liberty tax service basic income tax course lesson 5

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Liberty Tax ServiceLiberty Tax Service Basic Income Tax Course Basic Income Tax Course

Lesson 5Lesson 5

Instructor: Val Smith-FulcherInstructor: Val [email protected] [email protected]

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Wages, Salaries, Tips, Etc. and Wages, Salaries, Tips, Etc. and Withheld Taxes Withheld Taxes

Classwork 1. Classwork 1. True or False.True or False.1)1) Employee bonuses are not included in gross income. Employee bonuses are not included in gross income. FF

2)2) Most taxable compensation you receive as an employee is Most taxable compensation you receive as an employee is shown in box 1 of Form W-2. shown in box 1 of Form W-2. TT

3)3) Tips are not taxable income. Tips are not taxable income. FF

4)4) The amounts shown in each box on Form W-2 are entered The amounts shown in each box on Form W-2 are entered on your tax return. on your tax return. FF

5)5) Taxable employee compensation is reported on line 7 of Taxable employee compensation is reported on line 7 of Form 1040. Form 1040. TT

6)6) If the amount shown in box 1 of Form W-2 is incorrect, you If the amount shown in box 1 of Form W-2 is incorrect, you should cross it out and write in the correct amount. should cross it out and write in the correct amount. FF

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Wages, Salaries, Tips, Etc. and Wages, Salaries, Tips, Etc. and Withheld TaxesWithheld Taxes

Classwork 1. Classwork 1. True or False.True or False.7)7) Box 8 of Jackie’s Form W-2 shows allocated tips of $340. If Box 8 of Jackie’s Form W-2 shows allocated tips of $340. If

Jackie cannot prove she received a smaller amount of tips, she Jackie cannot prove she received a smaller amount of tips, she must include $340 in the amount she enters on line 7 of Form must include $340 in the amount she enters on line 7 of Form 1040 and she must complete Form 4137. 1040 and she must complete Form 4137. TT

8)8) Joe contributes part of his salary to the 401(k) retirement plan Joe contributes part of his salary to the 401(k) retirement plan set up by his employer. Joe will never have to pay tax on these set up by his employer. Joe will never have to pay tax on these contributions. contributions. FF

9)9) Generally, withholding of federal taxes is required on all Generally, withholding of federal taxes is required on all employee compensation. employee compensation. TT

10)10) In 2002, Carol (born 2/2/1950) retired on disability from her job In 2002, Carol (born 2/2/1950) retired on disability from her job at Starr Industries. The minimum retirement age at Starr is 62 at Starr Industries. The minimum retirement age at Starr is 62 years of age. For the 2009 tax year, Carol reports the disability years of age. For the 2009 tax year, Carol reports the disability pensionpension payments she received from Starr on line 7 of her Form 1040. payments she received from Starr on line 7 of her Form 1040. TT

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Wages, Salaries, Tips, Etc. and Wages, Salaries, Tips, Etc. and Withheld TaxesWithheld Taxes

CLASSWORK 2CLASSWORK 2: Should the following types of compensation : Should the following types of compensation be included in box 1 of Form W-2? Yes or No.be included in box 1 of Form W-2? Yes or No.

1)1) A vacation trip you were awarded as a prize for meeting A vacation trip you were awarded as a prize for meeting sales goals. sales goals. YY

2)2) Your employer’s contribution to a qualified retirement Your employer’s contribution to a qualified retirement plan. plan. NN

3)3) The ham your employer gave you for Christmas. The ham your employer gave you for Christmas. NN

4)4) Employer provided vehicles used for personal driving, Employer provided vehicles used for personal driving, including commuting to and from work. including commuting to and from work. YY

5)5) Payments received from your employer while you were Payments received from your employer while you were out with a broken leg. out with a broken leg. YY

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4HOMEWORK 1: Answer the questions for each situation.HOMEWORK 1: Answer the questions for each situation.

1. 1. Frankie is employed by Sherman Bros. Insurance. In 2009, his salary Frankie is employed by Sherman Bros. Insurance. In 2009, his salary was $48,500. Frankie participates in the 401(k) retirement plan his was $48,500. Frankie participates in the 401(k) retirement plan his employer has set up. In 2009, Frankie contributed $4,000 to the employer has set up. In 2009, Frankie contributed $4,000 to the plan. Frankie also received the following from his employer in 2009:plan. Frankie also received the following from his employer in 2009:

– A Florida vacation worth $3,264 as a prize for meeting his A Florida vacation worth $3,264 as a prize for meeting his sales goals. Frankie was not able to take the vacation until sales goals. Frankie was not able to take the vacation until January 2010.January 2010.

– $200 tickets to a pro basketball game as a Christmas present.$200 tickets to a pro basketball game as a Christmas present.– Group health insurance premiums valued at $3,400.Group health insurance premiums valued at $3,400.– $2,500 as reimbursement for his travel costs. Frankie does not $2,500 as reimbursement for his travel costs. Frankie does not

have to account to Sherman Bros. for the reimbursements or have to account to Sherman Bros. for the reimbursements or return any money he does not spend.return any money he does not spend.

a.a. Which of the above 4 items are taxable to Frankie in 2009?Which of the above 4 items are taxable to Frankie in 2009?Florida vacation, pro basketball tickets, travel cost reimbursementsFlorida vacation, pro basketball tickets, travel cost reimbursements

b. What is the amount of employee compensation that will be shown in b. What is the amount of employee compensation that will be shown in box 1 of Frankie’s Form W-2? box 1 of Frankie’s Form W-2?

