Tax Return Preparers - SwiftFP

Training Series

Tax Return Preparers

Property of SFP. Can only be use for intended purpose.

Tax- A MANDATORY payment by a governing body, for a service related or nonrelated to a specific person. (McGraw Hill’s Taxation of Individuals, 2012 Edition, Spilker B, Ayers B, ET ©2012)

Key phrases Payment is mandatory Payment is by a governing body The payment is either related or nonrelated to a

specific person

Tax Definition


Tax Preparers Ethics

DUTIES


Compute taxes owed or overpaid, using adding machines or personal computers, and complete entries on forms, following tax form instructions and tax tables.

Prepare or assist in preparing simple to complex tax returns for individuals or small businesses.

Use all appropriate adjustments, deductions, and credits to keep clients' taxes to a minimum.

Interview clients to obtain additional information on taxable income and deductible expenses and allowances.

Review financial records such as income statements and documentation of expenditures to determine forms needed to prepare tax returns.

Furnish taxpayers with sufficient information and advice to ensure correct tax form completion.

Consult tax law handbooks or bulletins to determine procedures for preparation of atypical returns.

Calculate form preparation fees according to return complexity and processing time required.

Check data input or verify totals on forms prepared by others to detect errors in arithmetic, data entry, or procedures.


DUTIES



Common Frivolous Arguments Filing a tax return or payment of tax is

voluntary. Only federal employees and persons living in

Washington, D.C., are subject to federal income tax.

Native Americans can avoid federal income tax because of a "Native American Treaty."

Taxpayers can validate invalid returns or other invalid tax positions or documents by writing or stamping the phrase "nunc pro tunc" on the face of the return.Property of SFP. Can only be use for intended purpose.

Income and expenses can be attributed to a purported trust to avoid federal income tax liability.

Taxpayers are not required to file an income tax return because of the Paperwork Reduction Act of 1980.

Taxes are only owed on foreign income under tax code Section 861.

Taxpayers have basis in their labor equal to the fair market value of their wages, and therefore have no taxable gain.


Common Frivolous Arguments



Taxpayers who reside in the U.S. are not citizens or persons within the meaning of the tax code.

U.S. residents living abroad who can exclude U.S. taxable income under tax code Section 911 are in fact residents of a foreign country.

Taxpayers can buy or sell the right to claim a child for purposes of the Earned Income Credit.

Taxpayers can deduct all of their no business-related household expenses if they establish home businesses.



Employer withholding of employment taxes is voluntary.

The 9th Amendment exempts those with religious or other objections to military spending from paying taxes to the extent the taxes will be used for military spending.

None of these or any of the other arguments on the IRS's full list of frivolous arguments will excuse you from filing a return or paying your taxes.




• Failure to furnish copy of return - IRC Section 6695(a) • $50 fine per return

• Failure to sign a tax return - IRC Section 6695(b)• $50 fine per return

• Failure to keep copy of tax return or a list of taxpayers for 3 years - IRC Section 6695(d)• $50 fine per return


Fines and Penalties


• Negligent or intentional disregard of tax rules and regulations – Internal Revenue Code (IRC) Section 6694(a) • $250 fine per return or claim

• Willful attempt to understate the liability for tax - IRC Section 6694(b) • $1,000 fine per return or claim

• Aiding and abetting understatement of tax liability - IRC Section 6701(a)• $1,000 fine per return ($10,000 for corporations)


Fines and Penalties


First introduced in 1986 to reduce paper and have more accurate tax forms

by 2010 there were 93.4 million out of the 129.3 million returns (72.3% of all tax returns)

In 2004 the IRS introduced Modernized E-file (MeF, or MeFile) for corporations to file.

In 2010 MeF was able to support the form 1040 series (1040, 1040A, 1040-EZ) and all supporting schedules

Almost all of the tax preparation services and CPA firms use E-file, including Swift Tax Refunds

Electronic Filing (e-File)


W-2 & 1099 Forms

W-2


Year-to-Date statement from employer to employee

Shows how much the employee made during the tax year, regardless of when the employee started or how long the employee worked there.

W-2 also shows how much Social Security and Medicare (FICA taxes) were taken out

How much federal withholding was withdrawn

W-2 & 1099 Forms


W-2

The form consists of six copies: Copy A - Submitted by the employer to the Social Security

Administration Copy B – Sent to employee and filed with employee’s tax

returns Copy C – Sent to employee for employee’s records Copy D – Retained by employer for employer’s records Copy 1 – Submitted by employer to employee’s state

and/or local taxing agency Copy2 - Sent to employee and filed with state and/or local

tax returns

W-2 & 1099 Forms


W-2

Taxpayers who receive an incorrect Form W-2 or do not receive one at all, must contact their employer as soon as possible.

