ADVANCED
WORKSHOP
2
VOLUNTEER INCOME TAX ASSISTANCE (VITA)
TRAINING
REV 11/13/14
RECAP
What we covered last week:
• History
• Volunteer
• Annuities/Pensions/IRA
• Itemizations
• Schedule C – Business Income
TODAY
What we will cover:
•
Credits
•
• EITC
• Residential Energy
• Foreign
• American Opportunity
• Lifetime Learning
Schedule D
•
Capital Gains/Loss
•
•
•
Short Term
Long Term
Schedule E
•
•
Royalties
K-1
TAX PREPARATION
Earned Income Tax Credit
To qualify for Earned Income Tax Credit or EITC, you, and your spouse if married and filing a
joint return, must meet all of the following rules:
Have a Social Security Number that is valid for employment
Have earned income from working for someone, running or owning a business or farm or
another source
Cannot file as married filing separate
Must be:
• a U.S. citizen or resident alien all year or
• a nonresident alien married to a U.S. citizen or resident alien, file a joint return and
choose to be treated as a resident alien (for more information on making this choice,
see Publication 519, U.S. Tax Guide for Aliens)
Cannot be the qualifying child of another person
Cannot file Form 2555 or 2555-EZ (related to foreign earned income)
Your Adjusted Gross Income and earned income must meet the limits shown on the Income
Limits, Maximum Credit Amounts and Tax Law Updates Page
Your investment income must meet or be less than the amount listed on the Income Limits,
Maximum Credit Amounts and Tax Law Updates Page
TAX PREPARATION
Earned Income Tax Credit
TAX PREPARATION
Earned Income Tax Credit Test
1.
2.
A taxpayer has interest income of $3,500. His job
pays him $7,000 annually. He is 30, single, has a
valid social security number and is not the qualifying
child of anyone else, does he qualify?
Starting in February of the tax year, Sam has cared
for Lisa in his home. She is the 10 year old daughter
of his stepson who also lives with him and is
unemployed. Does Lisa meet the EITC requirements
for a qualifying child?
TAX PREPARATION
Earned Income Tax Credit
Read the directions, if you answer 4a with a yes, then move to
Line 5.
TAX PREPARATION
Earned Income Tax Credit
• Answer each question carefully and accurately.
TAX PREPARATION
Earned Income Tax Credit
This is the tricky portion to the
EIC worksheet, be sure to
read each line and answer
accordingly.
Complete each column where
a qualifying child is listed.
TAX PREPARATION
Earned Income Tax
Credit
Ask taxpayer if they have
ever been disallowed for
the tax credit.
Most questions are prefilled, but Question 13
asks about residency. If
taxpayer has lived in
United States for more
than half the year,
answer, Yes.
RESIDENTIAL ENERGY CREDIT
• For tax years after 2005, the total combined credit limit is
$500, and the combined credit limit for windows is $200
(Form 5695, Part I).
•
The maximum credit for residential energy property costs
is $50 for any advanced main air circulating fan; $150 for
any qualified natural gas, propane, or oil furnace, or hot
water boiler; and $300 for any item of energy-efficient
building property. The energy-efficiency standards for
qualified natural gas, propane, or oil furnaces, and hot
water boilers have increased.
