Lesson 3
Income
Objectives
• Determine what is taxable and
nontaxable income
• Determine where to report income on
Forms 1040, 1040A, and 1040EZ
• Identify who can file Schedule C-EZ
• Identify who must file Schedule SE
Intake/Interview Process –
Form 13614 - Income
Taxable Income
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Wages, salaries, commissions, tips
Interest, dividends, pensions, capital gains
Alimony, business income, hobby income
Rents, royalties, estate or trust income
Unemployment benefits, jury duty pay
Other items of income unless they are
designated as nontaxable
Nontaxable Items
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Child Support
Federal income tax refunds
Gifts and inheritances
Municipal bond interest
Public assistance
Veteran’s disability benefits
Other items listed in the text
Earned Income
• Wages and Salaries
• Tip Income
• Scholarships and Fellowships
Interest
• Interest Income
• Taxable Interest Income
• Coverdell ESA
• Tax-Exempt Interest
Dividend Income
• Reporting Dividends and Capital
Gain Distributions
Other Income
• State and Local Tax Refunds
• Alimony
• Income From Business
Who Can File Schedule C-EZ?
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Business expenses do not exceed $5,000
Use the cash method of accounting
Did not maintain an inventory
Did not have a net loss
Had no employees
Does not claim depreciation
Does not deduct expenses for use of
home
Completing Schedule C-EZ
and Schedule SE
• Be sure to include the Principal Business
Code on the Schedule C-EZ
• You do not have to provide details on the
type of expenses included
• Complete Schedule SE if the net profit is
$400 or more.
• Remember to deduct, as an adjustment to
income, ½ of the amount calculated on the
SE
Other Income
• Capital Gains and Losses
• Sale of Business Property
• Pension and Annuity Income
• Rents, Royalties, Partnerships,
Estates, and Trusts
• Farm Income
• Unemployment Compensation
Quality Review (QR) Income
• Use the Form 8158, Quality Review Checklist
or the Publication 730, Important Tax Records
Envelope or your site’s equivalent form to
review all returns prepared.
– All income indicated on the intake sheet and
supporting documents is included on the return.
Lesson Summary
Review of types of income
Military Objectives
• Determine gross income of Armed Forces
members
• Amend return for medical separation pay
• Determine combat pay exclusion
• Identify qualifying items of military pay
received from combat zone.
Military Income
• Includible and Excludable Military
Income
• Medical Separation Pay
• Combat Zone Exclusion
• Combat Zones
Military/Special Issues
Objectives
• Determine whether the taxpayer
qualifies for the foreign earned
income exclusion.
• Calculate the foreign earned
income exclusion.
Military/Special Issues
Foreign Earned Income
Exclusion
• Must show home is in foreign
country
• Meet bona fide residence or
physical presence test
• Tax Home
Military/Special Issues
Foreign Earned Income
Exclusion
• Period of Stay
• Physical Presence Test
Military/Special Issues
Foreign Earned Income
Exclusion
• Military Members working
second jobs
• Spouses
Military/Special Issues
Foreign Earned Income
Exclusion
• Must have Earned Income
• Can exclude up to $82,400
• Voluntary
• Use Form 2555 or 2555 EZ
Military Summary
Review Military Income
issues
International Issues
• Worldwide Income
• Self-employment Tax
• Rental Income &
Expenses
International Issues
Objectives – Worldwide Income
• Define worldwide income and compute
the U.S. dollar value of a foreign
currency.
• Determine when to use average annual
exchange figures
International Issues
Objectives – Self-Employment Tax
• Determine who is a self-employed individual
• Compute the self-employment tax for a U.S.
citizen or resident
• Compute the deduction for self-employment
tax
International Issues
Objectives – Rental Income and
Expenses
• Determine how to report rental income
• Determine how to report rental expenses
• Determine how to report rental income when
property is used for personal purposes either
part of the year or during the entire year
International Issues
Objectives – Rental Income and
Expenses (cont.)
• Determine how to compute deductible
depreciation expense
• Identify the application of at-risk and
passive activity rules
International Summary
Review International
Income issues