Campus Fellow Paperwork & Training Materials

2014 – 2015 Campus Fellow Intermediate & Advanced Tax Training A Session

Campus Fellow Paperwork & Training Materials
Paperwork to be filled out and returned to trainer (signed): Campus Fellow Contract Media and Publicity Release Form Volunteer Information Form Acknowledgement of Risk and Release from Liability Form Volunteer Standards of Conduct Agreement (Form 13615) Confidentiality, Inventions and Property Agreement W-9 Gas Reimbursement/Meal Reimbursement (if applicable)

Welcome Page Agenda Training Summary Chart Training Notes Selections from Pub 4012 Kevin Kent – Campus Fellow Training Exercise #1 Mark Austin – Campus Fellow Training Exercise #2 Training Exercise Answer Keys

Intermediate Training
1) Basic Training Refresher 2) Alimony 3) State Tax Refund 4) Business Income 5) Retirement Income (with taxable amount) 6) Adjustments to Income 7) Itemized Deductions 8) Education Credit 9) Foreign Tax Credit

Basic Scope Refresher Preliminary Interview
Review I/I Form and collect forms Verify photo IDs and SS cards Determine personal exemption, dependency exemptions and filing status Tabs A, B and C in Pub 4012

Basic Scope Refresher Preparing the Return in TaxWise
Complete the “Interview” through the dependents section Fill out “Main Info” and “Dependents” forms(s) Complete Form 1040 Complete AL-40 Complete Gen Use, Gen Disclosure and Prep Use Review the return

Forms of Income Wages: W-2 (line 7) Interest: 1099-INT (line 8)
Dividends: 1099-DIV (line 9) Unemployment: 1099-G (line 19) Social Security Benefits: SSA-1099 (line 20) Gambling Winnings: W2-G (line 21) Prize/Award Money: 1099-MISC (line 21)

Credits Child and Dependent Care Expenses Credit
Link: Line 48  2441 Retirement Savings Contribution Credit Link: Line 50  8880 Child Tax Credit $1,000 max. per child (TW calculates, line 51) Credit for the Elderly and Disabled Link: Line 53  Sch R Earned Income Credit Fill out Sch EIC and Sch EIC Wkt Additional Child Tax Credit Refundable portion of CTC (TW calculates, line 65)

Savings Bond Purchases
Add and complete Form 8888 Enter the banking information If a taxpayer invests in savings bonds, ONLY fill out the routing and account numbers on the Form 8888. If a taxpayer does not invest in savings bonds, fill out the routing and account numbers on the Main Info form and on Form 1040, line 74.

Alabama Return Personal exemptions Dependents Filing status
Taxpayers receive a personal exemption if AL even if they CAN be claimed as a dependent by someone else. Dependents Taxpayer provided over 50% of his/her support and is related to the taxpayer by blood NOT cousins, friends or foster children Filing status Taxpayers can only claim Head of Family if they are unmarried/legally separated at the end of the year Non-taxable income Unemployment and Social Security

Basic Training Refresher
Please review the Basic Training Slides at

TaxWise Practice: Kent Exercise
Review I/I and Notes Line 7: Wages Line 8: Interest Skip seller-financed mortgage for now Line 9: Dividends Skip foreign tax paid and capital gain distributions for now Line 19: Unemployment Line 20: Social Security Line 21: Other Income Line 48: Child and Dependent Care Line 64a: EIC

Alimony A payment to or for a spouse or former spouse under a separation or divorce instrument Person RECEIVING the alimony must report it as income on line 11 Person PAYING the alimony can subtract it as an adjustment on line 31

Alimony May include: Does NOT include:
Medical bills, housing costs and other expenses Does NOT include: Child support or voluntary payments outside

Alimony vs. Child Support
Child support payments from a separation or divorce instrument will stop once the child is grown.

Alimony Information You need the EXACT amount from a divorce or separate instrument executed after 1984 Amount of alimony reported on one tax return as income must match the alimony adjustment amount on the spouse’s tax return

Reporting Alimony Income
Line 11  enter amount of alimony received No worksheet for reporting alimony income Do NOT need Social Security number of the person who paid the alimony

State Tax Refund Taxpayers who receive a refund of state or local income taxes may receive Form 1099-G listing their refund in box 2. NOT everyone must include their state tax refund as taxable income.

1099-G: State Tax Refund

State Tax Refund 2013 state tax refund may be taxable and need to be reported (usually Alabama) Conditions in which 2013 state tax refund is taxable: Received a refund on a state return (Alabama) Itemized Deductions in 2013 (Federal) AND Deducted state income tax instead of state sales tax when itemizing deductions (Federal)

2013 State Tax Refund Answer question in Box under line 9.
If NO, there are no additional forms If YES, Link: Line 10  St Tax Refund Complete the St Tax Refund Worksheet with information from the 2013 return

Info Needed from 2013 Return
State refund amount Sch A, line 5a, income taxes Sch A, line 5b, general sales tax Total itemized deductions amount Form 1040, line 40 Filing status Taxable income amount Form 1040, line 43

State Tax Refund in TaxWise
Enter in the amounts: Line 1: enter AL and state refund amount Line 2: income taxes from Sch A, line 5a Line 2: general sales tax from Sch A, line 5b

St Tax Refund in TaxWise
Enter in the amounts: Line 6: total itemized deductions Line 7: filing status Line 12: taxable income amount

Purpose of St Tax Refund Wkst
Taxpayers who itemized deductions and received a state or local refund may have to include all, part, or none of the refund in their federal taxable income. St Tax Refund Wkt calculates the amount that is taxable. If a taxpayer does not have a copy of the previous year’s return, Link: Line 10  Scratch Pad and enter the full amount of the state tax refund.

St Tax Refund

Business Income Income from personal business (sole proprietor) or independent contractor Income can be reported on: 1099-MISC (with an amount in Box 7, Nonemployee Compensation) W-2 (with Statutory Employee checked in Box 13) 1099-K (Merchant Card and Third Party Payments) Taxpayer’s books and personal records Link: Line 12  Sch C-EZ or Sch C

Form 1099-MISC

Form W-2

Form 1099-K

Business Income Having a part-time business (even in addition to another job) may still be self-employment income and need to be reported on line 12 Remember: Income that was not reported on Form W-2, 1099-MISC or 1099-K still needs to be reported as cash payments.

Example Andy works as an independent contractor for a painting company. He received a 1099-MISC from the company that shows he made $10,000. He also received $2,000 in cash payments from a few different people for the work he completed, but he did not receive a 1099-MISC for the $2,000. What is Andy’s total business income that needs to be reported on Line 12?

Example - Answer Andy must include the amounts from both the 1099-MISC and cash payments. His total business income that must be reported is $12,000.

Business Income vs. Other Income
An activity qualifies as a business if the primary purpose for engaging in the activity is for income or profit and the taxpayer is involved in the activity with continuity and regularity Link: Line 12  Sch C or Sch C-EZ Other Income A sporadic activity or a hobby does not qualify as a business Hobby: undertaken for pleasure during leisure time (not for profit) Link: Line 21  multiple forms

Business Income Terms Business expenses: amounts that are ordinary and necessary to carry on the business Cash method of accounting: reports all income when received and deducts all expenses when paid Inventory: the items the taxpayer buys or makes for resale for others Depreciation: the cost of items that are expected to last more than a year should be spread over a period of years, rather than deducted in the year of purchase

Business Income Conditions that must be met for us to file a tax return with business income: Less than $5,000 of business expenses (Sch C-EZ) Less than $10,000 of business expenses (Sch C) Cash method of accounting No inventory Does not want to depreciate Must report a profit: No net loss! Gross Receipts – Business Expenses Only one business—If taxpayer owns a business (Sch C-EZ) More than one business must use Sch C No employees

Sch C vs. Sch C-EZ Sch C-EZ is just the simplified version of the Sch C Use the Sch C-EZ if there are few business expenses and only one business Less than $5,000 Use the Sch C if there are a lot of business expenses and more than one business $5,000 to $10,000 Sch C meets ALL of the requirements of the Sch C-EZ on the previous slide EXCEPT: Can report a loss However: Business income with a net loss is out of VITA scope!

Net Profit/Loss Net Profit/Loss = Gross Receipts – Expenses

Reporting Gross Receipts:
1099-MISC, Box 7 Cash Payments W-2, Statutory Employee 1099-K

1099-MISC Income reported in Box 7 on 1099-MISC is considered self-employment income and should be reported on a Sch C or Sch C-EZ Link: Line 12  Sch C-EZ or Sch C Then, Link: Gross Receipts Line  1099-MISC DO NOT JUST ADD THE 1099-MISC!

Cash Payments CASH INCOME must also be reported on this line by linking to a scratch pad and entering the amount of cash income Link: Line 12  Sch C or Sch C-EZ  Gross receipts line  Scratch Pad

W-2: Statutory Employee
Make sure to check the Statutory employee box on the W-2 in TaxWise: Then check the box at the bottom of the W-2 in TaxWise in the Instructions: If you forget to check the box, the amount will show up on Line 7 (wages, salaries and tips)!