$50,464 which consists of:$48,500 (wages) - $4,000 (401(k) contribution) $50,464 which consists of:$48,500 (wages) - $4,000 (401(k) contribution) + $3,264 (vacation) + $200 (tickets) + $2,500 (travel)+ $3,264 (vacation) + $200 (tickets) + $2,500 (travel)

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4HOMEWORK 1: Answer the questions for each situation.HOMEWORK 1: Answer the questions for each situation.

2.2. Cameron Smith worked for a cab company for 6 months in 2009. He Cameron Smith worked for a cab company for 6 months in 2009. He received the following Form W-2.received the following Form W-2.

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4HOMEWORK 1HOMEWORK 1

Cameron reported his tips as required to his employer. The monthly totals in Cameron reported his tips as required to his employer. The monthly totals in his tip diary are as follows:his tip diary are as follows:

January $34January $34February $20February $20March $18March $18April $25April $25May $16May $16June $28June $28

a.a. What is the total amount of tips that Cameron reported to his employer?What is the total amount of tips that Cameron reported to his employer? $107 ( $34 + $20 +$25 + $28 = $107)$107 ( $34 + $20 +$25 + $28 = $107)

a.a. What is the total amount of Cameron’s tips that is subject to income tax? What is the total amount of Cameron’s tips that is subject to income tax? $141 ($107 + $18 + $16 = $141)$141 ($107 + $18 + $16 = $141)

a.a. What amount does Cameron enter on Form 1040, line 7?What amount does Cameron enter on Form 1040, line 7?b.b. $ 10,357 ($10,323 + $18 + $16 = $10,357)$ 10,357 ($10,323 + $18 + $16 = $10,357)

d. How much is his federal withholding? d. How much is his federal withholding? $1,032$1,032

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4

2. Craig R. Gregory (SSN 333-98-7654, born 9/24/1974) is 2. Craig R. Gregory (SSN 333-98-7654, born 9/24/1974) is divorced. He keeps up a home for himself and his son Barry (SSN divorced. He keeps up a home for himself and his son Barry (SSN 233-32-3232, born 6/7/2000), who lives with him. Craig has 233-32-3232, born 6/7/2000), who lives with him. Craig has stated in writing that his former wife can claim the exemption for stated in writing that his former wife can claim the exemption for Barry. Craig pays 70% of the total support for his widowed Barry. Craig pays 70% of the total support for his widowed stepfather Lucian Alexander (SSN 277-77-8787, born stepfather Lucian Alexander (SSN 277-77-8787, born 12/12/1936), who does not live with him. Lucian’s gross income 12/12/1936), who does not live with him. Lucian’s gross income in 2009 was $2,400.in 2009 was $2,400.

On some weekends, Craig works as a waiter at a banquet hall. In On some weekends, Craig works as a waiter at a banquet hall. In January his tips were $17 and in March his tips were $19 in cash January his tips were $17 and in March his tips were $19 in cash plus two tickets to the Bulls game (value $55). He did not report plus two tickets to the Bulls game (value $55). He did not report these tips to his employer. For every other month, Craig received these tips to his employer. For every other month, Craig received $20 or more in tips and he reported these to his employer.$20 or more in tips and he reported these to his employer.

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Questions and AnswersQuestions and Answers

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QUIZ 4QUIZ 4

Seahawk Fans?Seahawk Fans?

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What Happened?What Happened?

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You can talk…You can talk…when you have some of thesewhen you have some of these

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BREAKBREAK

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Chapter 5: Interest, Dividends, and Other IncomeChapter 5: Interest, Dividends, and Other Income

ObjectivesObjectives

Determine the Reporting of Interest and DividendsDetermine the Reporting of Interest and DividendsKnow How to Distinguish Between Taxable and Tax-Exempt Know How to Distinguish Between Taxable and Tax-Exempt

Interest and DividendsInterest and DividendsUnderstand How to Report Taxable Refunds, etc., From State Understand How to Report Taxable Refunds, etc., From State

and Local Income Taxesand Local Income TaxesIdentify Taxable Alimony and How to Report ItIdentify Taxable Alimony and How to Report ItLearn About Unemployment Compensation and How to Learn About Unemployment Compensation and How to

Report ItReport ItReport Other Sources of Taxable Income Report Other Sources of Taxable Income Identify when Back up Withholding is RequiredIdentify when Back up Withholding is Required

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Key Terms and Definitions Key Terms and Definitions Earned Income – All amounts received from providing a service, Earned Income – All amounts received from providing a service,

including wages, tips, bonuses and self-employment income in the including wages, tips, bonuses and self-employment income in the form of money, services or property. Investment income, such as form of money, services or property. Investment income, such as dividends and interest, is dividends and interest, is notnot counted as earned income. counted as earned income.

Unearned Income – Money received for the investment of money or Unearned Income – Money received for the investment of money or other property, such as interest, dividends and royalties. It also other property, such as interest, dividends and royalties. It also includes pensions, alimony, unemployment compensation and includes pensions, alimony, unemployment compensation and other income that is not earned for services performed.other income that is not earned for services performed.

Taxable Interest – Includes interest you receive from bank accounts, Taxable Interest – Includes interest you receive from bank accounts, loans you make to others, and other sources. loans you make to others, and other sources.

Tax-Exempt Interest - Interest income that is not subject to income Tax-Exempt Interest - Interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.states, cities, or counties and the District of Columbia.

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Key Terms and DefinitionsKey Terms and Definitions

Dividends – A stockholder’s share of the profit paid on an investment Dividends – A stockholder’s share of the profit paid on an investment in a corporation reported on Form 1099-DIV. “Dividends” from a in a corporation reported on Form 1099-DIV. “Dividends” from a savings and loan association or from a credit union are actually savings and loan association or from a credit union are actually reported as interest.reported as interest.

