Liberty Tax Service
Online Basic Income Tax
Course.
Lesson 5
1
HOMEWORK CHAPTER 4
HOMEWORK 1: Answer the questions for each situation.
1. Frankie is employed by Sherman Bros. Insurance. In 2008, his salary
was $48,500. Frankie participates in the 401(k) retirement plan his
employer has set up. In 2008, Frankie contributed $4,000 to the
plan. Frankie also received the following from his employer in 2008:




A Florida vacation worth $3,264 as a prize for meeting his
sales goals. Frankie was not able to take the vacation until
January 2008.
$200 tickets to a pro basketball game as a Christmas present.
Group health insurance premiums valued at $3,400.
$2,500 as reimbursement for his travel costs. Frankie does not
have to account to Sherman Bros. for the reimbursements or
return any money he does not spend.
a.
Which of the above 4 items are taxable to Frankie in 2008? Florida
vacation, pro basketball tickets, travel cost reimbursements
b.
What is the amount of employee compensation that will be shown in
box 1 of Frankie’s Form W-2? $50,464 which consists of:$48,500
(wages) - $4,000 (401(k) contribution) + $3,264 (vacation) + $200
(tickets) + $2,500 (travel)
2
HOMEWORK CHAPTER 4
HOMEWORK 1: Answer the questions for each situation.
2. Cameron Smith worked for a cab company for 6 months in 2008. He
received the following Form W-2.
3
HOMEWORK CHAPTER 4
HOMEWORK 1
Cameron reported his tips as required to his employer. The monthly totals in his
tip diary are as follows:
January $34
February $20
March $18
April $25
May $16
June $28
a. What is the total amount of tips that Cameron reported to his employer?
$107 ( $34 + $20 +$25 + $28 = $107)
b. What is the total amount of Cameron’s tips that is subject to income tax?
$141 ($107 + $18 + $16 = $141)
c. What amount does Cameron enter on Form 1040, line 7?
$ 10,357 ($10,323 + $18 + $16 = $10,357)
a. How much is his federal withholding? $1,032
4
HOMEWORK CHAPTER 4
HOMEWORK 2: Fill out page 1 of Form 1040 through line 7 and page 2, line 62, for the
following using the information and forms provided.
1. Austin L. (SSN 032-78-6543, born 5/16/1975) and Felicity N. Geary (SSN
044-65-4321, born 7/18/1977) are married and lived together in 2008 at
14 Shady Way, Brooklyn, NY 11201. Their son Ronnie (SSN 511-33-9999,
born 8/25/1996) and their daughter Darlene (SSN 511-51-1111, born
5/31/2000) are qualifying children for the child tax credit.
5
HOMEWORK CHAPTER 4
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HOMEWORK CHAPTER 4
7
HOMEWORK CHAPTER 4
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HOMEWORK CHAPTER 4
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HOMEWORK CHAPTER 4
10
HOMEWORK CHAPTER 4
2. Craig R. Gregory (SSN 333-98-7654, born 9/24/1973) is
divorced. He keeps up a home for himself and his son Barry (SSN
233-32-3232, born 6/7/1999), who lives with him. Craig has
stated in writing that his former wife can claim the exemption for
Barry. Craig pays 70% of the total support for his widowed
stepfather Lucian Alexander (SSN 277-77-8787, born
12/12/1935), who does not live with him. Lucian’s gross income
in 2008 was $2,400.
On some weekends, Craig works as a waiter at a banquet hall. In
January his tips were $17 and in March his tips were $19 in cash
plus two tickets to the Bulls game (value $55). He did not report
these tips to his employer. For every other month, Craig received
$20 or more in tips and he reported these to his employer.
