Tax Law Basics Pub 4012 The basics as presented in these slides apply to the federal return Instructors might wish to highlight differences for state tax purposes, if any

Income Overview Taxable income versus nontaxable income (including excluded income) Earned income versus unearned income NTTC Training – TY2015

Taxable Versus Nontaxable Income Pub 4012 D-1 Basic tenet of the income tax code: Income or gain, from whatever source derived, is taxable... unless the code says it is not taxable Table B on D-1 in Pub 4012 has examples of income that is not taxable The term “not taxable” includes Items that are “excluded” by a provision of the code or Items that are made nontaxable by a provision of the code For in-scope returns, it is not necessary to distinguish between the two NTTC Training – TY2015

Taxable Versus Nontaxable Income Even though not taxable, must input certain nontaxable income Exempt interest income Exempt interest income dividends May affect other calculations e.g., taxable portion of social security benefits NTTC Training – TY2015

Earned Versus Unearned Income Pub 4012 I-1 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 Ask participants to open Pub 4012 Page I-1 Earned income table shown is for EIC and Child Tax Credit purposes Advise participants that the forms will guide them through the differences E.g. for earned income credit, complete Sch EIC wkt – lines 1a and 1b Note: for IRA purposes, taxpayer must have “compensation” W-2 Sch C Alimony income NTTC Training – TY2015

Earned Versus Unearned Income Earned income usually includes (for in-scope returns): Wages – Normally reported on Form W-2 Business Income – Reported on Schedule C (there are more types of earned income) Earned income does not include income that is excluded, such as Medicaid Waiver payments These two are for in-scope returns NTTC Training – TY2015

Earned Versus Unearned Income Investment income is unearned income for in-scope returns – examples: Interest Dividends Capital gains or losses Royalties (not from own services) A Taxpayer may establish that buying and selling securities is their business. If so they should be referred to a paid preparer NTTC Training – TY2015

Earned Versus Unearned Income Other types of unearned income for in- scope returns Land rents Unemployment Retirement income Social security benefits (there are more types of unearned income) NTTC Training – TY2015

Deductions and Credits A grace of the law If there is not a provision to allow the deduction, it is not deductible To claim any credit, must satisfy all requirements NTTC Training – TY2015

Deductions Reduce income otherwise subject to tax Types: Adjustments to gross income Itemized or standard deduction Personal exemption deduction Dependent exemption deduction Adjustments appear on Page 1 of the 1040 Itemized deduction are on Schedule A and can be claimed instead of the standard deduction TaxWise will select the one that yields the lowest tax Personal exemptions for each taxpayer or dependent claimed also appear on Page 1 of 1040 There are times when not all can be claimed – covered earlier in Lessons 05-06 NTTC Training – TY2015

Credits Reduce tax liability dollar for dollar Nonrefundable Limited to amount of tax No cash back Refundable Cash back if exceed tax liability NTTC Training – TY2015

Tax Law Basics Comments? Questions? NTTC Training – TY2015