Income – wages, interest, etc. Spring 2018, lamc

Introduction Our VITA certification is Basic certification. We are only allowed to prepare returns for the types of income below: Wages & Reported Tips Scholarship and Fellowship Income Interest Income Dividend Income Taxable Refunds Alimony IRA Distributions (only if taxable amount is already determined) Pensions/Annuities (only if taxable amount is already determined) Unemployment Compensation Social Security Benefits Other Income

Introduction Gross Income Definition: This lesson will teach you to: Compute taxable and nontaxable income Distinguish between earned and unearned income Report income correctly on Form 1040, lines 7-11 Gross Income Definition: All income received in the form of money, goods, property, and services that is not exempt from tax. Taxable income must be reported on a taxpayer’s return and is subject to tax. Nontaxable income may have to be shown on the return, but is exempt from tax.

Taxable income Earned Income Definition: Any income received for work (i.e. wages, self-employment income) Unearned Income Definition: Any income not produced from work (i.e. unemployment income, investment income, rental income) Earned and unearned income are reported on Form 1040, line 22, as total income. Refer to Publication 4012,: Tab D, Income

Nontaxable income There are different types of nontaxable income: Child Support Damages for physical injury (other than punitive) Inheritances Supplemental Security Income (SSI) Insurance Proceeds Refer to Publication 4012: Tab D, Income Quick Reference Guide

How do you get started in preparing returns? Complete the intake and interview sheet with the taxpayer. Income is reported on different types of forms. Ask the taxpayer to provide you with all income forms. Types of Forms Form W-2 Form 1099-INT Form 1099-DIV Form 1099-G Refer to Publication 4012: Tab D, How to Enter Income

Form W-2 Form W-2: The form that is used when employers report wages and other employee compensation. What about household employees? Household employees are persons who work in someone’s home performing household duties such as cleaning, caring for children, cooking. Etc. Household employees earning less than $2,000 may not receive a Form W-2, but the income must be reported. What about tip income? If a taxpayer has a job where tips are normally received, be sure to ask about the tips received. If tip income is reported to the employer, then it will be included on Form W-2, box 1, 5, and 7. A person is not required to report tip income to an employer if its $20 or less per month. Our VITA certification does not extend to unreported tips. We would have to refer these clients to a VITA that has Advanced Certification.

Scholarship and fellowship income Scholarships and fellowships may be fully or partially taxable, or nontaxable. Taxable amounts are: Payment for services Money used for personal living expenses, such as room and board. Form W-2: If a taxpayer receives a Form W-2 for scholarship or fellowship, then you would include the amount on Form 1040, line 7. Form 1098-T: this form lists qualified tuition and related expenses billed by the school. It also lists scholarship and grant money the student received. If the scholarship or grants exceed the qualified educational costs, some of the grant or scholarship money may be taxable.

Interest income Some interest income is tax-exempt. Interest income (unearned income) is reported on Form 1099-INT. Common sources of interest income: Savings accounts CDs Savings certificates Government bonds Interest on insurance proceeds Loan interest Some interest income is tax-exempt. Refer to Publication 4491, 9-7 through 9-8

Dividends Generally, all dividend income is reported on Form 1040, line 9a and 9b. Dividends are reported on Form 1099-DIV. Types of Dividends Ordinary Dividends Qualified Dividends Capital Gain Distributions Nondividend Distributions 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. Capital gain distributions: also capital gain dividends. Come from mutual funds and real estate investment trusts. Taxed at lower long-term capital gain rates. Reported on Form 1040, line 13, and on Schedule D if required. Nondividend distributions: part of a distribution that is nontaxable because it is a return of the taxpayer’s costs or other basis.

Dividends

Dividends Ask taxpayers for their annual brokerage statement if they did not receive Form 1099-DIV for a dividend. Schedule B is needed if the taxpayer’s ordinary dividends are greater than $1,500. Out of scope: Form 1099-DIV boxes labeled Unrecap. Sec. 1250 gain, Section 1202 gain, Cash liquidation distributions, and Noncash liquidation distributions.

State and local refunds Will be shown on Form 1099-G. Not everyone must include the refund in their taxable income. Only taxpayers who itemized and received a federal income tax benefit for deducting their state or local INCOME taxes have to include their state/local tax refunds in income. State refunds should be reported if: Taxpayer itemized deductions last year, and Received an income tax benefit. Do not report if state sales tax was deducted. Taxable refund is reported on Form 1040, line 10 Click line 10 from Form 1040 View or click Income from the Federal Section then state and local refunds

Alimony Alimony is a payment to a spouse/former spouse under a separation or divorce agreement. This is NOT the same as child support. The person receiving alimony must report it as income. The person paying alimony can subtract it as an adjustment to income. Our VITA only covers alimony under an agreement executed after 1984. If agreement was before 1985, we need to refer to a professional tax preparer. Where is alimony reported? If taxpayer is receiving alimony, it is reported on Form 1040, line 11 If the taxpayer is paying alimony, it is reported in the Adjusted Gross Income section.