Tax Law Basics –Deductions 2016 U.S. Income Tax Filing · Necessity to file a return Standard...
Transcript of Tax Law Basics –Deductions 2016 U.S. Income Tax Filing · Necessity to file a return Standard...
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2016 U.S. Income
Tax Filing
Gary Koenig, BS CSc, MBA, CCP
Tax Law Basics
● All income is taxable (US or worldwide),
unless the law says it is not
● No deduction is allowed,
unless the law says it is
● No credit is allowed,
unless the law says it is
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Tax Law Basics – Income
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Gross Income
Minus adjustments
= Adjusted gross Income (AGI)
Minus deductions and exemptions
= Taxable Income
Tax Law Basics – Deductions
● Reduce income otherwise subject to tax
● Types:
� Adjustments to gross income
� Itemized or standard deduction
� Personal exemption(s)
� 1 – Single, MFS, HoH, QW
� 2 – MFJ
� Dependent exemption(s) (1 per dependent)
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Tax Law Basics – Credits
● Reduce tax liability dollar for dollar
� Nonrefundable
�Limited to amount of tax owed
�No cash back
� Refundable
�Cash back if exceed tax owed
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Tax Law Basics – Who Must File
Filing Status Under 65 65 or older (<1/2/1951)
Single $ 10,300 $ 11,850*
Married filing jointly
Both spouses
One spouse 65+
$ 20,600 $ 23,100*
$ 21,850*
Married filing separately $ 4,000 $ 4,000*
Head of Household $ 13,250 $ 14,800*
Qualifying Widow(er) $ 16,600 $ 17,850*
*Excludes Social Security
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Tax Law Basics – Who Must File
● Owe additional taxes
� Form 5329 – IRAs
� Unreported tips – social security / Medicare tax
� First Time Home Buyer Credit repayment
� ACA/Obamacare Payment/Refund� Received Form 1095-A
● $400 or more net self-employment income
● Over $108.28 of wages from a church
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Tax Law Basics – Who Should File
● Claiming refund of withheld taxes or estimated tax payments
● Claiming any refundable credit(credit independent of taxes owed)
� Earned Income Credit
� Additional Child Tax Credit
� Education Credits
● State return required
● Desire to help prevent identity theft
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Identity Theft (from prior year(s))
● IRS sends notices to taxpayers identified
as victims (or potential victims)
● Notice provides Identity Protection PIN
victim needs when filing 2015 tax return
� If you received a letter dated 1/4/16 with
PIN for 2014 return, IRS goofed (s/b 2015)
● If received IP PIN but lost it, call ID Theft
Toll-free Hotline: 800-908-4490
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Form 14039
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Tax Return Responsibilities
● Even if you have someone else prepare
your return …
� It’s your return and you are responsible
for accuracy of all data provided
� You must have accurate and complete
records if audited by IRS
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Details
Line-by
Line
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2015
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Details
Line-by
Line
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2015
2015
Tax Law Basics – Form 1040
● Identity, filing status and exemptions
● Income
● Adjustments (to income)
● Deductions and exemptions
● Tax and nonrefundable credits
● Additional taxes
● Refundable credits
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Form 1040 – Identity & Status
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15xxxx
Five Choices for Filing Status
● Single 4th
● Married filing jointly (MFJ) Best
● Married filing separately (MFS) Worst
● Head of household (HH) 3rd
● Qualified widow(er) (QW) 2nd
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Filing Status Determination
● Two criteria:
� Marital status on last day of tax year
�Federal definition – “married”
● Legal marriage under laws of any state or
country
● Does not include civil unions or registered
domestic partners
� Type of dependents, if any
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Pub 17 Ch 2
Living Situation Analysis
● Marital status as of 12/31
● Others living in home, if any
� Their relationship/dependency
� Who paid upkeep
● If widow(er)
� Date of death of spouse
� Any dependent children at home
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Filing Status Importance
● Many tax items affected by filing status
� Necessity to file a return
� Standard deduction
� Tax rate bracket
� Eligibility for certain credits
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Filing Status – Tax Rate
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Married Filing Jointly
● Married on last day of year
● Common law marriage
� If recognized in state where started
● Spouse died during current year/not
remarried
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Qualifying Widow(er)
● Spouse died in one of two past years
� Dependent child and/or stepchild lived in
home All year
� Grandchild not eligible
● Maintained home for child
� >50% of cost
● Can file QW for two years only
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Qualifying Widow(er)
● Advantages
� Standard Deduction – same as MFJ
� Uses MFJ tax rates
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Head of Household – Unmarried
● Provided home* for qualified child
� Might not be a dependent
● Provided home* for related dependent
● >50% cost of maintaining home for
dependent parents living elsewhere
* Paid more than 50% of cost of keeping up the home
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Head of Household – Married
● Lived apart all of last 6 months of year
● Provided home* for:
� Child, stepchild, or eligible foster child
for over six months
● No other relatives qualify
* Paid more than 50% of cost of keeping up the home
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Head of Household – Providing a Home
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Head of Household
● Key advantages
� Higher standard deduction than Single or
MFS
� Advantageous tax rate structure
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Single
● Not married as of December 31st
● Married, but legally separated
● No dependent children at home
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Married Filing Separately
● Taxpayer chooses to file MFS
● Spouse has already filed MFS
● Married but separated and not filing MFJ
● Rare cases – more advantageous
� Generally, no children in home
● TX is a community property state,
therefore, this can be messy
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MFS Disadvantages
● Highest tax rate/lower standard
deduction
● Cannot claim most tax credits
● Cannot deduct student loan interest
● Capital loss limit $1,500 (not $3,000)
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Exemptions
● Reduces taxable income
● Two Types
� Personal exemptions
� Dependent exemptions
�Qualifying child
�Qualifying relative
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Personal Exemptions
● Widow/er can file MFJ and claim two
personal exemptions in year of spouse’s
death
� If not remarried by 12/31
� If not divorced or legally separated on
date of death
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Dependent Exemption
● Person other than taxpayer or spouse
who entitles taxpayer to exemption:
� Qualifying child (which also includes
disabled adults)
OR
� Qualifying relative (which also includes
qualifying non-relatives)
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Tests to be a Qualifying Child /
Relative
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Dependency Terms
● Permanently and totally disabled
� Person cannot engage in any substantial
gainful activity because of a physical or
mental condition -AND-
� Doctor determines condition has lasted
or can be expected to last continuously
for at least a year or can lead to death
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Dependency Terms (cont.)
