Link and Learn - Income

Question 1

What happens if no 1099?

Answer 1

Sometimes taxpayers will know a reportable income amount, even if they have not received Form 1099. In such cases, report the income on the appropriate line of the return. Advise taxpayers who cannot accurately determine a reportable income amount to contact the payer of the income to get the missing information

Question 2

Where do i report the income in the software?

Answer 2

review the pages on Taxwise Entries and How/Where to Enter Income in the Volunteer Resource Guide, Income tab.

Question 3

What is Gross income?

Answer 3

Gross income is all income received in the form of money, goods, property, and services that is not exempt from tax. It includes income from sources outside the U.S. or from the sale of a primary residence, even if part or all of that income can be excluded. Gross income may include part of social security benefits received, and certain scholarship and fellowship grants.

Question 4

What is excludable income?

Answer 4

Nontaxable or “excludable” refers to income such as gifts and inheritances. Excludable income is not shown on the return.

Question 5

What is exempt income?

Answer 5

Exempt income includes interest income produced from certain types of investments. There are some instances when exempt income is shown on the return, but not included in the income tax computation, for example, tax-exempt interest income.

Question 6

What is earned and unearned income?

Answer 6

Earned income is any income received for work, such as wages or business/self employment income
Unearned income is any income produced by investments, such as interest on savings, dividends on stocks, or rental income

Question 7

Missing Form W-2

Answer 7

Form 4852
A taxpayer who has requested a Form W-2 or Form 1099-R and has still not received it by the due date of the return should file Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Taxpayers should:
Keep a copy of Form 4852 for their records
Attach Form 4852 to the tax return
If the taxpayer eventually receives the employer’s Form W-2 and the numbers differ from those on Form 4852, the taxpayer will need to amend the return to report the correct amounts.

Question 8

Allocated Tips

Answer 8

To ensure that everyone reports their fair share of income from tips, some employers have tip allocation programs. These programs are approved by the IRS. If an employee reports tips to the employer that were less than the designated share based on the employer’s formula, the employer reports the difference as “allocated tips” and includes it on the employee’s Form W-2.
Allocated tips are shown separately in Form W-2, box 8. Social security and Medicare taxes are not withheld on allocated tips. They are not included in the amount in Form W-2, box 1. Allocated tips must be included in Form 1040, line 7 unless taxpayers:
Kept a written and reliable tip record
Can prove the allocated amount is inaccurate.

Question 9

Scholarships and Fellowships

Answer 9

Scholarships and fellowships may be fully or partially taxable, or nontaxable. If the taxpayer received a Form W-2 for the scholarship or fellowship, include the amount on Form 1040, just as you would for any other Form W-2. This income is included in the total on Form 1040, line 7.

Form 1098-T lists qualified tuition and related expenses billed by the school. Verify that these amounts have been paid. It also lists scholarship and fellowship grant money the student received. If scholarships or grants exceed the qualified educational costs, some of the grant or scholarship money may be taxable.

Question 10

Loan Repayment Assistance Programs (LRAPs)

Answer 10

Health care professionals might receive education loan repayments; they are not taxable if they are made by:
The National Health Service Corps Loan Repayment Program
A state education loan repayment program eligible for funds under the Public Health Service Act, or
Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas

Question 11

NonTaxable Interest

Answer 11

Some interest is not taxable; examples include state and local bonds, qualified Series EE and Series I savings bonds used to pay higher education expenses, and interest earned on a traditional IRA.

Question 12

U.S. Savings Bonds

Series EE and Series I

Answer 12

The most common type of U.S. savings bonds are Series EE bonds. They are issued at a discount, and the interest is the difference between the purchase price and the amount received when the bonds are redeemed (cashed in).
Series I bonds, first offered in 1998, are issued at face value with a maturity period of 30 years. As with Series EE bonds, the interest is paid when the bonds are redeemed.
Taxpayers can report interest income from a Series EE or Series I savings bond either:
When the bond matures or is redeemed (whichever occurs first), or
Each year as its value increases
However, taxpayers must generally use the same method for all the Series EE and Series I bonds they own.
More Information
If the taxpayers cashed in Series EE or Series I bonds, they should have Form 1099-INT from the bank. Most taxpayers report the total interest when they cash the bonds. Some taxpayers may report savings bond interest as it accrues. This method is out of scope for the volunteer program and taxpayers should be referred to a professional tax preparer.

