1 liberty tax service online basic income tax course. lesson 5

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Liberty Tax Service Liberty Tax Service Online Basic Income Tax Online Basic Income Tax

Course.Course.

Lesson 5 Lesson 5

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4HOMEWORK 1: Answer the questions for each situation.HOMEWORK 1: Answer the questions for each situation.

1. 1. Frankie is employed by Sherman Bros. Insurance. In 2008, his salary Frankie is employed by Sherman Bros. Insurance. In 2008, his salary was $48,500. Frankie participates in the 401(k) retirement plan his was $48,500. Frankie participates in the 401(k) retirement plan his employer has set up. In 2008, Frankie contributed $4,000 to the employer has set up. In 2008, Frankie contributed $4,000 to the plan. Frankie also received the following from his employer in 2008:plan. Frankie also received the following from his employer in 2008:

A Florida vacation worth $3,264 as a prize for meeting his A Florida vacation worth $3,264 as a prize for meeting his sales goals. Frankie was not able to take the vacation until sales goals. Frankie was not able to take the vacation until January 2008.January 2008.

$200 tickets to a pro basketball game as a Christmas present.$200 tickets to a pro basketball game as a Christmas present. Group health insurance premiums valued at $3,400.Group health insurance premiums valued at $3,400. $2,500 as reimbursement for his travel costs. Frankie does not $2,500 as reimbursement for his travel costs. Frankie does not

have to account to Sherman Bros. for the reimbursements or have to account to Sherman Bros. for the reimbursements or return any money he does not spend.return any money he does not spend.

a.a. Which of the above 4 items are taxable to Frankie in 2008? Which of the above 4 items are taxable to Frankie in 2008? Florida Florida vacation, pro basketball tickets, travel cost reimbursementsvacation, pro basketball tickets, travel cost reimbursements

b.b. What is the amount of employee compensation that will be shown in What is the amount of employee compensation that will be shown in box 1 of Frankie’s Form W-2? box 1 of Frankie’s Form W-2? $50,464 which consists of:$48,500 $50,464 which consists of:$48,500 (wages) - $4,000 (401(k) contribution) + $3,264 (vacation) + $200 (wages) - $4,000 (401(k) contribution) + $3,264 (vacation) + $200 (tickets) + $2,500 (travel)(tickets) + $2,500 (travel)

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4HOMEWORK 1: Answer the questions for each situation.HOMEWORK 1: Answer the questions for each situation.

2.2. Cameron Smith worked for a cab company for 6 months in 2008. He Cameron Smith worked for a cab company for 6 months in 2008. He received the following Form W-2.received the following Form W-2.

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4

HOMEWORK 1HOMEWORK 1

Cameron reported his tips as required to his employer. The monthly totals in Cameron reported his tips as required to his employer. The monthly totals in his tip diary are as follows:his tip diary are as follows:

January $34January $34February $20February $20March $18March $18April $25April $25May $16May $16June $28June $28

a.a. What is the total amount of tips that Cameron reported to his employer? What is the total amount of tips that Cameron reported to his employer? $107 ( $34 + $20 +$25 + $28 = $107)$107 ( $34 + $20 +$25 + $28 = $107)

b.b. What is the total amount of Cameron’s tips that is subject to income tax? What is the total amount of Cameron’s tips that is subject to income tax? $141 ($107 + $18 + $16 = $141)$141 ($107 + $18 + $16 = $141)

c.c. What amount does Cameron enter on Form 1040, line 7?What amount does Cameron enter on Form 1040, line 7? $ 10,357 ($10,323 + $18 + $16 = $10,357)$ 10,357 ($10,323 + $18 + $16 = $10,357)

a.a. How much is his federal withholding? How much is his federal withholding? $1,032$1,032

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HOMEWORK CHAPTER 4HOMEWORK CHAPTER 4HOMEWORK 2: Fill out page 1 of Form 1040 through line 7 and page 2, line 62, for the 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.following using the information and forms provided.

1. Austin L. (SSN 032-78-6543, born 5/16/1975) and Felicity N. Geary (SSN 044-1. 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 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 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) 8/25/1996) and their daughter Darlene (SSN 511-51-1111, born 5/31/2000) are qualifying children for the child tax credit.are qualifying children for the child tax credit.

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77


88


99


1010


1111


2. Craig R. Gregory (SSN 333-98-7654, born 9/24/1973) is 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 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 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 stated in writing that his former wife can claim the exemption for Barry. Craig pays 70% of the total support for his widowed Barry. Craig pays 70% of the total support for his widowed stepfather Lucian Alexander (SSN 277-77-8787, born stepfather Lucian Alexander (SSN 277-77-8787, born 12/12/1935), who does not live with him. Lucian’s gross income 12/12/1935), who does not live with him. Lucian’s gross income in 2008 was $2,400.in 2008 was $2,400.

