Liberty Tax Service Online Basic Income Tax Course. Lesson 18

1. Liberty Tax Service Online Basic Income Tax Course.Lesson 18

2. Chapter 17 Homework HOMEWORK 1: Prepare the tax return based on the following information: Ace R. Venture III (SSN 154-22-2111, born 1/15/1959) is single and owns a detective agency called Precious Pet Police. The business code for his business is 561600. He uses the cash method of accounting. Ace lives at 125 Carey Drive, Newark, NJ 07195. He lives in, and works out of an apartment for which he pays rent (including utilities) of $600 per month. He uses two of his five rooms in the apartment for his business. His EIN is 22-2345678. He has no income other than his self-employment income.

3. Chapter 17 Homework He paid $1,000 in each quarter for estimated taxes (entered on Form 1040 line 63). He has written records for his business mileage and has only one car.

4. Chapter 17 Homework The information from his business is: Inventory None Gross receipts $75,000 Advertising 5,175 Telephone (separate line) 75 per month Office supplies 1,200 Travel (airfare, lodging) 27,800 Meals while traveling 4,780 Licenses 250 Costume rental 4,500 Auto: (placed in service on 21,000 total miles 1/2/2008) 9,500 business miles (5,000 in the first half of the year) Insurance 5,600 Supplies 3,280 Medical insurance 254 per month x 12 months (established under his business)

5. Chapter 17 Homework Ace also works as a part-time bartender for Bob’s Bar and Grill. His form W-2 is as follows .

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20. Chapter 18: Additional Payments, Penalties, Installment Agreement, and Injured Spouse Chapter Content • Payments • Estimated Tax Payments • Credit for Excess Social Security Tax • Underpayment Penalty • Paying the Amount You Owe • Installment Agreement • Injured Spouse • First-time Homebuyer Credit • Key Ideas Objectives • Be Aware Who Must Make Estimated Tax Payments • Know How to Figure Excess Social Security Tax • Learn When an Underpayment Penalty is Owed • Understand How to Make an Installment Agreement • Understand When to File an Injured Spouse Claim • Understand How to File the First-Time Homebuyers Credit

21. Additional Payments, Penalties, Installment Agreement, and Injured Spouse Form 1040, Page 2

22. PAYMENTS A. Payments are reported on lines 62-70 of Form 1040 and are subtracted from your total tax on line 61. 1. If your payments are more than your tax liability, you are due a refund 2. If your payments are less than your tax liability, you must pay the amount owed 3. Payments covered in prior chapters include withheld taxes, the earned income credit, and the additional child tax credit. B. Also entered in the payments section of Form 1040 are the amounts of: 1. Tax payments you made directly to the IRS (estimated tax payments), and 2. Social security tax paid for you that exceeded the maximum amount set by law.

23. PAYMENTS Estimated Tax And Payments A. Estimated tax is the amount of tax liability you expect to have for a tax year. 1. The estimate is made before the tax year begins or early in the year 2. You must pay most of this tax as you earn the income during the year 3. Payment is made through withheld taxes and/or estimated tax payments. B. You may need to make estimated tax payments if: 1. The amount withheld from your salary or other income is not enough to cover the amount of tax you are required to pay as you earn income during the year 2. You are self-employed, or 3. You receive interest, dividends, alimony, rent, or capital gains.

24. PAYMENTS C. Income, self-employment, and other taxes are paid by estimated tax payments. 1. Enter the amount of the payments you made on line 63 of Form 1040 2. If you do not pay enough through withholding and estimated tax payments you may owe a penalty.

25. WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR A. You must determine, at the beginning of the tax year, whether you need to make estimated tax payments. 1. In general, you must make estimated payments if you expect to owe at least $1,000 in tax after subtracting your withholding and credits from your expected total tax liability (estimated tax), and 2. You expect your withholding and credits to be less than the smaller of 90% of the expected tax for the year, or 100% of the tax shown on the prior year’s return. 3. Taxpayers with an AGI of more than $150,000 or $75,000 if MFS must pay a higher percentage of the prior year’s tax. B. If all your income is subject to withholding, you generally do not need to make estimated payments.

26. WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR – Problem 1 Judd is employed and also receives interest and dividend income. His total tax on Form 1040, line 61 of his 2008 return (which covered 12 months) was $4,000. In 2009, he expects his tax liability to be $5,000. $3,900 will be withheld from his wages in 2009 and he cannot claim any credits. He estimates the amount due with his 2009 tax return will be $1,100. His withholding is less than 90% of his expected 2009 total tax liability (90% of $5,000 = $4,500) and less than 100% of his 2008 tax liability. Does Judd need to make estimated tax payments? Yes or No?

27. WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR – Problem 1 Judd is employed and also receives interest and dividend income. His total tax on Form 1040, line 61 of his 2008 return (which covered 12 months) was $4,000. In 2009, he expects his tax liability to be $5,000. $3,900 will be withheld from his wages in 2009 and he cannot claim any credits. He estimates the amount due with his 2009 tax return will be $1,100. His withholding is less than 90% of his expected 2009 total tax liability (90% of $5,000 = $4,500) and less than 100% of his 2008 tax liability. Does Judd need to make estimated tax payments? Yes Judd must make estimated tax payments to cover the difference unless he asks his employer to withhold more from his pay and completes a new Form W-4.

28. WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR C. Even if your income is not subject to withholding, you do not have to make estimated payments if: 1. You had no tax liability for the prior year (your total tax was zero or you did not have to file a return) 2. You were a U.S. citizen or resident for the whole year, and 3. Your prior tax year covered a 12-month period.

29. WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR D. Generally, if you are married you can choose to make joint or separate estimated tax payments. 1. Apply the rules to your joint or separate income depending on your choice. 2. The choice to make either separate or joint tax payments will not affect your right to file either MFJ or MFS. E. Refer to Table 18-1 for a flowchart of who has to pay estimated tax.

30. WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR

31. FIGURING ESTIMATED TAX PAYMENTS A. To determine the amount of your payments, you first must figure your estimated tax liability. 1. Estimate your AGI (include all taxable income received whether or not tax is withheld from the income) 2. Subtract your standard deduction or estimated itemized deductions and exemptions 3. Subtract any credits you will claim, and 4. Add other taxes you will owe. 5. Use the worksheet included with Form 1040-ES and keep it with your records.

32. FIGURING ESTIMATED TAX PAYMENTS B. The amount of the estimated tax you must pay during the year (the required annual payment) is the smaller of 90% of the expected tax for the tax year, or 100% of the total tax on your last year’s return (or a higher percentage if you are a higher income tax payer). 1. Subtract your expected withholding from the required annual payment.

33. FIGURING ESTIMATED TAX PAYMENTS – Problem 1 Meg's total tax for 2008 was $3,500. She estimates her tax for 2009 will be $4,200. Her required annual payment for 2009 is $3,500. $3,500 is the smaller of 100% of her 2008 total tax or 90% of her estimated 2009 tax ($3,780). Her estimated withholding is $2,000. What amount of estimated tax payments must Meg make in 2009 to avoid a penalty? a. $1,000 b. $1,500 c. $2,000

34. FIGURING ESTIMATED TAX PAYMENTS – Problem 1 Meg's total tax for 2008 was $3,500. She estimates her tax for 2009 will be $4,200. Her required annual payment for 2009 is $3,500. $3,500 is the smaller of 100% of her 2008 total tax or 90% of her estimated 2009 tax ($3,780). Her estimated withholding is $2,000. What amount of estimated tax payments must Meg make in 2009 to avoid a penalty? b. $1,500 The amount of estimated tax payments Meg must make in 2009 to avoid a penalty is $1,500 ($3,500-$2,000).

35. FIGURING ESTIMATED TAX PAYMENTS – Problem 2 Suppose Meg estimates her tax for 2009 will be $2,800. Her estimated withholding is still $2,000. Would Meg be required to make estimated tax payments? Yes or No?

36. FIGURING ESTIMATED TAX PAYMENTS – Problem 2 Suppose Meg estimates her tax for 2009 will be $2,800. Her estimated withholding is still $2,000. Would Meg be required to make estimated tax payments? No Because her estimated tax NOT covered by withholding is less than $1,000, Meg is not required to make estimated tax payments ($2,800-$2,000=$800).

37. FIGURING ESTIMATED TAX PAYMENTS When figuring your estimated tax, you can use prior year information as a starting point. Be sure to adjust for changes in both your own tax situation and the tax law. Bo was divorced in January 2009. His former wife has custody of their child for whom she claims the dependent exemption. When figuring his estimated tax, Bo must take these changes into account or he will not get an accurate estimate of his tax liability for 2009. For 2008, Bo filed MFJ. In 2009, Bo's filing status is single with a lower standard deduction and has only his own exemption rather than three. As a result, his taxable income for 2009 will be higher even if his AGI is the same in 2008 and 2009. He will, therefore, have a greater tax liability in 2009.

