EKS 5 SCENARIO-BASED TRAINING - earnitkeepitsaveit.org · SCENARIO 5 TIMOTHY & NICOLE STERLING...

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EKS 5 SCENARIO-BASED TRAINING

Transcript of EKS 5 SCENARIO-BASED TRAINING - earnitkeepitsaveit.org · SCENARIO 5 TIMOTHY & NICOLE STERLING...

EKS 5SCENARIO-BASED TRAINING

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

LET’S GET STARTED

This will be you!

1.SCENARIO 5TIMOTHY & NICOLE STERLING

Let’s meet the taxpayers

What question(s) should you ask the Sterlings?

What forms should you look for in their packet?

INTERVIEW NOTES

BOTH RETIREDTimothy began

3/1/2018

SOLVENTAt the time of credit

card debt cancellation

HEALTH

INSURANCECovered CA & Medicare

RIDESHARE

DRIVERIncome & expenses

BEFORE DIVING IN...

Do Timothy & Nicole need to file?Is the return in scope?

Tab A

3.SCENARIO 5TIMOTHY & NICOLE STERLING

1040 step by step

WATCH instructor

Enter the Sterlings’ main info and filing status

Tab B

Now you try

Enter the Sterlings’ main info and filing status

Tab B

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

Scenario 5 Dividend Income

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

minus

Adjusted basis

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)

Capital Gains and Losses

CANCELLATION OF DEBT

Any debt forgiven by a creditor is considered income by the IRS.

D-58

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

Scenario 5 1099-C

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

SELF-EMPLOYMENTRIDESHARE DRIVER

Receive Forms 1099-Misc and/or 1099-K

D-13

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.

DEDUCTING MILEAGE

Pub

463

Scenario 5 1099-K

Is Nicole’s rideshare income & expenses in scope?

D13-21

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

WATCH instructor

Enter Nicole’s ride share income and expenses on Schedule C-EZ

D13-19

Now you try

Enter Nicole’s ride share income and expenses on Schedule C-EZ

D13-19

Should the Sterlings take standard or itemized deductions?

ACA:MEDICARE

Certain Medicare coverages are considered Minimum Essential Coverage

H-6

Scenario 5 Form SSA-1099

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

Scenario 5 1095-A

Do the Sterlings need any ACA Exemptions?

H-15

WATCH instructor

Enter the Sterling’s ACA information

Tab H

Now you try

Enter the Sterling’s ACA information

Tab H

"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

4.SCENARIO 5TIMOTHY & NICOLE STERLING

Finishing the return

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

CREDITS

Special thanks to all the people who made and released these awesome resources for free:

○ Presentation template by SlidesCarnival

○ Icons by Emojione

○ Rideshare information by The Rideshare Guy & Starzyk CPA