On some weekends, Craig works as a waiter at a banquet hall. In 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 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 plus two tickets to the Bulls game (value $55). He did not report these tips to his employer. For every other month, Craig received these tips to his employer. For every other month, Craig received $20 or more in tips and he reported these to his employer.$20 or more in tips and he reported these to his employer.

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Chapter 5: Interest, Dividends, and Other IncomeChapter 5: Interest, Dividends, and Other Income

Chapter ContentChapter ContentTaxable InterestTaxable InterestU.S. Savings BondsU.S. Savings BondsTax-Exempt InterestTax-Exempt InterestDividendsDividendsTaxable State and Local Income Tax RefundsTaxable State and Local Income Tax RefundsAlimony ReceivedAlimony ReceivedUnemployment CompensationUnemployment CompensationOther IncomeOther IncomeKey IdeasKey Ideas

ObjectivesObjectivesDetermine the Reporting of Interest and DividendsDetermine the Reporting of Interest and DividendsKnow How to Distinguish Between Taxable and Tax-Exempt Know How to Distinguish Between Taxable and Tax-Exempt Interest and DividendsInterest and DividendsUnderstand How to Report Taxable Refunds, etc., From State and Local Income Understand How to Report Taxable Refunds, etc., From State and Local Income

TaxesTaxesIdentify Taxable Alimony and How to Report ItIdentify Taxable Alimony and How to Report ItLearn About Unemployment Compensation and How to Report ItLearn About Unemployment Compensation and How to Report ItReport Other Sources of Taxable Income Report Other Sources of Taxable Income Identify when Back up Withholding is RequiredIdentify when Back up Withholding is Required

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Key Terms and DefinitionsKey Terms and Definitions

Earned Income – All amounts received from providing a service, Earned Income – All amounts received from providing a service, including wages, tips, bonuses and self-employment income in the including wages, tips, bonuses and self-employment income in the form of money, services or property. Investment income, such as form of money, services or property. Investment income, such as dividends and interest, is dividends and interest, is notnot counted as earned income. counted as earned income.

Unearned Income – Money received for the investment of money or Unearned Income – Money received for the investment of money or other property, such as interest, dividends and royalties. It also other property, such as interest, dividends and royalties. It also includes pensions, alimony, unemployment compensation and includes pensions, alimony, unemployment compensation and other income that is not earned for services performed.other income that is not earned for services performed.

Taxable Interest – Includes interest you receive from bank accounts, Taxable Interest – Includes interest you receive from bank accounts, loans you make to others, and other sources. loans you make to others, and other sources.

Tax-Exempt Interest - Interest income that is not subject to income Tax-Exempt Interest - Interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.states, cities, or counties and the District of Columbia.

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Key Terms and DefinitionsKey Terms and Definitions

Dividends – A stockholder’s share of the profit paid on an investment Dividends – A stockholder’s share of the profit paid on an investment in a corporation reported on Form 1099-DIV. “Dividends” from a in a corporation reported on Form 1099-DIV. “Dividends” from a savings and loan association or from a credit union are actually savings and loan association or from a credit union are actually reported as interest.reported as interest.

Capital Gain Distribution – Shareholder’s portion of gain from the sale Capital Gain Distribution – Shareholder’s portion of gain from the sale of capital assets, such as mutual funds and real estate investment of capital assets, such as mutual funds and real estate investment trusts. Capital gain distributions are taxed in the year received trusts. Capital gain distributions are taxed in the year received and are always considered to be held long term.and are always considered to be held long term.

Unemployment Compensation – Includes benefits to unemployed Unemployment Compensation – Includes benefits to unemployed individuals that a state or the District of Columbia paid from the individuals that a state or the District of Columbia paid from the Federal Unemployment Trust Fund.Federal Unemployment Trust Fund.

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Reporting Interest Income and DividendsReporting Interest Income and Dividends

Interest income and dividends are common types of unearned Interest income and dividends are common types of unearned income.income. They are considered They are considered unearned incomeunearned income because money, and not a because money, and not a person, is working to earn the income.person, is working to earn the income.

Most types of interest and dividends are taxable.Most types of interest and dividends are taxable.All interest and dividends must be reported on your tax return.All interest and dividends must be reported on your tax return.Interest Interest over $10over $10 is usually reported to you on is usually reported to you on a Form 1099-INT.a Form 1099-INT.Dividends Dividends over $10over $10 are reported to you on a Form 1099-DIV. are reported to you on a Form 1099-DIV.

Substitute Forms 1099-INT and 1099-DIV may also be usedSubstitute Forms 1099-INT and 1099-DIV may also be used

Interest and dividends Interest and dividends over $1,500over $1,500 must be reported on Schedule B of must be reported on Schedule B of Form 1040.Form 1040.

Taxable interest is reported on line 8a of Form 1040. Taxable interest is reported on line 8a of Form 1040.

Tax-exempt interest is reported on line 8b.Tax-exempt interest is reported on line 8b.

