eks 5 scenario-based training - earnitkeepitsaveit.org · scenario 5 timothy & nicole sterling...
TRANSCRIPT
THIS LESSON YOU WILL REVIEW
○Filing Status○Income – W-2, 1099-INT○Itemized Deductions versus Standard
Deduction○Qualified Business Income (20% Business
Deduction)○Form 8888○Earned Income Tax Credit
TODAY YOU WILL LEARN
○1099K - Ride Share driver○Social Security Income○Dividend Income○Capital Gains/Loss transactions○Cancellation of Debt - Credit Cards○Affordable Care Act – Medicare & Covered
CA
INTERVIEW NOTES
BOTH RETIREDTimothy began
3/1/2018
SOLVENTAt the time of credit
card debt cancellation
HEALTH
INSURANCECovered CA & Medicare
RIDESHARE
DRIVERIncome & expenses
SOCIAL SECURITY INCOME
Taxpayers receive a SSA-1099 if they receive benefits from the Social Security Administration - retirement, survivor
and disability benefits
D-41
If taxpayers have
other income, part of
their Social Security
benefits may be
taxable
SOCIAL SECURITY INCOME
Social Security
income alone does
not require someone
to file their taxes in
most cases
D-41
DIVIDEND INCOME
Corporate distributions such as ordinary dividends, qualified dividends, capital gain distributions, and
nondividend distributions are reported on 1099-DIV.
D-11
DIVIDEND INCOME
Ordinary
Dividends
Corporate
distributions paid
out of the
earnings and
profits of the
corporation.
Qualified
Dividends
Ordinary
dividends that
qualify for lower,
long-term capital
gains tax rates.
Nondividend
Distributions
Nontaxable
because they are
part of a
taxpayer’s cost or
other basis.
D-11
CAPITAL GAIN/LOSS
Capital gains are proceeds from the sale of stock, mutual funds or a personal residence.
Sale of any other asset is out of scope for VITA.
D20-25
MEASURING CAPITAL GAINS/LOSS
Amount Realized
Any money received,
plus the fair market
value of the property
(other than money)
received, minus
expenses related to the
sale (e.g., commissions,
sales charges, or fees)
Adjusted Basis
Generally, the cost
of the property,
including the cost
of acquiring the
property
CAPITAL GAINS/LOSS - BASIS
○The basis of property is usually the cost○The cost or basis should be reported on
the 1099-B○Taxpayers should go their broker if they
need help determining the basis○If a taxpayer cannot provide the basis, the
IRS will deem it to be zero
D-24
CAPITAL GAIN/LOSS EXAMPLES
Amount Realized
○ Sell 10 shares of
X for $1,000
minus $10
commission
○ Sell $1M home
for $300k
cash, subject to
$700k mortgage
Adjusted Basis
○ Buy $1M home
for $300k cash
and $700k
mortgage
○ Add second
story to home
for $200k
Gain
Buy 10 shares of
Y for $500; years
later, Y splits 2-1;
years later, sell
half of the Y
shares for $1,500
REPORTING CAPITAL GAINS/LOSS
○Sale of stock is
reported on a 1099-B
○Stock held for one
year or less is short
term
○Stock held for more
than one year is long
term
○A taxpayer cannot
offset ordinary
income with capital
losses of more than
$3,000 per year
○Unused losses can
be carried forward to
later years until they
are usedD-21
REPORTING CAPITAL GAINS/LOSS
The taxpayer will need to report:○ Date of sale○ Date of purchase/acquisition○ Short term or long term○ Sale price/proceeds of the sale○ Cost or other basis○ Federal income tax withheld○ Wash sale loss disallowed○ Description (Rust Corp 100 SH; Rio Motors 150 SH)
D-21
CAPITAL GAINS/LOSS
1. Identify short-term and long-term capital gains and losses (STCG, STCL, LTCG, LTCL)
2. Subtract STCG from STCL and LTCG from LTCL
3. Subtract STCG/L from LTCG/L
4. If positive (gain), pay tax on STCG and LTCG
5. If negative (loss), deduct up to $3,000 and carry forward the rest (retaining character/term) D-21
CAPITAL GAINS/LOSS - EXAMPLE
1. Short-term CG = $5k, short-term CL = $25k, long-term CG = $8k, long-term CL = $2k