Question 13

Bonds issued by the following are exempt from federal income tax:

Answer 13

tate and political subdivisions (county or city)
District of Columbia
U.S. possessions and political subdivisions
Port authorities
Toll-road commissions
Utility service authorities
Community redevelopment agencies
Qualified volunteer fire department
Amounts indicated on broker statements as tax-exempt interest

Question 14

Accrued Interest on Bonds

Answer 14

If a bond is sold between interest payment dates, part of the sales price represents interest accrued to the date of the sale. For the year of the sale, the seller must report part of the sales price as interest income, even if the seller does not receive a Form 1099-INT. The buyer will treat this amount as a return of capital investment, reducing their basis in the bond.
For the year of the sale, the buyer of the bond may receive a 1099-INT reflecting the accrued interest. This amount is taxable to the seller. This topic is complex and is out-of-scope for the VITA/TCE programs. Taxpayers who buy or sell bonds between interest payment dates should be referred to a professional tax preparer. If taxpayers would like additional information, refer them to Publication 550, Investment Income and Expenses.

Question 15

What schedule does interest income go on?

Answer 15

Beth has three savings accounts in three different banks. The total amount of interest earned from the accounts is $2,800. Beth will receive three Forms 1099-INT. She will list each payer and amount on Schedule B and file it with her tax return.

Question 16

Types of Corporate Distributions

Answer 16

The corporate distributions that VITA/TCE tax preparers may handle are:
Ordinary dividends
Qualified dividends
Capital gain distributions
Nontaxable dividends and distributions

Question 17

Qualified Dividends

Answer 17

Qualified dividends are ordinary dividends that are eligible for a lower tax rate than other ordinary income. They are shown on Form 1099-DIV.
Taxpayers who have questions about why a dividend is qualified or not qualified should contact the company that issued the dividend.

Question 18

Capital Gain Distributions

Answer 18

Capital gain distributions come from mutual funds and real estate investment trusts (REITs). These distributions are treated as long-term capital gains, regardless of how long the taxpayer holds the shares. Capital gain distributions are reported to the taxpayer on Form 1099-DIV. The taxpayer reports these distributions as long-term capital gains on Form 1040, line 13, and on Schedule D if required.

Question 19

Nondividend Distributions

Answer 19

Form 1099-DIV also shows nondividend distributions, part of a distribution that is nontaxable because it is a return of the taxpayer’s cost or other basis. Taxpayers should keep this information with their tax records in order to calculate the adjusted basis of the stock when it is sold.

Question 20

Reporting Capital Gain Distributions

Answer 20

Question: Are capital gains and capital gain distributions the same thing?
Answer: No. A capital gain occurs when the owner of a mutual fund (or capital asset) sells shares in the fund (or property) for more than its cost and realizes a profit. A capital gain distribution occurs when the mutual fund sells assets for more than their cost and distributes the realized gain to the shareholders.

Capital gain distributions are also called capital gain dividends.

Question 21

State and Local Refunds

Answer 21

Taxpayers who receive a refund of state or local taxes may receive Form 1099-G, Certain Government Payments, with their state or local income tax refund. Not everyone must include the refund in their taxable income.
Taxpayers who claimed the standard deduction on the tax return for the year they received a refund of state or local income taxes are not required to include the refund in their taxable income
Taxpayers who itemized deductions and received a state or local refund may have to include all, part, or none of the refund in their federal taxable income
Only those taxpayers who itemized deductions and received a federal income tax benefit for deducting their state or local income taxes have to include their state/local tax refunds in income. If they itemized deductions and deducted the state sales tax instead of the state income tax withheld, none of the refund is taxable.

Question 22

What is Retirement Income?

Answer 22

If Form 1099-R is for an IRA-type distribution, it will be indicated in box 7.
The 1099 forms indicate information such as the amount received, the taxable portion, and the taxpayer’s cost (investment) in the plan.
If the taxable amount is indicated, Basic certified volunteers can complete the return. In general, if the taxable amount is not indicated, volunteers with Advanced certification must calculate the taxable portion using the Simplified Method Worksheet covered later in this lesson.