An employer who prepared an incorrect Form W-2 must issue a Form W-2c, Corrected Wage and Tax Statement. For employees who receive Form W-2c: Use the W-2c amounts on the return Be sure to attach the Form W-2c to the taxpayer's return Only an employer can issue a Form W-2 or a

Form W-2c

W-2 & 1099 Forms

Incorrect Form W-2


All wage, salary, and tip income must be reported on the return, even if the employee does not receive a Form W-2. A taxpayer who does not receive a Form W-2 by January

31 should first contact the employer and find out if or when the Form W-2 was mailed. If the taxpayer does not receive the Form W-2 after a reasonable amount of time, the taxpayer should contact the IRS for assistance at 1-800-829-1040, but not before February 15

W-2 & 1099 Forms

Missing W-2


W-2 & 1099 Forms

1099


Form 1099 is used for income other than wages, salary, and tips. The exception is nonemployee compensation in Box 7 of Form 1099-MISC

Three sometime four copies are made One copy for the payer One copy for the payee One copy for the IRS One for state governments that require them

Payers that file less than 250 1099 forms can paper file the forms, 250 and over must me filed electronically

W-2 & 1099 Forms

1099


Common types of 1099’s 1099-B: Proceeds from Broker and Barter Exchange Transactions 1099-DIV: Dividends and Distributions 1099-G: Government Payments 1099-INT: Interest Income 1099-MISC: Miscellaneous Income 1099-R: Distributions from Pensions, Annuities, Retirement Plans,

IRAs, or Insurance Contracts SSA-1099: Social Security Benefit Statement W-2G: Certain Gambling Winnings, when winning are greater than

$600 in a single season (although W-2G is not a 1099, it is not wages, salary, or tips).

W-2 & 1099 Forms

1099


Also know as either 1040, or the “long Form” Created in 1913 Consists of two pages

Page1 includes: taxpayer information, filing status, dependents, amount of income, adjustments to income

Page 2 includes: deductions, taxes, credits, payments, tax refund or tax due, taxpayer signature

Form 1040 Series

Form 1040


Must be filed every year No limitations to amount of income, number

of dependents, or filing status Must be filed on April 15th unless April 15th

falls on a Saturday, Sunday, or legal holiday in Washington D.C. then must be filed on the next day that is not a Saturday, Sunday or holiday

11 attachments called schedules

Form 1040 Series

Form 1040


1040 Schedules Schedule A-Itemized Deduction Schedule B-Interest and Ordinary Dividends Schedule C-Profit or Loss from Business Schedule D-Capital Gains and Losses Schedule E-Supplemental Income and Loss Schedule F- Farming Income Schedule H-Household Employment Taxes Schedule J- Income Averaging for Farmers and Fishermen Schedule R- Claim for Additional Standard Deduction for Over 65 and/or

disabled Schedule SE- Self Employment Taxes Schedule EIC- Claiming Earned Income Credit

Form 1040 Series

Form 1040


Known as either 1040A, or the “short form” Only for taxpayers who make less than

$100,000 and are only using the standard deduction

No requirement for filing status

Form 1040 Series

Form 1040A


A taxpayer who uses the 1040A tax return can only have income from the following sources: Wages, salaries, and tips. Interest and ordinary dividends. Capital gains distributions. Taxable scholarships and fellowship grants. Pensions, annuities, and IRAs. Unemployment compensation. Taxable social security and railroad retirement benefits. Alaska Permanent Fund dividends.

Form 1040 Series

Form 1040A


Known as either 1040-EZ, EZ, or the “easy form” Has many restrictions including:

Filing status must be single or married filing jointly. Income must be below $50,000 for single, $100,000 for

married filing jointly Filer must be under age 65 and not blind at the end of 2012. Filers must not claim any dependents (other than

themselves). No adjustments to income can be claimed. The only credit that can be claimed is the Earned Income

Tax Credit (EITC).

Form 1040 Series

Form 1040-EZ


Income can only include: Wages, salary, ad tips Taxable scholarship or fellowship grants Alaska Permanent Fund dividends Interest income less than $1,500

Form 1040 Series

Form 1040-EZ


Known as either 1040X or amended 1040 Must be filed within 3 years from the day the

tax return was filed Is the amendment is based on bad debt or

worthless security, then the 1040X must be filed within 7 years

Must be paper filed, e-File is not an option Processing takes between 6-8 weeks

Form 1040 Series

Form 1040X


Consists of 2 pages, like the Form 1040 Page 1 includes three columns for changes

Column A-original amounts Column B-net increase or decrease or each line Column C-new amounts

Page 2 includes Under or over payments Explanations of changes made Taxpayers signature

Form 1040 Series

Form 1040X


Based on personal preference Small talk (weather, traffic, etc.) Avoid boring the customer Ask constructive questions Greet the taxpayer and introduce yourself Explain the tax preparation processes Use Active Listening Ask Questions Effectively Overcoming Communication Barriers

Interview Techniques


Filing status gives important information 5 different filing statuses

Single Married Filing Jointly Married Filing Separately Head of Household Qualifying Widow(er)

Filing Status


Never married Legally separated or divorced Widowed before the first day of the tax year

and not remarried during the year.