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Form 1099-INTForm 1099-INT

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Form 1099-DIV Form 1099-DIV

2121

Taxable InterestTaxable Interest

Most interest income is taxable. In general, any Most interest income is taxable. In general, any interest that you receive or that is credited to interest that you receive or that is credited to your account and can be withdrawn is your account and can be withdrawn is taxable taxable incomeincome..

Sara earned $49 in interest on money in her bank Sara earned $49 in interest on money in her bank savings account. She must report the $49 as savings account. She must report the $49 as interest income even though she did not interest income even though she did not withdraw it from the bank.withdraw it from the bank.

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Taxable interest income includes interest from:Taxable interest income includes interest from: bank accountsbank accounts interest on loans you make to othersinterest on loans you make to others interest from most other sources. interest from most other sources.

Report the total taxable interest income on line 8a of Report the total taxable interest income on line 8a of Form 1040.Form 1040.

If your total interest income is more than $1,500, Part I If your total interest income is more than $1,500, Part I and III of Schedule B must be completed. and III of Schedule B must be completed.

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Zachary received $1,500 in interest income from BBT Bank Zachary received $1,500 in interest income from BBT Bank this year. He will report the $1,500 directly on line 8a of this year. He will report the $1,500 directly on line 8a of Form 1040. If his interest income from BBT Bank were Form 1040. If his interest income from BBT Bank were $1,501, he would also need to report the $1,501 on Part I $1,501, he would also need to report the $1,501 on Part I of Schedule B as in the second example below.of Schedule B as in the second example below.

Form 1040, Page 1Form 1040, Page 1

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Some of the other common sources of taxable Some of the other common sources of taxable interest come from interest on:interest come from interest on:

Certificates of deposit (CDs)Certificates of deposit (CDs) Deposits or share accounts from credit unions, Deposits or share accounts from credit unions,

mutual savings banks, cooperative banks, and mutual savings banks, cooperative banks, and federal and domestic savings and loan associationsfederal and domestic savings and loan associations

U.S. obligations such as U.S. Treasury bills, notes U.S. obligations such as U.S. Treasury bills, notes and bondsand bonds

U.S. savings bondsU.S. savings bonds Installment sale paymentsInstallment sale payments Life insurance proceeds remaining with the Life insurance proceeds remaining with the

insurance companyinsurance company Tax refundsTax refunds Gifts for opening accounts Gifts for opening accounts

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U.S. SAVINGS BONDSU.S. SAVINGS BONDS Interest on U.S. Savings Bonds is reported in box 3 of Form 1099-INT. If you use Interest on U.S. Savings Bonds is reported in box 3 of Form 1099-INT. If you use

the the cash method of accountingcash method of accounting, as most individual taxpayers do, you , as most individual taxpayers do, you generally report interest on U.S. savings bonds in the year that you receive it. generally report interest on U.S. savings bonds in the year that you receive it. There are three types of U.S. Savings Bonds:There are three types of U.S. Savings Bonds:

HH bonds HH bonds EE bondsEE bondsI bondsI bonds

HH Bonds are purchased at face value. Interest is paid semiannually. You HH Bonds are purchased at face value. Interest is paid semiannually. You report the interest as income in the year it is received.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 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 taxed when the bond is redeemed. The taxable interest is the difference between the purchase amount and the redemption value.between the purchase amount and the redemption value.

I Bonds are newer U.S. bonds. They are purchased at face value and interest is I Bonds are newer U.S. bonds. They are purchased at face value and interest is paid at maturity.paid at maturity.

You can report the interest on series EE, series E, and series I bonds in either of You can report the interest on series EE, series E, and series I bonds in either of the following ways:the following ways:

Method 1. Report the interest at maturity of the bond or when you cash it.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.Method 2. Report the increase in redemption value as interest each year.

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U.S. SAVINGS BONDSU.S. SAVINGS BONDS

Sometimes U.S. Savings Bonds are owned by more than one person.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.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 taxesInterest on U.S. savings bonds is exempt from state and local taxes

Table 5-1. Who Pays the Tax on U.S. Savings Bond InterestTable 5-1. Who Pays the Tax on U.S. Savings Bond Interest

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OTHER INTERESTOTHER INTEREST

CERTIFICATE OF DEPOSIT (CD)CERTIFICATE OF DEPOSIT (CD)1.1. If you buy CDs with maturity of more than one If you buy CDs with maturity of more than one

year, include part of the interest as income year, include part of the interest as income each year.each year.

2.2. Early withdrawal penalty is reported in box Early withdrawal penalty is reported in box 2 of Form 1099-INT and reported on line 30 2 of Form 1099-INT and reported on line 30 of Form 1040.of Form 1040.

