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Liberty Tax Service Basic Income Tax Course Lesson 5. Instructor: Val Smith-Fulcher email@example.com. Wages, Salaries, Tips, Etc. and Withheld Taxes. Classwork 1. True or False. Employee bonuses are not included in gross income. F
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Liberty Tax Service Basic Income Tax CourseLesson 5 Instructor: Val Smith-Fulcher firstname.lastname@example.org
Wages, Salaries, Tips, Etc. and Withheld Taxes Classwork 1. True or False. • Employee bonuses are not included in gross income. F • Most taxable compensation you receive as an employee is shown in box 1 of Form W-2. T • Tips are not taxable income. F • The amounts shown in each box on Form W-2 are entered on your tax return. F • Taxable employee compensation is reported on line 7 of Form 1040. T • If the amount shown in box 1 of Form W-2 is incorrect, you should cross it out and write in the correct amount. F
Wages, Salaries, Tips, Etc. and Withheld Taxes Classwork 1. True or False. • Box 8 of Jackie’s Form W-2 shows allocated tips of $340. If Jackie cannot prove she received a smaller amount of tips, she must include $340 in the amount she enters on line 7 of Form 1040 and she must complete Form 4137. T • Joe contributes part of his salary to the 401(k) retirement plan set up by his employer. Joe will never have to pay tax on these contributions. F • Generally, withholding of federal taxes is required on all employee compensation. T • In 2002, Carol (born 2/2/1950) retired on disability from her job at Starr Industries. The minimum retirement age at Starr is 62 years of age. For the 2009 tax year, Carol reports the disability pension payments she received from Starr on line 7 of her Form 1040. T
Wages, Salaries, Tips, Etc. and Withheld Taxes CLASSWORK 2: Should the following types of compensation be included in box 1 of Form W-2? Yes or No. • A vacation trip you were awarded as a prize for meeting sales goals. Y • Your employer’s contribution to a qualified retirement plan. N • The ham your employer gave you for Christmas. N • Employer provided vehicles used for personal driving, including commuting to and from work. Y • Payments received from your employer while you were out with a broken leg. Y
HOMEWORK CHAPTER 4 HOMEWORK 1: Answer the questions for each situation. 1. Frankie is employed by Sherman Bros. Insurance. In 2009, his salary was $48,500. Frankie participates in the 401(k) retirement plan his employer has set up. In 2009, Frankie contributed $4,000 to the plan. Frankie also received the following from his employer in 2009: • A Florida vacation worth $3,264 as a prize for meeting his sales goals. Frankie was not able to take the vacation until January 2010. • $200 tickets to a pro basketball game as a Christmas present. • Group health insurance premiums valued at $3,400. • $2,500 as reimbursement for his travel costs. Frankie does not have to account to Sherman Bros. for the reimbursements or return any money he does not spend. • Which of the above 4 items are taxable to Frankie in 2009? Florida vacation, pro basketball tickets, travel cost reimbursements b. What is the amount of employee compensation that will be shown in box 1 of Frankie’s Form W-2? $50,464 which consists of:$48,500 (wages) - $4,000 (401(k) contribution) + $3,264 (vacation) + $200 (tickets) + $2,500 (travel)
HOMEWORK CHAPTER 4 HOMEWORK 1: Answer the questions for each situation. • Cameron Smith worked for a cab company for 6 months in 2009. He received the following Form W-2.
HOMEWORK CHAPTER 4 HOMEWORK 1 Cameron reported his tips as required to his employer. The monthly totals in his tip diary are as follows: January $34 February $20 March $18 April $25 May $16 June $28 • What is the total amount of tips that Cameron reported to his employer? $107 ( $34 + $20 +$25 + $28 = $107) • What is the total amount of Cameron’s tips that is subject to income tax? $141 ($107 + $18 + $16 = $141) • What amount does Cameron enter on Form 1040, line 7? • $ 10,357 ($10,323 + $18 + $16 = $10,357) d. How much is his federal withholding? $1,032
HOMEWORK CHAPTER 4 2. Craig R. Gregory (SSN 333-98-7654, born 9/24/1974) is divorced. He keeps up a home for himself and his son Barry (SSN 233-32-3232, born 6/7/2000), who lives with him. Craig has stated in writing that his former wife can claim the exemption for Barry. Craig pays 70% of the total support for his widowed stepfather Lucian Alexander (SSN 277-77-8787, born 12/12/1936), who does not live with him. Lucian’s gross income in 2009 was $2,400. On some weekends, Craig works as a waiter at a banquet hall. In January his tips were $17 and in March his tips were $19 in cash plus two tickets to the Bulls game (value $55). He did not report these tips to his employer. For every other month, Craig received $20 or more in tips and he reported these to his employer.