Filing Status

Single


They are married and: Live together as husband and wife, or Live apart but are not legally separated or divorced

They live together in a recognized common-law marriage

The taxpayer's spouse died during the year and the taxpayer has not remarried

Filing Status

Married Filing Jointly


Which means the husband and wife report their own incomes and deductions on separate returns, even if one spouse had no income.

One spouse may not want to be responsible for the other spouse's tax owed.

If a married couple files separately and one spouse itemizes deductions, the other spouse must either:

Also itemize deductions, or Claim "0" (zero) as the standard deduction

Filing Status

Married Filing Separately


Was unmarried (single, divorced, or legally separated) on the last day of the year, or

Met the tests for married persons living apart with dependent children

The taxpayer's qualifying child The taxpayer's qualifying relative

Filing Status

Head of Household


You didn't remarry in the 2 years following the year of the spouses death.

Have been eligible to file a joint return for the year the spouse died Have a child, stepchild, or adopted child who qualifies as the

taxpayer's qualifying child for the year. Have furnished over half the cost of keeping up the child's home for

the entire year. After the 2 years following the year in which your spouse died, you

may qualify for Head of Household status.

Filing Status

Qualifying Widow(er)


You must file a return if your gross income is more than the threshold for your filing status.

Even if your gross income is below the filing requirement, you must file a return to receive any refund to which you are entitled.

Filing Requirements


Filing Requirements

Thresholds


Single younger than 65 with gross income of $9,750 or more 65 or older with gross income of $11,200 or more

Married Filing Jointly

you are both younger than 65 with a combined gross income of $19,500 or more

only 1 spouse is 65 or older and together you have a combined gross income of $20,650 or more

you are both 65 or older with a combined gross income of $21,800 or more

Filing Requirements

Thresholds


Married Filing Separately any age with gross income of $3,800 or more

Head of Household younger than 65 with gross income of $12,500 or

more 65 or older with gross income of $13,950 or more

Qualifying Widow(er) younger than 65 with gross income of $15,700 or

more 65 or older with gross income of $16,850 or more

If someone else can claim you as a dependent, you must file a return if you have any of the following: unearned income more than $950 earned income more than $5,950 gross income more than the larger of $950

or earned income (up to $5,650) plus $300

Filing Requirements

Thresholds


You must file a tax return if: You owe taxes for Social Security and Medicare tax on tips you didn't report to your

employer or on wages you received from an employer who didn't withhold these taxes. You owe Alternative Minimum Tax. You owe tax on an IRA or qualified employer retirement plan or other tax-favored

account, such as a Coverdell ESA. You must recapture an education credit, investment credit or other credit. You are self-employed with net earnings of $400 or more. You are a resident of Puerto Rico or if you have income from a U.S. possession, special

filing requirements may apply. Check with your tax professional for more information. You had wages of $108.28 or more from a church or qualified church organization that is

exempt from employer Social Security and Medicare taxes. You are a nonresident alien and you have income from a trade or business in the U.S., or

you have income not from a trade or business, and not all the U.S. tax you owe was withheld from that income.

Filing Requirements


Other Circumstances

An exemption allows you to reduce the amount of your total taxable income.

The personal exemption amount for 2012 is $3,800

you generally can claim an exemption for yourself, one for your spouse (married filing jointly), and your dependents.

you can't claim your exemption if you're the dependent of another person

Exemptions and Dependents

Exemptions


Can be a qualifying child, or a qualifying relative

There is no limit to the number of dependents you can claim; some credits (such as Earned Income Credit) only accept a certain number of dependents.

You cannot claim a dependent if you yourself is claim on another's return

Your dependent cannot file a joint return, and must be a U.S. citizen


Dependents


To be a qualifying relative, 3 requirements must be met Gross income — the person has gross income of less

than $3,800 for the year unless the person is disabled. Support test — you must have provided more than

half that person's support for the year. Member of household or relationship test — the

person must have either lived with you for the entire year as a member of your household or be related to you. Certain relatives are not required to live with you for the entire year



Qualifying Relative

Four requirements must be met to claim a qualifying childRelationship — the child must be your child or stepchild foster child, sibling or stepsibling, or a descendant of one of these.

Residence — the child must live with you for more than half the tax year, or be a full time student living away from home

Age — the child must be younger than 19 at the end of the tax year, or younger than 24 if a full-time student for at least 5 months of the year.

Support — you provided more than half of his own support for the year.



Qualifying Child

If a child can be claimed by two taxpayers the tiebreaker rules apply If one taxpayer is the parent, they claim the child If both are parents, then the parent whom the

child lived with the longest can claim the child If a parent can claim the child but doesn’t, the

taxpayer with the highest AGI claims the child If no parent, the taxpayer with the highest AGI

claims the child



Tiebreaker Test

Created for low income households Is a refundable credit Between 25-65 years old (no qualifying child, any

age with a qualifying child) Must be a U.S. citizen for the whole year Cannot be claimed as a dependent on another’s

tax return Must have earned income Investments must be less than $3,200

Earned Income Credit (EIC)


Qualifications

$13,980 ($19,190 married filing jointly) with no qualifying children

$36,920 ($42,130 married filing jointly) with one qualifying child

$41,952 ($47,162 married filing jointly) with two qualifying children

$45,060 ($50,270 married filing jointly) with three or more qualifying children



Thresholds

$475 with no qualifying children $3,169 with one qualifying child $5,236 with two qualifying children $5,891 with three or more qualifying children



Maximum Amounts

Must interview the taxpayer to find if they qualify Complete all four parts of form 8867

Part I covers EIC eligibility requirements for all taxpayers.