3.3. Early withdrawal penalty is for withdrawing Early withdrawal penalty is for withdrawing money from CDs or other time-deposit money from CDs or other time-deposit savings accounts before the maturity date. savings accounts before the maturity date. It is a forfeit of some of the interest paidIt is a forfeit of some of the interest paid

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LIFE INSURANCE PROCEEDSLIFE INSURANCE PROCEEDS

Life insurance proceeds paid to a beneficiary Life insurance proceeds paid to a beneficiary are not usually taxable unless the benefits are not usually taxable unless the benefits received are more than the amount that received are more than the amount that would have been payable at time of would have been payable at time of insured person’s death. (Interest can insured person’s death. (Interest can accrue before distribution)accrue before distribution)

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TAX REFUNDSTAX REFUNDS

Interest received on tax refunds is taxable income.Interest received on tax refunds is taxable income.

GIFT/OPENING AN ACCOUNTGIFT/OPENING AN ACCOUNT

The fair market value of a gift or service you receive The fair market value of a gift or service you receive for opening an accountfor opening an account in a savings institution in a savings institution must be reported as interest in the year you must be reported as interest in the year you receive it. receive it.

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Tom has a CD that matures in January 2009 and Tom has a CD that matures in January 2009 and paid $75 in interest in 2008. Does Tom include paid $75 in interest in 2008. Does Tom include the $75 interest as income on his 2008 return?the $75 interest as income on his 2008 return?

Yes or No?Yes or No?

3131


Tom has a CD that matures in January 2009 and Tom has a CD that matures in January 2009 and paid $75 in interest in 2008. Does Tom include paid $75 in interest in 2008. Does Tom include the $75 interest as income on his 2008 return?the $75 interest as income on his 2008 return?

YesYes

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TAX-EXEMPT INTERESTTAX-EXEMPT INTEREST

Some types of interest are exempt from Some types of interest are exempt from federal income tax. If you are required to federal income tax. If you are required to file a return you must show any tax-exempt file a return you must show any tax-exempt interest you receive for informational interest you receive for informational purposes only. Tax-exempt interest is purposes only. Tax-exempt interest is reported on line 8b of Form 1040 and reported on line 8b of Form 1040 and generally you will generally you will notnot receive a Form 1099- receive a Form 1099-INT. INT.

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DIVIDENDSDIVIDENDS

Distributions of money, stock, or other Distributions of money, stock, or other property paid to you by a corporation.property paid to you by a corporation.

Report dividends over $1,500 on Part II Report dividends over $1,500 on Part II of Schedule B.of Schedule B.

Dividends may also come from a Dividends may also come from a partnership, estate, trust, or an S partnership, estate, trust, or an S corporation and be reported to you on a corporation and be reported to you on a Form K1.Form K1.

Major types of dividends are: ordinary Major types of dividends are: ordinary dividends, capital gain distributions, dividends, capital gain distributions, nondividend distributions, and other nondividend distributions, and other distributions.distributions.

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DIVIDENDSDIVIDENDS

Ordinary dividends are taxable income and Ordinary dividends are taxable income and are paid out of the earnings and profits are paid out of the earnings and profits of a corporation. of a corporation.

They are NOT capital gains.They are NOT capital gains.

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DIVIDENDSDIVIDENDSSchedule B, Part II

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DIVIDENDSDIVIDENDS

Pauline Adams received a Form 1099-DIV for $1,646 Pauline Adams received a Form 1099-DIV for $1,646 from NY Money Market Fund.from NY Money Market Fund.

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DIVIDENDSDIVIDENDS

Qualified dividends are the ordinary dividends Qualified dividends are the ordinary dividends that are subject to the same 0% or 15% that are subject to the same 0% or 15% maximum tax rate that applies to net maximum tax rate that applies to net capital gain. capital gain.

Qualified dividends should be shown in box 1b Qualified dividends should be shown in box 1b of Form 1099-DIV. Capital gains will be of Form 1099-DIV. Capital gains will be covered in Chapter 11. covered in Chapter 11.

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DIVIDENDSDIVIDENDS

Capital Gain DistributionsCapital Gain Distributions

Mutual funds pass capital gains to investors as Mutual funds pass capital gains to investors as capital gain distributions. Capital gain capital gain distributions. Capital gain distributions are reported in box 2a of 1099-DIV distributions are reported in box 2a of 1099-DIV and are reported directly on line 13 of Form and are reported directly on line 13 of Form 1040 if a Schedule D is not required.1040 if a Schedule D is not required.

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DIVIDENDSDIVIDENDS

Corey does not have to file a Schedule D. He Corey does not have to file a Schedule D. He received a capital gain distribution of $695 received a capital gain distribution of $695 from JTH investments in 2008.from JTH investments in 2008.

Form 1040, Page 1Form 1040, Page 1

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DIVIDENDSDIVIDENDS Nondividend distributionsNondividend distributions

A return of capital is reported to you on A return of capital is reported to you on box 3 of Form 1099-DIV. Report the box 3 of Form 1099-DIV. Report the return of capital as a capital gain once return of capital as a capital gain once your basis has been reduced to zero.your basis has been reduced to zero.

