Income from Form 1040

1. Income from Form 1040

2. Form 1040—Addition and Subtraction Problem See left side for section names • Income (+) • Adjusted Gross Income (-) • Tax and Credits (+ and -) • Other Taxes (+) • Payments (-) • Refund (+) • Amount Owed (-)

3. Determining Taxable and Nontaxable Income • Nontaxable (excludable) • Gifts and inheritances • Exempt income • Earned • Received for work, such as wages, business income • Unearned • Interest income from investments • Review Pub 4012 (Tab D) for examples What are the differences between taxable and nontaxable income?

4. Determining Taxable and Nontaxable Income • Review Pub 4012(Tab 2) for examples • Tax Forms: • W-2 • 1099-INT • 1099-DIV • 1099-G Examples of income items used to determine entries in TaxWise.

5. Line 7 - Wages, Salaries, Tips, etc. • Form W-2: Issued to employees by January 31, reports wages and other compensation • Pub 4012 (Tab 2) How/Where to Enter Income • Pub 4012 (Tab 2) Form W-2 Instructions • Pub 4012 (Tab 2) How to Enter Tips

6. Line 7- Taxable Scholarship Income • Taxable scholarship income may be reported on Form W-2 and Form 1098-T • If the taxpayer did not receive aForm W-2, the taxable amountshould still be reported • Review Pub 4012 (Tab D) Tax Treatment of Scholarship and Fellowship Payments Consult shift supervisor

7. Line 8a - Interest Income • Interest income (unearned income) is reported on Form 1099-INT • Common sources: savings accounts, CDs, saving certificates, government bonds, interest on insurance proceeds, loan interest • Use TaxWise Interest statement which links to Schedule B if interest is over $1500 (2013). Use state adjustment column as necessary.

8. Line 9 & 9a - Dividends • Ordinary Dividends • Reported in Form 1099-DIV, box 1a • Qualified Dividends: Eligible for lower tax rate; shown in box 1b • Review Pub 4012 (Tab 2) • See Publication 17, Dividends and Other Distributions for more details

9. Lines 9 & 9a Dividends • Capital Gains Distributions (aka capital gain dividends) are reported on Form 1099-DIV, box 2a

10. Lines 9 and 9a Dividends • Form 1099-DIV for a dividend. May be on a consolidated statement • Schedule B is needed if the taxpayer’s ordinary dividends are greater than $1,500 • Out of scope: Form 1099-DIV boxes 2b, 2c, 2d, 8, and 9

11. State and Local Refunds • On Form 1099-G, refund will be in box 2 • Report only if: • Taxpayer itemized deductions last year • See Intake/Interview Sheet, item 5—If standard deduction in previous year-change to no, list reason and initial. • Taxable refund is reported on Form 1040, line 10

12. TaxWise – State or Local Refund Question

13. Alimony • Do not confuse child support payments with alimony • Where do you get alimony information? • Ask the taxpayer • Alimony payments under an agreement executed before 1985 are out of scope • How do you report alimony? • Form 1040, line 11 if receiving, line 31a if paying

14. Alimony • Getting information about alimony • Form 13614-C • Pub 4012 (Tab E)

15. Line 12- Business Income

16. Business Income or Loss Information • Business income information may come from: • Form 1099-MISC (Nonemployee compensation) • Form W-2 (Statutory Employee) (see box 13) • Taxpayer’s books and records • Cash payments to self-employed taxpayers must be included as business income, even if not reported on Form 1099-MISC

17. Types of Business Expenses in Scope • Business expenses must be ordinary and necessary to be deductible • Review examples of types of business expenses from L&LT topic • Find details in Schedule C Instructions • Refer to Pub 4012 (Tab F) • Travel Expenses chart • Deductible Transportation Expenses chart

18. When to Complete Schedule C-EZ or C • What are the conditions for use of Schedule C versus Schedule C-EZ? • Conditions for use of Schedule C-EZ are shown on the top of the schedule • Schedule C is in scope if business expenses are between $5,000 and $10,000

19. Completing Schedule C-EZ • Pub 4012 (Tab 2) Schedule C-EZ Business Income • Part I, General Information, lines A-G • Find Principal Business Codes in TaxWise Help or 1040 Instructions • Part II, Figure Your Net Profit, lines 1a-3 • TaxWise will total all the business expenses and transfer the amount to Schedule C-EZ, line 2 • Part III, Information on Your Vehicle, lines 4-8 • Can taxpayers claim expenses for car repairs in addition to the standard mileage rate?

21. Schedule CEZ

23. Schedule C

24. Schedule C

25. Schedule SE • Self-employment taxes are computed on Schedule SE for net earnings of more than $400. • Self-employment tax is automatically calculated in TaxWise. • This topic is covered in the Other Taxes session.