● Student
� A full-time student during some part of
each of any five calendar months of the
year
� Full-time is the number of hours or
courses the school considers to be full-
time
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Dependency Terms (cont.)
● Student (cont.)
� Attending a school that has a regular
teaching staff, course of study and
student body at the school
� Does NOT include on-the-job training
course, correspondence school, or school
offering courses only through the
Internet
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Multiple Uses of Dependent Info
● Dependent Exemption
● Dependent Care Deduction
● Earned Income Credit
● Child Tax Credit
● Education Credit
● Medical and Tertiary School Expenses
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Form 1040 – Income
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Taxable Versus Nontaxable Income
● Even though not taxable, must show
certain nontaxable income
� Exempt interest income
� Exempt dividend income
�May affect other calculations
e.g., taxable portion of social security
benefits
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Earned Versus Unearned Income
● Definition differs – must check rules for particular benefit
● Example:
� For the earned income credit� Earned income does not include taxable
scholarship income
� For the gross income filing requirement of a dependent� Earned income does include taxable
scholarship income
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Earned Versus Unearned Income
● Other types of unearned income
� Land rents
� Unemployment
� Retirement income
� Social security benefits
(there are more types of unearned
income)
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Interest Income – What Is It?
● Earnings on
� Bank, savings, and credit union deposits
� Certificates of Deposit
� Bonds (corporate or government)
� Money loaned out
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Interest Income – What Is It?
● It is not earned income
� Money, not a person, is earning the
income
● Reported in year earned
� Usually when posted to account
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Where to Find Interest Income
● Form 1099-INT
● Brokerage Statement
● Schedule K-1
● No tax form from payer
� Seller financed mortgage interest income
� Private or foreign payer
� Interest less than $10
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Interest Income
● Whether or not reported by the payer
on a tax form, all interest must be
included in the return
� Taxable
- OR -
� Exempt
� Other calculations can be impacted
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Interest Income
● All interest is taxable except:
� State or municipal obligations; including
�D.C.
�U.S. possessions
�See Pub 17
● U.S. obligations (T-Bills, Savings Bonds,
etc.) are fully taxable for federal tax
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Dividend Income – What is it?
● Payment by a corporation
● Paid to its shareholders
● Represents a portion of the
corporation’s earnings
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Dividend Income – What is it?
● Mutual funds “pay” to their investors
� Dividends from the fund’s income
�Dividend income from corporations
� Interest income from bonds/accounts
� Capital gain distributions from capital
transactions that the fund makes
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Dividend Income – What is it?
● Mutual fund dividends
� Dividend income from corporations
�Will be identified as ordinary/qualified
� Interest income from bonds/accounts
�Will be identified as exempt if from
exempt securities, e.g. state bonds
� But both are still dividends to the fund’s
shareholders
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Dividend Income
● Ordinary dividend income (not qualified)
� Taxed at regular tax rates
● Qualified dividend income
� A subset of Ordinary Dividends
� Taxed at capital gain rates
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Where to Find Dividend Income
● Form 1099-DIV
● Substitute 1099-DIV (brokerage or
mutual fund statement)
● Schedule K-1
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Dividend Income
● Reinvested dividends
� Really, two transactions
�Dividend income
�Purchase of more shares
� Payer effects both instantaneously
�Payers keep track of basis for covered securities (always taxpayer’s responsibility)
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Alimony Received
What is Alimony?
● Spousal support under separation or divorce instrument
● Usually stops if recipient remarries, may stop sooner
● Not subject to change based on factors such as age of a child
� Child/family support is NOT alimony
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Alimony Received
● Not earned income for
� Earned Income Credit
� Child tax credit
� Dependent care credit
�But IS “compensation” for IRA
Contributions
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Self-Employment Income
Is it a Business?
There are 3 choices
1. A business
2. Income producing, but not a business
3. Not entered into for profit (e.g. hobby)
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A Business
● Facts and circumstances:
� Profit motive
� Reasonable expectation of profit
� Means of livelihood
� Regular activity
� Conducted in a business-like manner
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Income Producing, Not a Business
● Facts and circumstances:
� Sporadic activity, e.g., one-time fee
� Gambling winnings
� Investing
� Sale of personal assets (e.g. yard sales,
Craig’s list, etc.)
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Not Entered Into for Profit
● Facts and circumstances:
� Model airplane contest
� Beer mug collecting
� Antique hunting, when not a business
● Usually, more pleasure driven than
income driven
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Self-Employment Notes:
● Taxpayer does not have to conduct
regular full-time business activities to be
self-employed
● Remember – all income is taxable unless
the law says it isn’t!
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What if it is NOT a Business?
● Income goes to Form 1040 line 21 “other”
● Deductible items go on Schedule A
� Usually subject to 2% of AGI (Lines 21 – 23)
� To produce or collect income or
� To manage or maintain income-producing property or
� To determine any tax
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What if it is NOT a Business?