11
HOMEWORK CHAPTER 4
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HOMEWORK CHAPTER 4
13
HOMEWORK CHAPTER 4
14
Chapter 5: Interest, Dividends, and Other Income
Chapter Content
Taxable Interest
U.S. Savings Bonds
Tax-Exempt Interest
Dividends
Taxable State and Local Income Tax Refunds
Alimony Received
Unemployment Compensation
Other Income
Key Ideas
Objectives
Determine the Reporting of Interest and Dividends
Know How to Distinguish Between Taxable and Tax-Exempt
Interest and Dividends
Understand How to Report Taxable Refunds, etc., From State and Local Income
Taxes
Identify Taxable Alimony and How to Report It
Learn About Unemployment Compensation and How to Report It
Report Other Sources of Taxable Income
Identify when Back up Withholding is Required
15
Key Terms and Definitions
Earned Income – All amounts received from providing a service,
including wages, tips, bonuses and self-employment income in the
form of money, services or property. Investment income, such as
dividends and interest, is not counted as earned income.
Unearned Income – Money received for the investment of money or
other property, such as interest, dividends and royalties. It also
includes pensions, alimony, unemployment compensation and
other income that is not earned for services performed.
Taxable Interest – Includes interest you receive from bank accounts,
loans you make to others, and other sources.
Tax-Exempt Interest - Interest income that is not subject to income
tax. Tax-exempt interest income is earned from bonds issued by
states, cities, or counties and the District of Columbia.
16
Key Terms and Definitions
Dividends – A stockholder’s share of the profit paid on an investment
in a corporation reported on Form 1099-DIV. “Dividends” from a
savings and loan association or from a credit union are actually
reported as interest.
Capital Gain Distribution – Shareholder’s portion of gain from the sale
of capital assets, such as mutual funds and real estate investment
trusts. Capital gain distributions are taxed in the year received
and are always considered to be held long term.
Unemployment Compensation – Includes benefits to unemployed
individuals that a state or the District of Columbia paid from the
Federal Unemployment Trust Fund.
17
Reporting Interest Income and Dividends
 Interest income and dividends are common types of unearned
income.
 They are considered unearned income because money, and not a
person, is working to earn the income.
 Most types of interest and dividends are taxable.
All interest and dividends must be reported on your tax return.
Interest over $10 is usually reported to you on a Form 1099-INT.
Dividends over $10 are reported to you on a Form 1099-DIV.
 Substitute Forms 1099-INT and 1099-DIV may also be used
 Interest and dividends over $1,500 must be reported on Schedule B of
Form 1040.
 Taxable interest is reported on line 8a of Form 1040.
 Tax-exempt interest is reported on line 8b.
18
Reporting Interest Income and Dividends
Form 1099-INT
19
Reporting Interest Income and Dividends
Form 1099-DIV
20
Taxable Interest
Most interest income is taxable. In general, any interest
that you receive or that is credited to your
account and can be withdrawn is taxable income.
Sara earned $49 in interest on money in her bank
savings account. She must report the $49 as
interest income even though she did not withdraw
it from the bank.
21
Taxable Interest
Taxable interest income includes interest from:
 bank accounts
 interest on loans you make to others
 interest from most other sources.
Report the total taxable interest income on line 8a of
Form 1040.
If your total interest income is more than $1,500, Part I
and III of Schedule B must be completed.
22
Taxable Interest
Zachary received $1,500 in interest income from BBT Bank
this year. He will report the $1,500 directly on line 8a of
Form 1040. If his interest income from BBT Bank were
$1,501, he would also need to report the $1,501 on Part I
of Schedule B as in the second example below.
Form 1040, Page 1
23
Taxable Interest
Some of the other common sources of taxable interest
come from interest on:
 Certificates of deposit (CDs)
 Deposits or share accounts from credit unions,
mutual savings banks, cooperative banks, and
federal and domestic savings and loan associations
 U.S. obligations such as U.S. Treasury bills, notes
and bonds
 U.S. savings bonds
 Installment sale payments
 Life insurance proceeds remaining with the
insurance company
 Tax refunds
 Gifts for opening accounts
24
U.S. SAVINGS BONDS
Interest on U.S. Savings Bonds is reported in box 3 of Form 1099-INT. If you use
the cash method of accounting, as most individual taxpayers do, you
generally report interest on U.S. savings bonds in the year that you receive it.