Part II covers EIC eligibility requirements for taxpayers with a qualifying child.

Part III covers EIC eligibility requirements for taxpayers without a qualifying child.

Part IV covers the paid preparer's due diligence requirements.

EIC Due Diligence


Requirements

Complete and submit eligibility checklist Form 8867, attach whether e-Filed or paper filed

Compute the credit Knowledge

Both the law, and what the client says

Keep records Whether paper or electronic, records must be

kept for minimum 3 years

EIC Due Diligence


Requirements

If the IRS examines the taxpayers return, and denies EIC based on your client, consequences include:

must pay back the amount in error with interest may need to file the Form 8862, Information to

Claim Earned Income Credit after Disallowance cannot claim EIC for the next two years if the IRS

finds the error is because of reckless or intentional disregard of the rules

Cannot claim EIC for the next ten years if the IRS finds the error is because of fraud

EIC Due Diligence


Consequences

If the IRS examines the taxpayers return, and denies EIC based on what you prepared, not based on the client, consequences include: A $500 penalty for each failure to comply with EIC due diligence requirements for returns required to be filed after December 31, 2011.

An employer or employing firm may also be penalized if an employee fails to comply with the EIC due diligence requirements.

A minimum penalty of $1,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to an, unreasonable position.

A minimum penalty of $5,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to your reckless or intentional disregard of rules or regulations.

EIC Due Diligence


Consequences

Other consequences may include: Disciplinary action by the IRS Office of

Professional Responsibility Suspension or expulsion of you or your firm

from IRS e-file Injunctions barring you from preparing tax

returns or imposing conditions on the tax returns you may prepare

EIC Due Diligence


Consequences

A nonrefundable tax credit that is worth up to $1,000 per child (no maximum number)

7 criteria must be met to claim the credit must be your dependent son, daughter, stepchild,

foster child, brother, sister, stepbrother, stepsister or a descendant of any of them

must be claimed as a dependent on your tax return must be younger than 17 at the end of the year

and younger than you (and your spouse if Married Filing Jointly)

Child Tax Credit


Requirements

7 requirements cont’d must not have filed a joint return with his or

her spouse unless that return was filed only as a claim for refund

must not have provided more than half of his or her own support

must live with you more than half the year Must be a U.S. citizen, U.S. national or

resident of the U.S.

Child Tax Credit


Requirements

Thresholds begin when AGI is at: $110,000 if Married Filing Jointly $75,000 if Single, Head of Household or

Qualifying Widow(er) $55,000 if Married Filing Separately

For every $1,000 (or fraction of $1,000) over threshold, $50 is reduced from credit

Since Child Tax Credit is based on number of children, there is no maximum AGI limit

Child Tax Credit


Threshold for Higher Income

Child Tax Credit cannot reduce tax liability below $0 If Child Tax Credit is limited by tax, Additional Child

Tax Credit may be claimed Requirements are:

Your taxable earned income is more than $3,000 (for 2012).

You have 3 or more eligible children and the Social Security and Medicare tax you paid is more than your Earned Income Credit.

If you qualify, you'll need to file Form 8812

Child Tax Credit


Additional Child Tax Credit

2 types of interest: taxable, and tax-exempt Taxable- Interest taxed at the taxpayers

ordinary rate Bank accounts Bonds U.S. Treasury bonds

Tax-exempt- not taxable Municipal bonds Indian Tribal Government bonds

Interest and Dividends


Interest

2 types of dividends: ordinary, and qualified Ordinary Dividends- the most common form,

dividends that are taxed at the taxpayer ordinary tax rate

Qualified Dividends- are dividends that are taxed at preferential rates (either 15% or 0%) Rule for qualified dividends- stock must be held for

61 days during the 121 day period starting 60 days before the ex-dividend (declaration) date, and 60 days after



Dividends

Schedule to report taxable interest and ordinary dividends

Used for any dividend amount, interest totaling more than $1,500

Used to exclude interest from U.S. Treasury bonds before 1989

Used to report foreign accounts or trusts



Schedule B

Income not from: employment, alimony, investments, or Trade or Business

Some items include: Gambling Winnings, over $600 in one season Punitive Damages Alaska Permanent Fund Cash and Travel Prizes from Game Shows, Lotteries, and

Raffles Employment Bonuses Union Benefits Jury duty

Other Income


Educator Expense- up to $250 ($500 for Married Filing Jointly and both are educators)

Moving Expenses- expenses can be claimed as long as the new place of work is 50 miles or more from the old residence, then the old place of work to the old residence