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DIVIDENDSDIVIDENDS

Jesse purchased stock in 1996 for $4,000. He received Jesse purchased stock in 1996 for $4,000. He received a return of capital of $500 on the stock in 1999. a return of capital of $500 on the stock in 1999. Jesse reduced his basis in the stock to $3,500 Jesse reduced his basis in the stock to $3,500 ($4,000-$500). In 2008, he received a return of capital ($4,000-$500). In 2008, he received a return of capital of $4,500. Since he only had a basis of $3,500, his of $4,500. Since he only had a basis of $3,500, his basis was reduced to zero.basis was reduced to zero. What is the taxable What is the taxable amount for 2008?amount for 2008?

A. $4,500A. $4,500

B. $3,500B. $3,500

C. $1,000C. $1,000

4242

DIVIDENDSDIVIDENDS

Jesse purchased stock in 1996 for $4,000. He Jesse purchased stock in 1996 for $4,000. He received a return of capital of $500 on the stock in received a return of capital of $500 on the stock in 1999. Jesse reduced his basis in the stock to $3,500 1999. Jesse reduced his basis in the stock to $3,500 ($4,000-$500). In 2008, he received a return of capital ($4,000-$500). In 2008, he received a return of capital of $4,500. Since he only had a basis of $3,500, his of $4,500. Since he only had a basis of $3,500, his basis was reduced to zero.basis was reduced to zero. What is the taxable What is the taxable amount for 2008?amount for 2008?

C. $1,000C. $1,000

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OTHER DISTRIBUTIONSOTHER DISTRIBUTIONS

Alaska Permanent Fund Dividends are not Alaska Permanent Fund Dividends are not dividends. They are reported on line 21 of Form 1040 dividends. They are reported on line 21 of Form 1040 as other income.as other income.

4444

BACKUP WITHHOLDING ON BACKUP WITHHOLDING ON INTEREST AND DIVIDENDSINTEREST AND DIVIDENDS

Interest and dividends are generally not subject to Interest and dividends are generally not subject to withholding. However, if you fail to give the payer withholding. However, if you fail to give the payer your social security number or you give an incorrect your social security number or you give an incorrect number, the payments are subject to mandatory number, the payments are subject to mandatory withholding (backup withholding).withholding (backup withholding).

Backup withholding will be shown in box 4 of Form Backup withholding will be shown in box 4 of Form 1040-INT or Form 1040-DIV.1040-INT or Form 1040-DIV.

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TAXABLE STATE AND LOCAL INCOME TAXABLE STATE AND LOCAL INCOME TAX REFUNDSTAX REFUNDS

State or local income tax refunds, etc. State or local income tax refunds, etc.

Reported on Form 1099-G.Reported on Form 1099-G.

If you itemized deductions and claimed state and If you itemized deductions and claimed state and local income taxes as an itemized local income taxes as an itemized deduction and receive a state or local deduction and receive a state or local refund, generally reported on line 10 of refund, generally reported on line 10 of Form 1040. Form 1040.

If you either took standard deduction or claimed If you either took standard deduction or claimed state and local general sales taxes as a state and local general sales taxes as a deduction then the state or local tax refund deduction then the state or local tax refund is is notnot taxable. taxable.

4646

TAXABLE STATE AND LOCAL INCOME TAXABLE STATE AND LOCAL INCOME TAX REFUNDSTAX REFUNDS

In 2008, Natalie, age 42, received a Form In 2008, Natalie, age 42, received a Form 1099-G for her state refund of $325. Her 1099-G for her state refund of $325. Her total itemized deductions in 2007 were total itemized deductions in 2007 were $7,200. Her filing status was single. Using $7,200. Her filing status was single. Using the worksheet on the next page, Natalie will the worksheet on the next page, Natalie will report $325 on line 10 of her Form 1040report $325 on line 10 of her Form 1040. .

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TAXABLE REFUNDS, CREDITS, OR OFFSETS TAXABLE REFUNDS, CREDITS, OR OFFSETS OF STATE AND LOCAL INCOME TAXESOF STATE AND LOCAL INCOME TAXES

Form 1040, Page 1

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ALIMONY RECEIVEDALIMONY RECEIVED

Report alimony received on line 11 of Report alimony received on line 11 of Form 1040.Form 1040.

Child support payments are NOT Child support payments are NOT alimony.alimony.

Use Table 5-2 (page 5-13) to clarify Use Table 5-2 (page 5-13) to clarify alimony requirements alimony requirements

Child support payments are NOT Child support payments are NOT alimony. If you make child support alimony. If you make child support payments, do not deduct them. If you payments, do not deduct them. If you are receiving child support payments, are receiving child support payments, you do not have to include them as you do not have to include them as income.income.

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ALIMONY RECEIVEDALIMONY RECEIVEDThe following table shows what is, and what The following table shows what is, and what

is not considered alimony. is not considered alimony.

Table 5-2 Alimony Requirements (Instruments Executed After 1984)Table 5-2 Alimony Requirements (Instruments Executed After 1984)

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Wanda receives $250 per month of alimony. What Wanda receives $250 per month of alimony. What amount is reported on Form 1040?amount is reported on Form 1040?

