1. SaveFirst Advanced Tax Training 2011

2. SaveFirst Intermediate Training ● 2011 © Training Outline 1.Taxable Portion of a Pension Plan 2.Sale of Stock 3.Sale of Home 4.Schedule K-1

3. SaveFirst Intermediate Training ● 2011 © Training Outline 1.Taxable Portion of Retirement Distributions 2.Sale of Stock 3.Sale of Home 4.Schedule K-1

4. SaveFirst Intermediate Training ● 2011 © Fully Taxable Plans A plan is fully taxable if  the employer contributed all of the initial money into the retirement plan  a taxpayer contributed to the plan only with pre-tax dollars (withheld from paycheck) The funds are taxed now because neither the contributions nor the gains have already been taxed. Taxable Portion of Retirement Distributions

5. SaveFirst Intermediate Training ● 2011 © Partially Taxable Plans A plan is partially taxable if  The taxpayer contributed to the plan with after-tax dollars Taxable Portion of Retirement Distributions SOME of the funds (those contributed by the employer and the employee with pre-tax dollars) are taxed now because neither the contributions nor the gains have already been taxed. SOME of the funds are exempt from tax because the taxpayer has already paid a tax on that money.

6. SaveFirst Intermediate Training ● 2011 © IRAs Earnings and investment gains generally accumulate tax-free or tax-deferred until they are withdrawn as fully or partially taxable distributions. There are four kinds of IRAs, each with different tax implications:  Traditional IRA  Roth IRA  Savings Incentive Match Plans for Employees (SIMPLE) IRA (OUT OF SCOPE)  Simplified Employee Pension (SEP) IRA (OUT OF SCOPE

7. SaveFirst Intermediate Training ● 2011 © Determining the Taxable Portion Typically, the taxable amount is reported Box 3 of the 1099R If not, use the Simplified Method to calculate the tax-free portion of each pension payment.  Divide the taxpayer’s cost (total post-tax contributions) by the total number of anticipated monthly payments (based on taxpayer age) Taxable Portion of Retirement Distributions

8. SaveFirst Intermediate Training ● 2011 © Simplified Method You must have the following information:  Cost in plan at starting date (Box 9b)  Age of retiree (and spouse if a joint annuity) at starting date  The amount in past years that has already been excluded Taxable Portion of Retirement Distributions

9. SaveFirst Intermediate Training ● 2011 © Disability Pension Issues Code 3 in Box 7 BEFORE taxpayer reaches mandatory retirement age: treated as wages  Link to 1099R from Line 7 to report AFTER taxpayer reaches mandatory retirement age: treated as retirement income Taxable Portion of Retirement Distributions

10. SaveFirst Intermediate Training ● 2011 © Training Outline 1.Taxable Portion of a Pension Plan 2.Sale of Stock 3.Sale of Home 4.Schedule K-1

11. SaveFirst Intermediate Training ● 2011 © Investment Income Investment property produces investment income  Interest  Dividends  Capital gains Sale of Stock

12. SaveFirst Intermediate Training ● 2011 © Capital Gains Sale of stock Sale, exchange, or redemption of mutual fund shares Redemption: Fund reacquires shares in exchange for money or property Sale: Transfer of shares for money Exchange: Transfer of shares for other shares Sale of Stock

13. SaveFirst Intermediate Training ● 2011 © 1099-B Sale of Stock

14. SaveFirst Intermediate Training ● 2011 © Form 1099-B Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, includes 5 new boxes:  Box 1b to report the date of acquisition  Box 3 to report cost or other basis  Box 5 to report the amount of loss disallowed due to a wash sale  Box 6 to report whether the property sold is a noncovered security  Box 8 to report whether the gain or loss is short-term or long- term. Brokers must complete boxes 1b, 3, 5, and 8 when reporting sales of securities, unless box 6 is checked.

15. SaveFirst Intermediate Training ● 2011 © Sale of Stock GAIN = AMOUNT REALIZED – ADJUSTED BASIS In Layman’s Terms… GAIN = MONEY YOU GET – MONEY YOU PAID Adjusted basis: Original cost of the shares of stock increased or decreased to account for commissions, fees, depreciation, etc. Sale of Stock

16. SaveFirst Intermediate Training ● 2011 © Determining Adjusted Basis INCREASE adjusted basis per share for  Commissions  Fees DECREASE adjusted basis per share for  Stock Dividends  Stock splits Inherited property = FMV of property on date of decedent’s death Sale of Stock

17. SaveFirst Intermediate Training ● 2011 © Determining Gain or Loss GAIN: amount realized is GREATER than adjusted basis LOSS: amount realized is LOWER than adjusted basis Sale of Stock