Deductible Part of Self-Employment Tax- self-employed taxpayer are allowed to take off part of self-employment taxes, as an adjustment to income. Taxpayers with less than $14,204 in tax can take off 57.51%, taxpayers with more than $14,204 in self-employment tax take 50% +$1,101

Adjustments to Income


Alimony Paid- can take off all alimony paid, must include recipients SSN Student Loan Interest Deduction- up to $2,500. to qualify taxpayer

must: Have paid interest on qualified student loans in 2012. Be filing as any status EXCEPT Married Filing Separately. Cannot be claimed by anyone else Must have Modified AGI under $75,000, or $150,000 if filing jointly (AGI

before student interest and expenses) Tuition and Fees- AGI under $65,000 can deduct up to $4,000, between

$65,000-$80,000 can deduct up to $2,000, over $80,000 cannot deduct anything

Married Filing Separately cannot deduct student loan or tuition and fees

Adjustments to Income


Given regardless of AGI Single and Married Filing Separate - $5950 Head of Household – $8700 Married Filing Jointly and Qualifying Widow(er)

– $11,900

Deductions


Standard Deduction

Deductions


Itemized Deductions Medical Expenses-

prescription medication, glasses and contacts, medical aids such as wheelchairs and canes, doctor and dental visits, including optometrist and physical

therapy transportation either by ambulance or your car (transportation

by car has a standard mileage rate of 23.5 cents per mile) long term facilities such as nursing homes non-deductible and non-reimbursed health insurance premiums Subject to 7.5% floor, any amount over 7.5% is deductible

State Taxes and Interest- State Sales Tax (usually based off IRS tables), home mortgage interest from form 1098

Charitable Contributions- 50% of AGI for cash and capital property, 30% of AGI for cars, clothing, furniture

Casualty and Theft Loss- unusual and unexpected loss and theft from personal use assets Must deduct $100 from each loss Total losses (minus the $100 from each loss) are subject to

10% floor, any amount over 10% is deductible

Deductions


Itemized Deductions

2% Miscellaneous Deductions Unreimbursed business expenses like travel expenses and

professional societies such as the AICPA (American Institute of Certified Public Accountants)

Tax preparation fees Other expenses such as legal and accounting fees, investment

expenses, and safe deposit box fees. Subject to 2% floor, any amount over 2% of AGI is deductible

Other Miscellaneous Deductions Gambling losses, to the extent of gambling winnings Hobby losses Casualty losses and theft of income producing property

Deductions


Itemized Deductions

Used to report Itemized Deductions, only when Itemized Deductions are greater than the Standard Deduction

Deductions


Schedule A

All expenses are deductible, such as: Advertising, Supplies, Utilities, and Wages

Portion of home that is strictly used for business, can deduct portion of mortgage and utilities for business space

Vehicle solely used for business, all expenses are fully deductible

Vehicle for both business and personal, only mileage is deductible, rate of 55.5¢/mile

Employee Business Expenses


Gain on the property is considered a Long-Term Capital Gain

Exemption of $250,000 is given for gain on sale

Loss on sale is not deductible Sale of land but not the real estate, no

exemption allowed

Sale of Real Estate


Personal Real Estate

Ownership Test- must own the home for two years or more, during the five year period ending on the date-of-sale

Use Test- must have used the home for two years or more, during the five year period ending on the date-of-sale

To pass the test, the two year period does not have to be continuous or consecutive

Sale of Real Estate


Personal Real Estate

Classified as a §1250 property, subject to depreciation recapture

Gains from property held for less than one year is ordinary gains

Gains from property held for one or more years is §1231 asset subject to preferential rates

All losses are ordinary losses Land is not depreciable, all gains are §1231

gains

Sale of Real Estate


Business Real Estate

Corporation or Partnership- recapture is 20% of the lesser of recognized gain or accumulated depreciation, all unrecaptured gain is §1231 gain

Sole Proprietor- recapture is at 0% of gain or accumulated depreciation, all recognized gain is §1231 gain

Sale of Real Estate


Depreciation Recapture

Cost allocation of tangible property IRS uses Modified Accelerated Cost Recovery

System (MARCS, pronounced “makers”) MACRS uses half-year and mid-month

depreciation tables Half-year and mid-month depreciation

closely represent double declining and straight-line depreciation respectively

Depreciation


For 5 and 7 year depreciation schedules 5 year- cars, computers 7 year- furniture, fixtures, machinery Takes ½ year depreciation in the first year full amount in

between years and ½ year depreciation in the disposition year

If asset is disposed before the table, take ½ of dispositions years depreciation

Example: sold a company car in April of year 4 what is the depreciation percentage.5*11.52=5.76%

Depreciation


Half-Year Conversion

Depreciation


Half-Year Conversion

Year 5-Year 7-Year

1 20.00% 14.29%

2 32.00 24.49

3 19.20 17.49

4 11.52 12.49

5 11.52 8.93

6 5.76 8.92

7 8.93

8 4.46

½ of the first month plus full amount for the rest of the months of the year, full amount of in between years, and ½ of the month of disposition plus full amount of previous months