Capital Gain Distribution – Shareholder’s portion of gain from the sale Capital Gain Distribution – Shareholder’s portion of gain from the sale of capital assets, such as mutual funds and real estate investment of capital assets, such as mutual funds and real estate investment trusts. Capital gain distributions are taxed in the year received trusts. Capital gain distributions are taxed in the year received and are always considered to be held long term.and are always considered to be held long term.

Unemployment Compensation – Includes benefits to unemployed Unemployment Compensation – Includes benefits to unemployed individuals that a state or the District of Columbia paid from the individuals that a state or the District of Columbia paid from the Federal Unemployment Trust Fund.Federal Unemployment Trust Fund.

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Reporting Interest Income and DividendsReporting Interest Income and Dividends

Interest income and dividends are common types of unearned Interest income and dividends are common types of unearned income.income. They are considered They are considered unearned incomeunearned income because money, and not a because money, and not a person, is working to earn the income.person, is working to earn the income.

Most types of interest and dividends are taxable.Most types of interest and dividends are taxable.All interest and dividends must be reported on your tax return.All interest and dividends must be reported on your tax return.Interest Interest over $10over $10 is usually reported to you on is usually reported to you on a Form 1099-INT.a Form 1099-INT.Dividends Dividends over $10over $10 are reported to you on a Form 1099-DIV. are reported to you on a Form 1099-DIV.

Substitute Forms 1099-INT and 1099-DIV may also be usedSubstitute Forms 1099-INT and 1099-DIV may also be used

Interest and dividends Interest and dividends over $1,500over $1,500 must be reported on Schedule B of must be reported on Schedule B of Form 1040.Form 1040.

Taxable interest is reported on line 8a of Form 1040. Taxable interest is reported on line 8a of Form 1040.

Tax-exempt interest is reported on line 8b.Tax-exempt interest is reported on line 8b.

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Form 1099-INTForm 1099-INT

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Form 1099-DIV Form 1099-DIV

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Taxable InterestTaxable Interest

Most interest income is taxable. In general, any Most interest income is taxable. In general, any interest that you receive or that is credited to interest that you receive or that is credited to your account and can be withdrawn is your account and can be withdrawn is taxable taxable incomeincome..

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Where does Taxable interest income normally come Where does Taxable interest income normally come from?from?

bank accountsbank accounts interest on loans you make to othersinterest on loans you make to others interest from most other sources. interest from most other sources.

Where do you report taxable interest on the Form 1040?Where do you report taxable interest on the Form 1040?

Report the total taxable interest income on line 8a of Report the total taxable interest income on line 8a of Form 1040.Form 1040.

If your total interest income is more than $1,500, Part I If your total interest income is more than $1,500, Part I and III of Schedule B must be completed. and III of Schedule B must be completed.

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Zachary received $1,500 in interest income from BBT Bank Zachary received $1,500 in interest income from BBT Bank this year. He will report the $1,500 directly on line 8a of this year. He will report the $1,500 directly on line 8a of Form 1040. If his interest income from BBT Bank were Form 1040. If his interest income from BBT Bank were $1,501, he would also need to report the $1,501 on Part I $1,501, he would also need to report the $1,501 on Part I of Schedule B as in the second example below.of Schedule B as in the second example below.

Form 1040, Page 1Form 1040, Page 1

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What are some of the other common sources of What are some of the other common sources of taxable interest?taxable interest?

Certificates of deposit (CDs)Certificates of deposit (CDs) Deposits or share accounts from credit unions, Deposits or share accounts from credit unions,

mutual savings banks, cooperative banks, and mutual savings banks, cooperative banks, and federal and domestic savings and loan associationsfederal and domestic savings and loan associations

U.S. obligations such as U.S. Treasury bills, notes U.S. obligations such as U.S. Treasury bills, notes and bondsand bonds

U.S. savings bondsU.S. savings bonds Installment sale paymentsInstallment sale payments Life insurance proceeds remaining with the Life insurance proceeds remaining with the

insurance companyinsurance company Tax refundsTax refunds Gifts for opening accounts Gifts for opening accounts

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U.S. SAVINGS BONDSU.S. SAVINGS BONDS Interest on U.S. Savings Bonds is reported in box 3 of Form Interest on U.S. Savings Bonds is reported in box 3 of Form 1099-INT. If you use the 1099-INT. If you use the cash method of accountingcash method of accounting, as most , as most individual taxpayers do, you generally report interest on U.S. individual taxpayers do, you generally report interest on U.S. savings bonds in the year that you receive it. There are three savings bonds in the year that you receive it. There are three types of U.S. Savings Bonds:types of U.S. Savings Bonds:

HH bonds HH bonds EE bondsEE bondsI bondsI bonds

HH Bonds are purchased at face value. Interest is paid HH Bonds are purchased at face value. Interest is paid semiannually. You report the interest as income in the year it is semiannually. You report the interest as income in the year it is received.received.

EE Bonds are purchased at a discount and the interest on these EE Bonds are purchased at a discount and the interest on these bonds is taxed when the bond is redeemed. The taxable interest is bonds is taxed when the bond is redeemed. The taxable interest is the difference between the purchase amount and the redemption the difference between the purchase amount and the redemption value.value.

I Bonds are newer U.S. bonds. They are purchased at face value and I Bonds are newer U.S. bonds. They are purchased at face value and interest is paid at maturity.interest is paid at maturity.

You can report the interest on series EE, series E, and series I You can report the interest on series EE, series E, and series I bonds in either of two ways. What are these methods?bonds in either of two ways. What are these methods? Method 1. Report the interest at maturity of the bond or when you Method 1. Report the interest at maturity of the bond or when you

cash it.cash it. Method 2. Report the increase in redemption value as interest Method 2. Report the increase in redemption value as interest

each year.each year.