Chapter 5: Interest, Dividends, and Other Income Objectives Determine the Reporting of Interest and Dividends Know How to Distinguish Between Taxable and Tax-Exempt Interest and Dividends Understand How to Report Taxable Refunds, etc., From State and Local Income Taxes Identify Taxable Alimony and How to Report It Learn About Unemployment Compensation and How to Report It Report Other Sources of Taxable Income Identify when Back up Withholding is Required
Key Terms and Definitions Earned Income – All amounts received from providing a service, including wages, tips, bonuses and self-employment income in the form of money, services or property. Investment income, such as dividends and interest, is not counted as earned income. Unearned Income – Money received for the investment of money or other property, such as interest, dividends and royalties. It also includes pensions, alimony, unemployment compensation and other income that is not earned for services performed. Taxable Interest – Includes interest you receive from bank accounts, loans you make to others, and other sources. Tax-Exempt Interest - Interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.
Key Terms and Definitions Dividends – A stockholder’s share of the profit paid on an investment in a corporation reported on Form 1099-DIV. “Dividends” from a savings and loan association or from a credit union are actually reported as interest. Capital Gain Distribution – Shareholder’s portion of gain from the sale of capital assets, such as mutual funds and real estate investment trusts. Capital gain distributions are taxed in the year received and are always considered to be held long term. Unemployment Compensation – Includes benefits to unemployed individuals that a state or the District of Columbia paid from the Federal Unemployment Trust Fund.
Reporting Interest Income and Dividends • Interest income and dividends are common types of unearned income. • They are considered unearned income because money, and not a person, is working to earn the income. • Most types of interest and dividends are taxable. All interest and dividends must be reported on your tax return. Interest over $10 is usually reported to you on a Form 1099-INT. Dividends over $10 are reported to you on a Form 1099-DIV. • Substitute Forms 1099-INT and 1099-DIV may also be used • Interest and dividends over $1,500 must be reported on Schedule B of Form 1040. • Taxable interest is reported on line 8a of Form 1040. • Tax-exempt interest is reported on line 8b.
Reporting Interest Income and Dividends Form 1099-INT
Reporting Interest Income and Dividends Form 1099-DIV
Taxable Interest Most interest income is taxable. In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income.
Taxable Interest Where does Taxable interest income normally come from? • bank accounts • interest on loans you make to others • interest from most other sources. Where do you report taxable interest on the Form 1040? Report the total taxable interest income on line 8a of Form 1040. If your total interest income is more than $1,500, Part I and III of Schedule B must be completed.
Taxable Interest Zachary received $1,500 in interest income from BBT Bank this year. He will report the $1,500 directly on line 8a of Form 1040. If his interest income from BBT Bank were $1,501, he would also need to report the $1,501 on Part I of Schedule B as in the second example below. Form 1040, Page 1
Taxable Interest What are some of the other common sources of taxable interest? • Certificates of deposit (CDs) • Deposits or share accounts from credit unions, mutual savings banks, cooperative banks, and federal and domestic savings and loan associations • U.S. obligations such as U.S. Treasury bills, notes and bonds • U.S. savings bonds • Installment sale payments • Life insurance proceeds remaining with the insurance company • Tax refunds • Gifts for opening accounts
U.S. SAVINGS BONDS Interest on U.S. Savings Bonds is reported in box 3 of Form 1099-INT. If you use the cash method of accounting, as most individual taxpayers do, you generally report interest on U.S. savings bonds in the year that you receive it. There are three types of U.S. Savings Bonds: HH bonds EE bonds I bonds • HH Bonds are purchased at face value. Interest is paid semiannually. You report the interest as income in the year it is received. • EE Bonds are purchased at a discount and the interest on these bonds is taxed when the bond is redeemed. The taxable interest is the difference between the purchase amount and the redemption value. • I Bonds are newer U.S. bonds. They are purchased at face value and interest is paid at maturity. You can report the interest on series EE, series E, and series I bonds in either of two ways. What are these methods? Method 1. Report the interest at maturity of the bond or when you cash it. Method 2. Report the increase in redemption value as interest each year.
