1. Pub 4491 – Part 6 – Lesson 28 Pub 4012 – Tab H
Other Taxes
Pub 4491 – Part 6 – Lesson 28 Pub 4012 – Tab H
Form 1040 – Lines 57-63
Pub 17 – Chapters 6,10,17, 30

2. Other Taxes Self-employment tax
Social security and Medicare taxes on tip income
Additional taxes on IRAs and other qualified retirement plans
Repayment of first-time homebuyer credit
SRP for health insurance—See Lesson 3
Not reduced by nonrefundable credits
NTTC Training – TY2015

3. Self-employment Tax A tax in addition to the income tax
Composed of two elements
Social security
Medicare
TaxWise does it automatically when data entered on Schedule C
When a person goes to collect social security, his/her benefits may be better if they paid in more into the system
NTTC Training – TY2015

4. Self-employment Tax
Applies if net income from self- employment is $400 or more
Does not apply to a Notary Public
Does not apply to statutory employee (already withheld on W-2)
Special rules for ministers or church workers – out of scope
NTTC Training – TY2015

5. Self-employment Tax The additional tax: The tax Form In TaxWise
Refer to Form 1040 page 2
Emphasize that there are only payments and refundable credits that offset the self-employment tax
NTTC Training – TY2015

6. Self-employment Tax
Social Security portion 6.20% + Medicare portion 1.45% = 7.65% x 2 = 15.30% Both employer and employee portions paid by self-employed person
Temporary reduction in the employee portion of social security lapsed 2012
NTTC Training – TY2015

7. Self-employment Tax
“Employer” part is deductible in computing the self-employment tax Profit from business $10,000 Employer part (7.65%) 765 Net $ 9,235 Tax rate (combined) 15.3% Tax $ 1,413 TaxWise does the math on Sch SE!
Effective tax rate is 14.13%
This is the calculation reflected on Schedule SE
It explains the 92.35% factor used on Sch SE Line 5b
NTTC Training – TY2015

8. Self-employment Tax Adjustment
The deductible portion of the tax (the “employer’s” part) – Form 1040 Line 27:
TaxWise does it automatically!
NTTC Training – TY2015

9. Self-employment Taxes
Special situation:
Notary public – no Self-employment tax
Input exempt net profit from notary business on Sch SE Line 3
NTTC Training – TY2015

10. Self-employment Tax Notary Public Also check box on 1040 Pg 2 Line 57
NTTC Training – TY2015

11. Tip Income
Tip income included in W-2 Box 7 already had FICA and Medicare taxes withheld
Allocated tips shown in W-2 Box 8 have not
TaxWise automatically calculates add’l FICA and Medicare taxes on Form 4137
Put 17 Chapter 6
Additional Tip Income info in 09 Business Income slides
NTTC Training – TY2015

12. Unreported Tip Income
If employee keeps good records (tip log available free from IRS)
Can enter actual amount of all tips on Form 4137 instead of allocated tip amount
Will need to use a scratch page to adjust line 4 of Form 4137
NTTC Training – TY2015

13. Unreported Tip Income
If tips <$20/month were not reported to employer
Presumed included in allocated tips for income tax purposes and
Not subject to social security / Medicare tax (Form 4137 Line 5)
NTTC Training – TY2015

14. Tip Income – Self-Employment
If self-employed, enter tips on Sch C with other business income
NTTC Training – TY2015

15. Add’l Tax on Tips
Based on entries in Form 4137, TaxWise computes Social Security and Medicare taxes
Carries additional tax amount to Form Line 58
NTTC Training – TY2015

16. Additional Tax on IRAs, etc.
Pub 4491 – Part 6 – Lesson 28 Pub 4012 – Pages H-1 – H-2
Form 1040 – Lines 57-63
Pub 4012 – Tab H
Pub 17 – Chapters 6,10,17

17. Additional Tax on IRAs, etc. Form 5329
Distributions before 59½ not rolled-over (“early distribution”) (Pt I) – 10%* additional tax
Required Minimum Distribution (RMD) not taken after 70½ (Pt IX) – 50% additional tax
There are exceptions
* 25% for SIMPLE IRAs
If client has not taken RMD, they must correct the problem by taking out the missed amount
Results in two distributions in the year of correction
IRS will generally waive the penalty if taxpayer has corrected the situation and puts forth a reasonable excuse
NTTC Training – TY2015

18. Additional Tax on IRAs, etc. Form 5329
Other parts of Form 5329 are out of scope:
Part II: 10% tax on education and ABLE accounts
Parts III – VIII: 6% tax on excess contributions to various qualified accounts not removed by due date of return
Excess contributions can either be withdrawn, including earnings thereon
Or can be “used up” by not making an otherwise allowable contribution to the IRA
Applies to Traditional IRA and Roth IRA separately
6% applies to traditional IRAs, Roth IRAs, education savings accounts and medical savings accounts
NTTC Training – TY2015