W-2: Statutory Employee
Link: Line 12  Sch C or Sch C-EZ  Gross Receipts Line  Scratch Pad

1099-K Link: Line 12  Sch C or Sch C-EZ  Gross Receipts Line  Scratch Pad

Deductible Business Expenses
Advertising Car and Truck Expenses Commissions and Fees Insurance Other Interest Legal and Professional Services Office Expense Rent or Lease – Vehicle, Machinery and Equipment Repairs and Maintenance Supplies Taxes and Licenses Travel/Meals and Entertainment Utilities

Advertising Costs associated with promoting the business through various means: Yellow pages Newspapers Magazines Billboards Racing sponsors Television spots

Car & Truck Expenses A taxpayer who uses a car/truck in a business may be able to deduct the costs of operating and maintaining the vehicle Vehicle expenses are calculated using the standard mileage rate Actual expenses include depreciation, which is out of our scope

Commissions and Fees Commissions are paid to both individuals and businesses

Insurance Insurance policies and coverages are deductible for the business operation Property Automobile (business vehicles only) Malpractice If the standard mileage rate is used, no deduction is allowed for automobile insurance premiums Health insurance is NOT deductible

Other Interest Interest paid on operating loans, but not mortgage interest

Legal and Professional Services
Fees paid to professionals, such as attorneys, accountants, appraisers and engineers

Office Expense Supplies such as pens, paper, postage, etc.

Rent or Lease Rental fees for cars, trucks, vans, machinery, equipment and other personal property Leases of more than 30 days are out of scope

Repairs and Maintenance
Repairs on equipment, automobiles, office space and buildings are some possible expenditures

Supplies Costs for general operating supplies not associated with the cost of goods sold

Taxes and Licenses Taxes and license fees paid in the operation of the business: State and local sales taxes imposed on the taxpayer as the seller of goods or services Real estate and personal property taxes Certain licenses and regulatory fees

Travel/Meals and Entertainment
Ordinary and necessary expenses of traveling away from home for business

Utilities Normal electric, gas, water and telephone
No deduction for personal expenses

Business Mileage Rates
If used for business purposes, taxpayer can receive a mileage deduction at the federal rate. Cannot deduct commuting miles. Cannot calculate depreciation (out of scope). For 2014, the rate will be 56.5 cents per mile On Sch C-EZ and Sch C, enter total miles

Sch C in TaxWise Link: Line 12  Sch C
Enter in the business information

Sch C in TaxWise Line A: Enter the type of business
Line B: Enter the Principal Business Code Help  Business 1099R and Country Codes Line C: Enter the business name, if no separate name, leave blank Line D: Employer ID Number (EIN), if any Line E: Enter the Business Address Line F: Check accounting method (only cash accounting is in VITA scope) Line G: Materially participate (on a regular, continuous and substantial basis) Line H: Business acquired in 2014? Line I: Make payments that would require filing of Forms 1099? Line J: Will the business file all required Forms 1099?

Sch C in TaxWise: Part I (Income)
1: Gross receipts, income reported on 1099-MISC with Box 7, W2 if the “Statutory Employee” box is checked, 1099-K or cash payments

Sch C in TaxWise: Expenses
Enter in the amounts for the qualified business expenses for lines 8-27

Sch C in TaxWise TaxWise Calculates!

Sch C in TaxWise: Part III (Cost of Goods Sold)
Out of Scope!

Sch C in TaxWise: Part IV (Vehicle)
Enter in the amounts and answer the questions TaxWise carries over the mileage expense for you

Sch C in TaxWise: Part V (Other Expenses)
Part V: Includes all ordinary and necessary expenses not deducted elsewhere on Sch C

Sch C-EZ in TaxWise Link: Line 12  Sch C-EZ
Enter in the business information

Sch C-EZ in TaxWise: Income & Expenses
1: Gross receipts income reported on 1099-MISC with Box 7, W2 if the “Statutory Employee” box is checked, 1099-K or cash payments (just like Sch C) 2: Total expenses (Link to a Scratch Pad) 3: TaxWise calculates net profit

Sch C-EZ in TaxWise: Vehicle
Enter in the amounts and answer the questions You NEED to enter in the mileage expense amount on Line 2 (Total expenses) in Part II by adding it to the Scratch Pad!

Self Employment Tax Must file Sch SE if self-employment earnings are over $400 Covers Social Security and Medicare taxes Complete Sch C or C-EZ first TaxWise automatically calculates the tax onto Line 56

Record Keeping Good records will help the taxpayer do the following:
Monitor the progress of their business Prepare their financial statements Identify source of receipts Keep track of deductible expenses Prepare tax returns Support items reported on tax returns

Record Keeping The law does not require any specific kind of records. Taxpayers can choose any system suited to their business. Supporting documents: purchases, sales slips, paid bills, invoices, receipts, deposit slips, cancelled checks, payroll, other transactions usually found in accounting journals and ledgers

Two Major Categories of Retirement Plans
Defined Benefit Plan Funded by the employer Promises a specific monthly benefit at retirement May explicitly state the promised benefit as an exact dollar amount (e.g., $100 a month) May calculate benefit from a formula derived from salary, age, and number of years worked for company Generally, employees do not contribute to these plans

Two Major Categories of Retirement Plans
Defined Contribution Plan Does not promise a specific monthly benefit at retirement Employee and/or employer contribute money to your individual account in the plan Often, employee is responsible for choosing how these contributions are invested and deciding how much to contribute through pretax deductions Employer often matches a certain percentage of contributions

Types of Retirement Plans
Pension: series of payments for past work (DB) Annuity: series of payments from a contract with a company, trust or individual (DB or DC) 401(k) Plan: employer contributes part of the employee’s cash wages to a retirement plan on a pre-tax basis (not subject to income tax until employee receives it as a distribution from retirement account) (DC)

Individual Retirement Arrangements
Individual Retirement Arrangements: A personal savings plan that offers tax advantages to set aside money for retirement Earnings generally accumulate tax free until withdrawn Types: Traditional Roth: Out of Scope (usually – discussed in Advanced Training) SIMPLE: Out of Scope! SEP: Out of Scope!

Retirement Forms Retirement income can be reported on:
Form 1099-R  Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Form CSA 1099-R  Statement of Annuity Paid (civil service retirement payments) Form CSF 1099-R  Statement of Survivor Annuity Paid Form RRB 1099-R  Annuities or Pensions by the Retirement Railroad Board

Form 1099-R: Taxable Amount Determined
At this point, we are only going to prepare returns with 1099-R Forms that already have the taxable amount determined. Advanced Training: 1099-R with an empty Box 2a.

Lines 15/16: Retirement (Forms 1099-R)
Distributions from retirement accounts will be reported on some type of Form R. Since retirement income can be fully or partially taxable, this form can record both the gross distributions in Box 1 and the taxable portion in Box 2a As an intermediate volunteer you can complete the return ONLY if the taxable portion has already been figured (i.e. there is an amount recorded in Box 2a).

Form 1099-R: Taxable Amount Determined
If IRA Box is checked, link: Line 15a  1099R We can only prepare traditional IRA returns! If IRA Box is NOT checked, link: Line 16a  1099R

Form 1099-R: IRA (Line 15a) Link: Line 15a  1099R

Form 1099-R: IRA (Line 15a)

Form 1099-R: Pension/Annuity (Line 16a)
Link: Line 16a  1099R

Form 1099-R: Pension/Annuity (Line 16a)

Form CSA 1099-R Link: Line 16a  1099R

Form CSA 1099-R

Railroad Retirement Plans
RRB 1099 Treated like SSA 1099 (social security benefits) Line: 20a  1040 Wkt1 RRB 1099-R Treated like 1099-R (pension) Line 16a  1099R

Form RRB 1099: Part 1 Link: Line 20a  1040 Wkt 1

RRB 1099: Line 20a  1040 Wkt1 Railroad tier 1: Enter total benefits from Box 5 Medicare Parts B, C and D: Enter amount from Box 11 Federal tax withheld: Enter amount from Box 10

RRB 1099-R: Part 2 Link: Line 16a  1099R

RRB-1099-R: Line 16a  1099R Line 1: Enter Total Gross paid from Box 7
Click: Taxable amount not Determined (discussed in Advanced training) Line 4: Enter Withholding from Box 9 Line 7: Enter 7 for the code Line 9b: Enter employee contributions from Box 3 Click: Railroad retirement Distributions from retirement accounts will be reported on some type of Form R. Since retirement income can be fully or partially taxable, this form can record both the gross distributions in Box 1 and the taxable portion in Box 2a As an intermediate volunteer you can complete the return ONLY if the taxable portion has already been figured (i.e. there is an amount recorded in Box 2a).