18. SaveFirst Intermediate Training ● 2011 © Gross vs Net Proceeds Gross proceeds  Commissions/fees not already included  Preparer must add them to the basis Net proceeds  Adjustment has already been made Remember: Basis must be adjusted for commissions/fees for purchase OR sale Sale of Stock

19. SaveFirst Intermediate Training ● 2011 © Holding Period Period starts the day after the property is acquired and continues through the day it is sold Sale of StockShort-term: held for one year or less Long-term: Held for more than one year Note: Inherited property is ALWAYS long-term

20. SaveFirst Intermediate Training ● 2011 © Determining Shares Sold Specific Share Identification  Taxpayer CAN identify which shares were sold (received written confirmation from broker)  Basis = Adjusted basis of specific shares FIFO (First In, First Out)  Taxpayer CANNOT identify which shares were sold  Basis = Adjusted basis of oldest shares Sale of Stock

21. SaveFirst Intermediate Training ● 2011 © Form 8949 A new Form 8949 contains all capital gain and loss transactions.  Subtotals from Form 8949 are carried over to Schedule D, where gain or loss is calculated in aggregate. Short and long-term transactions are listed by these categories:  Form 1099-B, Box 3 that show basis  Form 1099-B, Box 3 that does not show basis  Form 1099-B not received A checkbox in Part I and Part II identifies the type of transaction reported. Note: Information will be reported first on a Capital Gain Worksheet.

22. SaveFirst Intermediate Training ● 2011 © Form 8949

23. SaveFirst Intermediate Training ● 2011 © Reporting Income from Sale of Stock Information from 1099-B is reported on Sch D From the Sales Price column in Schedule D Part I or II, link to the Form 8949 At the top of 8949, select type of transaction. From the Description of Property column, link to Capital Gain or Loss Transaction Worksheet.  Make sure to indicate type of transaction on Capital Gain or Loss Worksheet as well. Do not enter this information directly on Form 8949 or Schedule D.

24. SaveFirst Intermediate Training ● 2011 © Worthless Securities Worthless  no reasonable hope that investors will get anything for their holdings  Even if only worth pennies, shares are not worthless  Stocks or Bonds Treated as if sold on the last day of the tax year Sale of Stock

25. SaveFirst Intermediate Training ● 2011 © Carryover Losses Loss that can be claimed in one year is the lesser of  The total loss OR  $3000 ($1500 if MFS) Unused portion of loss can be carried over from year to year until total loss is claimed  remains long-term or short-term.  if not claimed in some year, unused loss is decreased by the amount that should have been claimed. Reported on Sch D Sale of Stock

26. SaveFirst Intermediate Training ● 2011 © Mutual funds Use cost basis OR average basis  If elected, average basis must be used for all accounts in the same fund in all succeeding years (this must be determined by broker). Capital gains are reported on 1099-DIVCapital gains are reported on 1099-DIV  Enter on interest statement; Taxwise will transfer amount to Sch D For more info, see Publication 550 Sale of Stock

27. SaveFirst Intermediate Training ● 2011 © Out of Scope Stock received as a gift Inherited stock with basis calculated other than using date of decedent’s death Bonds or other tax-exempt holdings with basis not determined Sale of Stock For TY 2010, Congress repealed the estate tax. If the decedent died between December 31, 2009 and January 1, 2011 the basis of the inherited property is neither the adjusted basis to the buyer nor the FMV at the time of death. Refer any taxpayers with stock inherited from a 2010 decedent to a paid preparer.

28. SaveFirst Intermediate Training ● 2011 © Practice John bought 100 shares of ABC stock at $10 each in 2004. Then, he bought 50 additional shares at $12 each in 2005. He had to pay a commission of $50 to acquire the 2005 stocks. What is his basis in the ABC stock? Sale of Stock

29. SaveFirst Intermediate Training ● 2011 © Practice John bought 100 shares of ABC stock at $10 each in 2004. Then, he bought 50 additional shares at $12 each in 2005. He had to pay a commission of $50 to acquire the 2005 stocks. What is his basis in the ABC stock? (100 shares * $10) + (50 shares * $12) + $50 commission = $1,650 Sale of Stock

30. SaveFirst Intermediate Training ● 2011 © Practice On March 15, Bill bought 1,000 shares of stock for $15,000, including commission. On March 15, one year later, he sold 600 shares of the stock for $7,800, net proceeds (shown on Form 1099-B). Is this short-term or long-term? Is this a loss or a gain? Sale of Stock