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U.S. SAVINGS BONDSU.S. SAVINGS BONDSSometimes U.S. Savings Bonds are owned by more than one person.Sometimes U.S. Savings Bonds are owned by more than one person. Table 5-1 clarifies who pays tax on U.S. Savings Bond interest.Table 5-1 clarifies who pays tax on U.S. Savings Bond interest.

Interest on U.S. savings bonds is exempt from state and local taxesInterest on U.S. savings bonds is exempt from state and local taxes

Table 5-1. Who Pays the Tax on U.S. Savings Bond InterestTable 5-1. Who Pays the Tax on U.S. Savings Bond Interest

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OTHER INTERESTOTHER INTEREST

CERTIFICATE OF DEPOSIT (CD)CERTIFICATE OF DEPOSIT (CD)1.1. If you buy CDs with maturity of more than one If you buy CDs with maturity of more than one

year, include part of the interest as income each year, include part of the interest as income each year.year.

2.2. Early withdrawal penalty is reported in box 2 of Early withdrawal penalty is reported in box 2 of Form 1099-INT and reported on line 30 of Form Form 1099-INT and reported on line 30 of Form 1040.1040.

3.3. Early withdrawal penalty is for withdrawing Early withdrawal penalty is for withdrawing money from CDs, or other time-deposit savings money from CDs, or other time-deposit savings accounts, before the maturity date. It is a accounts, before the maturity date. It is a forfeit of some of the interest paidforfeit of some of the interest paid

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LIFE INSURANCE PROCEEDSLIFE INSURANCE PROCEEDS

Life insurance proceeds paid to a beneficiary Life insurance proceeds paid to a beneficiary are not usually taxable are not usually taxable unlessunless the benefits the benefits received are more than the amount that received are more than the amount that would have been payable at time of would have been payable at time of insured person’s death. (Interest can insured person’s death. (Interest can accrue before distribution)accrue before distribution)

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TAX REFUNDSTAX REFUNDS

Interest received on tax refunds is taxable Interest received on tax refunds is taxable income.income.

GIFT/OPENING AN ACCOUNTGIFT/OPENING AN ACCOUNT

The fair market value of a gift or serviceThe fair market value of a gift or service you you receive receive for opening an accountfor opening an account in a savings in a savings institution must be reported as interest in institution must be reported as interest in the year you receive it. the year you receive it.

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Tom has a CD that matures in January Tom has a CD that matures in January 2010 and paid $75 in interest in 2009. 2010 and paid $75 in interest in 2009. Does Tom include the $75 interest as Does Tom include the $75 interest as income on his 2009 return?income on his 2009 return?

YesYes

INTEREST INCOME INTEREST INCOME TRUE OR FALSETRUE OR FALSE

Interest income of less than $10 is not Interest income of less than $10 is not required to be reported.required to be reported.

FF

Total interest income of more than Total interest income of more than $1,500 must be reported on $1,500 must be reported on Schedule B, Part I. Schedule B, Part I.

TT

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Interest credited to a savings account is unearned income. Interest credited to a savings account is unearned income. TT

Interest on a Roth IRA is reported on line 8b of Form 1040. Interest on a Roth IRA is reported on line 8b of Form 1040. FF

Interest on an EE or I bond can only be reported at the maturity date or Interest on an EE or I bond can only be reported at the maturity date or when you cash it. when you cash it.

FF

Interest on U.S. savings bonds is taxable on the state return. Interest on U.S. savings bonds is taxable on the state return. FF

If money is withdrawn from a CD before the maturity date and you If money is withdrawn from a CD before the maturity date and you forfeited some of the interest paid, report this amount on line 30 forfeited some of the interest paid, report this amount on line 30 of Form 1040 as an early withdrawal penalty. of Form 1040 as an early withdrawal penalty.

TT

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Report a dividend from a credit union Report a dividend from a credit union of $1,500 or less on line 8a of Form of $1,500 or less on line 8a of Form 1040 if you have no other similar 1040 if you have no other similar income. income. TT

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TAX-EXEMPT INTERESTTAX-EXEMPT INTEREST

Some types of interest are exempt from Some types of interest are exempt from federal income tax. If you are required to federal income tax. If you are required to file a return you must show any tax-exempt file a return you must show any tax-exempt interest you receive for informational interest you receive for informational purposes only. purposes only.

How is this reflected on the Form 1040?How is this reflected on the Form 1040?

Tax-exempt interest is reported on line 8b of Tax-exempt interest is reported on line 8b of Form 1040 and generally you will Form 1040 and generally you will notnot receive a Form 1099-INT. receive a Form 1099-INT.

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DIVIDENDSDIVIDENDSWhat are they?What are they?

Distributions of money, stock, or other Distributions of money, stock, or other property paid to you by a corporation.property paid to you by a corporation.

Report dividends over $1,500 on Part II of Report dividends over $1,500 on Part II of Schedule B.Schedule B.

Dividends may also come from a Dividends may also come from a partnership, estate, trust, or an S partnership, estate, trust, or an S corporation and be reported to you on a corporation and be reported to you on a Form K1.Form K1.

Major types of dividends are: ordinary Major types of dividends are: ordinary dividends, capital gain distributions, dividends, capital gain distributions, nondividend distributions, and other nondividend distributions, and other distributions.distributions.

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DIVIDENDSDIVIDENDS

What are Ordinary Dividends?What are Ordinary Dividends?

Ordinary dividends are taxable income Ordinary dividends are taxable income and are paid out of the earnings and and are paid out of the earnings and profits of a corporation.profits of a corporation.

