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Advanced Training

Advanced Training. Cuyahoga EITC Coalition For 2011 Returns. Capital Gains – Chap 10. Schedule D Sale of Investments and Property Long-term vs. Short-term Long-term starts at one year and one day. Inherited property cost basis is FMV at date of death. Always Long-term. Capital Gains.

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Advanced Training

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  1. Advanced Training Cuyahoga EITC Coalition For 2011 Returns

  2. Capital Gains – Chap 10 • Schedule D • Sale of Investments and Property • Long-term vs. Short-term • Long-term starts at one year and one day. • Inherited property cost basis is FMV at date of death. Always Long-term

  3. Capital Gains • Capital Losses offset capital gains. • Deduct up to $3000 or $1500 for MFS • Any more capital losses incurred may be carried over to future years. • Commissions • Paid at the time of purchase are added to basis (cost of the stock) • Paid at sale are deducted from proceeds

  4. Capital Gains • Taxpayer can specifically identify which shares were sold. • If taxpayer does not know basis then the IRS assumes it is zero – 100% gain. • Mutual Funds – more difficult to determine the basis. Can choose the cost basis or average basis. Cost is specific identification. • Mutual Funds capital gains distributions appear on a 1099-DIV. Enter all numbers in TaxWise and may not need to complete a Schedule D. • If on Schedule D then gains are long-term.

  5. Capital Gains Example • Chris purchased 100 shares of ABC stock on 4/16/02 at $7 each with a commission of $25. He sells the 100 shares on 11/10/11 for $11 each and he paid $40 in commission. What is his long term gain? • Same as above but what if the ABC stock split 2 for 1 on 4/1/04?

  6. Sale of Personal Residence • May exclude up to $250,000 in gain ($500,000 if married) if meet certain tests: • Owned the home for at least 2 years • Main home for 2 of last 5 years • Gain = (Sales – Selling Expenses) – Adjusted Basis • Adjusted Basis = Purchase Price + Capital Improvements (Major Projects)

  7. Sale of Residence • Real Estate Taxes Paid by the Seller can be deducted on a Schedule A • Losses from the sale of a home are NOT tax deductible • Inherited Property basis is FMV at date of death. • Most of our clients will not have a taxable gain.

  8. Self-employed Schedule CChapter 9 • Many of our clients receive a 1099-MISC but could also have other revenue not reported on a 1099. • Mileage for business purposes • $.51 from January to June • $.555 from July to December • Self-employed tax (Schedule SE); Tax is on Line 56 (most clients haven’t paid any). • SE adjustment for 1/2 on Line 27 • Ask if the taxpayer incurred any expenses, e.g. buying tools

  9. Rental Income – Schedule EChap 12 • Expenses • Interest on Mortgage – portion of rental • Insurance • Property Taxes • Maintenance • Utilities • Repairs vs Capital Improvements • Depreciation – Building not Land

  10. Rental Income – Continued • Depreciation will limit the basis of the property when it is sold! • Passive Activity Loss (PAL) – limits the loss on property; • Most of our clients can be considered active up to $25,000 loss since they make tenant selection, rental terms and approving expenditures.

  11. K-1 Income • Three kinds of K-1s • 1041 – Estates/Trusts • 1065 - Partnership • 1120S – Limited Liability Corporation • We should not do a partnership or LLC. Those are for paid preparers. • 1041 – the amounts carry to the corresponding schedules and 1040. Interest Income should be on Schedule B and Line 8a and Royalty Income on Schedule E and Line 17.

  12. Life Insurance Proceeds • Generally not taxable when proceeds received from one’s death. • Interest income (if proceeds not all received at once) is taxable each year. • If policy is surrendered for cash then the taxable amount is proceeds less premiums.

  13. Health Savings Accounts (HSA) • Like an IRA • Contributions are deductible • Distributions are not taxable if for an eligible use – 20% penalty too. • Can make contributions for 2011 until 4/17/12. • No joint HSAs even if family coverage. • Used by folks who have a High Deductible Health Plan (HDHP)

  14. HSAs Continued HDHP Limits • Maximum Contributions to HSA $3,050 for Single and $6,150 for family • Over 55 may do an extra catch-up of $1,000 for either spouse.

  15. HSA eligibility • HDHP but not Flex Spending or Health Reimbursement Account • No other insurance • Not in Medicare • Not a dependent • No joint HSAs

  16. HSA • Eligible costs • Periodic health evaluations • Child and adult immunizations. • Tobacco cessation programs. • Obesity weight-loss programs. • Screening services • Non-health distributions that are eligible • Death • Disabled • Over 65

  17. First Time Homebuyer Repayment • Credit claimed in 2008 needs to be repaid. • Paid over the next 15 years. • Line 59 – Other Taxes • Form 5405

  18. Restructuring and Foreclosure • 1099-A – Abandonment has one taxable event – Capital Gains. However, a 1099C – Cancellation of debt has 2 taxable events. Capital Gains and Cancelled Debt • May receive both in same tax year • Recourse vs. Nonrecourse – What is the difference. • Gain/Loss Calculation – FMV (Recourse) and Debt (Nonrecourse) used for Sales Price • Mortgage Forgiveness Debt Relief Act

  19. Restructuring Mortgages • Restructurings – Cancelled Debt is taxable but cancelled interest and fees are not. • Form 982 Line 1e and Line 2 should have 1099-C Box 2 amount. – Nontaxable. • If interest is capitalized into a new mortgage then a 1098 could be triggered.