31. SaveFirst Intermediate Training ● 2011 © Practice On March 15, Bill bought 1,000 shares of stock for $15,000, including commission. On March 15, one year later, he sold 600 shares of the stock for $7,800, net proceeds (shown on Form 1099-B). Is this short-term or long-term? Is this a loss or a gain? Short-term. $7,800 - [($15,000 ÷ 1,000) x 600] = -$1,200 Sale of Stock

32. SaveFirst Intermediate Training ● 2011 © Practice 1991 100 shares $10/each 1992 200 shares $11/each 1993 100 shares $9/each In 2010, Alice sold 150 shares, but cannot identify which shares she sold. Which shares do we assume that she sold, and what is the basis? Sale of Stock

33. SaveFirst Intermediate Training ● 2011 © Practice 1991 100 shares $10/each 1992 200 shares $11/each 1993 100 shares $9/each In 2010, she sold 150 shares, but cannot identify which shares she sold. Which shares do we assume that she sold, and what is the basis? 100 shares from 1991 and 50 shares from 1992. BASIS = (100*$10) + (50*$11) = $1,550 Sale of Stock

34. SaveFirst Intermediate Training ● 2011 © Practice Ruth bought 200 shares of XYZ stock for $600. She paid a $50 fee to acquire the shares. She sold all of the shares for $900. She paid a 5% ($45) commission to sell the shares. Her 1099-B lists gross proceeds of $900. What is the adjusted basis? What is the gain or loss? Sale of Stock

35. SaveFirst Intermediate Training ● 2011 © Practice Ruth bought 200 shares of XYZ stock for $600. She paid a $50 fee to acquire the shares. She sold all of the shares for $900. She paid a 5% ($45) commission to sell the shares. Her 1099-B lists gross proceeds of $900. What is the adjusted basis? What is the gain or loss? Basis = $600 + $50 + $45 = $695 Gain = $900 – $695 = $205 Sale of Stock

36. SaveFirst Intermediate Training ● 2011 © Training Outline 1.Taxable Portion of a Pension Plan 2.Sale of Stock 3.Sale of Home 4.Schedule K-1

37. SaveFirst Intermediate Training ● 2011 © Sale of Home Taxpayers can exclude $250,000 ($500,000 if MFJ) of the gain from taxable income.  Meet Ownership AND Use Tests.  Not excluded gain in two years prior to current sale of home Sale of Home

38. SaveFirst Intermediate Training ● 2011 © Ownership and Use Tests In the 5 years preceding date of sale, taxpayer must  Own the home for at least 2 years (either spouse if MFJ)  Live in the home as his/her main home for at least 2 years (both spouses if MFJ) Can be different 2-year periods Sale of Home Important: If either spouse does not meet requirements, it is OUTSIDE THE SCOPE OF VITA

39. SaveFirst Intermediate Training ● 2011 © Determining Main Home Taxpayers CANNOT choose  Must live in the home most of the time;  In same location as place of employment, organizations, church, banks  Other family members live there  Address for bills and homestead exemption  Address listed on tax returns, driver’s license, car registration, voter registration. Sale of Home

40. SaveFirst Intermediate Training ● 2011 © Reporting the Gain GAIN = AMOUNT REALIZED – ADJUSTED BASIS Selling price: Total amount received from sale Amount realized: Selling price - selling expenses Basis:  The price of purchase OR  FMV on date of decedent’s death (inherited property) Adjusted basis: Additions/improvements useful life > 1 year Sale of Home

41. SaveFirst Intermediate Training ● 2011 © Reporting the Gain Not reported unless greater than exclusion amount  UNLESS taxpayer receives 1099-S (reported, but not taxed) Part II of Schedule D (Long Term Gains) CANNOT deduct losses  If taxpayer receives a 1099-S, he/she must report a loss of “0” on Sch D Sale of Home

42. SaveFirst Intermediate Training ● 2011 © Training Outline 1.Taxable Portion of a Pension Plan 2.Sale of Stock 3.Sale of Home 4.Schedule K-1

43. SaveFirst Intermediate Training ● 2011 © Schedule K-1 Reports income from  Partnership  S-corporation  Estate  Trust Schedule K-1

44. SaveFirst Intermediate Training ● 2011 © Schedule K-1

45. SaveFirst Intermediate Training ● 2011 © Types of Income Schedule K-1 Type if IncomeWhere to Report Taxable InterestSchedule B Tax Exempt Interest1040, Line 8b DividendsSchedule B Capital Gains/LossesSchedule D RoyaltiesSchedule E

46. SaveFirst Intermediate Training ● 2011 © Out of Scope Any income NOT on listed the previous slide Royalty income on a 1099-MISC Schedule K-1

47. SaveFirst Intermediate Training ● 2011 © Taxwise Exercises twonline.taxwise.com/training Exercises:  Austin  Fleming  Sterling