page D-9 Dividends are reported on 1099-DIV Entered on TaxWise dividend statement see 4012, page D-10 1099 INT/DIV have many variations, but all contain box numbers that determine TaxWise entries Any Foreign Taxes paid are entered directly on 1040, page 2, line 48 22
1099-INT 20XX 23
Dividends 1099-DIV 20XX 24
Interest (2014 MA Manual Page 3) 25
Schedule B, Part III Must be completed if Interest AND/OR Dividend are over $1500 26
State Refund, 1040 line 10 Refunds reported on 1099G (no TWO form to fill out) If Standard Deduction was used the previous year not taxable income If Itemized Deduction was used the previous year refund may be taxable income because state taxes or RE taxes were used as deductions answer question for line 10 Follow flow chart previously discussed if refund includes MA circuit breaker credit 27
TaxWise State Tax Refund Worksheet 28
Alimony, 1040 Line 11 Alimony received (person paying alimony must include SSN of recipient to get income adjustment) Enter Amount directly on 1040 29
Taxability of Retirement Income, 1040 lines 15, 16 Taxpayer made no contributions fully taxable Taxpayer contributed before tax dollars fully taxable Taxpayer contributed after tax dollars not taxed on contributions; taxed on growth* If taxable amount not determined, Simplified Method Social security/rrb tier 1 may be partially taxable TaxWise calculates taxable amount Treatment of retirement income in Massachusetts is unique * Exc Roth IRA for Federal; exc gov t pensions for MA 30
Pensions, Annuities, IRA Distributions Reported on Form 1099-R 31
Pensions, Annuities, IRA Distributions Reported on Form 1099-R 2008 32
Box 7 Distribution Codes 4012, pages 21-22 Common codes for pensions, trad IRA s 1 - early distribution, no known exceptions (usually before 59 ½) penalties possible 2 early distribution, exception applies (under 59½) - may avoid penalty 3 disability (over retirement age) 4 death (survivor benefit) 7 normal G direct rollover - non-taxable Enter code on paper copy into TWO; TWO does rest; may need to use Form 5329 to avoid penalty 33
Additional Box 7 Code Scope Additions (not Roth IRA) 6 Tax Free 1035 exchange L, with 1, 4, B Loans from retirement plans treated as deemed distributions W LTC charges or payments not taxable Enter above codes and TaxWise will handle appropriately 34
Roth IRA Distributions Roth IRA distributions that are not taxable are qualified and in-scope (4012, page D-22, 25) Roth IRA distributions that are partially or totally taxable are non-qualified out-of-scope In-scope Box 7 codes (4012, D-21 to 22) H direct rollover not taxable Q qualified distribution not taxable J early distribution-see next chart T in scope if Roth has been held 5 yrs+ 35
Roth IRA with J in Box 7 Enter 1099-R with J in Box 7 TaxWise inserts Form 8606 with Red s on page 2, Pt III Distributions From Roth Enter basis of Roth on line 22* If line 23 is 0 or less, distribution is tax free; complete rest of return If line 23 is positive (cost basis is less than distribution), the remainder is taxable out of scope *Cost basis = amount contributed or transferred to Roth less previous distributions 36
Form 8606, Part III 37
Railroad Retirement Tier 1 (Blue Form) Equivalent to social security Enter on Worksheet 1 in TaxWise Tier 2 (Green Form) Treat as a pension Enter on 1099R in TaxWise See Pub 4012, page D-26 to translate box numbers to standard 1099-R boxes 38
Entering 1099R s Into TaxWise Click on 1099R in Forms Tree Enter data from 1099R paper copy to TaxWise 1099R exactly If taxable amount (box 2) is blank and 9b has an amount, use Simplified Method to determine taxable amount Fill out Simplified Method worksheet at bottom of 1099R form see 4012, page D-24 Use 1099R box 9b amount on line 1 Use taxpayer data to fill out lines 2, 4, 5 TaxWise will calculate line 6 (what is not taxable) and carry taxable amount to Form 1040 and MA Form 1 do not fill in box 2 on TaxWise 1099R!! 39
Simplified Method Example 1099R, Box 9b Check age of primary annuitant at time annuity started 40