U.S. SAVINGS BONDS Sometimes U.S. Savings Bonds are owned by more than one person.Table 5-1 clarifies who pays tax on U.S. Savings Bond interest. Interest on U.S. savings bonds is exempt from state and local taxes Table 5-1. Who Pays the Tax on U.S. Savings Bond Interest
OTHER INTEREST CERTIFICATE OF DEPOSIT (CD) • If you buy CDs with maturity of more than one year, include part of the interest as income each year. • Early withdrawal penalty is reported in box 2 of Form 1099-INT and reported on line 30 of Form 1040. • Early withdrawal penalty is for withdrawing money from CDs, or other time-deposit savings accounts, before the maturity date. It is a forfeit of some of the interest paid
OTHER INTEREST LIFE INSURANCE PROCEEDS Life insurance proceeds paid to a beneficiary are not usually taxable unless the benefits received are more than the amount that would have been payable at time of insured person’s death. (Interest can accrue before distribution)
OTHER INTEREST TAX REFUNDS Interest received on tax refunds is taxable income. GIFT/OPENING AN ACCOUNT The fair market value of a gift or service you receive for opening an account in a savings institution must be reported as interest in the year you receive it.
OTHER INTEREST Tom has a CD that matures in January 2010 and paid $75 in interest in 2009. Does Tom include the $75 interest as income on his 2009 return? Yes
INTEREST INCOME TRUE OR FALSE Interest income of less than $10 is not required to be reported. F Total interest income of more than $1,500 must be reported on Schedule B, Part I. T
INTEREST INCOME TRUE OR FALSE Interest credited to a savings account is unearned income. T Interest on a Roth IRA is reported on line 8b of Form 1040. F Interest on an EE or I bond can only be reported at the maturity date or when you cash it. F Interest on U.S. savings bonds is taxable on the state return. F If money is withdrawn from a CD before the maturity date and you forfeited some of the interest paid, report this amount on line 30 of Form 1040 as an early withdrawal penalty. T
INTEREST INCOME TRUE OR FALSE • Report a dividend from a credit union of $1,500 or less on line 8a of Form 1040 if you have no other similar income. T
TAX-EXEMPT INTEREST Some types of interest are exempt from federal income tax. If you are required to file a return you must show any tax-exempt interest you receive for informational purposes only. How is this reflected on the Form 1040? Tax-exempt interest is reported on line 8b of Form 1040 and generally you will not receive a Form 1099-INT.
DIVIDENDS What are they? • Distributions of money, stock, or other property paid to you by a corporation. • Report dividends over $1,500 on Part II of Schedule B. • Dividends may also come from a partnership, estate, trust, or an S corporation and be reported to you on a Form K1. • Major types of dividends are: ordinary dividends, capital gain distributions, nondividend distributions, and other distributions.
DIVIDENDS What are Ordinary Dividends? Ordinary dividends are taxable income and are paid out of the earnings and profits of a corporation. They are NOT capital gains
DIVIDENDS Schedule B, Part II
DIVIDENDS Pauline Adams received a Form 1099-DIV for $1,646 from NY Money Market Fund.
DIVIDENDS What are Qualified Dividends? Qualified dividends are the ordinary dividends that are subject to the same 0% or 15% maximum tax rate that applies to net capital gain. Qualified dividends should be shown in box 1b of Form 1099-DIV. Capital gains will be covered in Chapter 11.
DIVIDENDS Capital Gain Distributions Mutual funds pass capital gains to investors as capital gain distributions. Capital gain distributions are reported in box 2a of 1099-DIV and are reported directly on line 13 of Form 1040 if a Schedule D is not required.
DIVIDENDS Corey does not have to file a Schedule D. He received a capital gain distribution of $695 from JTH investments in 2009. Corey had no other capital transactions for the year. Form 1040, Page 1
DIVIDENDS Nondividend distributions A return of capital is reported to you on box 3 of Form 1099-DIV. Report the return of capital as a capital gain once your basis has been reduced to zero.
DIVIDENDS Jesse purchased stock in 1997 for $4,000. He received a return of capital of $500 on the stock in 2000. Jesse reduced his basis in the stock to $3,500 ($4,000-$500). In 2009, he received a return of capital of $4,500. Since he only had a basis of $3,500, his basis was reduced to zero.What is the taxable amount for 2009? A. $4,500 B. $3,500 C. $1,000 C. $1,000
OTHER DISTRIBUTIONS Alaska Permanent Fund Dividends are not dividends. They are reported on line 21 of Form 1040 as other income.
BACKUP WITHHOLDING ON INTEREST AND DIVIDENDS Interest and dividends are generally not subject to withholding. However, if you fail to give the payer your social security number or you give an incorrect number, the payments are subject to mandatory withholding (backup withholding). Backup withholding will be shown in box 4 of Form 1040-INT or Form 1040-DIV.