27.5 year conversion for rental property, 39 year conversion for nonresident property

Calculation for asset disposed before table: number of month used in year (such as May=5)/12=year percentage, year percentage*(1/27.5or39 which ever table your using)

Example: sold a factory in year 28 in June what is the depreciation percentage? 6/12=.5*2.564=1.282%

Depreciation


Mid-Month Conversion

Year

1 2 3 4 5 6 7 8 9 10 11 12

1 3.485%

3.182%

2.879%

2.576%

2.273%

1.97%

1.667%

1.364%

1.061%

.758%

.455%

.152%

2-27

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

28 1.97 2.273 2.576 2.879 3.182 3.485

3.6365

3.6365

3.6365

3.6365

3.6365

3.6365

29 X x x x x x .152 .455 .758 1.061

1.364

1.667

Depreciation


Mid-Month

Year

1 2 3 4 5 6 7 8 9 10 11 12

1 2.461%

2.247%

2.033%

1.819%

1.605%

1.391%

1.177%

.963%

.749%

.535%

.321%

.107%

2-39

2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564

2.564

2.564

2.564

2.564

40 .107 .321 .535 .749 .963 1.177 1.391 1.605

1.819

2.033

2.247

2.461

Rental Property-27.5 years

nonresidential Property-39years

Company is allowed to depreciate the entire amount of the asset up to $500,000

If cost is between $2,000,000 and 2,500,000 the phase out amount of §179 depreciation is dollar for dollar

For 2012 only qualified real property is not allowed under §179 depreciation

Depreciation


§179 Depreciation

Setting your own work hours Work full or part time Work for more than one company Realize either profit or loss Work from wherever you want Work without constant oversight

Self Employment


Benefits of Self Employment

Self Employment


Taxes Still must pay FICA (Federal Insurance

Contribution Act) taxes Self Employed taxpayers pay both employee

and employer portion of FICA taxes IRS gives 7.65% “employer portion” discount Social Security- 10.4% up to $110,100(4.2%

employee, 6.2% employer) Medicare- 2.9% (1.45%employee,

1.45%employer)

Gross Receipts under $119,220- 13.3% of 92.35% of gross receipts (example: gross receipts=$50,000, 50,000*.9235=46175, 46175*.133=6141 total FICA taxes)

Gross Receipts are greater than $119,220- 2.9% of 92.35% of gross receipts + 11,450 (example: gross receipts= $120,000, 120,000*.9235=110,820, 110,820*.029=3214, 3214+11,450=14,664)

If gross receipts are $434or less, no taxes are taken

Self Employment


Taxes

Self Employed- $50,000= $6141W-2 Employed-$50,000= $2825 (Social Security-4.2% + medicare-1.45%)

Self Employed- $120,000= $14,664W-2 Employed- $120,000= $6364 (Social Security ceiling is $110,100)

Self Employment pays higher FICA taxes due to paying both employee and employer portions

Self Employment


Comparison

Tax form used to calculate profit and loss from a business

All self employed and those with amount on 1099-MISC Box 7, must file Schedule C

All business expenses, including depreciation and mileage, can be written off

Must report profit for 3 of the previous 5 years to be considered a business, if more loss than profit the business is considered a hobby

Self Employment


Schedule C

Tax form used to calculate self employment taxes, and deductible portion of self employment

Must be filed with either Schedule C or Schedule F (profit or loss from farming, discussed later)

Self Employment


Schedule SE

If you are renting property in the Course of Trade or Business, then you must file Schedule C

All income must be included and expenses can be written off

Rental Property


Course of Trade or Business

Residence with minimal rental use Rented for 14 days or less and the homeowner

still lives in the house No income or expense are claimed Mostly used for events such as: Super Bowl,

Mardi Gras, The Olympics, Ball Fall on New Years, etc.

Rental Property


Rental Use of Personal Home

Residence with significant rental use Rented for 15 or more days Homeowner lived in home for the greater of 14

days or 10% of the rented days Income and expenses are reported on Schedule E Expenses classified in three tiers

Tier 1: expenses to obtain tenants, home expenses such as mortgage

Tier 2: utilities and maintenance of the home Tier 3: depreciation

Rental Property


Rental Use of Personal Home

Rented home for 15 or more days, owner did not stay in home for the greater of 15 days or 10% of rented days

If owner stays in home for 14 or less days, allocate expenses between Schedule E, and Schedule A for the days in home

If property is rented for less than 15 days, and owner does not live in the property for more than 15 days, all income is reported on Form 1040 Line 21, no expenses allowed

Rental Property


Nonresidence

Reports multiple activities Includes income and expenses from significant

use and nonresidence rental, and royalties Activity for flow-through entities such as S

Corporations Activity form estates and trust funds Residual interest from mortgage backed

securities

Self Employment


Schedule E

Short-term and long-term Investments include: stocks, mature bonds,

mutual funds, hedge funds, §1231 gains and losses, §1202 gains and losses (small business stock)