They are NOT capital gainsThey are NOT capital gains

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DIVIDENDSDIVIDENDSSchedule B, Part II

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DIVIDENDSDIVIDENDSPauline Adams received a Form 1099-DIV for $1,646 Pauline Adams received a Form 1099-DIV for $1,646

from NY Money Market Fund.from NY Money Market Fund.

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DIVIDENDSDIVIDENDS

What are Qualified Dividends?What are Qualified Dividends?

Qualified dividends are the ordinary dividends Qualified dividends are the ordinary dividends that are subject to the same 0% or 15% that are subject to the same 0% or 15% maximum tax rate that applies to net maximum tax rate that applies to net capital gain. capital gain.

Qualified dividends should be shown in box 1b Qualified dividends should be shown in box 1b of Form 1099-DIV. Capital gains will be of Form 1099-DIV. Capital gains will be covered in Chapter 11. covered in Chapter 11.

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DIVIDENDSDIVIDENDS

Capital Gain DistributionsCapital Gain Distributions

Mutual funds pass capital gains to investors as Mutual funds pass capital gains to investors as capital gain distributions. Capital gain capital gain distributions. Capital gain distributions are reported in box 2a of 1099-DIV distributions are reported in box 2a of 1099-DIV and are reported directly on line 13 of Form and are reported directly on line 13 of Form 1040 if a Schedule D is not required.1040 if a Schedule D is not required.

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DIVIDENDSDIVIDENDS

Corey does not have to file a Schedule D. He Corey does not have to file a Schedule D. He received a capital gain distribution of $695 from received a capital gain distribution of $695 from JTH investments in 2009. Corey had no other JTH investments in 2009. Corey had no other capital transactions for the year.capital transactions for the year.

Form 1040, Page 1Form 1040, Page 1

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DIVIDENDSDIVIDENDS Nondividend distributionsNondividend distributions

A return of capital is reported to you A return of capital is reported to you on box 3 of Form 1099-DIV. Report on box 3 of Form 1099-DIV. Report the return of capital as a capital the return of capital as a capital gain once your basis has been gain once your basis has been reduced to zero.reduced to zero.

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DIVIDENDSDIVIDENDSJesse purchased stock in 1997 for $4,000. He received Jesse purchased stock in 1997 for $4,000. He received

a return of capital of $500 on the stock in 2000. a return of capital of $500 on the stock in 2000. Jesse reduced his basis in the stock to $3,500 Jesse reduced his basis in the stock to $3,500 ($4,000-$500). In 2009, he received a return of capital ($4,000-$500). In 2009, he received a return of capital of $4,500. Since he only had a basis of $3,500, his of $4,500. Since he only had a basis of $3,500, his basis was reduced to zero.basis was reduced to zero. What is the taxable What is the taxable amount for 2009?amount for 2009?

A. $4,500A. $4,500B. $3,500B. $3,500C. $1,000C. $1,000C. $1,000C. $1,000

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OTHER DISTRIBUTIONSOTHER DISTRIBUTIONS

Alaska Permanent Fund Dividends are not dividends. Alaska Permanent Fund Dividends are not dividends. They are reported on line 21 of Form 1040 as other They are reported on line 21 of Form 1040 as other income.income.

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BACKUP WITHHOLDING ON BACKUP WITHHOLDING ON INTEREST AND DIVIDENDSINTEREST AND DIVIDENDS

Interest and dividends are generally not subject to Interest and dividends are generally not subject to withholding. However, if you fail to give the payer withholding. However, if you fail to give the payer your social security number or you give an incorrect your social security number or you give an incorrect number, the payments are subject to mandatory number, the payments are subject to mandatory withholding (backup withholding).withholding (backup withholding).

Backup withholding will be shown in box 4 of Form Backup withholding will be shown in box 4 of Form 1040-INT or Form 1040-DIV.1040-INT or Form 1040-DIV.

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TAXABLE STATE AND LOCAL INCOME TAXABLE STATE AND LOCAL INCOME TAX REFUNDSTAX REFUNDS

State or local income tax refunds, etc. State or local income tax refunds, etc.

Reported on Form 1099-G.Reported on Form 1099-G.If you itemized deductions and claimed state and If you itemized deductions and claimed state and

local income taxes as an itemized deduction local income taxes as an itemized deduction and receive a state or local refundand receive a state or local refund, generally , generally reported on line 10 of Form 1040. reported on line 10 of Form 1040.

If you either took standard deduction or claimed If you either took standard deduction or claimed state and local general sales taxesstate and local general sales taxes as a as a deduction then the state or local tax refund deduction then the state or local tax refund is is notnot taxable taxable..

This is the easiest Amended Return we do. State and This is the easiest Amended Return we do. State and local refunds taxed in error.local refunds taxed in error.

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TAXABLE STATE AND LOCAL INCOME TAXABLE STATE AND LOCAL INCOME TAX REFUNDSTAX REFUNDS

In 2009, Natalie, age 42, received a Form In 2009, Natalie, age 42, received a Form 1099-G for her state refund of $325. Her 1099-G for her state refund of $325. Her total itemized deductions in 2008 were total itemized deductions in 2008 were $7,200. Her filing status was single. Using $7,200. Her filing status was single. Using the worksheet on the next page, Natalie will the worksheet on the next page, Natalie will report $325 on line 10 of her Form 1040report $325 on line 10 of her Form 1040. .