There are three types of U.S. Savings Bonds:
HH bonds
EE bonds
I bonds
 HH Bonds are purchased at face value. Interest is paid semiannually. You
report the interest as income in the year it is received.
 EE Bonds are purchased at a discount and the interest on these bonds is
taxed when the bond is redeemed. The taxable interest is the difference
between the purchase amount and the redemption value.
 I Bonds are newer U.S. bonds. They are purchased at face value and interest
is paid at maturity.
You can report the interest on series EE, series E, and series I bonds in either of
the following ways:
Method 1. Report the interest at maturity of the bond or when you cash it.
Method 2. Report the increase in redemption value as interest each year.
25
U.S. SAVINGS BONDS
Sometimes U.S. Savings Bonds are owned by more than one person.
Table 5-1 clarifies who pays tax on U.S. Savings Bond interest.
Interest on U.S. savings bonds is exempt from state and local taxes
Table 5-1. Who Pays the Tax on U.S. Savings Bond Interest
26
OTHER INTEREST
CERTIFICATE OF DEPOSIT (CD)
1. If you buy CDs with maturity of more than one
year, include part of the interest as income
each year.
2. Early withdrawal penalty is reported in box
2 of Form 1099-INT and reported on line 30
of Form 1040.
3. Early withdrawal penalty is for withdrawing
money from CDs or other time-deposit
savings accounts before the maturity date.
It is a forfeit of some of the interest paid
27
OTHER INTEREST
LIFE INSURANCE PROCEEDS
Life insurance proceeds paid to a beneficiary
are not usually taxable unless the benefits
received are more than the amount that
would have been payable at time of
insured person’s death. (Interest can
accrue before distribution)
28
OTHER INTEREST
TAX REFUNDS
Interest received on tax refunds is taxable income.
GIFT/OPENING AN ACCOUNT
The fair market value of a gift or service you receive
for opening an account in a savings institution
must be reported as interest in the year you
receive it.
29
OTHER INTEREST
Tom has a CD that matures in January 2009 and
paid $75 in interest in 2008. Does Tom include
the $75 interest as income on his 2008 return?
Yes or No?
30
OTHER INTEREST
Tom has a CD that matures in January 2009 and
paid $75 in interest in 2008. Does Tom include
the $75 interest as income on his 2008 return?
Yes
31
TAX-EXEMPT INTEREST
Some types of interest are exempt from
federal income tax. If you are required to
file a return you must show any tax-exempt
interest you receive for informational
purposes only. Tax-exempt interest is
reported on line 8b of Form 1040 and
generally you will not receive a Form 1099INT.
32
DIVIDENDS
 Distributions of money, stock, or other
property paid to you by a corporation.
 Report dividends over $1,500 on Part II
of Schedule B.
 Dividends may also come from a
partnership, estate, trust, or an S
corporation and be reported to you on a
Form K1.
 Major types of dividends are: ordinary
dividends, capital gain distributions,
nondividend distributions, and other
distributions.
33
DIVIDENDS
Ordinary dividends are taxable income and
are paid out of the earnings and profits
of a corporation.
They are NOT capital gains.
34
DIVIDENDS
Schedule B, Part II
35
DIVIDENDS
Pauline Adams received a Form 1099-DIV for $1,646
from NY Money Market Fund.
36
DIVIDENDS
Qualified dividends are the ordinary dividends
that are subject to the same 0% or 15%
maximum tax rate that applies to net capital
gain.
Qualified dividends should be shown in box 1b
of Form 1099-DIV. Capital gains will be
covered in Chapter 11.
37
DIVIDENDS
Capital Gain Distributions
Mutual funds pass capital gains to investors as
capital gain distributions. Capital gain
distributions are reported in box 2a of 1099-DIV
and are reported directly on line 13 of Form
1040 if a Schedule D is not required.