Other Tax Considerations Taxability needs to be computed separately for each 1099-R CSA Form 1099-R issued by Office of Personal Management Issued for Federal civil service retirement benefits See 4012, page D-26 on how to handle in TaxWise Individual Retirement Account (IRA) distribution is noted with x in Box 7 of 1099R Most IRA s were paid for with before-tax dollars: Box 2 is equal to Box 1 all taxable on Federal return If Box 2 (taxable amount) is blank, see guidance in 4012, page D-27 for different variations 41
CSR 1099-R US Gov t Civil Service 20XX 42
1099R Exclusion Wksht 4012, page D-23 43
MA Treatment of Retirement Income The following is not taxed by MA Social security benefits and RRB, Tier 1 TaxWise will automatically exclude Certain pensions (see Form 1 Instructions, page 10) Contributory annuity, pension or retirement plans of US gov t and MA or political subdivisions; RR Tier 2 Must check box 1 on TaxWise 1099-R, opposite Box 15, to exclude from MA income Pensions from other states with reciprocal agreements with MA (see MA Manual for list of states & how to claim deduction on Sch Y) 44
MA Treatment of Retirement Income US government Thrift Savings Plan and MA 457 plans are fully taxable* Taxability of traditional IRA withdrawals MA has never allowed IRA deductions in the year the contributions were made; therefore, MA does not tax 1099R distributions until taxpayer s contributions are exceeded Must use Sch X to determine how much is taxable See MA manual for how to implement on Sch X If traditional IRA results from 401k (or equiv) rollover, income is taxable * Refer to List of Retirement Plan Contributions & Distributions in MA manual 45
MA Sch X/Wksht 3 for IRA 46
K-1 s 1040 lines 8, 9, 13, 17 Interest Dividends Royalties ST CG LT CP 47
Entering K-1 s Do not call up and fill out a K-1 in TWO! Interest income enter on interest statement Dividend income enter on dividend statement Net ST cap gains enter Sch D, line 5 Net LT cap gains enter Sch D, line 12 Royalties enter Sch E, which transfers to 1040, line 17 and MA Form 1, line 7 48
UNEMPLOYMENT COMPENSATION 1040 Line 19 Unemployment Income is taxable and reported on 1099-G Enter data into 1099-G worksheet (Forms Tree) 49
Massachusetts 1099-G 50
Other Income Examples 1040 Line 21/Wksht 7 Gambling income Must be entered on W-2G Mass Lottery requires special entry Click on W-2G in Forms Tree Jury duty pay (enter on Wksht 7) Prizes and awards (enter on Wksht 7) Other income not reported on other lines and schedules; e.g., Worked for town during elections 1099-MISC, box 3 (Must fill out 1099-MISC) 51
OTHER INCOME Worksheet 7 52
Gambling Income Check For MA lottery Enter Gambling Losses 53
Massachusetts Lottery Winnings Must check box in lower left hand corner of Taxwise W-2G TaxWise places winnings on Form 1, Line 8b, not Sch X If not done, MA e-file will be rejected!! 54
Capital Gains, line 13 Sale of stocks, bonds, mutual funds will be reported on 1099B Taxpayer should file returns to establish cost basis with IRS and MA DOR; otherwise, IRS will assume all proceeds are ordinary income, whereas many times assets long term and are sold at loss Cost basis is what taxpayer paid for asset (for the most part) Amended tax laws now require some cost basis reporting; otherwise, Establishing cost basis can be difficult and mistakes can be made 55
Reporting Capital Gain or Loss Must determine elements of sale What is it? 1099B When did you buy it? long or short term When did you sell it? 1099B What is sales price? 1099B What is the cost basis? 1099 B or ask taxpayer Was it inherited? (always long-term) Sales MUST be entered on TaxWise capital gain or loss worksheet (next slide) TaxWise runs all calculations and transfers results to Form 8949 and then to Sch D and 1040 56
2015 Capital Gains Work Sheet Column (f) is for gain/loss adjustment codes; very rare; but see 4012, page D-17 & D-18 Column (g) is for amount of adjustment 57
1099 Consolidated Statement 2008 2008 2008 2008 58
Tax Implications Net Loss Situation TaxWise calculates amount of gain or loss (and long term vs short term) Net gain overall TaxWise calculates tax for Fed and MA Net loss overall Up to $3,000 can be used to reduce taxable income in the current year ($1,500 if MFS) (Federal) The amount in excess of $3,000 (or $1,500 if MFS) can be carried forward to and used the next year 59
Carryover Loss - Federal Copy Required For Next Year s Return 60