Question 23

Pension Withholding and Estimated Tax Payments

Answer 23

Some taxpayers are not aware that they can request federal income tax to be withheld from their retirement income by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments. Form W-4P is sent to the payer. Also, Form W-4V, Voluntary Withholding Request, is used to request withholding from social security benefits. Form W-4V is sent to the Social Security Administration.
If taxpayers owe $1,000 or more on the tax return, you should discuss their withholding and estimated tax options with them.
A taxpayer who chooses not to have tax withheld may have to pay estimated tax each quarter. Failure to have enough federal income tax paid in throughout the year can result in an estimated tax penalty. Also, it can result in a large amount of tax due when the return is filed. Form 1040-ES, Estimated Tax for Individuals, is used to calculate the estimated quarterly payment and provides vouchers with which to remit the payments.

Question 24

Social Security Benefits

Answer 24

Social security benefits are payments made under Title II of the Social Security Act. They include old-age, survivor, and disability insurance (OASDI) benefits.
Social security benefits include monthly retirement, survivor, and disability benefits. They do not include supplemental security income (SSI). Certain government retirees who receive a pension from work are not covered by social security.
Some portion of the social security benefits received may be taxable. Generally, if social security benefits are the only source of income, the benefits are not taxable. In this instance, taxpayers may not be required to file a return. However, if the taxpayers are filing Married Filing Separately and lived with their spouse at any time during the tax year, 85% of the benefits will be taxable.

Question 25

Railroad Retirement Benefits

Answer 25

Railroad Retirement Benefits (RRBs) are benefits paid to railroad employees who are covered by the Railroad Retirement Act (RRA). The RRA benefits have two components:
Tier 1 (social security equivalent benefits) and
Tier 2 (treated as a qualified employee plan)
The tier 2 benefits are reported on Form RRB 1099-R. These funds are discussed in the previous lesson on Retirement Income.

Question 26

When Are Benefits Taxable?

Answer 26

Part of the following benefits received by the taxpayer may be taxable:
Social security benefits
Railroad retirement benefits, tier 1 (social security equivalent portion)
The amount from box 5 of Form SSA-1099 or Form RRB-1099 is used to calculate the taxable portion of the benefits. The taxable amount, if any, of a taxpayer’s social security (or social security equivalent) benefits depends upon:
Filing status and other reportable income
Whether the benefits were the taxpayer’s only source of income
If the benefits were the only source of income, the taxpayer generally does not need to file a federal income tax return
A portion of the benefits is taxable if total income (including tax-exempt interest) plus one-half of the benefits received is more than certain base income amounts, which vary based upon filing status. A portion of the benefits is also taxable if the taxpayers are filing Married Filing Separately and lived with their spouse at any time during the year.
If the taxpayer received social security benefits and other income, complete the Social Security Benefits Worksheet to calculate the taxable portion.

Question 27

Lump-Sum Benefit Payments

Answer 27

Some taxpayers may have received a lump-sum benefit payment. The payment could be for the current tax year and for prior tax years. Box 3 of the taxpayer’s Form SSA-1099 or Form RRB-1099 will include the lump-sum payment. The form will also show the year, or years, of the payment. This additional information will be shown in Description of Amount in Box 3 on Form SSA-1099 or in boxes 7-9 on Form RRB-1099.
Tip
Do not confuse this type of lump-sum benefit payment with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. No part of the lump-sum death benefit is subject to tax.
When figuring the taxable portion of social security benefits, two options are available for lump-sum benefit payments:
The first option allows the taxpayer to report the whole payment in the year it was received. When the taxpayer chooses this option, complete the Social Security Benefits Worksheet as usual by including the entire lump-sum payment on line 1.
The second option is to treat the payment as received in the earlier year or years. This is done by figuring whether any part of these benefits is taxable, based on the earlier year’s income. Any part that is taxable is then added to any taxable benefits for the current year and included on Form 1040, line 20b. The taxpayer can elect this method if it lowers the taxable benefits.
Figuring the taxable benefits under the lump-sum election method is in scope for the VITA/TCE Programs. If the taxpayer chooses the second option, only the current year income will be adjusted. Do not file amended returns for the earlier years.