Capital Gains and Losses


Short-Term Capital Gains- gains from investments held for less than one year

Gains and losses are taxed at the taxpayers ordinary tax rate



Short-Term Capital Gains

Investments held for one year or more Preferential treatment of either 15%, 25%,

28%, or 0% based on taxpayer tax rate If taxpayers bracket at or below preferential

rate, then the investment is tax at 0%



Long-Term Capital Gains

15% -assets includes: stocks, bonds, mutual funds, and hedge funds, §1231 gains

25% -gains on personal property in excess of exclusion, unrecaptured §1250 gains (unrecaptured depreciation from sale of property)

28%- includes gains from: collectables such as, paintings, sports memorabilia, gems and §1202 assets (small business stocks) held for less than 5 years (§1202 assets held for more than 5 years is taxed at a maximum rate of 0%)



Long-Term Capital Gains

Wash Sales- when a person sells a stock at a loss, then immediately buys it back. This way a taxpayer can write off a capital loss, and still have the investment. If same or similar stock is bought 30 days before or after sale of

old stock, then wash sale occurs IRS made it so wash sale losses are not written off

Short Sale- when an investor borrows stock, sells them, buys back stock when price is lower, gives the stock back, the gain is the difference in the price sold and bought Think of short sales as backwards sales Recording is backwards, on Schedule D, price bought is the end

and price sold is the beginning



Special Cases

Tax form used to report all capital gains and losses

Started in 2011 broker now must send clients a 1099-B and include price bought and price sold

Form 8949 must also be attached to Schedule D, Form 8949 replaces Schedule D-1



Schedule D

Originally thought of in the 1960’s, originated in 1986

Created to make the wealthy pay their “fair share”

Today more and more people are getting affected by Alternative Minimum Tax (AMT)

AMT not adjusted for inflation AMT tax brackets are 26% and 28%

Alternative Minimum Tax


First take the taxpayers taxable income (Form 1040, Line 43)

Add back adjustments for any non-economic outflow payments (this includes personal exemption, standard deduction, tax-exempt interest, property taxes, home equity loan interest, miscellaneous itemized deductions)

Subtract any state refunds This equals the Alternative Minimum Taxable

Income (AMTI)



Calculation

Subtract the AMT exemption (Single and Head of Household- $33750, Married Filing Jointly- $45,000, Married Filing Separately- $22500. A phase out of 25% per dollar on AMTI over $150,000- married filing jointly, 75,000- married filing separately, 112,500- Single and Head of Household).

This gives you your AMT Base



Calculation

Multiply the AMT Base by AMT rate (26% on the first $175,000 of AMT Base, 28% on AMT Base in excess of $175,000).

This gives the Tentative Minimum Tax (TMT) If the TMT is larger than the taxpayer’s tax

liability, subtract TMT to get the total amount of Alternative Minimum Tax. If tax liability is greater than Tentative Minimum Tax, than no AMT is taken out.



Calculation

American Opportunity Credit (AOC) For first 4 years of college, up to $2,500 credit 40% refundable, maximum of $1,000 Taxpayers AGI must be below $90,000 Student must be full-time, no felonious conviction of drug

possession

Lifetime Learning Credit Up to $2,500, nonrefundable, no maximum number of years Taxpayers AGI must be below $61,000 No hour or conviction requirements

Taxpayer can take either AOC or Lifetime Learning Credit, but not both.

Education Expenses and Plans


Education Credits

Can deduct student loan interest up to $2,500

AGI must be below $75,000 ($150,000 for Married Filing Jointly)

You can’t claim student loan interest deduction if someone else claims you



Student Loan Deduction

Tax free savings plan for college Student does not have to live in, or go to

school in the state in which the plan originates Prepaid Plan- buy credits at todays rate,

performance based on the increase or decrease of college tuition

Savings Plan- put money in a fund, usually mutual fund, performance is based of the fund

Majority of §529 plans are Savings Plans



§529 plans

Created in 1986 Invested in only mutual funds Maximum contribution of $5,000, same for the for

AGI deduction Phase out when AGI is between $56,000-$66,000

(146,000-176,000 for Married Filing Jointly), 0-$10,000 for an employee based IRA

Distributions are at taxpayers ordinary tax rate, if taxpayer is younger than 59 ½, add 10% penalty charge

IRA’s and Retirement Plans


Traditional IRA

Created in 1997 Able to invest in other capital, not just mutual funds Contributions are the same as Traditional IRA’s Phase out when AGI is between $107,000-$122,000,

$169,000-$179,000 for Married Filing Jointly Distributions are non-taxable, if taxpayer is younger

than 59 ½, the distribution is still non-taxable but there is a 10% penalty charge

Traditional IRA can be “Rolled Over” to a Roth IRA Non-penalty withdrawal from Traditional IRA into Roth IRA



Roth IRA

Most widely used, and known plan Taxpayer invests money themselves Contributions are considered tax deferred,

meaning contributions are not recorded on W-2, are taxed when distributed

Some employers will match contributions up to a certain percentage of gross income or certain dollar amount