38
DIVIDENDS
Corey does not have to file a Schedule D. He
received a capital gain distribution of $695
from JTH investments in 2008.
Form 1040, Page 1
39
DIVIDENDS
Nondividend distributions
A return of capital is reported to you on
box 3 of Form 1099-DIV. Report the
return of capital as a capital gain once
your basis has been reduced to zero.
40
DIVIDENDS
Jesse purchased stock in 1996 for $4,000. He received
a return of capital of $500 on the stock in 1999.
Jesse reduced his basis in the stock to $3,500
($4,000-$500). In 2008, he received a return of capital
of $4,500. Since he only had a basis of $3,500, his
basis was reduced to zero. What is the taxable
amount for 2008?
A. $4,500
B. $3,500
C. $1,000
41
DIVIDENDS
 Jesse purchased stock in 1996 for $4,000. He
received a return of capital of $500 on the stock in
1999. Jesse reduced his basis in the stock to $3,500
($4,000-$500). In 2008, he received a return of capital
of $4,500. Since he only had a basis of $3,500, his
basis was reduced to zero. What is the taxable
amount for 2008?
C. $1,000
42
OTHER DISTRIBUTIONS
 Alaska Permanent Fund Dividends are not
dividends. They are reported on line 21 of Form 1040
as other income.
43
BACKUP WITHHOLDING ON
INTEREST AND DIVIDENDS
 Interest and dividends are generally not subject to
withholding. However, if you fail to give the payer
your social security number or you give an incorrect
number, the payments are subject to mandatory
withholding (backup withholding).
 Backup withholding will be shown in box 4 of Form
1040-INT or Form 1040-DIV.
44
TAXABLE STATE AND LOCAL INCOME
TAX REFUNDS
State or local income tax refunds, etc.
Reported on Form 1099-G.
If you itemized deductions and claimed state and
local income taxes as an itemized deduction
and receive a state or local refund,
generally reported on line 10 of Form 1040.
If you either took standard deduction or claimed
state and local general sales taxes as a
deduction then the state or local tax refund
is not taxable.
45
TAXABLE STATE AND LOCAL INCOME
TAX REFUNDS
In 2008, Natalie, age 42, received a Form
1099-G for her state refund of $325. Her
total itemized deductions in 2007 were
$7,200. Her filing status was single. Using
the worksheet on the next page, Natalie will
report $325 on line 10 of her Form 1040.
46
TAXABLE REFUNDS, CREDITS, OR OFFSETS
OF STATE AND LOCAL INCOME TAXES
Form 1040, Page 1
47
ALIMONY RECEIVED




Report alimony received on line 11 of
Form 1040.
Child support payments are NOT
alimony.
Use Table 5-2 (page 5-13) to clarify
alimony requirements
Child support payments are NOT
alimony. If you make child support
payments, do not deduct them. If you
are receiving child support payments,
you do not have to include them as
income.
48
ALIMONY RECEIVED
The following table shows what is, and what is
not considered alimony.
Table 5-2 Alimony Requirements (Instruments Executed After 1984)
49
ALIMONY RECEIVED
Wanda receives $250 per month of alimony. What
amount is reported on Form 1040?
A. $250
B. $3,000
C. $2,500
50
ALIMONY RECEIVED
Wanda receives $250 per month of alimony. What
amount is reported on Form 1040?
B. $3,000
She reports the $3,000 ($250 x 12) on line 11 of Form 1040.
51
UNEMPLOYMENT COMPENSATION
Unemployment compensation is
taxable.
 Reported to you on Form 1099-G
 You report it on line 19 of Form 1040.
52
UNEMPLOYMENT COMPENSATION
Anthony Sanders (073-22-8990) received $463 in
unemployment compensation in 2008 and it was reported
on the following Form 1099-G. He records the amount from
box 1 on line 19 of Form 1040.
Form 1040, Page 1
53
OTHER INCOME
Report other income not covered on lines 7-20b on
line 21 of Form 1040.