A. $250A. $250

B. $3,000B. $3,000

C. $2,500C. $2,500

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Wanda receives $250 per month of alimony. What Wanda receives $250 per month of alimony. What amount is reported on Form 1040?amount is reported on Form 1040?

B. $3,000B. $3,000

She reports the $3,000 ($250 x 12) on line 11 of Form 1040.She reports the $3,000 ($250 x 12) on line 11 of Form 1040.

5252

UNEMPLOYMENT COMPENSATIONUNEMPLOYMENT COMPENSATION

Unemployment compensation is Unemployment compensation is taxable.taxable. Reported to you on Form 1099-GReported to you on Form 1099-G You report it on line 19 of Form 1040.You report it on line 19 of Form 1040.

5353

UNEMPLOYMENT COMPENSATIONUNEMPLOYMENT COMPENSATION

Anthony Sanders (073-22-8990) received $463 in Anthony Sanders (073-22-8990) received $463 in unemployment compensation in 2008 and it was reported unemployment compensation in 2008 and it was reported on the following Form 1099-G. He records the amount from on the following Form 1099-G. He records the amount from box 1 on line 19 of Form 1040.box 1 on line 19 of Form 1040.

Form 1040, Page 1

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OTHER INCOMEOTHER INCOME

Report other income not covered on lines 7-20b on Report other income not covered on lines 7-20b on line 21 of Form 1040.line 21 of Form 1040.

1.1. Includes prizes, awards, lottery winnings, and Includes prizes, awards, lottery winnings, and jury dutyjury duty

2.2. Gambling income includes winnings from Gambling income includes winnings from lotteries, raffles, horse and dog races and lotteries, raffles, horse and dog races and casinos, as well as the fair market value of casinos, as well as the fair market value of prizes such as cars, houses, trips or other prizes such as cars, houses, trips or other noncash prizes. Gambling winnings of $600 noncash prizes. Gambling winnings of $600

or more are reported on Form W-2G.or more are reported on Form W-2G.

Describe the type of income on dotted line next Describe the type of income on dotted line next to line 21.to line 21.

5555

OTHER INCOMEOTHER INCOME

Donna won $2,500 in her state lottery. It was Donna won $2,500 in her state lottery. It was reported to her on a Form W-2G. Line 21 of reported to her on a Form W-2G. Line 21 of Form 1040 is shown below.Form 1040 is shown below.

Form 1040, Page 1

5656

WITHHOLDING ON GAMBLING WITHHOLDING ON GAMBLING INCOMEINCOME

Certain types of gambling winnings are subject to Certain types of gambling winnings are subject to mandatory withholding. Generally, tax will be mandatory withholding. Generally, tax will be withheld from winnings of more than $5,000.withheld from winnings of more than $5,000.

All gambling winnings are taxable even if you do not All gambling winnings are taxable even if you do not receive a Form W-2G.receive a Form W-2G.

5757

VOLUNTARY WITHHOLDINGVOLUNTARY WITHHOLDING

If you receive income from unemploymentIf you receive income from unemployment compensationcompensation, you can choose to have income , you can choose to have income tax withheld from the payments. To make this tax withheld from the payments. To make this choice, you will have to fill out a choice, you will have to fill out a FormForm W-4VW-4V, , Voluntary Withholding RequestVoluntary Withholding Request. .

Box 4 of Box 4 of FormForm 1099-G1099-G, , Certain Government Certain Government Payments,Payments, shows the taxes withheld from your shows the taxes withheld from your unemployment compensation. For unemployment compensation. For unemployment compensation, the payer is unemployment compensation, the payer is permitted to withhold 10% from each payment. permitted to withhold 10% from each payment. No other percentage or amount is allowed. No other percentage or amount is allowed.

5858

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeKEY IDEASKEY IDEAS

Report interest and/or dividend income over $1,500 on Report interest and/or dividend income over $1,500 on Schedule B, Form 1040.Schedule B, Form 1040.

Report early withdrawal penalties on line 30 of Form 1040. Report early withdrawal penalties on line 30 of Form 1040. Report capital gain distributions on lines 13 of Form 1040 Report capital gain distributions on lines 13 of Form 1040

if you are not required to file Schedule D.if you are not required to file Schedule D. State and local tax refunds are included in taxable income State and local tax refunds are included in taxable income

if you itemized deductions for the refund year and you if you itemized deductions for the refund year and you received a tax benefit by including the state and local tax received a tax benefit by including the state and local tax in itemized deductions.in itemized deductions.

Alimony and separate maintenance payments are taxable Alimony and separate maintenance payments are taxable income to the recipient of these payments and reported income to the recipient of these payments and reported on line 11 of Form 1040.on line 11 of Form 1040.

Other income, such as prizes, awards, gambling winnings, Other income, such as prizes, awards, gambling winnings, and jury duty pay, is reported on line 21 of Form 1040; and jury duty pay, is reported on line 21 of Form 1040; include the amount and a description of the income.include the amount and a description of the income.