Box 1, 2, 3 or Railroad Retirement?
On all 1099-R Forms in TaxWise ONE OF THE MOST IMPORTANT BOXES TO CORRECTLY CHECK IN TAXWISE!! DO NOT SKIP THIS FOR ANY 1099-R!

Defined Benefits: Box 1 Taxpayer receives a set amount each month for retirement and is based on salary history and years which they worked at a company. Defined Contributions: Taxpayer's retirement depends on the amount of contributions made into an investment account and the performance of those investments contributed. Examples: 401(k), 403(b), employee stock ownership plan, profit-sharing plan. When a taxpayer has a 1099-R, the first thing you should do is determine if it is defined benefits or defined contributions. A retirement plan is a defined benefit plan, also known as a traditional pension plan, if the taxpayer receives a set amount each month for retirement. This amount is based on salary history and the number of years the taxpayer worked at the company. With a defined benefits plan, the employer assumes the risk because it is the employer’s responsibility to make contributions and invest the money. Defined contributions plans are retirement plans which the employee’s retirement depends on the amount of contributions made into an investment account and the performance of those investments contributed, thus placing the risk on the employee. Examples of a defined contribution plan is a 401(k), 403(b), employee stock ownership plan, and profit-sharing plan.

Defined Benefits vs. Defined Contributions
Defined Benefit Plans – Box 1 – are NOT taxable in Alabama To find out if a retirement plan is Defined Benefits or Defined Contributions Consult online list ( Consult Site Coordinator Manual Call the company that administers the plan Call the Alabama Department of Revenue Call the IRS Luckily, you don't really have to remember all of these details. What you do need to remember is that Defined Benefits Plans are NOT TAXABLE at the state level. What is not up to you, however, is to decide what type of plan a taxpayer has. Most of our volunteers are not financial planning experts, so in order to avoid errors, everyone must look up the type of plan in one of three ways 1. You can consult the list of Defined Benefits plans on the Impact Alabama Website. This list (which becomes more comprehensive every year) lists the most common defined benefits plans in the state. 2. Unfortunately, the list is not completely all-inclusive. If a plan is not on it, you must contact either the plan administrator, whose number can be found on the R. 3. If you can't get a hold of the administrator, you can also contact the IRS. There is one shortcut to this process. All civil servants receive defined benefits plans. If your taxpayer is a retired teacher, city employee, soldier, etc, you can go ahead and check Box 1.

Defined Benefits vs. Defined Contributions
All retired civil servants (teachers, city employees, soldiers, etc.) have Defined Benefits plans 401(k)s are NOT Defined Benefits Luckily, you don't really have to remember all of these details. What you do need to remember is that Defined Benefits Plans are NOT TAXABLE at the state level. What is not up to you, however, is to decide what type of plan a taxpayer has. Most of our volunteers are not financial planning experts, so in order to avoid errors, everyone must look up the type of plan in one of three ways 1. You can consult the list of Defined Benefits plans on the Impact Alabama Website. This list (which becomes more comprehensive every year) lists the most common defined benefits plans in the state. 2. Unfortunately, the list is not completely all-inclusive. If a plan is not on it, you must contact either the plan administrator, whose number can be found on the R. 3. If you can't get a hold of the administrator, you can also contact the IRS. There is one shortcut to this process. All civil servants receive defined benefits plans. If your taxpayer is a retired teacher, city employee, soldier, etc, you can go ahead and check Box 1.

Defined Benefits or Defined Contributions?
You can also ask the taxpayer the following questions to help you reach a decision: Do you receive the same amount every pay period? (If yes  Defined Benefits) BOX 1 Did your employer match your retirement contributions? (If yes  Defined Contributions) Were your contributions placed into an investment account? (If yes  Defined Contributions) If the employer matched the employee’s contributions, then the plan is a 401(k). This is a Defined Contributions plan. However, make sure that this plan is a Traditional IRA. If IRA SEP/SIMPLE is checked, it is out of VITA scope.

On all 1099-R Forms in TaxWise ONE OF THE MOST IMPORTANT BOXES TO CORRECTLY CHECK IN TAXWISE!! DO NOT SKIP THIS FOR ANY 1099-R! Defined Benefits RRB-1099R (Railroad retirement) Note: Do NOT check Box 2 or 3

Example Joe has been receiving his retirement payments for several years and has received a 1099-R. When you ask him if he knows what kind of plan it is, he says he has no idea but he knows it is from his employment as a teacher. Is this a defined benefits or defined contributions plan?

Example – Answer Defined benefits plan – BOX 1 All civil servants will have a defined benefits plan.

Example Maria began receiving her retirement payments this year and was issued a1099-R. She tells you that this is being drawn from an investment account that she would contribute to and her former employer would match that contribution. Is this a defined benefits plan or defined contributions plan?

Defined contributions plan
Example – Answer Defined contributions plan Specifically, this is a 401(k) plan.

Example Charles has been receiving his retirement for seven years. Every month, he receives $100. Is this a defined benefits plan or defined contributions plan?

Defined benefits plan – BOX 1
Example – Answer Defined benefits plan – BOX 1

Example Steve comes in with a Form RRB-1099R. Is this a defined benefits plan, defined contributions plan or railroad retirement plan?

Railroad retirement plan
Example – Answer Railroad retirement plan

Defined Benefits Retirement Plans
FOR A DEFINED BENEFITS PLAN, CLICK BOX 1 ON THE BOTTOM OF THE 1099-R IN TAXWISE! If it is Defined Benefits, you must CHECK BOX 1 on the 1099-R in TaxWise. Here is what the form looks like. Box one is on the left side around the middle. All it says is “Box 1”--the form gives no other information about what it is for. It is up to you to remember that you must always check it for defined benefits plans, so that that particular 1099 R is not figured in to the Alabama return.

1099-R Codes: Box 7 1: Early distribution, no known exception (in most cases, under age 59 ½) 2: Early distribution, exception applies (under age 59 ½) 3: Disability 4: Death 5: Prohibited transaction 6: Section 1035 exchange (tax-free exchange of life insurance, annuity or endowment contracts) 7: Normal distribution 8: Excess contributions 9: Cost of current life insurance protection A: May be eligible for 10 year tax option B: Designated Roth account distribution D: Excess contributions plus earnings/excess deferrals G: Direct rollover and rollover distribution

Rollover Tax-free distribution Why? Example:
The money is really not going to be used, it is still be saved for retirement—it’s simply being rolled over into a new qualified retirement savings plan or back into the same retirement account Example: Julia left her job at Dog Food Company, but wanted to take her retirement account with her to her new job—Julie is going to take a full tax-free distribution of her account and roll it over to a new qualified retirement savings plan

Rollover Tax-free distribution Code G will be in Box 7 of the 1099-R
In TaxWise: Enter the top portion of the 1099-R as usual Make sure to enter Code G Fill out the Exclusion Worksheet Check the rollover box (Form 1040) Provide an explanation for the rollover

Rollover Enter the amount the taxpayer rolled over
Check the Box and type F9 Provide an explanation

Disability Pension Income
Why would a taxpayer have disability pension income? Perhaps they had an accident that rendered them totally and permanently disabled Disability payments may be coming from a qualified retirement pension plan The income is therefore going to be treated like wages, instead of retirement income UNTIL the taxpayer reaches the designated retirement age for that specific plan.

Disability Pension Income
Code 3 on a 1099-R Enter the 1099-R like normal in TaxWise Check to see if taxpayer has reached retirement age for that specific plan If taxpayer isn’t sure, may need to consult retirement paperwork or contact plan manager Don’t just rely on a previous year return—previous tax preparer might not have entered in correctly If taxpayer has not reached retirement age, click Check if disability and taxpayer is disabled and verify that amount appears on Line 7 as wages If taxpayer has reached retirement age, do NOT check that box and verify that the amount appears on Line 16 as retirement pension income

Disability Pension Income (Reported on 1099-R)

Incorrect Code on 1099-R If a taxpayer has an incorrect code on a 1099-R, he/she should contact the retirement company and get the issue resolved If the retirement company refuses, then the taxpayer must enter the 1099-R as it is written on the 1099-R If an additional IRA tax is calculated (due to an early distribution)but it does not apply (because it should actually be a normal distribution), then: Link: Line 58  5329 to correct the incorrect code See site coordinator if this situation arises

Form 5329 Enter 12 as the exception number
Enter the full amount of the retirement distribution (line 1 of 1099-R) that was incorrectly coded The amount of the additional tax that was previously on Line 58 of the 1040 should then be removed

TaxWise Practice – Kent Exercise
Line 10: State Tax Refund Line 12: Business Income Lines 15: IRA Distributions People’s Trust & Yale Security Line 16: Pensions & Annuities Retirement Services Program Skip Alpine Pension Fund for now

Adjustments to Income Basic life expenses that help decrease taxable income Found on Lines of Form 1040 Half of Self-Employment Tax Early Withdrawal Penalty Alimony IRA (traditional) Contributions Student Loan Interest College Tuition Payments Jury Duty The adjustment section of the 1040 appears on page one right after the Income section. Lines list the available adjustments. Though VITA volunteers are not qualified to work with all adjustments, we can handle those for Educator expenses, half of self-employment tax, early withdrawal penalties, alimony, ira contributions, student loan interest, tuition and fees deduction, and jury duty pay given to employer.