26. Out of Scope for this Lesson: Schedule C with: • Expenses over $10,000 • Return and allowances • Cost of goods sold • Other income • Expenses for employees • Business use of home • Casualty losses • Vehicle expenses reported as actual expenses • Depreciation • Rental or lease expenses • Accounting methods other than the cash method • Net losses • “No” on line G • Credit card payments not includible in income • “Yes” on line I (or line F on Schedule C-EZ), indicating there is a requirement to file Form(s) 1099

27. Summary • While business income or loss is generally beyond the scope of VITA /TCE, in some cases, you may help self-employed taxpayers who qualify to use Schedule C-EZ ($5,000 or less)or limited Schedule C ($5000 - $10,000)

28. Line 13 - Capital Gain or Loss

29. Line 13 – Capital Gain or Loss

30. Lines 15-16 – Retirement Income

31. Key Terms • Annuity • After-tax Contributions • Before-tax Contributions • Excludable Income • Form W4-P • Form W4-V • Individual Retirement Arrangement (IRA) • Lump-sum Distribution • Railroad Retirement Benefits (RRBs) • Required Minimum Distribution (RMD) • Retirement Income • Rollover • Simplified Method

32. Retirement Income Documents • What forms are used to report retirement income? • The Form 1099-R series – CSA, CSF, RRB 1099-Rs • The forms indicate amount received, taxable portion, and taxpayer’s cost (investment) in the retirement plan. • Pub 4012 (Tab 2), 1099-R Pension and Annuity Income

33. Retirement Plan Distributions • Retirement plans are funded by either “before-tax” or “after-tax” contributions. • This funding status determines if the distribution from the retirement plan is taxable • If the taxpayer did not contribute to the retirement plan, all the distributions are fully taxable • If the taxpayer made all contributions to a plan with before-tax dollars, the entire distribution is fully taxable. • If the taxpayer made all contributions to a plan with after-tax dollars, then the distributions will be partially taxable. • Review Pub 4012 (Tab 2) 1099-R Exclusion Worksheet

34. Taxable IRA Distributions • What is the difference between distributions from a Roth IRA and a traditional IRA? • Roth IRA distributions are generally tax-free, because the contributions were after-tax • Traditional IRA distributions may be fully or partially taxable, because the contributions were before-tax • Out of scope: SIMPLE and SEP IRAs, and nondeductible contributions to an IRA

35. Reporting IRA Distributions • Distribution codes on Form 1099-R, box 7: TaxWise has explanations; also on the back of Form 1099-R. • Distributions rolled directly into another qualified plan are not taxable (code G in box 7). • Roth account rollover is code H

36. Taxable Pensions and Annuities • When are pension or annuity payments fully taxable? • Taxpayers did not pay any part of the cost of their employee pensions or annuities • Employers did not withhold part of the cost from the taxpayers’ pay while they worked • Employers withheld part of the cost from the taxpayers’ “before-tax” pay while they worked

37. Taxable Pensions and Annuities • Two methods used to figure taxable portion of pension or annuity payment: • The General Rule – out of scope • The Simplified Method • Form 1040 Instructions Simplified Method Worksheet • Disability income from a retirement plan is taxed differently depending on the taxpayer’s age: • Before minimum retirement age – taxed as wages • After minimum retirement age – taxed as pension

38. Other Retirement Income Issues • Some distributions are subject to additional taxes, computed on Form 5329. Only Part I of Form 5329 is within scope. • Lump sum distributions • Premature distributions • Required minimum distributions • Withdrawal of excess IRA contributions

39. When to Adjust Withholding • If taxpayer owe $1,000 or more on their tax return • Taxpayers can request withholding using form W-4P or Form W-4V • If no withholding, taxpayer may need to make quarterly estimated tax payments

40. Line 17 – IncomeSchedules K-1 Consult shift supervisor

41. Schedule K-1 • Reports taxpayer’s share of income and other distributions, deductions, and credits from partnerships, S corporations, and some estates and trusts • Limited Schedule K-1 income topics (and reporting forms) are in scope • Interest income (Form 1040, line 8a, unless Schedule B is required) • Dividend income (Form 1040, line 9a, unless Schedule B is required) • Net short-term capital gains and losses (Schedule D, line 5) • Net long-term capital gains and losses (Schedule D, line 12) • Tax-exempt interest income (Form 1040, line 8b) • Royalty income (Schedule E) – only in scope if the source document is a Schedule K-1

42. Line 19 Unemployment Compensation

43. Unemployment Compensation Defined • Any amount received under an unemployment compensation law of the United States or of a state in the U.S. • Reported on Form 1099-G • Taxable in most cases • Not considered earned income for calculating EITC

44. Reporting Unemployment Compensation • Enter the amount of unemployment received shown in box 1 of Form 1099-G on Form 1040, line 19. • Enter the amount of withholding from Form 1099-G, box 4 on Form 1040, line 62. • If the taxpayer has more than one Form 1099-G, total the amounts from each box on all the Forms(s) 1099-G and enter on the return.

45. Line 20a–Social Security Benefits

46. Key Terms Definitions are always available in the L&LT online Glossary. • Annuity • Pension • Railroad Retirement Benefits (RRBs) • Social Security Benefits

47. Social Security and Railroad Retirement Benefits • Social security benefits: • Old-age, survivor, and disability insurance (OASDI) • Workers’ compensation • Monthly retirement • Reported on Form SSA-1099 • Railroad Retirement Benefits (RRBs): • Tier 1 (social security equivalent benefits) • Tier 2 (treated as a qualified employee plan) • Reported on Form RRB-1099 • Intake & Interview Sheet , Part III

48. Social Security and Railroad Retirement Benefits • Pub 4012 (Tab 2) Railroad Retirement, Civil Service, and Social Security Benefits shows how to enter data in TaxWise

49. Social Security and Railroad Retirement Benefits • Link to Form 1040 Social Security Worksheet from line 20a

50. Finding the Taxable Portion The taxable amount, if any, depends upon: • Filing status and other reportable income • Whether the benefits were the taxpayer’s only source of income • If the benefits were the only source of income, the benefits are generally not taxable, and the taxpayer need not file a federal income tax return. • If the taxpayer received other income, complete the Social Security Benefits Worksheet to calculate the taxable portion.