You can choose to have income tax withheld from other You can choose to have income tax withheld from other types of income such as unemployment compensation.types of income such as unemployment compensation.

5959

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: CLASSWORK 1: True or FalseTrue or False1.1. Interest income of less than $10 is not required to be reported. Interest income of less than $10 is not required to be reported.

2.2. Total interest income of more than $1,500 must be reported on Schedule Total interest income of more than $1,500 must be reported on Schedule B, Part I. B, Part I.

3.3. Report a dividend from a credit union of less than $1,500 on line 8a of 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. Form 1040 if you have no other similar income.

4.4. Interest credited to a savings account is unearned income. Interest credited to a savings account is unearned income.

5.5. Interest on a Roth IRA is reported on line 8b of Form 1040. Interest on a Roth IRA is reported on line 8b of Form 1040.

6.6. Interest on an EE or I bond can only be reported at the maturity date or Interest on an EE or I bond can only be reported at the maturity date or when you cash it. when you cash it.

7.7. Interest on U.S. savings bonds is taxable on the state return. Interest on U.S. savings bonds is taxable on the state return.

8.8. If money is withdrawn from a CD before the maturity date and you 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 forfeited some of the interest paid, report this amount on line 30 of Form 1040 as an early withdrawal penalty. 1040 as an early withdrawal penalty.

6060

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: True or FalseCLASSWORK 1: True or False

9.9. Interest received on tax refunds is not taxable income. Interest received on tax refunds is not taxable income.

10.10. Life insurance proceeds you receive as a beneficiary are usually not Life insurance proceeds you receive as a beneficiary are usually not taxable. taxable.

11.11. Jury duty pay is reported as income on line 21 of Form 1040. Jury duty pay is reported as income on line 21 of Form 1040.

12.12. Unemployment compensation is not taxable. Unemployment compensation is not taxable.

13.13. Alimony payments you receive are reported on Form 1040, line 11 and are Alimony payments you receive are reported on Form 1040, line 11 and are taxable. taxable.

14.14. Child support payments you make can be deducted from your total Child support payments you make can be deducted from your total income. income.

15.15. A state income tax refund is reported to you on Form 1099-G. A state income tax refund is reported to you on Form 1099-G.

16.16. All state tax refunds are nontaxable. All state tax refunds are nontaxable.

6161

Interest, Dividends, and Other IncomeInterest, Dividends, and Other Income

CLASSWORK 1: True or FalseCLASSWORK 1: True or False

17.17. Income from the Alaska Permanent Fund is reported on line 9a of Form Income from the Alaska Permanent Fund is reported on line 9a of Form 1040. 1040.

18.18. Interest and dividends are considered unearned income. Interest and dividends are considered unearned income.

19.19. Gambling winnings are not taxable. Gambling winnings are not taxable.

20.20. Child support payments are required to be reported on line 21. Child support payments are required to be reported on line 21.

6262

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: CLASSWORK 1: True or FalseTrue or False1.1. Interest income of less than $10 is not required to be reported. Interest income of less than $10 is not required to be reported. FF

2.2. Total interest income of more than $1,500 must be reported on Schedule Total interest income of more than $1,500 must be reported on Schedule B, Part I. B, Part I. TT

3.3. Report a dividend from a credit union of $1,500 or less on line 8a of Form 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. 1040 if you have no other similar income. TT

4.4. Interest credited to a savings account is unearned income. Interest credited to a savings account is unearned income. TT

5.5. Interest on a Roth IRA is reported on line 8b of Form 1040. Interest on a Roth IRA is reported on line 8b of Form 1040. FF

6.6. Interest on an EE or I bond can only be reported at the maturity date or Interest on an EE or I bond can only be reported at the maturity date or when you cash it. when you cash it. FF

7.7. Interest on U.S. savings bonds is taxable on the state return. Interest on U.S. savings bonds is taxable on the state return. FF

8.8. If money is withdrawn from a CD before the maturity date and you 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 forfeited some of the interest paid, report this amount on line 30 of Form 1040 as an early withdrawal penalty. 1040 as an early withdrawal penalty. TT

6363

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 1: True or FalseCLASSWORK 1: True or False

9.9. Interest received on tax refunds is not taxable income. Interest received on tax refunds is not taxable income. FF

10.10. Life insurance proceeds you receive as a beneficiary are usually not Life insurance proceeds you receive as a beneficiary are usually not taxable. taxable. TT (only interest earned after death is taxable)(only interest earned after death is taxable)

11.11. Jury duty pay is reported as income on line 21 of Form 1040. Jury duty pay is reported as income on line 21 of Form 1040. TT

12.12. Unemployment compensation is not taxable. Unemployment compensation is not taxable. FF

13.13. Alimony payments you receive are reported on Form 1040, line 11 and are Alimony payments you receive are reported on Form 1040, line 11 and are taxable. taxable. TT

14.14. Child support payments you make can be deducted from your total Child support payments you make can be deducted from your total income. income. FF