● In some cases, deductible items go on
Schedule A, but are not subject to 2% of
AGI rule (Line 28)
�Gambling losses and expenses
�Certain other activities
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Capital Gains / Losses
● What is a capital gain?
� It’s your profit when you sell a capital
asset for more than you have in it
● What is a capital loss?
� It’s your loss when you sell a capital
asset for less than you have in it
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Capital Gains / Losses
● Ordinary income tax rates range from
10% to 39.6%
● Capital gain tax rates are much lower
� Usually 0% or 15% rate
� Could be 20% rate for very high incomes
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Capital Gain Distributions
● Capital Gain Distributions represent
share of profit from sale of assets within
mutual fund
� Always long term
� Taxed at capital gain rates
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Capital Asset Taxation
● Capital gain tax rates apply to “net long-
term gains” and qualified dividends
● Ordinary income rates apply to “net
short-term gains”
● Capital gains or losses come from the
sale* of capital assets
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*or other reportable event
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When is a Gain/Loss Not Reported
● Not reported if not a “sale or exchange”
� A gift is not sale or exchange
� Donation to charity is not sale or
exchange
� Bequest to heir is not sale or exchange
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What is a Capital Asset
● Generally, nonbusiness assets
● Securities are capital assets
� Stocks
� Bonds
� Mutual fund shares
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What is NOT a Capital Asset
● Copyright, a literary, musical, or artistic
composition, letter, memo or similar* are not
capital assets
* Held by the creator or letter recipient
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“Sort-of” Capital Assets
● Homes and other non-investment assets
� Capital assets for gains
� Personal assets for losses
(not deductible)
�Government is a profits-only partner!
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Sale of Principal Residence (“Main Home”)
● Generally not a taxable event if:
� Residence was main home
� Taxpayer satisfies ownership and use
tests
� Gain less than $250,000 ($500,000 MFJ)
� Taxpayer did not receive Form 1099-S
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What is a Main Home
● Where taxpayer lives most of the time
● Can be houseboat, mobile home, condo or co-op
● Must have cooking, sleeping and bathroom
facilities
● If more than one home, main home is one
taxpayer lives in most of the time
● Taxpayer cannot simply “choose”
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Sale of Main Home
● Report on tax return if
� Any part of gain is taxable
� Any time Form 1099-S is received
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Types of Retirement Income
● Pensions
● Annuities
● Social Security
● Individual Retirement
Arrangement (IRA) Distributions
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Retirement Income Reported on:
● Form 1099-R – Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans,
IRAs, Insurance Contracts, 401(k) plans etc.
● Form RRB 1099-R – Annuities or Pensions by the
Railroad Retirement Board
● Form CSA 1099-R – Statement of Annuity Paid
(civil service retirement payments)
● Form CSF 1099-R – Statement of Survivor
Annuity Paid
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“Pension” Distributions
● Reported on Forms
� 1099-R – company plans *
� RRB-1099-R – (green) Railroad Benefit
� CSA-1099-R – civil service, government
* Pension distributions include distributions
from 401(k), 403(b) and 457(b) plans
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Four Types of IRAs
● Traditional
● Roth
● Savings Incentive Match Plans for
Employees (SIMPLE)
● Simplified Employee Pension (SEP)
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Pub 17 Chapter 17
IRA Distributions
● Regular
● Required minimum distributions (RMD)
● Trustee to trustee transfer (not taxable)
● Rollover (not taxable if done correctly)
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Pub 17 Ch 17
Pub 590-B
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Traditional IRA Distributions
● Required Minimum Distribution (RMD)
� Must take required minimum
distribution – age 70½
� Must take by April 1 of year following
� Can avoid two distributions taxed in one
year by taking first in year turn 70½
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Pub 17 Ch 17
Pub 590-B
Traditional IRA Distributions
● Potential 10% additional tax for
distribution prior to 59½ (“too early”
penalty)
� 25% for SIMPLE distributions within 2
years and prior to 59½
● Exceptions may apply
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Traditional IRA RMD
● IRA administrator (trustee) optionally calculates RMD and notifies taxpayer of requirement and amount
● Taxpayer responsible to take RMD (either from one account or multiple accounts)
● 50% additional tax for amount not distributed (“too late” penalty)
● Can request waiver of additional tax using Form 5329 Part IX
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Roth IRA
● Contributions not deductible
● Distributions tax free if conditions met
� Pub 17, last page of chapter 17
� Pub 590-B
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Qualified Roth IRA Distributions
● No additional tax if:
� Made after the five-year period beginning with first contribution -AND-
� Made on or after age 59½ -OR-
� Disabled -OR-
� Death -OR-
� To pay up to $10,000 of certain qualified first-time homebuyer amounts
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Other Income
● Income not reported on other lines and
schedules
● Does NOT include rent or royalty income
which are reported on Sch E
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Examples of “Other” Income
● Gambling winnings including lotteries and raffles
● Reported on 1099-MISC, Box 3
● Reported on 1099-MISC, Box 7 (but “not a business”)
● 1099-LTC
● Jury duty pay and Poll Worker Pay (not on W-2)
● Other:
� Prizes and awards
� Medical study subject pay
� Cancellation of credit card debt
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Pub 17, pg 94
Cancellation of Debt
● Nonbusiness credit card debt
● Taxpayer must be solvent immediately
before debt cancelled
� Value of assets exceeds value of
liabilities
� Not in bankruptcy
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Cancellation of Debt
● Lenders must issue Form 1099-C if cancel
$600 or more of debt
� Less than $600 must also be reported as
income by taxpayer
● Cancelled debt included on Form 1040,
Line 21
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Long Term Care Payments
1099-LTC
● LTC Insurance Contracts –
� Generally reimbursements not taxable
� Per diem costs up to an aggregate limit
of $330/day are non-taxable
● Reported to taxpayer on 1099-LTC
● Complete Form 8853, Section C
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Accelerated Death Benefits
1099-LTC
● Insured has been certified by a physician
as terminally ill
� Fully excludible
● Certified as chronically ill
� Treated the same as paid under a
qualified long-term care insurance
contract
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Medicaid Waiver Payments
● Paid by state or county
● Paid to caregiver to provide nonmedical
support services to an individual in
caregiver’s home
● Frequently paid to care recipients own
family
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Difficulty of Care Payments
● IRS Notice 2014-7
� Treats “qualified Medicaid waiver
payments” as difficulty of care payments
� MUST be excluded from Income
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Form 1040 – Adjustments
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Adjustments to Income
● Educator expenses
● Health Savings
Account (HSA)
● Self-employment tax
● Early withdrawal
penalty
● Alimony paid*
● IRA contributions*
● Student loan interest*
● Tuition and Fees
● Jury duty pay given to
employer
* Further Explanations
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Alimony Paid – Line 31a
● Allowed if paid under Divorce/Separation
Agreement
● Must provide recipient’s Social Security No.