2. Net short-term CL = $20K, net long-term CG = $6K
3. Subtract: net capital loss = $14k (short term loss)
4. Result: deduct up to $3,000 (against ordinary income) and carry forward $11k short-term capital loss
D-21
CAPITAL GAINS/LOSS - OTHER CONSIDERATIONS
❖ Special rules apply to determining basis in the event of a gift
❖ The sale of a principal residence is in scope for VITA, but is subject to special rules (including an exemption for the first $250k/$500k (MFJ) of taxable gain)
❖ Multiple stock sales can be combined into one line entry IF the same character (long term or short term)
CANCELLATION OF DEBT (COD) -CREDIT CARDS
Creditors and debt
collectors that agree to
accept at least $600 less
than the original balance
of the debt are required
by law to file a 1099-C
form with the IRS and to
send it to the debtor
❖ The COD is
taxable income
❖ Exceptions may apply
to taxpayers in
bankruptcy or who
are insolvent, but
these are out of scope
D-58
CANCELLATION OF DEBTSCOPE
Scope:
1. Credit card debt or
certain home
mortgage debt
2. Taxpayer must be
solvent and not in
bankruptcy
3. Debt cannot relate to
a business
Use the screening tool in
Pub 4012 Tab D58 to
determine if the client’s
credit card COD is in
scope of VITA.
For home mortgage
debt, see Pub 4012 Tab
EXT 1-5D58-60
EXT 1-5
WATCH instructor
Enter the Sterlings’ income: W-2, social security, retirement,
dividend income, COD & capital gains
Tab D
Tab D
Now you try
Enter the Sterlings’ income: W-2, social security, retirement,
dividend income, COD, & capital gains
Tab D
RIDESHARE DRIVERUBER and LYFT 1099s
Uber sends out 1099-K’sto drivers who reach a certain threshold
Lyft sends out 1099-Ks both for lump-sum payments as well as driving
D13-19
RIDESHARE DRIVERDEDUCTIONS
There are two ways to
calculate vehicle
expense: standard
mileage rate and actual
expense method.
Standard mileage rate is
usually the better
option. For tax year
2018 it will be 54.5
cents per mile.
Actual expense method
is out of scope for VITA.
D-19
Remember that expenses have to be allocated between personal and business use. Only those used for business can be deducted.
Standard mileage rate
includes maintenance,
gas, etc. for car; do not
enter in separately.
Parking, tolls, personal
property tax can be
entered separately.
Rideshare drivers can
include driving between
customer pick-ups as
business miles.
Qualified Business Income Deduction
New 20% deduction for business owners (including those who are self-employed, such as Uber/Lyft drivers)
Qualified Business Income
○Taxpayers should generally receive a 20% deduction for all Schedule C income
○Taxpayer need not operate the business through a legal entity
○Special rules apply to non-U.S. businesses or higher income taxpayers
○Deduction does NOT apply to income which is employee compensation
RIDESHARE NOTES
MILES8,956 business miles
2,587 commute miles
3,321 other miles
Jan 6, 2016Car placed in service
EXPENSES$72 on tolls
$960 in gasoline
ALWAYSTakes the standard
mileage rate
BOTHTimothy and Nicole’s
cars were available for
personal use
MAINTAINEDA written record of
mileage
ACA:COVERED CA
WITH PTCThe premium tax credit (PTC) helps eligible taxpayers pays
for health insurance
H-23
PREMIUM TAX CREDIT
When enrolling in health coverage through Covered CA, eligible taxpayers choose:○ Have advance payments of the premium tax credit (APTC)
made on their behalf to their insurance company○ Forego APTC and get all the benefit of the PTC when they
claim the credit on their federal tax return
Those who choose to get the benefit of APTC must file a federal tax return for the year the payments are made even if they have gross income for the year that is below the income tax filing threshold.