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TAXABLE REFUNDS, CREDITS, OR OFFSETS TAXABLE REFUNDS, CREDITS, OR OFFSETS OF STATE AND LOCAL INCOME TAXESOF STATE AND LOCAL INCOME TAXES

Form 1040, Page 1

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ALIMONY RECEIVEDALIMONY RECEIVEDReport alimony received on line 11 of Form Report alimony received on line 11 of Form

1040.1040.Child support payments are NOT alimony.Child support payments are NOT alimony.Use Table 5-2 (page 5-13) to clarify alimony Use Table 5-2 (page 5-13) to clarify alimony

requirements requirements Child support payments are NOT alimony. If Child support payments are NOT alimony. If

you make child support payments, do not you make child support payments, do not deduct them. If you are receiving child deduct them. If you are receiving child support payments, you do not have to support payments, you do not have to include them as income.include them as income.

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ALIMONY RECEIVEDALIMONY RECEIVEDThe following table shows what is, and what The following table shows what is, and what

is not considered alimony. is not considered alimony. Table 5-2 Alimony Requirements (Instruments Executed After 1984)Table 5-2 Alimony Requirements (Instruments Executed After 1984)

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ALIMONY RECEIVEDALIMONY RECEIVEDWanda receives $250 per month of alimony. What Wanda receives $250 per month of alimony. What

amount is reported on Form 1040?amount is reported on Form 1040?

B. $3,000B. $3,000

She reports the $3,000 ($250 x 12) on line 11 of Form 1040.She reports the $3,000 ($250 x 12) on line 11 of Form 1040.

5858

UNEMPLOYMENT COMPENSATIONUNEMPLOYMENT COMPENSATION

Unemployment compensation is Unemployment compensation is taxable.taxable.

Reported to you on Form 1099-GReported to you on Form 1099-G You report it on line 19 of Form You report it on line 19 of Form

1040.1040. For TY2009, the first $2,400 of For TY2009, the first $2,400 of

unemployment benefits are not unemployment benefits are not taxabletaxable

5959

UNEMPLOYMENT COMPENSATIONUNEMPLOYMENT COMPENSATION

Anthony Sanders (073-22-8990) received $2,863 in Anthony Sanders (073-22-8990) received $2,863 in unemployment compensation in 2009 and it was reported unemployment compensation in 2009 and it was reported on the following Form 1099-G. He records the amount from on the following Form 1099-G. He records the amount from box 1 on line 19 of Form 1040.box 1 on line 19 of Form 1040.

Form 1040, Page 1

6060

OTHER INCOMEOTHER INCOMEReport other income not covered on lines 7-20b on line 21 Report other income not covered on lines 7-20b on line 21

of Form 1040.of Form 1040.1.1. Includes prizes, awards, lottery winnings, and jury Includes prizes, awards, lottery winnings, and jury

duty, garage/yard sales, street pharmacist and duty, garage/yard sales, street pharmacist and other illegal income.other illegal income.

2.2. Gambling income includes winnings from lotteries, Gambling income includes winnings from lotteries, raffles, horse and dog races and casinos, football raffles, horse and dog races and casinos, football pools, etc.pools, etc.

It also includes the fair market value of prizes such as It also includes the fair market value of prizes such as cars, houses, trips, extreme makeovers, pimped cars, houses, trips, extreme makeovers, pimped rides or other noncash prizes.rides or other noncash prizes.

Gambling winnings of $600 or more are reported on Gambling winnings of $600 or more are reported on Form W-2G.Form W-2G.

Describe the type of income on dotted line next to line Describe the type of income on dotted line next to line 21.21.

6161

OTHER INCOMEOTHER INCOME

Donna won $2,500 in her state lottery. It was Donna won $2,500 in her state lottery. It was reported to her on a Form W-2G. Line 21 of reported to her on a Form W-2G. Line 21 of Form 1040 is shown below.Form 1040 is shown below.

Form 1040, Page 1

6262

WITHHOLDING ON GAMBLING WITHHOLDING ON GAMBLING INCOMEINCOME

Certain types of gambling winnings are subject to Certain types of gambling winnings are subject to mandatory withholding. Generally, tax will be mandatory withholding. Generally, tax will be withheld from winnings of more than $5,000.withheld from winnings of more than $5,000.

All gambling winnings are taxable even if you do not All gambling winnings are taxable even if you do not receive a Form W-2G.receive a Form W-2G.

6363

VOLUNTARY WITHHOLDINGVOLUNTARY WITHHOLDING

If you receive income from unemploymentIf you receive income from unemployment compensationcompensation, you can choose to have income , you can choose to have income tax withheld from the payments. To make this tax withheld from the payments. To make this choice, you will have to fill out a choice, you will have to fill out a FormForm W-4VW-4V, , Voluntary Withholding RequestVoluntary Withholding Request. .

Box 4 of Box 4 of FormForm 1099-G1099-G, , Certain Government Certain Government Payments,Payments, shows the taxes withheld from your shows the taxes withheld from your unemployment compensation. For unemployment compensation. For unemployment compensation, the payer is unemployment compensation, the payer is permitted to withhold 10% from each payment. permitted to withhold 10% from each payment. No other percentage or amount is allowed. No other percentage or amount is allowed.

6464


6565

BREAKBREAK

6666

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeSUMMARYSUMMARY

Report interest and/or dividend income over $1,500 on Report interest and/or dividend income over $1,500 on Schedule B, Form 1040.Schedule B, Form 1040.

Report early withdrawal penalties on line 30 of Form 1040. Report early withdrawal penalties on line 30 of Form 1040. Report capital gain distributions on lines 13 of Form 1040 Report capital gain distributions on lines 13 of Form 1040

if you are not required to file Schedule D.if you are not required to file Schedule D. State and local tax refunds are included in taxable income State and local tax refunds are included in taxable income

if you itemized deductions for the refund year and you if you itemized deductions for the refund year and you received a tax benefit by including the state and local tax received a tax benefit by including the state and local tax in itemized deductions.in itemized deductions.