Half of Self-Employment Tax
Offsets the tax burden placed on individuals who do not have employers to pay half of their taxes. TaxWise will automatically calculate this adjustment on Form 1040, Line 27 if you have completed a Schedule C. Since employers normally pay ½ of the FICA taxes owed by every employee, individuals who are self-employed or independent contractors (in other words, those whose must file a Schedule C-EZ) are under an unfair tax burden. Consequently, they can take ½ their self-employment tax as an adjustment. Taxwise will automatically calculate and enter this amount if you have correctly filled out the Schedule C-EZ.

Penalty on Early Withdrawal of Savings
When a taxpayer withdraws savings before maturity, a penalty is incurred. Box 3: Form 1099-INT or Form 1099-OID Can deduct these penalties from income. TaxWise automatically calculates the adjustment on Form 1040, Line 30. Make sure you entered in ALL interest and penalties imposed correctly on the Sch B. Another adjustment that Taxwise will automatically calculate is one for early withdrawal penalties. Just make sure you enter all penalties in the correct line of the interest statement on the Schedule B. Taxwise will pull these amounts straight to line 30.

Form 1099-OID

Alimony Paid Payment to a spouse or former spouse under a divorce/separation agreement. Child support and voluntary payments are NOT considered alimony. Alimony received is considered income. Deduct total alimony paid for the whole year, not just one month. Enter in amount taxpayer paid and the recipient’s SSN on Form 1040, Line 31. Alimony adjustments require a little more work on your part, but once again are fairly simple. The individual who PAYS the alimony takes the adjustment (the recipient must report the incoming alimony as income). You need only calculate the amount he/she paid for the entire year (often taxpayers report the amount they pay each month). Enter this amount, along with the social security number of the recipient on Line 31 of the A taxpayer MUST know the social security number of their ex-spouse in order to take the adjustment. Also Remember, Child support is NOT alimony and cannot be entered as an adjustment.

IRA Contributions Deduction
Pub 4012, Tab E-5 IRA: Individual Retirement Arrangements Personal savings plan that offers tax advantages to set aside money for retirement Earnings and gains on contributions are not taxable until withdrawal Contributions to a traditional IRA can be either deductible or nondeductible The next line, Line 32, is where the taxpayer can record any contributions made to an IRA. An IRA is an Individual Retirement Account. This is a personal savings plan that offers tax advantages on money set aside for retirement. For example, earning and gains on money in an IRA is not taxable until it is withdrawal. There are different types of IRAs (SIMPLE, ROTH, and traditional). Only contributions to a traditional IRA are eligible for the IRA contributions adjustment. And even these contributions can be deductible or nondeductible depending on other factors.

IRA Contributions Deduction
Eligibility Requirements: Only contributions to a traditional IRA are deductible Age Limit: must be under the age of 70 ½ at the end of the tax year Compensation: must have taxable compensation Time Limit: Contributions must be made by due date of filing the return Contribution limit is the lesser of earned income or: $5,500 ($6,500 if > age 50)

IRA Deduction: Joint Returns
If the taxpayers file a joint return and one spouse’s compensation is greater than the other’s compensation, then: Married taxpayers’combined contributions cannot exceed combined compensation. Neither spouse can contribute more than $5,500 ($6,500 if > age 50). Rules for the allowable contribution amounts get a little more complicated for couples filing jointly. When looking at the limit set by compensation both the husband and the wife are lumped together. Their COMBINED contributions cannot exceed their COMBINED compensation. However, an individual limit of $5,000 (or $6,000 for those over 50) remains for each individual. So assuming that their combined compensation is greater than $10,000, even if one spouse only contributed $4,000 the other cannot contribute $6,000.

IRA Deduction Link: Line 32  IRA Wkt Enter contributions on line 10

Student Loan Interest Pub 4012, Tab E-4
Up to $2,500 of interest paid during the year on a loan for qualified higher education expenses in the name of a: Taxpayer Spouse Dependent (when the loan was obtained) Note: Student must have been enrolled at least half-time in a program leading to a degree, certificate, or other credential. Student loan interest is the adjustment found on line 33. It is calculated on Worksheet 2 of the Each taxpayer can deduct up to $2,500 for interest paid on loans for the higher education of the taxpayer, his spouse, or an individual who was a dependent at the time of the loan. The student must have been enrolled at least half-time in a program leading toward some degree, certificate, or other credential.

Student Loan Interest: Eligibility
Loan was for an eligible student and was paid within a reasonable period of time before/after obtaining the loan School IS: Accredited Qualified to participate in a student aid program or conduct internship/residency programs leading to a degree or certificate Taxpayer IS NOT: Filing as MFS Able to be claimed as a dependent If the taxpayer cannot be claimed as a dependent but his/her parents paid the student loan interest, the student can claim the deduction. What is more, the institution in which the student was enrolled must be both accredited and qualified to participate in a student aid program or conduct internship or residency programs leading toward a degree or certificate (which most accredited schools are). The taxpayer himself must also meet certain requirements: he must not be MFS or be able to be claimed by a dependent by anyone else. Once again, please note that it is not whether he IS claimed as a dependent, but whether he CAN BE claimed as a dependent that matters.

Student Loan Interest: Qualified Expenses
Qualified expenses include tuition and fees required for enrollment, room and board, transportation, books, and supplies Usually reported on Form 1098-E or another statement from the lender Amount must be reduced by scholarships, employer-provided benefits, or tax-free education expenses Finally, in order to be applied as an adjustment, money from the loans on which the interest is paid must have been used for qualified higher education expenses like tuition and fees, room and board, books, supplies and other necessary expenses. The amount must also be reduced by any scholarships, employer-provided benefits, or tax-free education benefits. Basically, a taxpayer cannot get a benefit for an expense that somebody else paid. If the students, institution, taxpayer, and expenses meet all requirements (which they normally do) you need only record the amount of interest in the appropriate line on Worksheet 2.

Form 1098-E

Student Loan Interest Adjustment
Link: Line 33  1040 Wkt2

Jury Duty Pay Given to Employer
Jury duty pay is taxable income. BUT: if that pay is given to the employer, it can be deducted as an adjustment. Enter the amount on Form 1040, Line 35, Jury duty pay you gave to your employer. The last adjustment we are going to talk about it for Jury Duty Pay that a taxpayer repaid to his/her employer. Hopefully, you remember from Basic training that taxpayers must report an Jury Duty Pay received as “other income.” Nevertheless, many employers agree to continue paying an employee with jury duty their normal wages provided that the employee return any jury duty pay to them. They can subtract the amount that they pay back from their taxable income by recording it in Line 35 of the adjustment section. You can simply type the amount in the indicated line.

Adjustments to Income Line 31: Alimony Paid Line 32: IRA Contribution Line 33: Student Loan Interest

Itemized Deductions Every taxpayer can take a specific amount for a “standard” deduction Reduces taxable income There are certain designated expenses that a taxpayer can choose to list out separately, and, if they total more than the standard deduction, the taxpayer will “itemize” his deductions Reduces taxable income by a greater amount

When to Itemize A taxpayer can receive a larger deduction by itemizing if he/she has: At the Federal Level (higher standard deduction): Home mortgage payment Large number of medical bills At the State Level (lower standard deduction): Expenses that may/may not have been sufficient to justify itemization on the federal level Note: If a taxpayer is MFS and his/her spouse itemizes, the taxpayer must also itemize, regardless of whether the Standard Deduction would be higher

Qualifying Expenses Unreimbursed Medical Expenses
Charitable Contributions Taxes Home Mortgage Interest Miscellaneous Deductions

Unreimbursed Medical Expenses
A taxpayer can claim expenses for Him/Herself Spouse Dependents He/she can only deduct the amount that exceeds 7.5% of his/her AGI on federal returns 4% of his/her AGI on state returns

Covered Medical Expenses
Unreimbursed medical and dental expenses Eligible long-term care premiums Be sure the expenses were not paid with pretax dollars or reimbursed by an insurance company.

Deductible Medical Expenses
Co-pays to doctor, dentist, eye doctor Prescription drugs Cost of glasses or hearing aids Cost of medical equipment Health insurance premiums Long-term care insurance premiums (cap on amount based on age) Cost of surgery, operations Miles to and from doctor NOTE: For a complete listing of deductible and nondeductible expenses see Pub 502 on the IRS website

Nondeductible Medical Expenses
Life insurance policy premiums Funeral, burial, cremation costs Unnecessary cosmetic surgery Nonprescription drugs NOTE: For a complete listing of deductible and nondeductible expenses see Pub 502 on the IRS website

Medical Expenses in TaxWise (Click on the A Detail in the Loaded Forms Menu)
Enter in the amounts for: Medical miles Insurance Medicare (carries over from 1040 Wkt 1) Other medical expenses (prescriptions, glasses, etc.)