● Recipient must claim as income
● Child Support not deductible
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IRA Contribution – Line 32
● Age limits
� For traditional IRA – under 70½
� For Roth IRA – no age limit
�Note: Roth IRA contribution is not
deductible and will not show on line 32
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IRA Deduction – Line 32
● Can contribute lesser of $5,500 ($6,500 if age 50 or over) or taxable compensation
● Taxable compensation
� Wages, tips, bonuses, Sch C income, alimony
� Not interest, dividends, pensions, unemployment, social security
● Taxpayer has until end of filing season to make contribution for current tax year
● Actual amount depends on Taxpayer / spouse retirement plans, modified AGI, age and filing status
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Non-Deductible Contributions
● If taxpayer participates in employer’s
plan and AGI is too high
� Some or all of Traditional IRA
contribution may be nondeductible
● Roth IRA contributions
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Student Loan Interest – Line 33
● Interest paid on qualified student loan for post secondary education expenses
● Qualified Loan:
� Expenses of taxpayer, spouse, or dependent (when loan originated)
� For education expenses paid within reasonable time since loan was opened
� For education provided when student enrolled at least ½ time in degree program
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Pub 17, Ch 19
Student Loan Interest – Line 33
● Qualified Loan (cont)
� Loan cannot be from relative
� Taxpayer cannot be filing MFS
� Taxpayer cannot be claimed on someone else’s return
� Loan cannot be from qualified retirement plan
� Taxpayer must be liable on the loan
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Student Loan Interest – Line 33
● Maximum $2,500 per year
● Phases out as AGI increases
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Form 1040 Page 2 – Tax & Credits
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Nonrefundable
Deductions
● Subtractions from a taxpayer’s adjusted gross income (AGI)
● Reduces amount of income taxed
● Most taxpayers have a choice
� Standard deduction
� Itemizing deductions
● Use type of deduction that results in lower tax
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Deductions
● If taxpayer files MFS and spouse
itemizes deductions
� Taxpayer must itemize -OR-
� Take a standard deduction of ZERO
● If taxpayer files MFS with standard
deduction and spouse then files MFS
with itemized deduction, taxpayer must
amend return
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Standard Deduction
● Fixed reduction of AGI based on:
� Filing status
� Age (65 or older)
� Blindness
� Dependency
● Standard amounts change each year
(indexed for inflation)
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Blindness
● Totally blind taxpayer
-OR-
● Certified statement from eye doctor that
� Taxpayer cannot see better than 20/200 in the better eye with glasses or contact lenses -OR-
� Field of vision is not more than 20 degrees
114
Possible Itemized Deductions
(Schedule A)
● Medical or dental expenses
● Taxes
● Interest
● Gifts to charity
● Casualty and theft losses
● Miscellaneous expenses – subject to 2%
● Miscellaneous expenses – not subject to 2%
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Medical Expenses
● Medical expenses include
� Diagnosis, cure, mitigation, treatment, or prevention of disease
� Treatments affecting any part or function of body
� Equipment, supplies, and diagnostic devices
� Premiums for insurance that covers medical care
� Long-term care insurance premiums (limited)
� Transportation/travel to get medical care
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Medical Expenses
● Not all “medical expenses” qualify
● Examples of not qualified expenses:
� Cosmetic surgery
� Funeral or burial expenses
� Nonprescription drugs (except insulin)
� Weight loss program not prescribed
� Diet food
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Pub 17 Table 21-1; Pub 502
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Medical Expenses
● Must be paid during tax year by cash or c/c
� Cannot be reimbursed expenses including
expenses claimed for HSA
● Only for taxpayer, spouse, dependents or
individuals that would have been
dependent except for gross income or filing
situation – when paid or when incurred
● 23¢/mile for travel for medical purposes
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Taxes
● MUST be imposed on taxpayer
� Can’t pay someone else’s taxes and claim
it as a deduction
● MUST be paid in current tax year
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Taxes
● State and local taxes
� Income tax -OR-
� General sales tax
● Real estate tax (U.S. or foreign)
● Personal property tax based on value
● Foreign income tax (if not claiming a
credit)
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State and Local Taxes – Line 5
● Income taxes
� Withheld (W-2, 1099-R, etc.)
� Tax Paid for state estimated and prior year payments
� Other local income tax payments?
OR
● General sales taxes
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Additional Sales Tax
● Any large purchases?
