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

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

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

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

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

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

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

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

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

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

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

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

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

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

Add’l Tax on Tips Based on entries in Form 4137, TaxWise computes Social Security and Medicare taxes Carries additional tax amount to Form 1040 Line 58 NTTC Training – TY2015

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

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

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

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

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

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 1099-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

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

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

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

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

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

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

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

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

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

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

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

First Time Homebuyers Credit Payback

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

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

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 $400.00. NTTC Training – TY2015

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

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

FTHC Payback If disposed of home purchased in 2008 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

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

Home Sold or No Longer Main Home If taxpayer and spouse claimed the credit on joint return, each must file a separate Form 5405 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

Home Ceases to be Main Home Conversion to rental property; condemnation; foreclosure – Out of Scope See the general instructions for Form 5405 for additional repayment information NTTC Training – TY2015

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

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

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

Other Taxes Questions? Comments? NTTC Training – TY2015 46