Charitable Contributions
Non-qualifying Organizations: Qualifying Organizations: Business Religious Civic/Political Charitable Social Educational Foreign Scientific Homeowners' Associations Literary

Deductible Items: Monetary donations Dues, fees, and assessments Fair market value (FMV) of clothing, furniture Uniforms required to be worn during service Unreimbursed transportation expenses Tolls, bus fare, parking fees, and cost of gas at 14 cents per mile IMPORTANT: The taxpayer must keep receipts!

FMV of Donated Goods If a taxpayer has made non-cash contributions to charity and does not have receipts, use the following resources to determine the FMV of donated items: Salvation Army Valuation Guide

Nondeductible Expenses: Raffle, bingo, lottery tickets Tuition Value of time of service Blood Contributions to individuals The FMV of any good received in exchange for a donation (i.e. t-shirts, cds, tote bags, etc.)

Limits to Charitable Contributions
Contributions that total more than 20% of their AGI may be able to deduct only a percentage of their contributions, and must carry over the remainder to a later tax year If taxpayers have >$500 of non-cash contributions, they need to be referred to a professional preparer if they want to deduct the full amount. Form 8283 (OUT OF SCOPE)

Recordkeeping Cash contribution Noncash contribution
Canceled check or bank statement Written communication from the charity Name of charity, date and amount Noncash contribution For each contribution < $250 Written communication, description, FMV For each contribution between $250 and $500 Written communication, description, FMV and acknowledgement of any goods received in return For each contribution > $500 Refer to professional preparer

Charitable Contributions in TaxWise (Click on the A Detail in the Loaded Forms Menu)
Enter in the amounts for: Charitable miles Charitable cash contributions Uniforms required for service FMV of other than cash contributions

Taxes Deductible Nondeductible
Taxes imposed on and paid by the taxpayer in 2014 Nondeductible Taxes the taxpayer pays for someone else Taxes someone else pays for the taxpayer Taxes not paid during 2014

Taxes Deductible Nondeductible State and local taxes Federal taxes
Real estate taxes (Property Tax) Hunting licenses Water/sewer State and local taxes on a new car purchase Taxes on alcohol, tobacco, or gas Ad valorem tax on car tags (total paid - $24.50) Utilities

Taxes Paid in TaxWise (Click on the Schedule A in the Loaded Forms Menu)
Enter in the amounts for: City/county real estate taxes (6) Personal property taxes (7) Ad valorem tax, make sure to subtract $24.50 before entering (8)

Home Mortgage Interest
Any interest paid on a loan secured by the taxpayer’s home, line of credit, or a home equity loan. Is generally reported on Form 1098 Only taxpayers who are legally liable for the debt can deduct the interest Taxpayers may have more than one mortgage or may have refinanced and have multiple statements Points: only points paid as a form of interest (for the use of money) can be deducted

Home Mortgage Interest
Note: Real estate taxes may be reported in Box 5 and should be entered on Line 6

Home Mortgage Interest in TaxWise (Click on the Schedule A in the Loaded Forms Menu)
Enter the amounts for: Home mortgage interest and points (10)

Nondeductible Interest
Personal interest personal loans car loans credit cards etc.

Casualty and Theft Losses
Out of Scope!

Miscellaneous Deductions
Schedule A, Lines 21-28 Union dues Uniforms (that cannot be worn in any other circumstance) Professional books, journals Small tools and supplies, used for business Employment-related educational expenses Includes educator expenses > $250 (after the adjustment) Expenses for looking for a new job Tax preparation fee from last year Safe deposit box Gambling losses up to amount of winnings

Miscellaneous Deductions in TaxWise (Click on the Schedule A in the Loaded Forms Menu)
Enter the amounts and descriptions for: Employment: job travel, union dues, job education, literary journal for work, educator expenses (21) Tax prep fees (22) Safe deposit box (23) Miscellaneous: literal journal not for work, gambling losses from W2-G (28)

Nondeductible Expenses
Burial or funeral expenses Wedding expenses Fees and licenses Fines, penalties, traffic tickets Home repairs and insurance Rent Insurance premiums (except health and mortgage) Losses from sale of home

Example Are the following expenses deductible?
Medical insurance premiums Vitamins Federal income tax Interest on car loan Church contribution Tax preparation fee from last year

Medical insurance premiums - YES Vitamins Federal income tax Interest on car loan Church contribution Tax preparation fee from last year

Medical insurance premiums - YES Vitamins - NO Federal income tax Interest on car loan Church contribution Tax preparation fee from last year

Medical insurance premiums - YES Vitamins - NO Federal income tax - NO Interest on car loan Church contribution Tax preparation fee from last year

Medical insurance premiums - YES Vitamins - NO Federal income tax - NO Interest on car loan - NO Church contribution Tax preparation fee from last year

Medical insurance premiums - YES Vitamins - NO Federal income tax - NO Interest on car loan - NO Church contribution - YES Tax preparation fee from last year

Medical insurance premiums - YES Vitamins - NO Federal income tax - NO Interest on car loan - NO Church contribution - YES Tax preparation fee from last year - YES

Itemized Deductions (Alabama Return)
If the taxpayer is itemizing deductions on the Federal and State returns or if the taxpayer is just itemizing on the State return, you always enter the itemized deductions on Sch A on the Federal return. Never start to itemize on the AL A. It is okay to leave the deductions on the Federal return even if the taxpayer does not have enough to itemize, because there is a good chance he/she can itemize on the State return. All of the information from the Sch A carries over to the AL A.

Itemized Deductions (Alabama Return)
All information will carry over from the Sch A to the AL A, but you will need to add a description if there is an amount listed on line 8 of the AL A. Usually is the property tax and/or ad valorem tax. Put multiple descriptions if necessary.

Line 40: Itemized Deductions

Paperwork to be filled out and returned to trainer (signed): Campus Fellow Contract Media and Publicity Release Form Volunteer Information Form Acknowledgement of Risk and Release from Liability Form Volunteer Standards of Conduct Agreement (Form 13615) Confidentiality, Inventions and Property Agreement W-9 Gas Reimbursement/Meal Reimbursement (if applicable)

Please bring back ALL training material to your scheduled B session!

2014 – 2015 Campus Fellow Intermediate & Advanced Tax Training B Session

Education Credits Offset higher education expenses paid during the year The student can be taxpayer, spouse, or a dependent Two types of credits available: American Opportunity Credit 40% (up to $1,000) is refundable Lifetime Learning Credit Nonrefundable credit

Education Credits Tuition amounts paid by the taxpayer are reported on a 1098-T and can be entered as a credit.

Education Credits: Eligibility
Filing status cannot be MFS Cannot be claimed as a dependent on someone else’s return Qualified expenses: tuition and fees required for enrollment Accredited institution CAN claim on the basis of expenses paid with student loans Taxpayer / student will often receive Form 1098-T

Expenses That Do Not Qualify
Room and board Insurance Medical expenses (including student health fees) Transportation costs Personal, living or family expenses Expenses for a course involving sports, games or hobbies, unless it is required for the degree/certificate

Education Credits: Dependents
When the student can be claimed as a dependent, Taxpayer must claim credit if taxpayer claims the exemption Student must claim credit if taxpayer does not claim exemption If the taxpayer claims the dependency exemption, any amount paid by the student is considered to have been paid by the taxpayer

American Opportunity (Hope) Credit Lifetime Learning Credit
Up to $2,500 per eligible student Up to $2,000 credit per return Available for the 1st 4 years of college Available for all years Student must be pursuing a degree or recognized education credential Student does not need to be pursuing a degree or credential Student must be enrolled at least half time Available for one or more courses No felony drug conviction on student’s record Felony drug conviction does not apply Expenses include tuition, fees, and course materials Expenses include only tuition and fees

Qualified Expenses for Credit
American Opportunity (Hope) Credit Qualified tuition and related expenses up to $4,000 per eligible student Includes expenses for course materials (books, supplies, and equipment needed for a course of study, whether or not they were purchased from institution) Link: Line 49  8863 Pg. 1

Qualified Expenses for Credit
Lifetime Learning Credit Expenses include only tuition and fees Course-related books, supplies and fees are included ONLY if they must be paid to the institution as a condition of enrollment Link: Line 49  8863 Pg. 2

Education Credits: No Double Benefits
The taxpayer CANNOT claim Both the American Opportunity (Hope) and Lifetime Learning credits for the same qualified tuition expenses Expenses paid with a tax-free scholarship, grant, or other assistance, including Pell grants (in other words, the taxpayer must subtract these scholarships from the total expenses before claiming either credit)

Qualified Expenses IMPORTANT!
Verify with the taxpayer that the amount in Box 1 or 2 of Form 1098-T is actually the amount paid in the current tax year for qualified expenses!