� Motor vehicle (car, motorcycle, motor
home, off-road vehicle, etc.)
� Boat or airplane
� Home, home addition or renovation
�Sales tax must have been separately
stated and paid by taxpayer (not the
contractor)
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Deductible Taxes
● Line 6 – Real Estate (Property) Taxes
� May be reported by mortgage company on Form 1098
� Not for business
� Not for
� Benefit to property
� Itemized charges for services (such as trash pickup or sewer fees)
� Transfer taxes (or stamp taxes)
� Rent increases due to higher real estate taxes
� Homeowners' association charges
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Other Deductible Taxes
● Line 7 – Personal Property Taxes based
on value of personal property only
� If based on weight and value, only value
portion is deductible (boat, vehicles, RVs,
etc.)
● Line 8 – Other Taxes
� Foreign income taxes, if credit not
claimed on Form 1116 (1040 line 47)
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Deductible Taxes
126
State and
local income taxes
or Sales Tax
Main home
Other realty
e.g. car
Foreign
income tax
Non-Deductible Taxes
● Federal income and excise taxes
● Social Security, Medicare
● Federal Unemployment (FUTA)
● Railroad retirement taxes (RRTA)
● Customs duties
● Federal estate and gift taxes
● Per capita tax
127
Pub 17, Table 22-1
Home Mortgage Interest
● Interest on loan secured by main home or second home
● Mortgage to buy or build home or second home (both limited)
● Home equity loan or line of credit (limited)
● Both taxpayer and lender must intend that loan be repaid
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Home Mortgage Interest Deductibility
● Mortgages taken out before October 14,
1987 – fully deductible, no limit
● Mortgages after October 13, 1987, to
buy, build, or improve home
� Limited to $1,000,000 total debt (this
plus pre-10/14/87 ) ($500,000 MFS)
129
Home Mortgage Interest Deductibility
● Mortgages post October 13, 1987, not to
buy, build, or improve home limited to
� Debt of $100,000 ($50,000 MFS) and
� Total debt on home does not exceed fair
market value of home when taken out
● $1,000,000 and $100,000 limits apply to
combined mortgages on main home and
second home
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Home Mortgage Interest
● Points
� Paid at loan origination
� If to buy or build main home, deductible
in full
� Otherwise, spread over life of loan
131
Home Mortgage Interest
● Examples
� Deduct points on purchase, loan #1
� Refinance – points on Refinance are spread over life of new loan (#2)
� Refinance 2nd time–
�Remaining points on loan #2 can be deducted when loan #2 is paid off
�Points on 2nd Refinance (loan #3) are spread over life of loan #3
132
Home Mortgage Interest
● Qualified home mortgage insurance
premium (called PMI)
� Must relate to home acquisition debt
� Insurance contract issued after 2006
� Sometimes not reported on Form 1098
133
Interest
● Home Mortgage
� Line 10 – Interest/Points from Form 1098
� Line 11 – Interest if not on Form 1098
� Line 12 – Points not on Form 1098
� Line 13 – Qualified mortgage Insurance premium
● Line 14 – Investment interest
134
Pub 17 fig 23A & 23B
Deductible Interest Expense
135
Interest and points on 1098
Interest not on 1098
Points not on 1098
PMI
Non-Deductible
● Personal interest (e.g. car loan, line-of-credit)
● Service charges
● Annual fees for credit cards
● Loan fees
● Credit investigation fees
● Interest to purchase or carry tax-exempt securities
● Fines and penalties paid to a government for violations of law
136
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Gifts to Charity
● Qualified charity
� Churches, governments, schools, etc.
� Approved by IRS
�U.S. charity
� irs.gov/charities for list
� Limited to % of AGI
�Public charity: <50% of AGI
� Private foundations: <20% or 30% of AGI
NTTC Training – TY2015137
Gifts to Charity
● Monetary contribution less than $250
� Bank record (check, credit card or bank
statement) or receipt
-OR-
� Written acknowledgement from charity
● If payment is >$75, charity must state
value of goods/services provided, if any
NTTC Training – TY2015138
Gifts to Charity
● Monetary contribution $250 or more
� Written acknowledgement from charity
� Must state value of goods or services
provided in exchange for contribution, if
any
e.g., fundraising dinner – value of dinner
must be deducted from ticket price paid;
only net amount deductible
NTTC Training – TY2015139
Gifts to Charity
● Housing foreign exchange student
� May deduct up to $50 per month
● Foster child unreimbursed expenses
140
Pub 17, Chapter 24
Gifts to Charity
● Donations of clothing or household items
� Deduct fair market value
�Usually thrift store value
� Good used condition or better
● Capital gain or business property donations
● Car, boat, or plane donations
● Total charitable gifts <50% of AGI
141
Gifts to Charity
● Out-of-pocket expenses are also deductible
� Mileage @ 14¢/mi
� Tolls and parking
� Out of pocket expenses when serving as
volunteer for qualified charity (e.g., hospital
volunteer uniform)
● Need written acknowledgement from
charity if any single item is >$250
142
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Non-Cash Contributions
● Need receipt for all non-cash donations
● Single non-cash gifts $250 or more
� Written acknowledgement from charity
● More than $500
� Complete Form 8283 – Section A, Part 1 only
● Should always keep detailed list of items
donated (pictures help)
143
Non-Cash Contributions (cont.)