1. Includes prizes, awards, lottery winnings, and
jury duty
2. Gambling income includes winnings from
lotteries, raffles, horse and dog races and
casinos, as well as the fair market value of
prizes such as cars, houses, trips or other
noncash prizes. Gambling winnings of $600
or more are reported on Form W-2G.
Describe the type of income on dotted line next
to line 21.
54
OTHER INCOME
Donna won $2,500 in her state lottery. It was
reported to her on a Form W-2G. Line 21 of
Form 1040 is shown below.
Form 1040, Page 1
55
WITHHOLDING ON GAMBLING
INCOME
 Certain types of gambling winnings are subject to
mandatory withholding. Generally, tax will be
withheld from winnings of more than $5,000.
All gambling winnings are taxable even if you do not
receive a Form W-2G.
56
VOLUNTARY WITHHOLDING
 If you receive income from unemployment
compensation, you can choose to have income
tax withheld from the payments. To make this
choice, you will have to fill out a Form W-4V,
Voluntary Withholding Request.
 Box 4 of Form 1099-G, Certain Government
Payments, shows the taxes withheld from your
unemployment compensation. For
unemployment compensation, the payer is
permitted to withhold 10% from each payment.
No other percentage or amount is allowed.
57
Interest, Dividends, and Other Income
KEY IDEAS







Report interest and/or dividend income over $1,500 on
Schedule B, Form 1040.
Report early withdrawal penalties on line 30 of Form
1040.
Report capital gain distributions on lines 13 of Form 1040
if you are not required to file Schedule D.
State and local tax refunds are included in taxable
income if you itemized deductions for the refund year
and you received a tax benefit by including the state and
local tax in itemized deductions.
Alimony and separate maintenance payments are taxable
income to the recipient of these payments and reported
on line 11 of Form 1040.
Other income, such as prizes, awards, gambling
winnings, and jury duty pay, is reported on line 21 of
Form 1040; include the amount and a description of the
income.
You can choose to have income tax withheld from other
types of income such as unemployment compensation.
58
Interest, Dividends, and Other Income
CLASSWORK 1: True or False
1.
Interest income of less than $10 is not required to be reported.
2.
Total interest income of more than $1,500 must be reported on
Schedule B, Part I.
3.
Report a dividend from a credit union of less than $1,500 on line 8a of
Form 1040 if you have no other similar income.
4.
Interest credited to a savings account is unearned income.
5.
Interest on a Roth IRA is reported on line 8b of Form 1040.
6.
Interest on an EE or I bond can only be reported at the maturity date or
when you cash it.
7.
Interest on U.S. savings bonds is taxable on the state return.
8.
If money is withdrawn from a CD before the maturity date and you
forfeited some of the interest paid, report this amount on line 30 of
Form 1040 as an early withdrawal penalty.
59
Interest, Dividends, and Other Income
CLASSWORK 1: True or False
9.
Interest received on tax refunds is not taxable income.
10.
Life insurance proceeds you receive as a beneficiary are usually not
taxable.
11.
Jury duty pay is reported as income on line 21 of Form 1040.
12.
Unemployment compensation is not taxable.
13.
Alimony payments you receive are reported on Form 1040, line 11 and
are taxable.
14.
Child support payments you make can be deducted from your total
income.
15.
A state income tax refund is reported to you on Form 1099-G.
16.
All state tax refunds are nontaxable.
60
Interest, Dividends, and Other Income
CLASSWORK 1: True or False
17.
Income from the Alaska Permanent Fund is reported on line 9a of Form
1040.
18.
Interest and dividends are considered unearned income.
19.
Gambling winnings are not taxable.
20.
Child support payments are required to be reported on line 21.
61
Interest, Dividends, and Other Income
CLASSWORK 1: True or False
1.
Interest income of less than $10 is not required to be reported. F
2.
Total interest income of more than $1,500 must be reported on
Schedule B, Part I. T
3.