Payments for the Next Academic Year
Taxpayers can claim payments prepaid for the academic period that begins in the first three months of the next calendar year. Example: Michael pays $1,500 in December 2014 for the winter semester that begins in January 2015. He can use the $1,500 paid in December 2014 to compute his credit for 2014. However, he cannot count the $1,500 again on his 2015 return.

Determining the Amount of the Credit
Review the list of qualifying students and expenses and decide which credit is best. Enter each qualifying student and SSN on Form 8863 Enter the students’ qualifying expenses Include only qualified expenses Are reduced by untaxed benefits (scholarships, grants, etc.) Are reduced by amounts paid in previous years Do not exceed the limit for the credit

Education Credits in TaxWise

Line 23: Yes  Lifetime Learning (Line 31) No  American Opportunity (Line 24)

OR

Example James takes one course at a local community college. He received a Form 1098-T showing qualified tuition expenses of $1,000. He lives with his parents, who can claim him as a dependent. Who is entitled to claim the credit? Which credit?

Example – Answer If James’s parents claim him, they must claim the credit. If James’s parents do not claim him, James must claim the credit. Lifetime Learning Credit

Example LaQuandra is a sophomore enrolled at UAB full- time. She provides all of her own support. She paid $10,000 in 2013 for tuition and fees for enrollment to UAB. She received a tax-free scholarship worth $4,000, and paid the rest from a student loan in her name. Can LaQuandra claim an education credit? Which one? How much of her expenses are qualified expenses?

Yes American Opportunity Qualified expenses = $6,000 ($4,000)
Example – Answer Yes American Opportunity Qualified expenses = $6,000 ($4,000)

1) Basic Training Refresher 2) Alimony 3) State Tax Refund 4) Business Income 5) Retirement Income (with taxable amount) 6) Adjustments to Income 7) Itemized Deductions 8) Education Credit 9) Foreign Tax Credit 10) Residential Energy Credit

Foreign Tax Credit Taken if a taxpayer paid income tax to a foreign country; U.S. possession; or political subdivision, agency, or instrumentality of a foreign country. Foreign tax paid > $300 is out of our scope! We may see some foreign tax reported on a 1099-DIV in Box 6. Enter the amount of foreign tax paid on Form 1040, Line 47 You will probably have to deal with Education credits at the site. Chances of you running in to this next credit we are going to talk about—the Foreign tax credit—are much slimmer. But you have to know it for the test, so listen up. The Foreign Tax Credit is a nonrefundable credit intended to benefit individuals who have foreign income and have already paid taxes on it another country; a US possession; or a political subdivision, instrumentality, or other agency of a foreign country. Most this is investment income. If foreign tax is listed in box 6 of the 1099-DIV, and the amount is less than $300, you can report it directly on line 47 of the If it is more than 300, the taxpayer must go to a professional preparer.

Form 1099-DIV

Line 27: Foreign Tax Credit Line 49: Education Credit

Advanced Training 1) Credit for the Elderly or Disabled
2) 1st Time Homebuyer Credit Repayment 3) Unreported Tips (& Social Security/Medicare Taxes) 4) Retirement (taxable amount not determined) 5) Sale of Stock 6) Sale of Home 7) Schedule K-1 8) Injured Spouse/Deceased Taxpayer 9) Rental Income 10) Finishing the Return 11) Additional Responsibilities

Elderly & Disabled Credit: Schedule R
Taxpayer is Over 65 AND/OR Retired and on disability benefits before the mandatory retirement age Elderly are seldom eligible because of income limits. Mandatory retirement age is set by a taxpayer’s employer. TaxWise automatically calculates this credit on a Schedule R.

Schedule R in TaxWise TaxWise will calculate this credit if the date of birth is provided. Be sure to include the taxpayer’s Social Security benefits, regardless of their taxability, to ensure the calculation is correct! Link: Line 53  Sch R

Line 59b: Repayment of First-time Homebuyers Credit (Form 5405)
Individuals who took $7,500 credit in 2008 to buy a home had to begin to repay in 2010 At least $500 (1/15 of that owed) has to be paid and reported in “Additional Taxes” section on Line 59b Link: Line 59b  5405 Pg. 2

Filling Out Form 5405 Line 1: If the taxpayer ceased using the home as the main home, enter the date Line 4: Enter the amount of credit claimed Line 5: Enter the amount of credit repaid in prior years Line 8: Enter the amount the taxpayer is repaying for the year; has to be at least $500

Form 5405 in TaxWise

Line 7: Wages, Salaries, Tips Form W-2 (Unreported Tips)

Reported Tips Tips totaling more than $20/month
Usually reported to employer Already totaled in Box 1 of Form W-2. Allocated tips of any amount Appear in Box 8 of W-2 Tips not reported to employer Must be reported to the federal government on a Form 4137

Tips If taxpayers have jobs in which tips are normally received (waiter, bellhop, hotel housekeeper, etc.), make sure to ask about any tips received. >$20/month at one job and reported to employer: Appear on W-2, boxes 1, 5 and 7 >$20/month at one job and not reported: Report on line 4 of Form 4137 Subject to SS and Medicare taxes <20/month at one job and not reported: Report on line 5 of Form 4137 NOT subject to SS and Medicare taxes

Line 7: Tips Not Reported (Form 4137)
Link: Line 7  Form 4137 (Enter in unreported tips on Line 4 or Line 5)

Unreported Tips (SS and Medicare Taxes)
Unreported tips entered on Form 4137 will display on Line 7, Form 1040 Form 4137 also calculates the employee portion of social security and Medicare taxes. These taxes will automatically display on Line 57, Form 1040

Taxable Portion (Retirement)
Depending on employee contributions, income from retirement plans can be: Fully taxable Partially taxable Not taxable

Determining the Taxable Portion
Typically, the taxable amount is reported in Box 2a of the 1099-R If not, use the Simplified Method to calculate the tax-free portion of each pension payment There are two methods used to figure the taxable portion of each pension or annuity payment: The General Rule The Simplified Method Unless an exception applies, retirees must use the Simplified Method for annuity payments from a qualified plan. A qualified plan is established by an employer to provide retirement benefits for employees and their beneficiaries. Employees typically do not pay taxes on plan assets until the assets are distributed; furthermore, earnings on qualified plans are tax deferred. Taxpayers who have been using the General Rule to figure the taxable portion for past years should be referred to a professional tax preparer.

Form 1099-R If the taxable amount is NOT determined in Box 2a, use the Simplified Method!

The Simplified Method If the taxpayer made after-tax contributions toward the pension, a portion of the annuity payment is not taxable. The Simplified Method calculates the non-taxable amount. Generally, if the starting date of the payments was prior to July 2, 1986, the Simplified Method would not apply. If the taxpayer used the 3-year rule, the annuity is fully taxable. If he used the general rule, refer him to a professional tax preparer.”

Info Needed to Use Simplified Method
Cost in plan at start date (from 9b of 1099-R) Age of retiree (and spouse if a joint annuity) at start date Number of months for which payments were received in 2014 Amount recovered tax free in prior years (if applicable)

If You Are Missing Information
Age of retiree (or spouse) at starting date: Look at past year returns and confirm with taxpayer Consult with the IRS Call administrator of the plan (find phone number on 1099-R or online) Amount that has already been excluded: Look at previous year’s return The Simplified Method is used to calculate the tax-free portion of each pension or annuity payment. The Simplified Method Worksheet calculates the taxpayer's cost basis for each monthly payment. The number of monthly payments is based on the taxpayer's age (and the spouse's age if a joint/survivor annuity is selected by the taxpayer) on the annuity start date. Using the Simplified Method Worksheet at the bottom of the 1099-R form on TaxWise, you can figure the tax-free portion of each pension/annuity payment by dividing the taxpayer's cost in the contract by the total number of expected monthly payments. The table in the worksheet will help determine the number of monthly payments based on the taxpayer's age (or the combined ages if a joint and survivor annuity is elected) on the annuity start date. Taxpayer's cost basis ÷ Number of monthly payments = Monthly Tax-Free Portion If preparing a paper return, use the Simplified Method Worksheet found in the Form 1040 or Form 1040A Instructions to calculate the taxable portion. Do not forget to include any amounts in box 4 of Form 1099-R in the Payments section of the tax return. If taxpayer cannot provide the necessary information, refer to last year’s tax return or consult with the IRS.

Simplified Method Enter in the amounts for:
Line 1: Cost in plan at start date from 9b of 1099-R Line 2: Age at start date Line 4: Number of months payments were received in 2014 Line 5: Amount recovered tax free in prior years

Simplified Method Do NOT enter an amount if Box 2a of the 1099-R in TaxWise if the amount was blank on the actual 1099-R form. TaxWise will calculate the taxable portion from the Simplified Method and will carry it over to Form 1040, line 16b. Remember: You need to determine if the plan is defined benefits/contributions. Check Box 1 if it is defined benefits.