● Generally report by donation date,
specify date
● Taxpayer provides fair market value and
other needed information
144
Non-Deductible Contributions
● Contributions to following types of organizations:
� Business organizations such as Chamber of Commerce
� Civic leagues and associations
� Political organizations and candidates
� Social clubs
� Foreign organizations
� Homeowners’ associations
� Communist organizations
145
Non-Deductible Contributions
● Cost of raffle, bingo, or lottery tickets
● Tuition
● Value of person’s time or service
● Donated blood
● Direct contributions to an individual
● Part of contribution that benefits taxpayer
146
Miscellaneous Deductions
● Subject to 2% of AGI threshold
� Line 21 – Unreimbursed employee
expenses
�Uniforms, job hunting, union dues, etc.
�Use 2106-EZ for mileage and travel
� Line 22 – Tax preparation fees
147
Pub 17 Ch 26
Miscellaneous Deductions (cont.)
● Subject to 2% of AGI threshold (cont)
� Line 23 – Other expenses, examples
� Investment fees
�Safe deposit box (if holds investments)
� IRA trustee fee (if paid from outside funds)
�Repayments of previously claimed income
�Cost to produce or collect taxable income
148
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Miscellaneous Deductions (cont.)
● Cost to produce or collect taxable income,
example: legal fees to obtain social security
benefits (e.g. survivor benefits)
� Deductible to the extent the income is
taxable
� If 85% of SS benefit is taxable, 85% of legal
fee is deductible
� If none of SS benefit is taxable, none of the
legal fee is deductible
149
Miscellaneous Not Subject to 2%
● Gambling losses to extent of winnings
● Unrecovered investment in annuity
● Certain work-related expenses for disabled
● Repayments of income >$3,000 under
claim of right
● Certain Ponzi scheme losses
● Certain casualties
150
Review Your Deductions
● Review to ensure all deductions
considered
● Review documents to ensure all
deductions are correct
● Compare to prior year’s deductions
● Review Schedule A – is it as expected?
● Keep records & receipts w/ tax return
152
Form 1040 – Taxes & Payments
153
Refundable
Dependent Care Expenses:
● Care was for a qualifying person who lived with taxpayer more than half the year
● Taxpayer must pay expenses so that taxpayer and spouse can work or look for work
● Expenses paid for care—not education
● Both taxpayer and spouse (if MFJ) must have earned income (unless spouse is disabled or a full-time student)
● Cannot file MFS (with some exceptions)
154
Qualifying Person?
● Qualifying child who is taxpayer’s dependent and under age 13 -OR-
● Qualifying person incapable of self-care
� Spouse
� Qualifying child
� Dependent
� Someone who would have been taxpayer’s dependent except that...
155
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Dependent except that...
... He or she filed MFJ -OR-
... He or she had gross income over
exemption amount -OR-
... Taxpayer could be claimed as a
dependent
156
Qualifying Child Chart:
157
Qualifying Relative Chart
158
Child of Divorced...Parents
Must live with taxpayer half the year, so
credit goes to custodial parent (if s/he
paid the expense)
159
Paid for Care—Not Education
● Below kindergarten
● After school
● Day camp okay, overnight camp not
● Adult day care okay
● In-home care okay
160
Who is the Caregiver?
● Cannot be spouse or dependent
● Cannot be taxpayer’s child who is under 19
● Cannot be child’s parent (with some exceptions for disabled adults)
● Must show provider’s name, address and identifying number
161
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How Much is the Credit?
● 20% – 35% of amount spent
● Percent is based on AGI
● Maximum amount spent
� $3,000 for one person
� $6,000 for two or more
� Lesser of taxpayer’s or spouse’s earned
income
162
Many Different Education Benefits
● Congress has passed many different laws
giving tax benefits for education.
● Sometimes different benefits use the
same words but have different
definitions for them.
163
Many Different Benefits
● Scholarships & Grants
● American Opportunity Credit
● Lifetime Learning Credit
● Student Loan Interest Adjustment
● Tuition & Fees Adjustment
● Education Savings Account
164
Many Different Benefits (cont.)
● Qualified Tuition Program
● Ed Savings Bond Program
● Employer Provided Education Assistance
● Business deduction Work Related
Educational Expenses
165
Common Definitions
● “Qualified educational institution”
� ALWAYS means any accredited public,
nonprofit, or private post-secondary
institution eligible to participate in Dept.
of Education student aid program
�College or university
�Technical, trade or vocational school
� See http://ope.ed.gov/accreditation
166
Common Definitions
● “Candidate for a degree”
� ALWAYS includes anyone working
toward a degree, certificate or
recognized credential (e.g. cosmetology
license, commercial drivers license)
� Sometimes includes primary or
secondary school student
167
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Common Definitions
● “Qualifying Expenses”
� ALWAYS includes tuition and fees that
must be paid to the school as a
condition of enrollment
� Sometimes includes other expenses
168
Non-Qualifying Educational Expenses
● Insurance
● Medical expenses (including student
health fees)
● Room and board
● Transportation or similar personal, living
or family expenses
169
Grants and Scholarships
● Taxable
� If spent on non-qualifying expenses, OR
� Student is not a candidate for a degree*
● Student determines which monies are
spent for which expenses. More on this
later.
*Degree always includes certificate or other credential
170
Education Credits
● Two Credits
� American Opportunity—designed to
cover first four years of college
� Lifetime Learning—designed to cover the
rest of your life
171
Rules for Both Credits
● Student must be taxpayer, spouse, or
dependent.
● Student must not be claimed as
dependent on another return.
� If student can be claimed as a dependent
but isn’t, s/he can take credit
● Student must be enrolled at eligible
post-secondary school.
172
Rules for Both Credits
● Taxpayer cannot file “Married Filing
Separate.”
● Taxpayer cannot treat spouse as
nonresident alien.
● Taxpayer’s AGI must be below limit for
filing status.