Report a dividend from a credit union of $1,500 or less on line 8a of
Form 1040 if you have no other similar income. T
4.
Interest credited to a savings account is unearned income. T
5.
Interest on a Roth IRA is reported on line 8b of Form 1040. F
6.
Interest on an EE or I bond can only be reported at the maturity date or
when you cash it. F
7.
Interest on U.S. savings bonds is taxable on the state return. F
8.
If money is withdrawn from a CD before the maturity date and you
forfeited some of the interest paid, report this amount on line 30 of
Form 1040 as an early withdrawal penalty. T
62
Interest, Dividends, and Other Income
CLASSWORK 1: True or False
9.
Interest received on tax refunds is not taxable income. F
10.
Life insurance proceeds you receive as a beneficiary are usually not
taxable. T (only interest earned after death is taxable)
11.
Jury duty pay is reported as income on line 21 of Form 1040. T
12.
Unemployment compensation is not taxable. F
13.
Alimony payments you receive are reported on Form 1040, line 11 and
are taxable. T
14.
Child support payments you make can be deducted from your total
income. F
15.
A state income tax refund is reported to you on Form 1099-G. T
16.
All state tax refunds are nontaxable. F
63
Interest, Dividends, and Other Income
CLASSWORK 1: True or False
17.
Income from the Alaska Permanent Fund is reported on line 9a of form
1040. F
18.
Interest and dividends are considered unearned income. T
19.
Gambling winnings are not taxable. F
20.
Child support payments are required to be reported on line 21. F
64
Interest, Dividends, and Other Income
CLASSWORK 2:
Tom and Sally are filing a joint return. They have the following
interest and/or dividend income:
Nations Savings and Loan (joint)
$1,390
First Federal Bank (Sally)
$125
Citizens Credit Union (Tom)
$40
U.S. Series HH Savings Bonds (joint)
$45
Pullman Mutual Fund (joint)
$1,590
Determine the total amount of interest and/or dividend income and
where it is reported on Form 1040 or other tax form.
65
Interest, Dividends, and Other Income
Classwork 2
Nations Saving and Loan
First Federal Bank
Citizens Credit Union
U.S. Series HH Savings Bonds
$1,390
125
40
45
$1,600
$1,600 would be reported on Schedule B, Part I and line 8a of
Form 1040.
Pullman Mutual Fund
$1,590
$1,590 would be reported on Schedule B, Part II and line 9a
of Form 1040.
66
Interest, Dividends, and Other Income
CLASSWORK 3:
Assuming no other interest or dividend income, where are the following
reported on the Federal tax return? (line of Form 1040 and the appropriate
schedules, if any.)
Ordinary dividends over $1,500
Credit union dividends over $1,500
Savings account interest of $8
Tax-exempt interest of $325
U.S. Treasury notes interest of $1,150
Early withdrawal penalty on a CD of $750
Capital gain distributions of $2,333
Alaska Permanent Fund dividends of $68
67
Interest, Dividends, and Other Income
CLASSWORK 3:
Assuming no other interest or dividend income, where are the
following reported on the Federal tax return? (line of Form 1040
and the appropriate schedules, if any.)
Ordinary dividends over $1,500 - reported on Schedule B,
Part II and line 9a of Form 1040
Credit union dividends over $1,500 – reported on Schedule
B, Part I and on line 8a of Form 1040
Savings account interest of $8 – reported on line 8a of
Form 1040
Tax-exempt interest of $325 – reported on line 8b of Form
1040
68
Interest, Dividends, and Other Income
CLASSWORK 3:
U.S. Treasury notes interest of $1,150 – reported on line 8a
of Form 1040
Early withdrawal penalty on a CD of $750 – reported on line
30 of Form 1040
Capital gain distributions of $2,333 – reported on line 13 of
Form 1040 and on Schedule D, (if required to file a
Schedule D)
Alaska Permanent Fund dividends of $68 - reported on line
21 of Form 1040
69
Questions and Answers
70