Investment Income Investment property produces investment income in the form of: Interest Dividends Capital Gains

What are Capital Gains? Sale, exchange, or redemption of mutual fund shares Sale of stock! Reported on a 1099-B Sale: Transfer of shares for money Exchange: Transfer of shares for other shares Redemption: Fund reacquires shares in exchange for money or property

Form 1099-B

Sale of Stock Gain = Amount Realized – Adjusted Basis
In Layman’s terms... Gain = Money You Get – Money You Paid Basis: original cost of the asset Adjusted Basis: original cost of the shares of stock increased or decreased to account for commissions, fees, depreciations, etc.

Determining Gain or Loss
Gain: amount realized is GREATER than adjusted basis Loss: amount realized is LOWER than adjusted basis

Needed Information from 1099-B
Basis or Adjusted Basis Holding Period Long or Short Term Proceeds from Sale If any of this information is missing from the 1099-B, contact the stockbroker; if the basis cannot be determined, the basis is zero.

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

Gross vs. Net Proceeds Gross proceeds Net 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

Gross vs. Net Proceeds If the Gross Proceeds Box is checked, report the broker’s commission/fees on Form 8949 Pg 1, Column g

Holding Period Holding period starts the day after the property is acquired and continues through the day it is sold Short Term: held for one year or less Long Term: held for more than one year Inherited property is ALWAYS long term

Determining Shares Sold
Specific Share Identification Taxpayer CAN identify which shares were sold (received written confirmation from broker) Basis = adjusted basis of specific shares First In, First Out (FIFO) Taxpayer CANNOT identify which shares were sold Basis = adjusted basis of oldest shares

Reporting Income from Sale of Stock
Information from a 1099-B is reported on Sch D Information from sale of stock may also be reported on a statement from the investment company

Reporting Income from Sale of Stock
Line 13 (short term) Sch D Pg 1 1b, 2, or Pg 1 (A, B, or C) 1a Cap Gn Wkst Line 13 (long term) Sch D Pg. 1 8b, 9, or 10 8949 Pg 2 (A, B, or C) 1a Cap Gn Wkst

Reporting Sale of Stock: Short Term
Line 13 (short term) Sch D Pg 1 1b, 2, or Pg 1 (A, B, or C) Link from 1b: 1099-B has basis reported (A) Link from 2: 1099-B does not have basis reported (B) Link from 3: sale of stock is NOT reported on a 1099-B (C)

This is the 8949 Pg 1 – Do NOT type anything on this form Line 1a Cap Gn Wkst A separate 8949 Pg 1 must be completed for each type of A, B, or C transaction

(a): from box 9 of 1099-B 1099: enter A, B, or C TSJ: taxpayer, spouse, or joint (b): from box 1b of 1099-B (c): from box 1a of 1099-B (d): from box 2 of 1099-B (e): from box 3 of 1099-B (g): enter in commissions/fees (unless reflected in box 2 of 1099-B)

Reporting Sale of Stock: Long Term
Line 13 (long term) Sch D Pg 1 8b, 9, or Pg 2 (A, B, or C) Link from 8b: 1099-B has basis reported Link from 9: 1099-B does not have basis reported Link from 10: sale of stock is NOT reported on a 1099-B

This is the 8949 Pg 2 – Do NOT type anything on this form Line 1a Cap Gn Wkst A separate 8949 Pg 2 must be completed for each type of A, B, or C transaction

(a): from box 9 of 1099-B 1099: enter A, B, or C TSJ: taxpayer, spouse, or joint (b): from box 1b of 1099-B (c): from box 1a of 1099-B (d): from box 2 of 1099-B (e): from box 3 of 1099-B (g): enter in commissions/fees (unless reflected in box 2 of 1099-B)

Remember: Form 8949 Different types of transactions:
A: Basis reported on a 1099-B B: Basis not reported on a 1099-B C: 1099-B not received A taxpayer with different types of transactions must file separate 8949s

Sch D in TaxWise Part I: Short Term Capital Gains/Losses
Part II: Long Term Capital Gains/Losses Part III: Summary Sch D is where the information carries over to and the aggregate GAIN or LOSS is reported

Carryover Losses Loss that can be claimed in one year is the lesser of
The total loss OR $3,000 ($1,500 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 Report carryover losses on Sch D Pg 1 Line 6 (short term) or line 14 (long term)

Reporting Carryover Losses: Sch D

For more information, see Publication 550
Mutual Funds Taxpayer will receive Form 1099-DIV and 1099-B 1099-DIV reports capital gain distributions 1099-B reports sale of shares in the mutual fund itself 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-DIV Enter on dividend statement; TaxWise will transfer amount to Sch D For more information, see Publication 550

Worthless Securities Worthless securities: stocks or bonds
No reasonable hope that investors will get anything for their holding Even if only worth pennies, shares are not worthless Treated as if sold on the last day of the tax year Out of scope for VITA!

Sale of Stock: Out of Scope!
Stock received as a gift Stock received as a part of Employee Stock Option Plan Inherited stock with basis calculated other than using date of decedent’s death Bonds or other tax-exempt holdings with basis not determined 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.

Sale of Stock - Review If the basis cannot be determined, what amount is reported as the basis? ZERO! How do you determine the adjusted basis for inherited property? FMV of the property on date of decedent’s death How do you determine if inherited property is long term or short term? Inherited property is always long term!

Sale of Stock - Review If a taxpayer CANNOT identify which shares were sold if he/she has multiple forms of stock, how do you determine which shares to report? FIFO (First in, first out) True or False: If a taxpayer has different types of transactions (A, B, and C), he/she can report all types on the same 8949 form FALSE: A taxpayer with different types of transactions must file separate 8949s

Example John bought 100 shares of ABC stock at $10 each in Then, he bought 50 additional shares at $12 each in He had to pay a commission of $50 to acquire the 2005 stocks. What is his basis in the ABC stock?

(100 shares x $10) + (50 shares x $12) + $50 commission =
Example - Answer John bought 100 shares of ABC stock at $10 each in Then, he bought 50 additional shares at $12 each in He had to pay a commission of $50 to acquire the 2005 stocks. What is his basis in the ABC stock? (100 shares x $10) + (50 shares x $12) + $50 commission = $1,650

Example On March 15th, Bill bought 1,000 shares of stock for $15,000, including commission. On March 15th, one year later, he sold 600 shares of the stock for $7,800, net proceeds (shown on a Form 1099-B). Is this short term or long term? Is this a loss or a gain?

Example - Answer On March 15th, Bill bought 1,000 shares of stock for $15,000, including commission. On March 15th, one year later, he sold 600 shares of the stock for $7,800, net proceeds (shown on a Form 1099-B). Is this short term or long term? Is this a loss or a gain? Short term loss: $7,800 – [($15,000 ÷ 1,000) x 600] = $(1,200)

Example shares $10/each shares $11/each shares $9/each In 2014, Alice sold 150 shares, but cannot identify which shares she sold. Which shares do we assume that she sold, and what is the basis?

Example - Answer shares $10/each shares $11/each shares $9/each In 2014, Alice 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 x $10) + (50 x $11) = $1,500 FIFO!

Example 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/loss?

Example - Answer 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/loss? Adjusted Basis = $600 + $50 + $45 = $695 Gain = $900 – $695 = $205

Briefly review Elderly Credit, Homebuyer Repayment and Tips Forms Line 16: Pensions & Annuities Retirement Services Program Alpine Pension Fund NOTE: The IRA box should NOT be checked on the Alpine Pension Fund 1099-R Line 13: Sale of Stock Line 9

Sale of Home Taxpayers can exclude $250,000 ($500,000 if MFJ) of the gain from taxable income If they meet Ownership AND Use tests Not excluded gain in two years prior to current sale of home If the taxpayer can exclude all of the gain, it is not necessary to report the sale A loss cannot be deducted, but taxpayers still need to report the loss

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 Important: If either spouse does not meet requirements, it is OUTSIDE THE SCOPE OF VITA Ownership test: own the home for at least 2 years of the 5 years preceding date of sale Use test: line in the home as the main residence for at least 2 years of the 5 years preceding date of sale The two year does not have to be consecutive. It can be any 24 months of the 5 years. Taxpayers who owned and used a home for less than two years (they do not meet the ownership and use test) may be able to claim a reduced exclusion under certain conditions. These include selling the home due to a change in place of employment (beyond a certain distance), health or unforeseen circumstances. If any apply, refer the taxpayer to a professional tax preparer. Reduced exclusion computations/determinations are beyond the scope of VITA/TCE.