173
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Qualified Expenses
● Tuition and certain related expenses
required for enrollment or attendance
● Student activity fees paid to institution
as condition of enrollment or
attendance
● Expenses paid in 2015 for academic
period beginning 2015 or first 3 months
of 2016
174
Qualified Expenses
● If student is dependent, expenses paid
by student are considered paid by
taxpayer.
● Costs paid by 3rd party, treated as paid
by student.
175
American Opportunities Credit
● Credit worth up to $2,500 per student
� 100% of first $2,000 of expenses
� 25% of second $2,000 of expenses
� Generally 40% refundable
176
American Opportunities Credit
● Can be taken only four tax years
● First four years of academic credit after
high school
● Student is a candidate for a degree*
● Minimum of half-time workload as set
by school
*Includes certificate or other credential
177
American Opportunities Credit
● No felony drug convictions
● Phased out for AGI greater then $80,000
($160,000 if MFJ)
● Includes tuition and course material
� Computer if required by course/school
178
Lifetime Learning Credit
● Credit worth up to $2,000 per RETURN
� 20% of first $10,000 of expenses
� Not a refundable credit
● No limit on number of years
● Not required to pursue a degree
� If not toward a degree, must be to
acquire or improve job skills
179
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Lifetime Learning Credit
● No minimum amount of course
workload
● Felony drug conviction not disqualifier
● Includes tuition and fees only
(books only if MUST be purchased from
school as a condition of enrollment)
180
Foreign Tax Credit
● Simplified foreign tax credit method
� Foreign tax must be from 1099-DIV,
1099-INT or K-1* ONLY (all others
disqualify)
AND
� Total foreign tax is ≤ $300 ($600 MFJ)
● If not, cannot use simplified method
181
* K-1: tax relating to passive income only (interest or dividends)
Foreign Tax Deduction
Too much foreign tax to use simplified method?
�May claim an itemized deduction for all the foreign income taxes (cannot split)
● Input amount on Sch A, Line 8
� Describe as Foreign Tax
● No benefit if not itemizing
● Benefit of deduction is less than of credit!
182
Two Child Tax Credits
#1: Child Tax Credit
� Up to $1,000 per qualifying child
� Nonrefundable
�Limited to amount of tax owed
#2: Additional Child Tax Credit
� Refundable
�15% of earned income over $3,000
�Up to unused portion of child tax credit
183
Qualifying Child
● Must be a dependent:
� A qualifying child
� NOT a qualifying relative
● Under age 17
● U.S. citizen, national or resident alien
184
Child of Divorced...Parents
● Must be a dependent, so CTC goes with
dependency to noncustodial parent
● See also Form 8332
185
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Other Non-Refundable Credits
● Retirement Savings Credit
● Nonbusiness Energy Property Credit
● Credit for the Elderly or Disabled
�Nonrefundable – offset income tax only,
no cash back
186
Retirement Savings Credit
● Made (or plans to make) contribution to a
retirement account
● May not show on any tax document
● “Other” may include myRA contributions
� Eligible for retirement savings credit
� Can designate tax refund as a contribution
187
Elderly or Disabled Credit
● Taxpayer is 65 or over, or retired on disability pension
● Income limits
� Max $30,500 Single & MFS,
$61,000 MFJ, $45,750 HH
● Schedule R
� Must enter any nontaxable income not entered on the 1040 on Sch R, pg 2
188
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
�Not reduced by nonrefundable credits
189
Self-employment Tax
● A tax in addition to the income tax
● Composed of two elements
� Social security
� Medicare
190
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
191
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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
192
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
193
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
194
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
195
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 explanations196
Types of Payments
● Federal income tax withheld
● Estimated payments
● Amounts applied from prior year
● Earned income credit
● Additional child tax credit (Form 8812)
● American opportunity credit (Form 8863)
● Premium tax credit (Form 8962)
● Payments made with request for extension
● Excess social security or tier 1 RRTA tax withheld
197
1040 page 2
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Form 1040, Page 2
198
Withholding Sources
● Employment
● Social Security
● Pensions, IRA distributions
● Capital gains, interest, dividends
● Unemployment compensation
● Gambling winnings
● W-2
● SSA 1099, RRB 1099
● 1099-R, RRB 1099-R
● Broker Statement
● 1099-INT, 1099-DIV
● 1099-G
● W-2G
199
Estimated Payments
● Typically made if:
� Self-employed
� Investment income
� Projected balance due >$1,000 (to avoid
penalty)
● Payments made periodically by taxpayer
200
Refundable Credit
● A refundable credit is one that can
generate a refund even if the taxpayer
didn’t pay any money in during the tax
year
201
Earned Income Credit Created in 1976
● As part of welfare reform
● To keep the working poor off welfare
● To qualify:
� Must be working
� Must be “poor”
202
Amount of the EIC Credit
203
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Refund/Balance Due
● Taxpayer has several choices on how to
receive refund or pay amount owed
204
Refund or Payment?