15.15. A state income tax refund is reported to you on Form 1099-G. A state income tax refund is reported to you on Form 1099-G. TT

16.16. All state tax refunds are nontaxable. All state tax refunds are nontaxable. FF

6464


CLASSWORK 1: True or FalseCLASSWORK 1: True or False

17.17. Income from the Alaska Permanent Fund is reported on line 9a of form Income from the Alaska Permanent Fund is reported on line 9a of form 1040. 1040. FF

18.18. Interest and dividends are considered unearned income. Interest and dividends are considered unearned income. TT

19.19. Gambling winnings are not taxable. Gambling winnings are not taxable. FF

20.20. Child support payments are required to be reported on line 21. Child support payments are required to be reported on line 21. FF

6565


CLASSWORK 2:CLASSWORK 2: Tom and Sally are filing a joint return. They have the following Tom and Sally are filing a joint return. They have the following

interest and/or dividend income:interest and/or dividend income:

Nations Savings and Loan (joint)Nations Savings and Loan (joint) $1,390$1,390

First Federal Bank (Sally) First Federal Bank (Sally) $125$125

Citizens Credit Union (Tom)Citizens Credit Union (Tom) $40$40

U.S. Series HH Savings Bonds (joint) U.S. Series HH Savings Bonds (joint) $45$45

Pullman Mutual Fund (joint)Pullman Mutual Fund (joint) $1,590$1,590

Determine the total amount of interest and/or dividend income and where it is reported on Form 1040 or other tax form.

6666


Classwork 2Classwork 2

Nations Saving and Loan Nations Saving and Loan $1,390$1,390First Federal BankFirst Federal Bank 125 125Citizens Credit UnionCitizens Credit Union 40 40U.S. Series HH Savings Bonds U.S. Series HH Savings Bonds 45 45

$1,600$1,600

$1,600 would be reported on Schedule B, Part I and line 8a of $1,600 would be reported on Schedule B, Part I and line 8a of Form 1040.Form 1040.

Pullman Mutual Fund $1,590Pullman Mutual Fund $1,590$1,590 would be reported on Schedule B, Part II and line 9a of $1,590 would be reported on Schedule B, Part II and line 9a of

Form 1040.Form 1040.

6767

Interest, Dividends, and Other IncomeInterest, Dividends, and Other IncomeCLASSWORK 3: CLASSWORK 3:

Assuming no other interest or dividend income, where are the following Assuming no other interest or dividend income, where are the following reported on the Federal tax return? (line of Form 1040 and the appropriate reported on the Federal tax return? (line of Form 1040 and the appropriate schedules, if any.)schedules, if any.)

Ordinary dividends over $1,500 Ordinary dividends over $1,500

Credit union dividends over $1,500Credit union dividends over $1,500

Savings account interest of $8Savings account interest of $8

Tax-exempt interest of $325Tax-exempt interest of $325

U.S. Treasury notes interest of $1,150 U.S. Treasury notes interest of $1,150

Early withdrawal penalty on a CD of $750Early withdrawal penalty on a CD of $750

Capital gain distributions of $2,333Capital gain distributions of $2,333

Alaska Permanent Fund dividends of $68Alaska Permanent Fund dividends of $68

6868


CLASSWORK 3: CLASSWORK 3:

Assuming no other interest or dividend income, where are the following Assuming no other interest or dividend income, where are the following reported on the Federal tax return? (line of Form 1040 and the reported on the Federal tax return? (line of Form 1040 and the appropriate schedules, if any.)appropriate schedules, if any.)

Ordinary dividends over $1,500Ordinary dividends over $1,500 - reported on Schedule B, - reported on Schedule B, Part II and line 9a of Form 1040Part II and line 9a of Form 1040

Credit union dividends over $1,500 Credit union dividends over $1,500 – reported on Schedule – reported on Schedule B, Part I and on line 8a of Form 1040B, Part I and on line 8a of Form 1040

Savings account interest of $8 Savings account interest of $8 – reported on line 8a of Form – reported on line 8a of Form 10401040

Tax-exempt interest of $325 Tax-exempt interest of $325 – reported on line 8b of Form – reported on line 8b of Form 10401040

6969


CLASSWORK 3:CLASSWORK 3:

U.S. Treasury notes interest of $1,150 U.S. Treasury notes interest of $1,150 – reported on line 8a – reported on line 8a of Form 1040of Form 1040

Early withdrawal penalty on a CD of $750 Early withdrawal penalty on a CD of $750 – reported on line – reported on line 30 of Form 1040 30 of Form 1040

Capital gain distributions of $2,333 Capital gain distributions of $2,333 – reported on line 13 of – reported on line 13 of Form 1040 and on Schedule D, (if required to file a Form 1040 and on Schedule D, (if required to file a Schedule D) Schedule D)

Alaska Permanent Fund dividends of $68 Alaska Permanent Fund dividends of $68 - reported on line - reported on line 21 of Form 1040 21 of Form 1040

7070

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