Determining Main Home Taxpayers CANNOT choose their main home!
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 A taxpayer's main home is the residence where the taxpayer lives most of the time. It does not have to be a traditional house. It simply has to be the residence where the taxpayer lives most of the time. A taxpayer's main home can be a: House Houseboat Mobile home Cooperative apartment, or Condominium (house or apartment) The taxpayer's main home may also be a rented house or apartment. Taxpayers who have more than one home, cannot choose which home to designate as their main home

GAIN = AMOUNT REALIZED – ADJUSTED BASIS
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 (pool, roof, additional room, etc.) The selling price is the total amount the taxpayer (seller) received for his or her main home. It includes money, all notes, mortgages, or other debts taken over by the buyer as part of the sale, and the fair market value of any other property or services that the seller received. If the taxpayer received Form S, Proceeds From Real Estate Transactions, use it to figure the selling price for the taxpayer's home. Box 1 shows the date of sale (closing) and box 2 shows the gross proceeds received from the sale of his or her main home. For taxpayers who did not receive a Form 1099-S, use sale documents and other records. If the taxpayer can exclude the entire gain from a sale in 2010, the person responsible for closing the sale (for example, a real estate broker or settlement agent) generally will not have to report it on Form 1099-S. If a Form 1099-S is issued and you determine that the gain is excludable, the sale should be shown on Schedule D to notify IRS that the gain is excludable. Selling expenses include commissions, advertising fees, legal fees, and loan charges paid by the seller, such as points. The basis in a home is determined by how the taxpayer obtained the home. For example, if a taxpayer bought or built a home, the basis is what it cost the taxpayer to buy or build that home. If a taxpayer received a home through an inheritance or as a gift, the basis is either its fair market value or the adjusted basis of the home. If the taxpayer inherited the home, the basis is its fair market value on the date of the decedent's death, or the later alternate valuation date chosen by the representative for the estate. The adjusted basis is the taxpayer's basis in a home increased or decreased by certain amounts. Increases include additions or improvements to the home such as installing a recreation room or putting on a new roof. In order to be considered an increase, an addition or improvement must have a useful life of more than one year. Repairs that maintain the home in good condition are not considered improvements and should not be added to the basis of the property. Decreases to basis include deductible casualty losses, gains a taxpayer postponed from the sale of a previous home before May 7, 1997, or certain credits.

Reporting the Gain Gains are NOT reported unless greater than the exclusion amount! Unless taxpayer receives 1099-S (reported, but not taxed) Report on 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 Proceeds from the sale of a main home that meet the ownership and use tests must be reported only if the gain is greater than the taxpayer's allowed exclusion; only the excess must be reported. Gain from the sale of a home that is not the taxpayer's main home will generally have to be reported as income. In both cases, the gain is taxable gain and must be reported on Schedule D. If the home was used for business purposes or as rental property, the gain would be reported on Form 4797 and the taxpayer should be referred to a professional tax preparer. If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of a main home cannot be deducted. If all the gain is excludable, there is no entry to Schedule D. If there is gain above the excludable maximum, record the full transaction on one line on Schedule D and, on the next line, put "IRC Section 121 Exclusion" and reduce the gain by the exclusion.

Reporting a Loss on Sale of Main Home
If a taxpayer has a loss on the sale of a main home and a 1099-S was received, you must report the loss on Form 8949 even though it is NOT DEDUCTIBLE Link: Line 13  Sch D Pg 1  line 10  8949 Pg 2  Cap Gn Wkst

Schedule K-1 Reports the taxpayer’s share of income or distributions from partnerships, S Corporations, and some estates & trusts The only Sch K-1 Income in our scope: Interest Dividend Capital Gain/Loss Royalty Income Schedule K-1 is used to report the taxpayer's share of income and other distributions, deductions, and credits from partnerships, S corporations, and some estates and trusts by the payee. S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

Schedule K-1 The income, other distributions, deductions, and credits will be reported on Form 1041, Form 1065, or Form 1120S by the payee. The fiduciary of a domestic decedent's estate, trust, or bankruptcy estate uses Form 1041 to report income to the taxpayer. Partnerships use Form 1065, Schedule K-1 to report the taxpayers' share of the partnership's income, deductions, credits, etc. Although the partnership is not subject to income tax, taxpayers are liable for tax on their share of the partnership income, whether or not that income was distributed. Corporations use Form 1120S, Schedule K-1 to report the taxpayers' share of the corporation's income (reduced by any tax the corporation paid on the income), as well as any deductions, credits, etc. Taxpayers are liable for tax on their share of the corporation's income, whether or not that income was distributed.

Types of Income on Sch K-1
Type of Income Where to Report Taxable Interest 8a  Sch B  1b  Interest Stmt Tax Exempt Interest Dividends 9a  Sch B  5a  Dividend Stmt Capital Gains/Losses Sch D (see slide 256) Royalties 17  Sch E Pg 1  1*C  K1 P/S Pg 1  Line 7/6 Income reported on Schedule K-1 will be included on the taxpayer's return in various places depending on the type of income.

Reporting Tax Exempt Interest
Link: Line 8a  Sch B  Interest Stmt Enter in E for NAEOB Enter amount from Box 8 of 1099-INT or from the Schedule K-1 to NAEOB amount

Reporting Royalties Link: Line 17  Sch E Pg 1  1*C  K1 P/S Pg 1
Enter the name of partnership or S Corporation Indicate P/S (for partnership/S Corporation) Enter Federal ID number Enter amount from Box 7 of Sch K-1 to Line 7/6

Sch K-1: Out of Scope Topics
Any income NOT listed on the previous slide! Any other income, deductions, credits, etc., reported on Schedule K-1 is out of scope for VITA/TCE, and the taxpayer should be referred to a professional tax preparer. Royalty income is in scope for the VITA/TCE Program only when the source document of the royalty income is a Schedule K-1. For these investors, the depletion allowance would already have been figured for them by the partnership or S corporation.

Seller-Finance Mortgages
If a taxpayer is collecting payments on a seller-financed mortgage, the interest received on the loan must be reported as income. Link: Line 8  Sch B Enter information in Part 1a: Seller-financed mortgages

Seller-Finance Mortgages
Enter the buyer’s name, address and social security number Enter the amount of interest received on the loan

Deceased Taxpayer Though it is best to see a will in order to make sure that the person filing for the decedent is doing so properly, it is not necessary We can trust an individual who claims to be the personal representative of the decedent If a taxpayer died in 2014 or 2015, we can e-file their return

Deceased Taxpayer Complete the tax return as normal
“Name line 2” must be completed on the Main Info sheet with the name of the person filing the return for the deceased person Type the percent (%) sign, followed by a space followed by the name This may be the surviving spouse if married filing jointly, or a personal representative Complete the tax return as normal The representative also needs to put his/her own address on the form

Injured Spouse If a taxpayer wishes to file MFS to avoid an offset of their refund against their spouse’s outstanding debts, suggest they file Form 8379, Injured Spouse Allocation When a joint return is filed and only one spouse owes a past-due amount, the other spouse can be considered an injured spouse Debts may include past due child support, student loans, or tax liability

Injured Spouse The injured spuse:
Must not be legally obligated to pay the past-due amount AND Must have made and reported tax payments or claimed a refundable tax credit If eligibility requirements are met, injured spouses may file Form 8379 to receive their share of the refund

Rental Income Payment received for renting a room or a home to a tenant is rental income reportable on Form 1040, Sch E Gross rental income may include: Ordinary rental payments Advanced rent Security deposits Payments for breaking a lease Expenses paid by the tenant Rental income is OUT OF SCOPE! Note: Confirm that taxpayer has NO rental income before completing the rest of the return.

Estimated Tax Payments
If tax due on certain income (self-employment, capital gains, royalties, etc.) exceeds certain limits, estimated tax must be paid quarterly by the taxpayer Also, taxpayers can apply a refund to the following year’s tax return Check previous year’s return and enter the amount of 2014 estimated tax payments and amount applied from 2013 return on Line 63

Estimated Tax Payments

Line 8: Seller-financed Mortgages Line 63: Estimated Tax Payments Alabama Return Direct Deposit Information

Finishing the Return Quality Review

Run Diagnostics

Run Diagnostics Correct all errors and then run the diagnostics again to make sure all errors were corrected Also pay attention to the warnings and overridden entries Do NOT create E-File (ONLY your site coordinator should do this)

Finishing the Return After you run diagnostics:
Make sure the preparer and quality reviewer names are listed on the I/I Form Note the status of the return on the I/I Form Print return (1 if E-Filing & 2 if paper filing) Assist with payment (voucher, addressing envelope…) Advise taxpayers they are ultimately responsible for all information provided Taxpayer and spouse must sign and date federal and Alabama returns File I/I Form in filing box Do NOT keep any personal documents!

Additional Duties Volunteer organization Crowd control
Appointment confirmation

Volunteer Organization
Make sure that everyone signs in Set a good example Place volunteers in stations Partner volunteers in such a way that they are both comfortable and competent Keep volunteers busy Enforce “Volunteer Etiquette”

Crowd Control Make sure each taxpayer signs in at the door
Direct taxpayers to the Intake and Interview forms Place taxpayers with available volunteers

Questions? You may complete the Campus Fellow Training Exercise #2 (Mark Austin) on your own for extra practice If you have any questions after this training, please our Training Coordinator, Seth Nelson

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