Volunteer Income Tax Assistance (VITA) 1040 Information Presentation www.cwfphilly.org
• The Campaign for Working Families, Inc. (CWFI) is a non-profit organization committed to helping working families and individuals achieve economic empowerment by providing free tax preparation, resourcebuilding and asset development. • In 2017, we had over 850 volunteers prepare over 56,000 tax returns (both federal and state), which brought in over $46.5 million in refunds to low-to- moderate income families in the region.
1040 1040 Line-by by-Li Line Re Review Practice Lab : https://vita.taxslayerpro.com/IRSTraining Password : TRAINPROWEB Certify : www.linklearncertification.com Email Volunteer Agreement : taxvolunteer@cwfphilly.org Sign Up for Volunteer Shifts : https://cwfphilly.volunteerhub.com Campaign for Working Families, Inc www.cwfphilly.org
Wages, Salaries, and Tips Line 7 of the 1040 D-4 to D-6 of the 4012 • Are usually reported on a W-2, various taxes are taken out • Whatever you see on the W-2, enter it exactly into the system • Federal wages can differ from Social Security wages, Medicare wages, state wages, and local wages • All tip income is taxable, whether reported to the employer or not • Common Box 12 Codes: • D – Elective contributions to a 401(k) plan • E – Elective contributions to a 403(b) plan • W – employer contribution to a health savings account • DD – Cost of employer-sponsored health coverage • Common Box 14 Items: • PA Unemployment Insurance • NJ FLI/UI/DI • City of Philadelphia and School District of Philadelphia – Retirement Contributions • Union dues
Taxable Interest and Tax Exempt Interest Lines 8a and 8b of the 1040 D-7 to D-9 of the 4012 • Common sources of taxable interest income are checking and savings accounts, certificates of deposit (CDs), savings certificates, U.S. government bonds, interest on insurance proceeds, and loans that the taxpayer makes to others. Taxable interest income is reported on Form 1099-INT. • Banks do not have to send out 1099-INT if the interest is less than $10, but the interest is still taxable • Certain types of interest are exempt from federal income tax. However, they may be taxable by the state, and sometimes the reverse is true; the interest may be taxable on the federal return and exempt from state income tax. • Interest from bonds issued by the following are exempt from federal income tax: state and political subdivisions (county or city), U.S. possessions and political subdivisions, port authorities, toll-road commissions, utility service authorities, community redevelopment agencies, qualified volunteer fire departments, amounts indicated on broker statements as tax-exempt interest or dividends • Read the taxpayer’s Form(s) 1099-INT carefully; both taxable and tax-exempt interest may be listed.
Ordinary Dividends and Qualified Dividends Lines 9a and 9b of the 1040 D-11 in the 4012 • Ordinary dividends - corporate distributions paid out of the earnings and profits of the corporation. Any dividend received on common or preferred stock is an ordinary dividend unless the paying corporation states otherwise. Total ordinary dividends are reported on Form 1099-DIV. • Qualified dividends are ordinary dividends that qualify for lower, long- term capital gains tax rates. Also reported on a 1099-DIV. • Capital gain distributions come from mutual funds and real estate investment trusts (REITs).They are taxed at the lower long-term capital gains rate, regard-less 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.
Taxable Refunds, Credits, or Offsets of State and Local Income Taxes Line 10 of the 1040 Page D-12 in the 4012 • Only taxpayers who itemized 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 and deducted the state sales tax instead of the state income tax withheld, none of the state/local refund is taxable. • Taxpayers who claimed the standard deduction on the tax return for the year they received a refund of state or local income taxes do not have to include the refund in their taxable income
Alimony Received Line 11 of the 1040 Page D-3 of the 4012 • Alimony is a payment to or for a spouse or former spouse under a separation or divorce decree. It may include payments on behalf of the spouse or former spouse, such as medical bills, housing costs, and other expenses. The person receiving alimony must include it as income. The person paying alimony can subtract it as an adjustment to income. • Do not confuse alimony with child support. Child support is not taxable income, nor does the person paying child support receive an adjustment to income or tax credit.
Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 • Business income information may come from the following: • Forms 1099-MISC , Miscellaneous Income, box 7, Nonemployee Compensation - no taxes are usually withheld • Forms W-2, Wage and Tax Statement with Statutory Employee checked in box 13 • Taxpayer’s books and records • Forms 1099-K, Merchant Card and Third Party Payments • Cash income - Some taxpayers may indicate that they received cash income for self- employment/independent contractor activity. This income must be reported as business income • An activity qualifies as a business if the primary purpose for engaging in the activity is for income or profit and the taxpayer is involved in the activity with continuity and regularity. • Qualified Medicaid waiver payments are treated as difficulty of care payments and are excludable from gross income (see page D-62). • Payments made to child care providers for providing child care services to someone that they are related to may be treated as other income instead of business income • Some employers misclassify workers as independent contractors and report their earnings on Form 1099-MISC. This income must still be reported as business income and the client may contact IRS for help
Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 • Schedule C-EZ or Schedule C shows the income and expenses and the net amount is carried to Form 1040, line 12. • Due to PA tax forms, CWF uses Schedule C with the following VITA limits: • Have less than $25,000 in business expenses • Use the cash method of accounting • Materially participated in the business • Have no inventory at any time during the year • Did not have a net loss from the business • Have no returns or allowances at any time during the year • Have no employees during the year • Are not required to file Form 4562, Depreciation and Amortization, for this business (depreciation and asset write-offs are out of scope for the VITA/TCE programs) • Do not deduct expenses for business use of a home • Do not have prior year unallowed passive activity losses from this business • Did not make any payments in the tax year that would require filing Form 1099-MISC
Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 • Business expenses should be ordinary and necessary. An ordinary expense is one that is common and accepted in the taxpayer’s industry. A necessary expense is one that is helpful and appropriate for the taxpayer’s trade or business. • Good recordkeeping shows income and expenses, and helps clients: • Monitor the progress of their business • Prepare their financial statements • Identify source of receipts • Keep track of deductible expenses • Prepare tax returns • Support items reported on tax returns in case of an IRS audit • Supporting documents for expenses include sales slips, paid bills, invoices, receipts, deposit slips, canceled checks, and mileage logs. • We can help clients with simple record reconstruction
Business Income or Loss – Schedule C Line 12 of the 1040 Pages D-13 to D-21 in the 4012 Expenses • Advertising - the costs associated with promoting the business through various means • Car and truck – only the standard business mileage deduction is in scope for VITA. If a client uses actual car and truck expenses, it is out of scope. • Standard mileage deduction = business miles x business mileage rate (currently $0.535 for TY 2017) • Business mileage includes travel between one business/work location to another business/work location • Business miles do not include commuting miles between home and the business location • See chart F-12 in 4012 for more details • Only tolls and parking fees may be added to the standard business mileage deduction • Commission and fees - paid to both individuals and businesses. • If payments to a single individual are $600 or more, the taxpayer must report the payments on Form 1099-MISC. In this case the taxpayers’ return is out of scope for the VITA/TCE programs. • Insurance - policies and coverage are deductible for the business operation, such as property and malpractice. • Does not include health insurance. • Automobile insurance for a business vehicle is out of scope for VITA. • Other Interest – can include interest paid on operating loans, but not mortgage interest
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