FOREIGN TAX CREDIT
Credit applies to those who have paid tax to a foreign
country
• Link to Form 1116 from Form 1040
• Can enter directly on 1040 page 2 if the foreign tax is less than
$300 Single/$600 Married Filing Jointly, is from passive
income, and is reported in box 6 of their 1099-INT or 1099-DIV
• If the foreign tax is not passive and/or is greater than the
election limits, refer to a professional tax preparer (out-ofscope for VITA)
AMERICAN OPPORTUNITY
CREDIT
• Who is eligible
• Taxpayer, spouse, or eligible dependent claimed on the tax
return
• Attended qualified post -secondary educational institute
(college, university, or vocational school) at least half time
• Cannot be married filing separately, and cannot be claimed
as a dependent on anyone else’s return
• Expenses that qualify
•
•
•
•
Tuition (Form 1098-T)
Activity fees if required of all students
Books and supplies
Subtract tax-free assistance (scholarships & grants)
AMERICAN OPPORTUNITY
CREDIT
• Who is eligible
• Taxpayer, spouse, or eligible dependent claimed on the tax
return
• Attended qualified post -secondary educational institute
(college, university, or vocational school) at least half time
• Cannot be married filing separately, and cannot be claimed
as a dependent on anyone else’s return
• Expenses that qualify
•
•
•
•
Tuition (Form 1098-T)
Activity fees if required of all students
Books and supplies
Subtract tax-free assistance (scholarships & grants)
LIFETIME LEARNING CREDIT
•No limit to the number of years credit can be claimed
•Course-related books, supplies, fees, and equipment are
included in qualified educational expense ONLY if the fees
and expenses must be paid to the institution as a condition
of enrollment
•No portion of the credit is refundable
WHICH CREDIT?
Question 1: Bob is a full-time student and is a fifth-year
senior. Does he qualify for the American opportunity credit?
□ Yes □ No
Question 2: Janice works full time and takes one course a
month at night school. Some of the courses are not for
credit, but they are meant to advance her career. Which credit
is appropriate for her?
□ American opportunity □ Lifetime
Question 3: Clark is an older student who has gone back to
college half time after serving 18 months in prison for felony
drug possession. Which credit is appropriate for him?
□ American opportunity □ Lifetime
QUESTIONS
TAX PREPARATION (SCH D)
Capital Gains and Losses:
• Proceeds from Sale – Gross or net proceeds from the sale of
stock or mutual fund is reported to taxpayer on Form 1099 B or
on a 1099 Consolidated Statement
• How to record on Schedule D ?– First need to determine the
“basis” and the “holding period”
TAX PREPARATION (SCH D)
Capital Gains and Losses:
TAX PREPARATION (SCH D)
Capital Gains and Losses:
• Original cost of the asset, adjusted for commissions
• The basis for stock received as a gift or inheritance is Fair
Market Value at the time it was received by taxpayer
• If the taxpayer cannot provide the basis, the IRS will
assume $0
• Dividends of stock in lieu of cash increase taxpayer’s
ownership so original basis is spread over more
shares…thus reducing effective basis
• Stock splits reduce original basis (e.g. 2 for 1 = 50%)
TAX PREPARATION (SCH D)
EXAMPLE:
Alice paid $1,100 for 100 shares of ABC, Inc. stock (which
included the broker’s commission of $25). The original basis
per share was $11 ($1,100 ÷ 100). She received 10 additional
shares as a tax-free stock dividend. Her $1,100 basis must be
allocated to the 110 shares (100 original shares plus the 10share stock dividend). This results in an adjusted basis of
$10 per share ($1,100 ÷ 110).
TAX PREPARATION (SCH D)
• Short-term property is held one year or less
• Long-term property is held more than one year, and is
taxed at a lower rate that short term gains
• Inherited stock is always treated as long-term property
• Using cash dividends to purchase additional shares of
stock simply adds new stock with it’s own separate basis
and holding period
TAX PREPARATION (SCH D)
• Repeal of estate tax for decedents dying after 12/31/2009
and before 1/1/2011
• Automatic long term holding period does not apply to
inherited stock
• If taxpayer sells property inherited from someone who
died in 2010, refer the taxpayer to a professional tax
preparer
TAX PREPARATION (SCH D)
How to Report:
• Reported to taxpayer on Form 1099-B or on a
Consolidated Statement
• Form 1099-S usually reflects gross proceeds of real estate
transactions
Enter on a Schedule D
• If box 5, 10, 11,12, 13, or 14 has an entry, refer the taxpayer
to a professional tax preparer. These boxes provide
information about wash sales, regulated futures contracts,
and bartering, which are out of scope
TAX PREPARATION (SCH D)
Capital Gain/Loss Example:
Lenny bought 500 shares of XYZ Corporation stock for $1,500,
including his broker’s commission. Five years later, XYZ
distributed a 2% nontaxable stock dividend (10 shares). Three
days after the stock dividend was distributed, Lenny sold all his
XYZ stock for $2,030.