Alimony and separate maintenance payments are taxable Alimony and separate maintenance payments are taxable income to the recipient of these payments and reported on income to the recipient of these payments and reported on line 11 of Form 1040.line 11 of Form 1040.

Other income, such as prizes, awards, gambling winnings, Other income, such as prizes, awards, gambling winnings, and jury duty pay, is reported on line 21 of Form 1040; and jury duty pay, is reported on line 21 of Form 1040; include the amount and a description of the income.include the amount and a description of the income.

You can choose to have income tax withheld from other You can choose to have income tax withheld from other types of income such as unemployment compensation.types of income such as unemployment compensation.

6767

Homework – Chapter 5Homework – Chapter 5Finish Classwork 1 (Questions 9 – 20)

Do Classwork 2 & 3

Homework 2 – Frank & Karen Walt

Read Chapter 6:

6868

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: CLASSWORK 1: True or FalseTrue or False1.1. Interest income of less than $10 is not required to be reported. Interest income of less than $10 is not required to be reported.

2.2. Total interest income of more than $1,500 must be reported on Total interest income of more than $1,500 must be reported on Schedule B, Part I. Schedule B, Part I.

3.3. Report a dividend from a credit union of less than $1,500 on line 8a of Report a dividend from a credit union of less than $1,500 on line 8a of Form 1040 if you have no other similar income. Form 1040 if you have no other similar income.

4.4. Interest credited to a savings account is unearned income. Interest credited to a savings account is unearned income.

5.5. Interest on a Roth IRA is reported on line 8b of Form 1040. Interest on a Roth IRA is reported on line 8b of Form 1040.

6.6. Interest on an EE or I bond can only be reported at the maturity date or Interest on an EE or I bond can only be reported at the maturity date or when you cash it. when you cash it.

7.7. Interest on U.S. savings bonds is taxable on the state return. Interest on U.S. savings bonds is taxable on the state return.

8.8. If money is withdrawn from a CD before the maturity date and you If money is withdrawn from a CD before the maturity date and you forfeited some of the interest paid, report this amount on line 30 of Form forfeited some of the interest paid, report this amount on line 30 of Form 1040 as an early withdrawal penalty. 1040 as an early withdrawal penalty.

6969

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: CLASSWORK 1: True or FalseTrue or False1.1. Interest income of less than $10 is not required to be reported. Interest income of less than $10 is not required to be reported. FF

2.2. Total interest income of more than $1,500 must be reported on Total interest income of more than $1,500 must be reported on Schedule B, Part I. Schedule B, Part I. TT

3.3. Report a dividend from a credit union of $1,500 or less on line 8a of Report a dividend from a credit union of $1,500 or less on line 8a of Form 1040 if you have no other similar income. Form 1040 if you have no other similar income. TT

4.4. Interest credited to a savings account is unearned income. Interest credited to a savings account is unearned income. TT

5.5. Interest on a Roth IRA is reported on line 8b of Form 1040. Interest on a Roth IRA is reported on line 8b of Form 1040. FF

6.6. Interest on an EE or I bond can only be reported at the maturity date or Interest on an EE or I bond can only be reported at the maturity date or when you cash it. when you cash it. FF

7.7. Interest on U.S. savings bonds is taxable on the state return. Interest on U.S. savings bonds is taxable on the state return. FF

8.8. If money is withdrawn from a CD before the maturity date and you If money is withdrawn from a CD before the maturity date and you forfeited some of the interest paid, report this amount on line 30 of Form forfeited some of the interest paid, report this amount on line 30 of Form 1040 as an early withdrawal penalty. 1040 as an early withdrawal penalty. TT

7070

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: True or FalseCLASSWORK 1: True or False

9.9. Interest received on tax refunds is not taxable income. Interest received on tax refunds is not taxable income.

10.10. Life insurance proceeds you receive as a beneficiary are usually not Life insurance proceeds you receive as a beneficiary are usually not taxable. taxable.

11.11. Jury duty pay is reported as income on line 21 of Form 1040. Jury duty pay is reported as income on line 21 of Form 1040.

12.12. All unemployment compensation is not taxable. All unemployment compensation is not taxable.

13.13. Alimony payments you receive are reported on Form 1040, line 11 and Alimony payments you receive are reported on Form 1040, line 11 and are taxable. are taxable.

14.14. Child support payments you make can be deducted from your total Child support payments you make can be deducted from your total income. income.

15.15. A state income tax refund is reported to you on Form 1099-G. A state income tax refund is reported to you on Form 1099-G.

16.16. All state tax refunds are nontaxable. All state tax refunds are nontaxable.

7171

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: True or FalseCLASSWORK 1: True or False

9.9. Interest received on tax refunds is not taxable income. Interest received on tax refunds is not taxable income. FF

10.10. Life insurance proceeds you receive as a beneficiary are usually not Life insurance proceeds you receive as a beneficiary are usually not taxable. taxable. TT (only interest earned after death is taxable)(only interest earned after death is taxable)

11.11. Jury duty pay is reported as income on line 21 of Form 1040. Jury duty pay is reported as income on line 21 of Form 1040. TT

12.12. Unemployment compensation is not taxable. Unemployment compensation is not taxable. FF

13.13. Alimony payments you receive are reported on Form 1040, line 11 and Alimony payments you receive are reported on Form 1040, line 11 and are taxable. are taxable. TT

14.14. Child support payments you make can be deducted from your total Child support payments you make can be deducted from your total income. income. FF

15.15. A state income tax refund is reported to you on Form 1099-G. A state income tax refund is reported to you on Form 1099-G. TT

16.16. All state tax refunds are nontaxable. All state tax refunds are nontaxable. FF

7272

Interest, Dividends, and Other IncomeInterest, Dividends, and Other Income

CLASSWORK 1: True or FalseCLASSWORK 1: True or False

17.17. Income from the Alaska Permanent Fund is reported on line 9a of Form Income from the Alaska Permanent Fund is reported on line 9a of Form 1040. 1040.