205
Refund Options
● Receive refund by check – no action needed
● Direct Deposit
� One account -OR-
� Add Form 8888 for split refund
� Up to three different accounts
� Can receive a portion in a check
� Can purchase US Series I Savings Bond
● Apply some or all to next year’s tax
206
Direct Deposits
● Use Direct Deposit
� Faster (1-2 weeks versus 3+ weeks by
mail)
� Safer
● For checking account, get routing
number and account number from
bottom of check
207
Direct Deposits
● IRS will send refund to savings account, but
its routing transit number is often not easy
to locate
● Direct deposit of refund may only go to
account (or accounts) in taxpayer’s name
● Financial institutions may not allow joint
refund to be deposited into an individual
account
208
Payment Due Options
● Due by April 15 (or later if extended due to weekends or holidays; 2016 – April 18)
1. Check or money order mailed with Form 1040-V, Payment Voucher
2. Electronic funds transfer (ACH)
3. IRS Direct Pay
4. Credit card (may have additional fee)
5. Electronic Federal Tax Payment System (EFTPS)
209
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Line 77 Estimated Tax Penalty
● If tax owed is $1,000 or more AND
● Withholding and estimated payments
less than the smaller of:
� 90% of tax shown on current tax return
OR
� 100% of tax shown on 2014 tax return
�Possible penalty may be due
210
Estimated Payments for 2016
● Taxpayer owes more taxes for 2015 than amount withheld or paid via credits
AND
● Taxpayer expects to owe more than $1,000 for next year after subtracting tax withheld and credits
AND
● Taxpayer expects 2016 tax withholding and credits to be less than 90% of the tax on 2015 return
211
Amending a Return – Why?
● Something not correctly reported on
original return
� New/updated information received by
taxpayer
� Should or could have used a different
filing status
� Mistakes
� Omissions
212
For example…
● Received another (or corrected) income statement not reported on original return (W-2, 1099, ...)
● Claimed personal exemption deduction when someone else was entitled to claim it
● Claimed deductions or credits that should not have been claimed
● Did not claim deductions or credits that should have been claimed
213
Filing Status Change
● Couples who previously filed MFS, HH,
Single, or QW may amend and file MFJ
� Up to three prior year returns
� Must have been legally married as of
December 31 of the respective tax year
● Couples may NOT file MFS if they
originally filed MFJ
214
Do Not Amend a Return
● Math errors – IRS will correct them
● IRS notifies taxpayer to provide missing
schedules/forms – taxpayer should
respond as per notice
215
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Amended Returns
● Essentially, Form 1040X will be the
taxpayer’s new tax return, changing their
original return to include new information
● Whatever was last filed* is starting point
� Even if refund claimed has not yet been
received
� Even if balance due has not yet been paid
* or as last determined (e.g., IRS made adjustment)
216
Amended Returns Statute of Limitations
● Time within which to claim a refund
� Later of:
�3 years from original due date or actual
date filed if later
�2 years from date the tax was paid
217
Amended Returns Statute of Limitations
● Additional tax owing
� IRS barred by Statute of Limitation from
assessing more tax
�3 years from original due date or date
filed if later
�Longer if fraud involved
� Can always voluntarily amend and pay
more tax
218
Amending 2015 Return
● Example:
� Filed 2015 return, say in February 2016
� Receive corrected 1099 in March 2016
● Wait until the IRS processes original
(efiled) return before submitting an
amended return
� Usually, 4 weeks is enough time to wait
219
Part III, Explanation of Changes
● Identify why changes are being made (in a concise and easy to understand way)
� “Received another W-2 after original return filed”
� “Changed filing status to Head of Household”
● Identify each changed item
● No need to say that tax liability was changed as result of other changes
220
Printing Amended Return
● Print 1040X and any form or schedule that
changed (two copies)
� If changed itemized deductions: print Sch A
� If changed business income: print Sch C
� If changed education credit: print 8863
� And so on
● Do not include new 1040
221
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Filing Amended Return
● Must be mailed – find IRS address on Page 5 (“Where to File”) of 1040X instructions
● No cover letter required
● Taxpayer (and spouse if MFJ) must sign and date copy to be mailed
● Keep an exact duplicate copy for your records
222
Amended 2015 Return
● If balance due:
� Taxpayer should file 1040X by April 15 or
as soon as possible thereafter with
payment to reduce interest charges, if
any
� IRS will send a bill for interest
223
New Provisions
● IRS is assigning IP Pins to dependents
● Taxpayer will be able to designate a
contribution to a myRA on Form 1040
● Mandatory exclusion of qualified
Medicaid waiver payments for difficulty
of care services
224
Indexing – Standard Mileage
● 57.5¢ per mile – business miles
● 23¢ per mile – medical miles
● 14¢ per mile – charitable miles
225
Indexing – Deductible Long-Term
Care Premium Limits
● Qualified long-term care premiums
includible as medical expense on Sch A
� $380 – Age 40 or under
� $710 – Age 41 to 50
� $1,430 – Age 51 to 60
� $3,800 – Age 61 to 70
� $4,750 – Age 71 and over
226
Due Dates
● 2015 tax returns are due
� Monday, April 18, 2016
● 2016 estimated payments due
� April 18, 2016*
� June 15, 2016
� September 15, 2016
� January 17, 2017
227
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Record Keeping
● Basic record keeping requirements
� Taxpayer should keep copy of all records
used to file tax return
�Three years from date return was filed
�Two years from date tax was paid
� See Pub 17 for additional requirements
228
Tax Return Preparation
● Verify and clarify information which appears to have changed from last year’s tax return
● Verify you have all needed documents by comparing to last year’s documents
● Verify accuracy of documents and receipts (e.g. correct year)
229
Quality Review Your Return
● Look for typos, transposed digits,
missing information, misspellings, etc.
● If not using tax software, check your
math
● Does the return look similar to last year
and does it have similar results?
● Did you do anything new this year that
you didn’t include?
230
Quality Review Your Return
● Verify adjustments
● Verify deductions (Schedule A)
● Verify credits – including required forms
● Verify correct entry of withholding and any
estimated payments
● Verify direct deposit information
� Bank routing number and account number
231
AARP Foundation Tax-Aide
● Nationwide non-profit program administered by AARP Foundation
● Helps low-to-moderate income taxpayers with special attention to age 60+
● Free confidential service
● Committed to high-quality service
● Answers tax questions/prepares returns
● Funding from AARP Foundation and IRS
232