H23-29
PREMIUM TAX CREDIT
Anyone who
purchased
insurance
through the
Marketplace will
receive Form
1095-A
Anyone who
received the
benefit of
advance
payments of the
premium tax
credit (APTC) must
complete Form
8962
You cannot
prepare the
return for
taxpayers who
received the
benefit of APTC
without Form(s)
1095-A
H23-29
"SIMPLIFIED"METHOD
Special rules apply to certain pension income for which the retiree contributed post-tax money
D-31 to D-34
SIMPLIFIED METHOD
❖ In some cases, an employee will pay for part of their annuity with post-tax dollars
❖ Each annuity payment consists of a part of this post-tax amount
❖ When the 1099-R reporting the annuity payment does not report the amount of each payment that is not taxable, a "simplified method" exists to determine the portion of the payment that is exempt from tax
D-34
SIMPLIFIED METHOD -REQUIREMENTS
❖ Qualified employer retirement plan
❖ Primary recipient < 75 on annuity start date (unless < 5 years of guaranteed payments under annuity)
❖ Annuity payment start date after July 1, 1986
❖ Taxpayer did not previously report using the "general rule" (another method of allocating non-taxable portion of annuity payments)
D-34
SIMPLIFIED METHOD -REPORTING
The taxpayer will need to report:○ Employee post-tax cost (Box 9b of Form 1099-R)○ Annuity start date (may not be on 1099-R)○ Age of taxpayer(s) on annuity start date
● Combine ages of spouses if joint or survivor annuity
○ Number of months annuity payments were received in the tax year
○ Amounts recovered (or which could have been recovered even if not actually recovered) tax free in prior years
D-34
CHECK YOUR WORKQUALITY REVIEW
Review entries:○ Main info and filing status○ Income: W-2, retirement, social security, COD,
capital gains and self-employment○ Adjustments: Self-employment tax deduction○ Credits: Foreign Tax Credit○ Taxes: Self-employment tax
Do we have matching AGI & refund?
$26,535AGI(Includes $772 interest, $108 dividends, $23,645 taxable IRA, $2,129 taxable social security, $989 COD, $1,892 business income, and $3,000 capital loss)
$3,451Federal Refund(Includes $378 QBI, $4 foreign tax credit, $268 self-employment tax, $921 premium tax credit repayment)
FINISHING THE RETURN
○Ask the questions in the Prep Use Fields○All returns must be Quality Reviewed○Print return for the Sterlings○Review return with the Sterlings○Have the Sterlings sign 8879s for Federal
and State and remind them they are responsible for the return
Bonus Topic: EITC
I-1Married, No Children/ Noncustodial Parent
Single, No Children/ Noncustodial Parent
Married, 1 Child
Head of Household, 1 Child Married, 2 Children
Head of Household, 2 Children
Married, 3+ Children
Head of Household, 3+ Children
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000
EITC OVERVIEW: Taxpayer Requirements
○Taxpayer and spouse (if MFJ):
●Must be U.S. citizens or green card holders●Cannot be qualifying child of another person●Must have investment income $3,500 or less● If no qualifying children, at least age 25, under 65 by
Dec. 31
Tab I
EITC OVERVIEW: Qualifying Children Requirements
○U.S. citizen or green card○Relationship test: kids (including step,
foster children), siblings, descendents○Not married (generally)○Age by Dec. 31: under 19, under 24 if
college (generally), or disabled○Residency test: 183-day rule○Tie-breaker rules!
Tab I
California EITC
o In addition to federal EITCo AGI must be < $24,950 with qualifying
children or < $16,750 withouto Childless adults may claim if 18+
(instead of only ages 25-65 for federal)o Pays (at most) about half what the
federal EITC pays