18.18. Interest and dividends are considered unearned income. Interest and dividends are considered unearned income.

19.19. Gambling winnings are not taxable. Gambling winnings are not taxable.

20.20. Child support payments are required to be reported on line 21. Child support payments are required to be reported on line 21.

7373


CLASSWORK 1: True or FalseCLASSWORK 1: True or False

17.17. Income from the Alaska Permanent Fund is reported on line 9a of form Income from the Alaska Permanent Fund is reported on line 9a of form 1040. 1040. FF

18.18. Interest and dividends are considered unearned income. Interest and dividends are considered unearned income. TT

19.19. Gambling winnings are not taxable. Gambling winnings are not taxable. FF

20.20. Child support payments are required to be reported on line 21. Child support payments are required to be reported on line 21. FF

7474

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 2:CLASSWORK 2: Tom and Sally are filing a joint return. They have the following Tom and Sally are filing a joint return. They have the following

interest and/or dividend income:interest and/or dividend income:

Nations Savings and Loan (joint)Nations Savings and Loan (joint) $1,390$1,390

First Federal Bank (Sally) First Federal Bank (Sally) $125$125

Citizens Credit Union (Tom)Citizens Credit Union (Tom) $40$40U.S. Series HH Savings Bonds (joint) U.S. Series HH Savings Bonds (joint) $45$45

Pullman Mutual Fund (joint)Pullman Mutual Fund (joint) $1,590$1,590

Determine the total amount of interest and/or dividend income and where it is reported on Form 1040 or other tax form.

7575


Classwork 2Classwork 2

Nations Saving and Loan Nations Saving and Loan $1,390$1,390First Federal BankFirst Federal Bank 125 125Citizens Credit UnionCitizens Credit Union 40 40U.S. Series HH Savings Bonds U.S. Series HH Savings Bonds 45 45

$1,600$1,600

$1,600 would be reported on Schedule B, Part I and line 8a of $1,600 would be reported on Schedule B, Part I and line 8a of Form 1040.Form 1040.

Pullman Mutual Fund $1,590Pullman Mutual Fund $1,590$1,590 would be reported on Schedule B, Part II and line 9a of $1,590 would be reported on Schedule B, Part II and line 9a of

Form 1040.Form 1040.

7676


CLASSWORK 3:CLASSWORK 3: Assuming no other interest or dividend income, where are the Assuming no other interest or dividend income, where are the

following reported on the Federal tax return? (line of Form 1040 following reported on the Federal tax return? (line of Form 1040 and the appropriate schedules, if any.)and the appropriate schedules, if any.)

Ordinary dividends over $1,500 Ordinary dividends over $1,500

Credit union dividends over $1,500Credit union dividends over $1,500

Savings account interest of $8Savings account interest of $8

Tax-exempt interest of $325Tax-exempt interest of $325

7777

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 3: CLASSWORK 3:

Assuming no other interest or dividend income, where are the following Assuming no other interest or dividend income, where are the following reported on the Federal tax return? (line of Form 1040 and the reported on the Federal tax return? (line of Form 1040 and the appropriate schedules, if any.)appropriate schedules, if any.)

Ordinary dividends over $1,500Ordinary dividends over $1,500 - reported on Schedule B, - reported on Schedule B, Part II and line 9a of Form 1040Part II and line 9a of Form 1040

Credit union dividends over $1,500 Credit union dividends over $1,500 – reported on Schedule B, – reported on Schedule B, Part I and on line 8a of Form 1040Part I and on line 8a of Form 1040

Savings account interest of $8 Savings account interest of $8 – reported on line 8a of Form – reported on line 8a of Form 10401040

Tax-exempt interest of $325 Tax-exempt interest of $325 – reported on line 8b of Form – reported on line 8b of Form 10401040

7878

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 3:CLASSWORK 3:

Assuming no other interest or dividend income, where are the Assuming no other interest or dividend income, where are the following reported on the Federal tax return? (line of Form following reported on the Federal tax return? (line of Form 1040 and the appropriate schedules, if any.)1040 and the appropriate schedules, if any.)

U.S. Treasury notes interest of $1,150 U.S. Treasury notes interest of $1,150

Early withdrawal penalty on a CD of $750Early withdrawal penalty on a CD of $750

Capital gain distributions of $2,333Capital gain distributions of $2,333

Alaska Permanent Fund dividends of $68Alaska Permanent Fund dividends of $68

7979


CLASSWORK 3:CLASSWORK 3:

Assuming no other interest or dividend income, where are the following Assuming no other interest or dividend income, where are the following reported on the Federal tax return? (line of Form 1040 and the reported on the Federal tax return? (line of Form 1040 and the appropriate schedules, if any.)appropriate schedules, if any.)

U.S. Treasury notes interest of $1,150 U.S. Treasury notes interest of $1,150 – reported on line 8a of – reported on line 8a of Form 1040Form 1040

Early withdrawal penalty on a CD of $750 Early withdrawal penalty on a CD of $750 – reported on line 30 of – reported on line 30 of Form 1040 Form 1040

Capital gain distributions of $2,333 Capital gain distributions of $2,333 – reported on line 13 of Form – reported on line 13 of Form 1040 and on Schedule D, (if required to file a Schedule D) 1040 and on Schedule D, (if required to file a Schedule D)

Alaska Permanent Fund dividends of $68 Alaska Permanent Fund dividends of $68 - reported on line 21 of - reported on line 21 of Form 1040 Form 1040

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liberty tax service basic income tax course lesson 5

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