Maximum contribution- $50,000/year



401(k)

Provision in the tax code that allows parents to transfer unearned income to their children, making the child sole beneficiary

Unearned income is then taxed at the child's tax rate

Child must be younger than 18, or younger than 24 and a full time student

Transferred unearned income must be at least $1,900

Kiddie Tax


Since some of the Kiddie Tax is at the parent’s marginal rate, first you must figure out the Kiddie tax before the child’s income is taxed. This done as follows:

Take the child’s gross AGI and subtract $1,900, this is Net Unearned Revenue

Take the Net Unearned Revenue and multiply that by the parents marginal tax rate, this is how much is owed for the Kiddie Tax

Kiddie Tax


Calculation

Next comes the child’s income tax, this is calculated by: Take the child’s gross AGI and subtract standard deduction

(standard deduction for a person claimed as a dependent the greater of $950, or earned income plus $300 not exceeding the standard deduction. If there is no earned income then the deduction is $950), this is the child’s taxable income

Take the child’s taxable income and subtract out the Net Unearned Income

Take the amount from the previous step and multiply that by the child’s tax rate, this is the child’s tax liability.

Add the Kiddie tax and the child’s tax liability to get the total tax liability

Kiddie Tax


Calculation

Can claim when a spouse (or former spouse) has debt obligations

Offsets include: past-due federal and/or State taxes, child support, unemployment, or student loan debt

Injured spouse can receive ½ of refund from withholdings, refundable credit refunds are based on wages earned

If tax owed, both parties may be liable

Injured and Innocent Spouse


Injured Spouse

Injured and Innocent Spouse


Innocent Spouse When one spouse does all finances, and understated or

erroneous amount are brought to attention Qualification for innocent spouse:

Must have filed a joint return Must be understated tax liability You can show that when you signed the joint return you

did not know, and had no reason to know, that the understated tax existed

Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax

If amount are not found understated or erroneous, or found innocent spouse knew of amounts, than innocent spouse does not apply

Cash Accounting- revenue is recognized when cash is given, expenses recognized when cash is paid

Accrual Accounting- revenue is recognized when earned (cash can be given before, same time or after service has been given), expenses recognized when incurred (cash paid before, same time, or after invoice is received)

Farm Income


Accounting Method

Tax form used to record income and expenses from farming Items include:

Amount from sale of livestock and other items bought for resale Total sales of livestock, produce, grains, and any other products you raised

Cooperative distributions Agricultural program payments Commodity Credit Corporation loans, both reported under election

and forfeited Crop insurance proceeds and any federal crop disaster payments Any custom hire income Any other income, including federal and state gasoline or fuel tax

credit or refund

Farm Income


Schedule F

Tax form used for averaging farm income for up to the previous three years

The taxpayer is not required to have been in farming for the base years (years prior to the business of farming), but must be in business the year the schedule J was filed

The taxpayer may elect to have the average even if their filing status was different

Farm Income


Schedule J

Schedule H- tax form used to report payment to a household employee such as: gardeners and nannies

Schedule L (defunct)- was used for addition to standard deduction for disaster zone areas

Schedule M (defunct)- was used to figure out Making Work Credit, part of the stimulus plan, gave taxpayers up to $400

Schedule R- used for taxpayers who are over 65, or are totally and permanently disabled. Credit is worth 15% of taxpayers income. Taxpayers with over $20,000 in income, or receive $5,000 or more from Social Security cannot receive the credit.

Other Schedules


Accelerate deductions, Defer income- income that is not recognized at year-end, try to push it into the next year (wages, and bonuses earned during the year are immediately recognized in that year). Use as many deductions for this year as possible

Income Shifting- shifting income from one person to another, usually from a higher tax bracket to a lower. This is usually done through Kiddie Tax

Tax Saving Ideas


Itemize or Standard Deductions- if itemized items are close to standard deduction, bunch itemize deductions one year and take the standard the next

Credits or Deductions- sometimes the credit will give you more sometimes the deduction will take off more, it all depends on the tax bracket and AGI Credit-lowers tax liability dollar for dollar Deduction-lowers taxable income dollar for dollar

Tax Saving Ideas


DO NOT EVADE TAXES Tax Evasion- illegal act of nonpayment of taxes. Tax evasion leads to

Felony conviction Fines Jail

Tax Avoidance- is the legal act of paying less or deferring payment of taxes. Congress and the IRS allows tax avoidance. Examples include Preferential rates Kiddie Tax Itemized Deductions Credits

Tax Saving Ideas


Tax Avoidance vs. Tax Evasion

All information summarized in this guide was researched by tax experts at Swift Financial Partners. Research was performed using: www.irs.gov McGraw Hill’s Taxation of Individuals, 2012 Edition Brian Spilker, Ben Ayers, John Robinson, Ed Outslay, Ron Worsham, John Barrick, Connie WeaverThe McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020Copyright © 2012, 2011, 2010

Appendix


http://www.irs.gov/

EXT TEXTTEX TEXT

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