19. Form 5329 in TaxWise 2015 Pub 17 Chapters 10 and 17 Form 1040 line 59
NTTC Training – TY2015

20. Part I: Early Distribution Exception Codes
Pub 4012 H-2
All plans (IRA and employer plans)
02 A series of substantially equal periodic payments
03 Due to total and permanent disabled
04 Due to death
05 The amount paid for medical expenses, minus >10% of AGI (or 7.5% if taxpayer or spouse age 65 or older) (same amount as would show on Sch A)
Even if medical or education expenses are used here, they can also be used as deductions or towards credits.
Note: The distribution can be taken for any reason, but if the taxpayer has incurred the medical expenses during the tax year, s/he can claim the exception(s). The funds are fungible so taking the distribution to replace the roof in May and then having medical in October means the taxpayer can qualify for the exception.
NTTC Training – TY2015

21. Part I: Early Distribution Exception Codes
Pub 4012 H-2
All plans (cont.)
10 Due to IRS levy
11 To reservists on active duty for 180 days or more
12 More than one exception code or other reason (see form), including distributions incorrectly coded on form R
Includes distributions incorrectly coded as 1, J or S in box 7 of 1099-R
See 5329 instructions or Pub 17 for further information
NTTC Training – TY2015

22. Part I: Early Distribution Exception Codes
Pub 4012 H-2
IRAs only:
07 The amount paid during the year for individual health insurance premiums while unemployed (see rules in Pub 590-B)
08 The amount paid during the year for qualified education expenses (including room and board), more details in later slides
09 Used to buy or build first main home (must be used within 120 days of distribution)
Even if health insurance or education expenses are used here, they can also be used as deductions or towards credits.
Generally, if you had no interest in a main home within 2 years of the date of acquisition for the home you are using, then you qualify as a first time home buyer.
Note: The distribution can be taken for any reason, but if the taxpayer has incurred the health insurance or education expenses during the tax year, s/he can claim the exception(s). The funds are fungible so taking the distribution to replace the roof in May and then having medical in October means the taxpayer can qualify for the exception.
NTTC Training – TY2015

23. Part I: Early Distribution Exception Codes
Pub 4012 Tab H
Other than IRAs only (employer plans)
01 After separation from service after the age of 55 (age 50 for public safety employee)
06 Made to an alternate payee under a Qualified Domestic Relations Order
NTTC Training – TY2015

24. Part I: Early IRA Distribution Exception Code 08
The amount of higher education expenses – special definition includes:
For self, spouse, foster child, adopted child or descendent of any of these
Does not have to be a dependent!
Tuition, fees, books, supplies and equipment required to enroll or attend
Special needs services expenses for special needs student
NTTC Training – TY2015

25. Part I: Early IRA Distribution Exception Code 08 (Cont)
The amount of higher education expenses- special definition includes (cont.):
If student is at least ½ time, room and board
Can be at-home room and board (based on allowance established by the education institution)
Reduced for nontaxable scholarships, grants or ESA distributions
See Pub 970 Chapter 9 for more details
Room and board amount may be limited – refer to Pub 970, Ch 9.
NTTC Training – TY2015

26. Part I Exercise
Joyce, age 50, has no medical insurance. She took a $10K distribution (code 1) from her traditional IRA in June 2015 when she broke her arm. Her total unreimbursed medical expenses for the year were $8K. Her AGI is $50K.
Q: What, if any, is the additional tax due on this distribution?
NTTC Training – TY2015

27. Part I Exercise Answer: $700
Line
Entry 1
$10,000 [Early distribution included in income] 2
Code 05 and $3,000 [Amount of early distribution not subject to additional tax] which is the $8,000 of medical expenses less 10% of her $50K AGI or $8,000 minus $5,000 = $3,000 3
$7,000 [Amount subject to additional tax] which is $10,000 minus $3,000 from Line 2 4
$700 [Additional tax = 10% of Line 3]
Line
Entry 1
$10,000 [Early distribution included in income]
Line
Entry 1
$10,000 [Early distribution included in income] 2
Code 5 and $3,000 [Amount of early distribution not subject to additional tax] which is the $8,000 of Medical Expenses less 10% of her $50K AGI or $8,000 minus $5,000 = $3,000 3
$7,000 [Amount subject to additional tax] which is $10,000 minus $3,000 from Line 2
Line
Entry 1
$10,000 [Early distribution included in income] 2
Code 5 and $3,000 [Amount of early distribution not subject to additional tax] which is the $8,000 of Medical Expenses less 10% of her $50K AGI or $8,000 minus $5,000 = $3,000
Note: Even though the medical expenses are used to offset the early IRA distribution, they can also be used as an itemized deduction on Schedule A
NTTC Training – TY2015

28. Part IX: Waiver Request for Failure to Take RMD
Taxpayer can request waiver of the additional tax for failure to take Required Minimum Distribution (RMD) from qualified retirement plan, including traditional IRAs
Counselor NOT expected to review all taxpayer plans and verify that required distributions were taken
NTTC Training – TY2015