MA Treatment of Losses Losses can be used to offset non-ma bank interest and dividends for current tax year ($2,000 max) (MA manual) Short term carryover loss appears on MA Sch B Long term carryover loss appears on MA Sch D TaxWise will do calculations for all of the above TaxWise does not carryover losses for MA Taxpayer must bring last year s paper return We have to manually enter carryover losses 61
Business or Self Employment line 12 Advanced scenario 9, Enrique Clayton will do later Income usually documented on 1099-MISC, box 7; transfer to Sch C Use TaxWise 1099-MISC tied to Sch C Follow Sch C-EZ scope guidelines Use Sch C to list other income (Sch C, line 6, or scratch pad to line 1) Only mileage for auto expenses Use chart on 4012, page F-12 to determine business miles TaxWise will take care of SE tax Link MA Sch C to Federal Sch C to transfer all entered data (enter 1 in box on MA Sch C) 62
Adjustments to Income 4012 Tab E Any allowable by MA will be transferred by TaxWise to MA Sch Y 63
Deductions and Exemptions AGI minus deductions and exemptions equals taxable income; Pub 4012, Tab F Taxwise inserts Standard Deduction amount Q& A for Itemized Deductions Pub 4012, pages F-3 and F-4 TaxWise chooses Itemized Deduction if greater than allowed Standard Deduction; however - Large medical deductions carry over to MA return and may result in lower combined Fed & MA tax, even if Itemized Deductions are less than Standard Deduction Check box on 1040 line 40 in TaxWise to choose itemized deductions 64
Schedule A Itemized Deductions 4012, Tab F Some medical expenses Some taxes Some interest Gifts to qualified charities Casualty & theft losses (Out of Scope) Job expenses and other items (not typical) Miscellaneous expenses (usually gambling) 4012, page F-6: Non-deductible items 65
Schedule A, Medical Expenses From Sch A detail sheet 66
Schedule A, Medical Expenses 67
Deductible Taxes Must be imposed on and paid by taxpayer during tax year Line 5a MA income tax TaxWise brings over from W-2 s, 1099 s, etc Estimated taxes Use F/S Tax Paid in Forms Tree Line 5b - Sales tax deducted in lieu of income taxes calculated by TaxWise 68
Deductible Taxes on Sch A Transfers to MA Sch CB if applicable 69
Non Deductible Taxes Federal income and excise taxes Social Security, Medicare Federal Unemployment Railroad retirement taxes Customs duties Federal estate and gift taxes 70
Interest Deductions on Sch A Out of Scope 71
Gifts to Charity Any cash contributions must be supported by: Bank or CC record (check, receipt, or statement) or Written communication from charity Single cash contribution > $250 must have written receipt from charity Receipt should identify any benefits given taxpayer Non-cash contributions Donated clothing or household items must be in good condition or better Less than $250 requires receipt with description and FMV of items; date and place of contribution 72
Gifts to Charity Non-cash contributions (concluded) More than $250 and less than $500 requires receipt, description of property, and value of any benefits given to taxpayer More than $500 total & less than $5000, fill out Form 8283 Donation of vehicles out of scope Include out-of-pocket expenses Mileage @ 14, tolls, parking 73
TaxWise Charity on A Detail 74
Miscellaneous Deductions 75
Exemptions and Tax Calculation Once standard vs itemized deductions is determined, TaxWise will: Subtract deductions from AGI Calculate exemption amount ($4000 times of number of exemptions for 2015) Subtract exemption amount to determine taxable income Calculate Federal tax owed If there is excess medical from Sch A, TaxWise will transfer that amount to MA Form 1 76
Credits vs Deductions or Adjustments A credit is generally worth more than a deduction or adjustment to income Two types of credits Non-refundable can reduce taxes to zero Refundable taxpayer gets refund even if no taxes are owed 77
Non-Refundable Credits 4012, Tab G Foreign Tax credit (enter directly) Child and dependent care (Form 2441) Check DC box for dependent on MIS Need provider information to complete 2441 Education credit (Form 8863) Retirement Savings Credit (Form 8880) Child Tax Credit Residential Energy Credit (Form 5695) 78
Foreign Tax Credit Non-refundable Who can benefit? Taxpayers who pay both U.S. and foreign tax on the same income, typically from mutual funds Reported on 1099-INT or 1099-DIV No Form 1116 required if: All foreign income is from interest & dividends Total foreign tax $300 or less ($600 MFJ) Enter foreign tax directly on form 1040, line 48 Do not open Form 1116 (or see Pub 4012, page G-2) 79
