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Lesson 3

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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Lesson 3

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  1. Lesson 3 Income

  2. 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

  3. Intake/Interview Process – Form 13614 - Income

  4. Taxable Income • 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

  5. Nontaxable Items • Child Support • Federal income tax refunds • Gifts and inheritances • Municipal bond interest • Public assistance • Veteran’s disability benefits • Other items listed in the text

  6. Earned Income • Wages and Salaries • Tip Income • Scholarships and Fellowships

  7. Interest • Interest Income • Taxable Interest Income • Coverdell ESA • Tax-Exempt Interest

  8. Dividend Income • Reporting Dividends and Capital Gain Distributions

  9. Other Income • State and Local Tax Refunds • Alimony • Income From Business

  10. Who Can File Schedule C-EZ? • 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

  11. 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

  12. Other Income • Capital Gains and Losses • Sale of Business Property • Pension and Annuity Income • Rents, Royalties, Partnerships, Estates, and Trusts • Farm Income • Unemployment Compensation

  13. 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.

  14. Lesson Summary Review of types of income

  15. 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.

  16. Military Income • Includible and Excludable Military Income • Medical Separation Pay • Combat Zone Exclusion • Combat Zones

  17. Military/Special Issues Objectives • Determine whether the taxpayer qualifies for the foreign earned income exclusion. • Calculate the foreign earned income exclusion.

  18. Military/Special Issues Foreign Earned Income Exclusion • Must show home is in foreign country • Meet bona fide residence or physical presence test • Tax Home

  19. Military/Special Issues Foreign Earned Income Exclusion • Period of Stay • Physical Presence Test

  20. Military/Special Issues Foreign Earned Income Exclusion • Military Members working second jobs • Spouses

  21. Military/Special Issues Foreign Earned Income Exclusion • Must have Earned Income • Can exclude up to $82,400 • Voluntary • Use Form 2555 or 2555 EZ

  22. Military Summary Review Military Income issues

  23. Worldwide Income Self-employment Tax Rental Income & Expenses International Issues

  24. 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

  25. 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

  26. 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

  27. 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

  28. International Summary Review International Income issues

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