Although Lenny owned the 10 shares for only three days, all the
stock has a long-term holding period. Stock acquired as a
nontaxable stock dividend has the same holding period as the
original stock owned. Because he bought the stock for $1,500
and then sold it for $2,030 more than a year later, Lenny has a
long-term capital gain of $530 on the sale of his 510 shares.
TAX PREPARATION (SCH D)
Capital Gain/Loss Test:
• Margo bought stock for $1,500, plus a $25 commission; 18
months later she sold all the stock for $2,000 and paid a
$25 commission. Her Form 1099-B shows the gross
proceeds of $2,000 as the sales price.
TAX PREPARATION (SCH D)
Capital Gain/Loss Example:
• Margo bought stock for $1,500, plus a $25 commission; 18
months later she sold all the stock for $2,000 and paid a
$25 commission. Her Form 1099-B shows the gross
proceeds of $2,000 as the sales price.
• Basis = ($1,500 + $25 + $25) = $1,550
• Sales Price = $2,000
• Gain or Loss = Sales Price – Basis = $2,000 – $1,550 =
$450
• Margo had a long-term gain of $450.
TAX PREPARATION (SCH D)
• A mutual fund is a regulated investment company
• Owners of mutual funds may receive both a 1099-DIV and
1099-B
• Form 1099-DIV: reports capital gain distributions from
sales of stock held by the mutual fund, and is then
reported on Form 1040, Schedule B
• Form 1099-B: reports the taxpayer’s sale of any of their
shares in the mutual fund itself. The taxable gain or loss
from the sale or exchange of the taxpayer’s share in the
mutual fund is reported on Form 1040, Schedule D
TAX PREPARATION (SCH D)
Capital Loss Carryover:
• Taxpayer’s cannot take loss of more than $3,000 in any
one year ($1,500 for married filing separately)
• Unused losses can be carried over to later years until
completely used
• Carryover losses are combined with gains in that year
• Short –term losses offset short-term gains
• Long –term losses offset long term gains
TAX PREPARATION (SCH D)
Prior Year Capital Loss Carryover:
• To take credit this year for carryover loss from prior year,
use Capital Loss Carryover Worksheet from Schedule D
(will also need the Schedule D Worksheet from prior year
return to confirm loss carry forward)
• Short-term capital loss carryover (from Schedule D
Worksheet 2, Line 8) goes to Schedule D, Part I, Line 6
• Long-term capital loss carryover (from Schedule D
Worksheet 2, Line 14) goes to Schedule D, Part II, Line 14
TAX PREPARATION (SCH D)
Form 8949 and Schedule D:
• NEW In 2013, Line 1 and Line 8 of the Schedule D now
divided to allow for entry of short and long term
transactions where the basis was reported to the IRS.
However, can still use 8949 for all transactions if client has
a combination of reported and non-reported sales.
• All other transactions are reported using Form 8949, Sales
and Other Dispositions of Capital Assets.
TAX PREPARATION (SCH D)
Capital Gain/Loss from Home Sale:
•
If main home (owned and used by the taxpayer for 2 of the 5
years prior to sale), then $250,000 of gain is non-taxable for
Individual taxpayers and $500,00 for Married Filing Jointly
•
Amount realized = sales price – selling expenses
•
Adjusted Basis = purchase price + additions improvements
with a useful life of more than one year
•
Gain/Loss = amount realized – adjusted basis
•
A gain is reported on Schedule D. Losses are not deductible.