Education Expenses - Which is Best? As a credit Generally highest net benefit As an adjustment Reduces AGI may be advantage As a Sch C/CEZ business expense As a deduction on Sch A if employee related (out-of-scope) Complete return and compare scenarios Cannot claim multiple benefits for same expense 80
Education Credits American Opportunity Credit (AOC) Advanced test scenario for Matthew Clark will do later Lifetime Learning Credit (LLC) See 4012, page J-2,3 to see comparison Page J-4,5 discusses conditions for credits 81
Typical Tuition Statement AARP Requires 82
Education Credits Non-Qualifying Expenses Insurance Medical expenses (including student health fees) Room and board Transportation or Similar personal, living or family expenses 83
Claiming Education Credits Must fill out Form 8863 will do for Matthew Clark See 4012, page J-7 for 8863 Fill out Part I (AOC) or Part III (LLC) on page 2 of 8863 TaxWise will calculate allowable refundable (in case of AOC) and non-refundable credit on page 1 of 8863 TaxWise will transfer credit to 1040, line 50 84
Retirement Savings Contribution Credit Provides credit to lower income taxpayers who make elective or voluntary contributions to retirement plans (incl IRA s) See 4012, page G-7 for qualifications TaxWise inserts Form 8880 if applicable, based on criteria and if retirement contributions are entered previously Ask if there were other retirement contributions Must identify any distributions from qualified plans TaxWise calculates credit and transfers to 1040, line 51 85
Earned Income Credit (EIC) Refundable credit for low income taxpayers or families Must have earned income (not SS, pensions, interest, etc.) Available to singles between 25 and 65 Credit can range $503 to $6242 for 2015 See 4012, Tab I for criteria & Q&A to determine eligibility Income and investment income limits apply TaxWise makes EIC easier Must check EIC box on Main Information Sheet when entering dependents Calculates credit based on data inputs (income, dependents, etc) We have to ask question about disallowance 4012, I-2 We must fill out Sch EIC & wksht 4012, I-6, I-7 15% of EIC carries to MA Form 1 86
Other Taxes and Payments See 1040 page 2 Pub 4012, Tab K TaxWise runs all calculations and brings data forward to 1040 You should give data a sanity check Enter estimated Fed and MA estimated payments on F/S Tax Paid wksht For a refund, find out if taxpayer wants a check, direct deposit, divide refund, etc. Dividing refund fill out Form 8888 For direct deposit, fill out bank info in two places line 76 and on Main Information Sheet Line 77 if taxpayer wants to carry refund to 2016 87
Other Taxes and Payments Taxes Owed If taxes owed is large, inform taxpayer that they may owe penalty IRS will tell them TaxWise defaults penalty to zero Form 1040-V will be printed if taxpayer wants to mail check If taxpayer is willing to have IRS pull money, check box and fill out ACH 1040/ES Bank info goes in two places; ACH 1040 and Main Information Sheet 88
MA Return Final Steps For refunds, MA Form 1, page 3 89
MA Return Final Steps If amount owed, MA Form 1, page 3 90
MA Return Final Steps MA Form 1, page 3 at bottom Bank info has to be entered twice if refund is to be deposited to different bank than Fed refund or no Fed refund or if amount is owed 91
Finishing the Return Ensure there are no red s on any form For e-file returns, complete Main Information Sheet with PIN s Run Diagnostics, examine contents, make corrections Conduct 2 nd person review using Intake sheet Review return with taxpayer; answer questions Print returns Get authorization/signatures for e-file Create e-file if you are authorized 92
E-file Documents IRS no longer requires 2 nd Form 8879 to be kept with tax documents showing withholding (e.g., W- 2 s, 1099R s, etc.); however, Taxpayer Form 8879 still must be printed and signed (given to taxpayer) For District 20 for this year, no change if I e-file Print two copies of Forms 8879 and M8453 s; retain signed copy of each with tax documents showing withholding & required ID I will destroy our copies after e-filing 93