38. FIGURING ESTIMATED TAX PAYMENTS Form 1040-ES, Estimated Tax for Individuals, includes a worksheet to help you figure your estimated tax. Keep the worksheet with your records; do not send it to the IRS. Early in 2009, Anne and Larry Jones figure their estimated tax payments for the year. They expect to receive the following income during 2009: Larry's salary $34,200 Unemployment compensation 600 Anne's projected net self-employment profit 38,500 Net rental income 2,671 Dividends 3,745 Interest income 2,300 Total $82,016

39. FIGURING ESTIMATED TAX PAYMENTS They also use the following expected items to figure their estimated tax: Adjustment to income for IRA contributions $ 1,000 Standard deduction 10,700 Deduction for exemptions (2 X $3,500) 7,000 2008 total tax 9,096 Withholding from Larry’s 2008 salary 5,795 The Joneses plan to file a joint return for 2009. They use the 2009 Estimated Tax Worksheet included in Form 1040–ES to figure their estimated tax payments. Their completed worksheet follows this discussion.

40. FIGURING ESTIMATED TAX PAYMENTS Expected adjusted gross income. Anne can claim an income tax deduction for one-half of her self-employment tax as a business expense. So before the Joneses figure their expected adjusted gross income, they figure Anne's expected self-employment tax as follows:

41. FIGURING ESTIMATED TAX PAYMENTS 1. Enter your expected income and profits subject to self-employment tax $38,500 2. Multiply the amount on line 1 by .9235 $35,555 3. Multiply the amount on line 2 by .029 $ 1,031 4. Social security tax maximum income $106,800 5. Enter your expected wages (if subject to social security tax) -0- 6. Subtract line 5 from line 4 Note. If line 6 is zero or less, enter –0– on line 8 and skip to line 9. $106,800 7. Enter the smaller of line 2 or line 6 $35,555 8. Multiply the amount on line 7 by .124 $ 4,409 9. Add line 3 and line 8. Enter the result here and on line 11 of your 2009 Estimated Tax Worksheet $ 5,440 10. Multiply the amount on line 9 by .50. This is your deduction for one-half your self- employment tax $ 2,720

42. FIGURING ESTIMATED TAX PAYMENTS The Joneses enter $35,555 on the dotted line and $5,440 in the blank on line 11 of the worksheet. They subtract one-half of that amount, $2,720, and their $1,000 adjustment for IRA contributions from their $82,016 total income to find their expected adjusted gross income, $78,296. They enter that amount on the worksheet line 1 and use their other information to figure their required annual payment, the amount they must pay by making estimated tax payments to avoid an underpayment penalty.

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46. WHEN TO PAY ESTIMATED TAX A. The year is divided into four estimated tax payment periods. The due dates are April 15, June 15, September 15, and January 15 of the following year. 1. You do not have to make the January payment if you file by January 31 and pay the rest of the tax you owe with the return. 2. Refer to Table 18-2 for payment periods and due dates. 3. You do not have to make estimated tax payments until you have income on which you will owe tax. 4. Refer to Table 18-3 for when to make payments based on when you first receive taxable income. 5. If changes in your income, exemptions, etc. change your estimated tax, pay the new amount by the next due date or in installments.

47. WHEN TO PAY ESTIMATED TAX Table 18-2. When To Pay Estimated Taxes.

48. WHEN TO PAY ESTIMATED TAX Table 18-3. When To Make Installment Payments.

49. WHEN TO PAY ESTIMATED TAX David is an employee and taxes are withheld from his wages. In July, he sold stock and realized a long-term gain of $28,000. When he refigures his tax liability for the year, he determines that his withholding will underpay the new required annual payment by $2,000. He must either adjust his withholding to cover the difference or make a 3rd quarter estimated tax payment by September 15. He can pay the entire estimated tax payment by September 15 or pay half by September 15 and half by January 15.

50. AMOUNT OF PAYMENTS A. Pay enough by the due date of each period to avoid a penalty for that period. B. Use the regular installment method to figure your payments if you expect your annual estimated income to stay the same throughout the year. 1. To find the amount due each payment period, divide the required annual payment you expect to owe for the year by 4. C. Use the annualized installment method if you do not receive your income evenly throughout the year. 1. To see if you can pay less for any period use the worksheet and follow the instructions in Publication 505.