•
A gain from the sale of home that is not a main home is
reported as taxable income (Schedule D)
QUESTIONS
SCHEDULE E AND K-1
Taxpayer’s share of income, other distributions, deductions,
and credits from partnerships, S Corporations, and some
estates and trusts
• Income reported on Schedule K-1 will be reported in
various places on the return:
• Interest and/or Dividend Income = 1040, unless Schedule
B is required
• Net short or long term capital gains/losses = Schedule D
• Tax-exempt interest income = Form 1040, line 8b
• Royalty Income = Schedule E Part 1, code 6
•The name and identification number for the estate/trust,
partnership, or S Corporation are reported in Part II of
Schedule E
TAX PREPARATION (COD)
Cancellation of Debt
•
Most frequently involves auto loans, credit cards, medical
expenses, professional services, installment payments on
furniture, etc. When a debt is forgiven, the taxpayer receives
a Form 1099-C, Cancellation of Debt and must report the
amount as income on Line 21 of Form 1040
•
Mortgage Forgiveness Debt relief Act of 2007 – taxpayers
may exclude debt forgiven or cancelled on their principal
residence.
•
Foreclosure– Form 1099-A, Acquisition or Abandonment of
Secured Property—used to determine gain/loss
•
Other exclusions also apply e.g. discharge of debt through
bankruptcy or insolvency but these are outside VITA scope
TAX PREPARATION (COD)
Cancellation of Debt
TAX PREPARATION (COD)
Cancellation of Debt Form 982
TAX PREPARATION (COD)
Cancellation of Debt Form 982
AFFORDABLE CARE
ACT
The individual shared responsibility provision of the Health
Care Law requires you and each member of your family to:
• have qualified health insurance, also called minimum essential
coverage,
• have an exemption, or
• make a shared responsibility payment when filing your federal
income tax return.
Many people already have qualifying health insurance
coverage and don’t need to do anything more than maintain
that coverage.
AFFORDABLE CARE
ACT
Exemptions and Where to Request:
•
Members of Certain Religious sects – Marketplace
•
Short Coverage Gap – IRS
•
Certain Noncitizens – IRS
•
Coverage is Considered Unaffordable – IRS
•
Household Income Below the Return Filing Threshold – IRS
•
Members of Federally-recognized Indian Tribes Marketplace or
IRS
•
Members of Health Care Sharing Ministries Marketplace or IRS
•
Incarceration Marketplace or IRS
•
Hardships Marketplace or IRS - depending which hardship
exemption you claim
EXIT INTERVIEW
Meet with taxpayer
Taxpayer should verify all information
• Social Security (ALL), Name Spelling, Address, etc.
Review refund or amount owed with taxpayer
• Instruct on what credits they’re receiving
• Instruct on why they owe
• Failure to pay Federal Witholding (W9)
• Self Employment tax if they’re self-employed
Taxpayer must sign 1040 PG 2
Return ALL documents to taxpayer
Taxpayer complete online survey either at site or at home
• Available on CAP Riverside webpage
EXIT INTERVIEW
Now that you’ve received your return, have you thought
about savings?
• US Savings Bonds
• Form 8888
• Bank Accounts
• Savings
• IDA (Individual Development Account)
• CAP Riverside
• Match Savings Program
• Workshops
US SAVINGS BOND
I Bonds are a low-risk, liquid savings product. While you own
them they earn interest and protect you from inflation. The
earnings rate has two parts: a fixed rate and an inflation rate.
•
The composite rate for I bonds issued from November 1, 2014,
through April 30, 2015, is 1.48%.
In order to purchase a Series 1 US Savings Bond with a refund,
must use form 8888:
•
Savings bonds are assessed at $50 each
•
Can purchase up to $5,000 in savings bonds
•
•
$50, $100, $200, $500
If a customer purchases $250 or less, then $50 denomination
used to fill order
US SAVINGS BOND
Savings bonds are designed as longer-term investments, and
generally cannot be redeemed during the first 12 months
after you buy them (unless you are affected by a disaster,
such as a flood, fire, hurricane, or tornado).
Also, if you redeem a savings bond within the first five years,
the three most recent months' interest will be forfeited. After
five years, no penalty will apply.
QUESTIONS
WHAT’S NEXT?
Certify/Live Scan by January 24th, 2014
• Once certified, print three (3) Volunteer Agreement and
sign
• Give one to Site Coordinator, Submit one to Program
Manager via e-mail, keep one for yourself
Software Training
• Visit capriverside.org for training schedule
• You may sign-up for as many software trainings as necessary