29. Part IX: Waiver Request for Failure to Take RMD
Taxpayer needs to remedy the distribution shortfall by taking an additional distribution
Will result in more than one year’s distribution in the year of remedy
Then ask for waiver
NTTC Training – TY2015

30. Waiver Request – Failure to Take RMD
Part IX of Form 5329 pg 2
Note: Select 5329 for taxpayer or spouse
NTTC Training – TY2015

31. From all plans – not just one(s) missed
Part IX of Form 5329 pg 2
From all plans – not just one(s) missed
Moved to Part IX for TY 2015
Link to Explanation for Request of Waiver of Tax form and explain reason for request
NTTC Training – TY2015

32. Part IX of Form 5329 pg 2 Possible explanations (examples):
Clerical error (math goof)
Relied on Trustee who failed to make the RMD
TP impaired by health
Beneficiary not notified by Trustee that RMD had not been taken
IRS accepts most reasonable explanations
NTTC Training – TY2015

33. First Time Homebuyers Credit Payback

34. Intake/Interview – First Time Homebuyers Credit
Did taxpayer receive FTHC in 2008?
FTHC could have been claimed
In 2008 – subject to repayment
In 2009 – not subject to repayment and because 36-month test period has passed, will never be repaid
In 2010 – not subject to repayment and because 36-month test period has passed, will never be repaid
In 2011 – limited to certain eligible taxpayers and not subject to repayment and because 36-month test period has passed, will never be repaid
Certain uniformed services or Foreign Service employees of the intelligence community
NTTC Training – TY2015

35. First Time Homebuyers Credit Payback…
Taxpayers who claimed First Time Homebuyer’s Credit in 2008
Started repayment in 2010
Continue to make payments until full amount of credit is repaid
Can look up amount of credit still owed on irs.gov
Can pay more than the minimum due
Wasn’t really a credit – rather was a 15-year loan
NTTC Training – TY2015

36. 2010 Letter for 2008 Credit Thomas J. Hunter 123 Main Street
Your City, YS YZ
$6,000.00
$400.00
$5,600.00
$6,000.00
$400.00
$5,600.00 $
NTTC Training – TY2015

37. FTHC Payback – 2008
In TaxWise – enter original credit claimed in 2008, amount repaid to date and amount paying with this return – Form 5405, Pt II
Also add note to Taxpayer Diary or Taxpayer Reminder section of Prep Use form as reminder for next year
While if still main home for borrower(s), can enter repayment directly on 1040 line 59b and Form 5405 is not required, best practice is to not enter anything directly on 1040 if there is a supporting form.
NTTC Training – TY2015

38. Form 5405 in TaxWise Total Credit Received in 2008
Line 4 – Total Credit received in 2008
Line 5 – Credit repaid in 2010, 2011 , 2012, 2013, and 2014
Line 8 – Amount repaying in 2015
Credit repaid in previous tax years
Amount repaying in current tax year, usually $500 but can pay more
NTTC Training – TY2015

39. FTHC Payback
If disposed of home purchased in or home ceased to be main home, must generally repay balance of un-repaid credit with current tax return
Complete Part I of Form 5405
2009 and 2010 credits
Do not have to be paid back if home continued to be main home for next 36 months
2009 FTHC – 36-month test period should have expired in 2012
NTTC Training – TY2015

40. Exceptions
If home sold to someone not related to taxpayer, repayment limited to gain on sale – Part III of Form 5405
If home destroyed or sold through condemnation, and if new main home purchased within 2 years of event, can continue with annual payments (out of scope)
NTTC Training – TY2015

41. Home Sold or No Longer Main Home
If taxpayer and spouse claimed the credit on joint return, each must file a separate Form claiming half the credit (and half of any repayments) to notify IRS of status change
If taxpayer claimed the credit on joint return for 2008, but spouse died, enter half of credit (and half of any repayments)
The remaining half (deceased spouse’s half) does not have to be repaid
Home is no longer main home
If converted to business or rental
Have a new principal residence
NTTC Training – TY2015

42. Home Ceases to be Main Home
Conversion to rental property; condemnation; foreclosure – Out of Scope
See the general instructions for Form for additional repayment information
NTTC Training – TY2015

43. Quality Review Self-Employment Tax
Is the correct amount of self- employment tax shown on 1040 Page 2
Is ½ of the tax deducted on 1040 Page 1
NTTC Training – TY2015

44. Quality Review Early Withdrawal Penalty
Verify Form 5329 not applicable if not used
Verify Form 5329 if used
Verify First Time Homebuyers Credit if applicable – read instructions carefully
NTTC Training – TY2015

45. Taxpayer Summary Explain any additional tax Type Amount Why
NTTC Training – TY2015

46. Other Taxes
Questions?
Comments?
NTTC Training – TY2015 46