1. Tax Law Basics
Pub 4012
The basics as presented in these slides apply to the federal return
Instructors might wish to highlight differences for state tax purposes, if any

2. Income Overview
Taxable income versus nontaxable income (including excluded income)
Earned income versus unearned income
NTTC Training – TY2015

3. Taxable Versus Nontaxable Income
Pub 4012 D-1
Basic tenet of the income tax code:
Income or gain, from whatever source derived, is taxable...
unless the code says it is not taxable
Table B on D-1 in Pub 4012 has examples of income that is not taxable
The term “not taxable” includes
Items that are “excluded” by a provision of the code or
Items that are made nontaxable by a provision of the code
For in-scope returns, it is not necessary to distinguish between the two
NTTC Training – TY2015

4. Taxable Versus Nontaxable Income
Even though not taxable, must input certain nontaxable income
Exempt interest income
Exempt interest income dividends
May affect other calculations
e.g., taxable portion of social security benefits
NTTC Training – TY2015

5. Earned Versus Unearned Income
Pub 4012 I-1
Definition differs – must check rules for particular benefit
Example:
For the earned income credit
Earned income does not include taxable scholarship income
For the gross income filing requirement of a dependent
Earned income does include taxable scholarship income
Ask participants to open Pub 4012 Page I-1
Earned income table shown is for EIC and Child Tax Credit purposes
Advise participants that the forms will guide them through the differences
E.g. for earned income credit, complete Sch EIC wkt – lines 1a and 1b
Note: for IRA purposes, taxpayer must have “compensation”
W-2
Sch C
Alimony income
NTTC Training – TY2015

6. Earned Versus Unearned Income
Earned income usually includes
(for in-scope returns):
Wages – Normally reported on Form W-2
Business Income – Reported on Schedule C
(there are more types of earned income)
Earned income does not include income that is excluded, such as Medicaid Waiver payments
These two are for in-scope returns
NTTC Training – TY2015

7. Earned Versus Unearned Income
Investment income is unearned income for in-scope returns – examples:
Interest
Dividends
Capital gains or losses
Royalties (not from own services)
A Taxpayer may establish that buying and selling securities is their business. If so they should be referred to a paid preparer
NTTC Training – TY2015

8. Earned Versus Unearned Income
Other types of unearned income for in- scope returns
Land rents
Unemployment
Retirement income
Social security benefits
(there are more types of unearned income)
NTTC Training – TY2015

9. Deductions and Credits
A grace of the law
If there is not a provision to allow the deduction, it is not deductible
To claim any credit, must satisfy all requirements
NTTC Training – TY2015

10. Deductions Reduce income otherwise subject to tax Types:
Adjustments to gross income
Itemized or standard deduction
Personal exemption deduction
Dependent exemption deduction
Adjustments appear on Page 1 of the 1040
Itemized deduction are on Schedule A and can be claimed instead of the standard deduction
TaxWise will select the one that yields the lowest tax
Personal exemptions for each taxpayer or dependent claimed also appear on Page 1 of 1040
There are times when not all can be claimed – covered earlier in Lessons 05-06
NTTC Training – TY2015

11. Credits Reduce tax liability dollar for dollar Nonrefundable
Limited to amount of tax
No cash back
Refundable
Cash back if exceed tax liability
NTTC Training – TY2015

12. Tax Law Basics
Comments? Questions?
NTTC Training – TY2015