  20. Foreclosures and Short Sales • Debt must be for the primary home - not a mortgage used for other purposes. • Need to know the FMV of the property - recourse • Foreclosure cancelled debt – Form 982 Line 13 and Line 2. • IRS would like us to show capital gain calculation on Schedule D though more than likely there is no gain because of the exclusion on sale of residence. • Frank owes $50,000 on his mortgage but his home is worth $30,000. He sells the property for $1 to the Lender and the mortgage is cancelled. How much of his income is taxable?

  21. Social Security Benefits • Client will receive a SSA-1099. Be sure to enter all figures into TaxWise. • Are benefits taxable? • Rule of thumb – ½ SS + all other income • MFJ $32,000 • MFS $0 • HOH or other $25,000

  22. Lump Sum Social Security • Many clients will receive a lump sum for several years – generally a retroactive payment while case was pending. • If less than the rule of thumb amounts then $0 is taxable. • If more then elect to receive in earlier years. The amount per year is on the SSA 1099 Form. • Enter into TaxWise on the Social Security Worksheet Page. • Lump sum death benefits are NOT taxable.

  23. Retirement Income Chap 11 Four Common Types of Retirement: • Pension – determinable payments made from an employer to an employee or survivor • Annuity – regular payments from an insurance company or trust • Qualified employee plan – stock or profit-sharing plan from employer to employee • 401(k) – employee and maybe employer contributions to a retirement account – pre-tax

  24. Taxable Calculation • Need to know the age of the client when the annuity began • If the annuity is a joint and survivor annuity then we need to know the spouse’s age too. • Simplified Method Worksheet.

  25. Calculating the Age • Mark and Valerie are married and Mark’s pension is a joint and survivor annuity to be paid over the lives of both Mark and Valerie. Mark was born on 12/11/52 and Valerie was born on 2/17/55. Mark began drawing on the annuity in March 2009. • Since Joint and Survivor, use both Mark and Valerie’s age at beginning of pension 3/09 (Mark – 56 and Valerie – 54) or 110 (410 months) on Page 260 of 4491W. • Employee Contribtution (Box 9b on 1099-R) divided by the months.

  26. Taxable Amount • If an employee contributed to a pension then that portion is non-taxable. These are the cost or investment of the pension. • Employee contributions are shown in Box 5 of the 1099-R • Annuity’s after 11/18/96 use the simplified method – Tax Wise has this in 1099R screen. • Tax-free amount does not change from year to year. Same until total contributions are paid. (Box 9b) • Surviving spouse also can use tax-free amount.

  27. IRA Distributions • Traditional IRA – normally a fully taxable event in the year of distribution. • Roth IRA – not deducted so distributions are tax free. • SIMPLE IRA – small or self-employed

  28. Railroad Retirement • First Category – Tier One benefits that are similar to Social Security and is treated as such. Form RRB-1099 • Second Category – Rest of Tier One, and any other benefit. Form RRB-1099-R • If the employee contributions amount is zero on the 1099-R then fully taxable.

  29. To Itemize or Standardize? • Clients should itemize when their total deductions are more than the standard deduction amount. • Usually this happens when the client is a homeowner. • Complete Schedule A • Taxes Paid from W-2s and 1099s will automatically carry forward in TaxWise.

  30. Schedule A • Medical • Insurance Premiums (tax free ineligible) • Costs not covered by Insurance • Non-prescription medicine – NOT eligible • Stop smoking programs are eligible. • Doctor prescribed weight loss programs are eligible. • Taxes • Vehicle Fees – not in OH • Real Estate Taxes • State and Local Income Tax or Sales – OH Income tax is usually higher

  31. Itemized Continued • Interest • Mortgage Interest • Mortgage Insurance Premiums – should be on 1098 • Charity • Paid to Nonprofits like United Way • Churches • Clothes and Donations in Good Condition • Not Payments to an individual • Political contributions are ineligible.

  32. Itemized • Casualty and Theft • Job Expenses – Limited to 2% of AGI • Union Dues • Work Clothes/Supplies not for normal wear • Safety Deposit Box • Others • Gambling Losses up to the amount of any winnings. • Cannot deduct miles driven between home and work.

  33. Energy Efficiency Credit • Form 5695 • Items installed must be certified – Contractor should have told the client. • Ceilings for various items. • Must be big items; Light bulbs (CFLs) are not eligible.

  34. Underpayment Penalty - 2120 • IRS charges a penalty for taxpayers not making payments during the year. • General rule is if the bill is more than $1,000. • Exceptions: • Payments >2010 Tax • Tax Balance is no more than 10% of 2011 • Only in the rarest of cases.

  35. Volunteer Sign Up and Practice Labs Volunteer registration at www.refundohio.org Online at home At CHN – Fridays 1 PM to 5 PM CHN is at 2999 Payne Avenue Online Practice Lab through IRS website. http://www.irs.gov/app/vita/index.jsp Password is learntwo User ID will be created for you to use with practice problems. 35

  36. Taking the Test Complete the paper copy – Please complete the Form 13615 in the booklet. Online web site: http://www.irs.gov/app/vita/index.jsp Certification Test web site: http://linklearn.webtechteam.com/login.aspx?ReturnUrl=/Default.aspx Please printout 13615 36

  37. Certificates Please send your completed certificates to Shannon Crandall, Enterprise Address: 3500 Lorain, #300, Cleveland, OH 44113 Fax: 216-631-0450 Email: scrandall@enterprisecommunity.org 37

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