Understanding Income Types and Reporting - Chapter 8, 9, 11, 13, 14, and 15

1. Income Chapter 8, 9, 11, 13, 14, and 15

2. Objective • Requirement • Types of Income • Income types we experience in the past. • Samples of forms that we will see • How to enter them in TWO

3. Requirement • All income must be reported except those that are exempt from tax by law.

4. Types of Income • Taxable Income • Earned – You worked for it • Wages • Self-employment / Business • Unearned – you did not worked for it • Interest • Social Security • Alimony • Gambling • Non-Taxable / Exempt Income • Child Support • Gifts • Inheritance

5. Taxable Income Cont.

6. Non Taxable Income Cont.

7. Income Types We Experienced in the Past • Line 07 – Wages (W-2) • Line 08 – Interest Income (1099-INT) • Line 09 – Dividend Income (1099-DIV) • Line 10 – Taxable Refunds (State Tax Refund - Itemized TP only) • Line 11 – Alimony Received • Line 12 – Business Income (1099-Misc) • Line 15 – IRA Distributions (1099-R) • Line 16 – Pensions / Annuities (1099-R) • Line 19 – Unemployment Compensation (1099-G) • Line 20 – Social Security Benefits (SSA-1099) • Line 21 – Other Income (W-2G)

8. Line 7 - Wages

9. Line 7 -Application • Input the amounts as shown in the W-2 Form into TWO. “KEY IT AS YOU SEE IT” • Note • If the taxpayer’s job is one in which tips are received, ask if he/she receive any tips and enter the amount in box 7 even if the information is not reported on the W-2 • Double check employer name and address – change them manually if necessary • Box 14 Other Item: California State Disability Insurance (CASDI) • Must be entered at the bottom of TWO’s W-2 form to be transferred to Schedule A (Itemized Deduction) to State Tax Paid • Must use correct literal “CASDI” • Deductible because it is mandatory. Thus VPDI is not deductible since it is voluntary.

10. Line 8 – Interest Income

11. Line 8 - Application • Enter via Schedule B > Interest Statement • List name of institution as much as it will fit • If there is an amount shown in Box 8: • Enter “E” in NAEOB column • Enter Box 8 Amount in NAEOB amount • Enter other amounts as applicable.

12. Line 9 - Dividends

13. Line 9 - Application • Enter on TWO via Dividend Statement in Schedule B • Enter information from the form 1099-DIV based on the description of the box.

14. Line 10 – Taxable Refunds of State Taxes • Only applicable to tax payer that itemized in the previous year • Use State Tax Refund Worksheet

15. Line 12 – Business Income • We use Schedule C-EZ only!!!!! (See next slide for details) • Sole Proprietor (Business Owner) If the taxpayer owns their own business or works out of their home or is an independent contractor, he/she will tell you that about the amount of income and expenses related to the business. I.E., Courtney has a small home-based word processing business. Her gross income was $6,570. Her expense for materials was $878.

16. Who can use Schedule C-EZ • Had business expenses of $5,000 or less • Used the cash method of accounting • Did not have an inventory at any time during the year • Did not have a net loss from the business • Were the sole proprietor for only one business (each spouse on a joint return may use a separate Schedule C-EZ to report business income from separately owned sole-proprietor business if other conditions for filing Schedule C-EZ are met) • Had no employees during the year • Did not deduct expenses for business use of their home • Did not have prior-year un allowed passive activity losses from their business

17. Line 12 – Cont • Self-employed (Independent Contractor – receive 1099-MISC) You will see this form when a taxpayer works for someone but is not consider an employee.

18. Line 12 – Business Income Con’t • Business Type & Business Code (NAICS Code*) • Business Name (If different than tax payer name) • Employer ID Number (If tax payer have employee) • Business Address (If different than tax return address) • Was 1099 issued to others (contracted work out to others) • Income (Credit Card, Other than credit card) • Expenses (See more info next page) • Net Profit • Business Miles * http://www.naics.com/search.htm

19. Line 12 – Business Income Con’t • We use only schedule C-EZ to complete business income!!!!! • Using schedule C is out of scope of VITA • If they have business loss it is also out of scope of VITA • If they still want to file with us we will use schedule C-EZ and reduce their expense to match their income so they will have no profit. *** Make sure taxpayer is ok with not claiming business loss.

20. Types of business Expenses • Advertising • Car and truck expenses • Commissions and Fees • Insurance • Other Interest • 50% of business meals and entertainment • Utilities (including telephone) • Legal and professional services and fees • Office expenses • Rent or lease expenses • Repairs and maintenance • Supplies • Taxes and licenses • Travel

21. Completing Schedule C-EZ Part I: General information • Line A, Principal business or profession • Line B, Business code • Line D, Employer ID number • Line E, Business address Part II: Figure Net Profit • Enter the amount as stated in each line

22. Part III: info. On your vehicle Use the standard mileage rate method: • Multiply the business miles by the applicable mileage rate • Add that amount to the business-related parking, tolls, and other deductible business expenses • Business Mileage • The 2011 rate for business use of a vehicle is: • 51 cents per mile from January 1, 2011, through June 30, 2011 • 55.5 cents per mile from July 1, 2011, through December 31, 2011

23. Gross Income Less Total Expenses • Line 3, Net profit, is the difference between gross receipts (line 1) and total expenses (line 2). • If net profit is less than $400, enter the amount on line 12 of Form 1040 and attach Schedule C-EZ to the return. • Schedule SE is not required unless there is a profit of $400 or more

24. Line 15 & 16 – IRA Dist., Pension, Annuities

25. Line 15 & 16 – IRA Dist., Pension, Annuities

26. Line 15 & 16 – 1099-R Application • Insert 1099-R form • Enter data to TWO from original form as seen in each box • Things to note: • If box 7 “IRA/SEP/Simple” box is check, it will transfer the data to line 15. Otherwise it will goes into line 16 of form 1040

27. Line 19 – Unemployment Compensation • Use 1099G Work Sheet to enter information in TWO

28. Line 20 – Social Security Benefit

29. Line 20 - Application • Enter information in 1040 Worksheet 1 • Information to be entered: (as applicable) • Social Security received this year • Medicare Part B, C, and D (use scratch pad to sum up the amounts) • Federal tax withheld • What if tax payer does not have the form? • www.socialsecurity.gov will allow you to request a copy of the most recent SSA-1099 and will arrive in about 10 days via mail. • Or they can go to the local Social Security Office to have them print it out.

30. Line 21 – Other Income • The type of income that will be reported on this line: • Foreign earned income • Prizes and awards • Gambling Winnings • Jury Duty Fees • DO NOT report 1099-MISC in this line as it should be reported with schedule C or C-EZ • DO NOT report non-taxable income in this line (they are not supposed to be reported at all) • i.e., Child Support, Roth IRA distributions, Gifts

31. Line 21 – Gambling Winnings

32. Line 21 - Application • The type of income description is very specific. • i.e., if you have gambling winning of any type you must use “GAMBLING WINNINGS” as the description exactly as spelled in the quotation. • Gambling Losses • Gambling losses can be deducted up to the amount of gambling winnings. • Gambling losses will not be considered if you are not itemized • Best practice is just to enter the loss on the form on TWO and if taxpayer does itemized you will not have to go back to re-enter the information.

33. Work Problem • Webster Return