Traditional IRA versus Roth IRA

Looking for a different retirement plan other then 401(k)s or 403(b)s offered by employers. There are also Traditional IRA’s and Roth IRA’s. The difference between each come down to the income limits, the tax incentives, and the withdrawal rules.

Income Limits

Traditional IRA

To contribute an individual must be younger than 70 1⁄2 and be earning an income. Whether the contribution is deductible depends on if the taxpayer or spouse (if married) is covered by a retirement plan through their job, such as a 401(k).

Roth IRA

For a Roth IRA there is not an age restrictions, but they have an income restriction. If someone made less than $133,000 in 2017 as a single taxpayer, they can contribute to a Roth. For married filing jointly, the gross income is $196,000 in 2017.

Tax Incentives

Traditional IRA

The contributions are tax deductible in the year that they were contributed. Then as withdraws are made from the account, it is taxed at the ordinary income tax rate.

Roth IRA

There is not a deduction on the contribution, however, when withdrawing from the account the income is tax-free.

For both accounts, taxes are not paid on the growth of the account funds, as long as the funds stay in the account.

Withdrawal Rules

A difference between the IRAs is the time someone must withdraw from the savings. For both the starting collecting age is 59 1⁄2.

Traditional IRA

An individual must start taking a minimum distribution when they turn 70 1⁄2 even if the funds are not needed at that time. The minimum distribution amount is calculated by the balance in the account and divided by the distributions period.

Roth IRA

The money from the account does not need to be withdrawn. However, for a Roth the first distribution made to the account must have been 5 years before withdrawing from the account without a penalty.

Extra Considerations

A Traditional IRA, can lower the amount of taxable income for that tax year and help some people qualify for different tax incentives such as the child tax credit or student loan deductions.

With Roth IRAs, there are no limits to what the money can be invested in like in a traditional one. Also with the Roth the withdrawing is tax-free before the age of 59 1/2.

With both a Traditional and a Roth, up to $10,000 can withdrawn for a qualified first-time home buyer expenses if the individual is under 59 1/2 .

How to Fill out Schedule C

To help fill out line 12 on the 1040 it was important to know how to fill out the Schedule C for a business.

General Info

The top section of the Schedule C is the general information about the business. This section includes; principal or professional business and the business code going with the principal business, for tax preparation services it is Code 541213. To find the business code look at the chart on page 17 of the schedule C instructions. This code helps tell the IRS a bit more about the business; such as what expenses are “normal” to deduct.

Other information needed is the Businesses Name, EIN, and Business Address. The EIN is the Employer ID Number given to a company from the IRS. In addition, it is important to know whether the business is on a Cash or Accrual accounting basis. Then at the bottom of the section are four questions with yes or no check boxes to answer about the business.

Part 1: Income

Line 1 for the Income Section is for gross receipts and sales; any money the business made through providing the service or product. Line 2 goes through returns and allowances for the business; items returned and a refund given for the product.
Line 4: Cost of Goods Sold is broken down in Part 3 of the schedule C. Other income is reported on Line 6 and includes things like federal and state gasoline tax credit or refund.
Lines 3, 5 and 7 are just adding or subtracting different line numbers together to get totals. Gross Sales subtract Returns and Allowances subtract Cost of Goods Sold and add Other Income is the breakdown of the Income Section.

Part 2: Expenses

Seperate this section into two mini sections. The first section is composed of lines 8 through 27b. It breaks down all of the expenses deductible for businesses. Some of the main categories include; Advertising, Office Supplies, Taxes, Travel and Wages. Line 9, Car and Truck Expense, is broken down farther in Part 4 of the Schedule. Line 27, Other Expenses, is also broken down in Section 5 of the Schedule C even more.

The second mini-section starts with total expenses on line 28; this is where all of the amounts in the above lines are added together. The other major line in this part is Line 30: Expenses for business use of home.

To calculate the business home deduction using the simplified method, take the area of the home office and multiply it by the home office deduction rate. In 2017, the rate was 5 dollars a square foot. A room 11’ by 12’ is used for a home office; this is a 121 square foot room. The deduction would be $605 using the simplified method.

Another way to calculate the home office deduction is through the expenses spent on the home office. For this method, Form 8829 is required. On this form, it will break down the total size of the home, the size of the home office and then all of the expenses paid towards it. Then taking the percentage of the home used for work and multiply that by the total expenses paid. To get a longer example look at the example if Part 4: Information on Your Vehicle.

Part 3: Cost of Goods Sold

Part 3 is a helpful section to help calculate the cost of goods sold for Line 4 of the Schedule C. Calculating cost of goods sold is a systematic process going through: inventory at the beginning of the year, inventory purchases, labor costs, and the inventory at the end of the year.

Part 4: Information on Your Vehicle

When a vehicle is used for business, not just commuting to work and home, then the vehicle becomes deductible. Use Part 4 of the Schedule C if the taxpayer is claiming car or truck expenses on line 9 of expense section.

Example: Susan drives her car for everything, getting to and from work, going to business meetings and appointments, driving her kids to sports practice and going to the store. During the last year, she drove 2,000 miles in commuting to work, 3,000 miles to appointments, and 4,000 miles of other miles. During the year, she also paid 100 for licensing, 300 in oil, 1,000 to repairs and 50 in tolls. How much does she report in Car or Truck Expenses?

Mileage

If Susan uses mileage to calculate her deduction, she will use Part 4 of the Schedule C. To calculate the expense she would take her the miles she used for work, being 3,000. Commuting miles are not included in the total business miles.

After, if Susan takes the 3,000 miles and multiples it by the mileage rate she will have her deductable amount. The business mileage rate for 2017 was .535. Taking the miles and the mileage rate, Susan’s Car and Truck Expense would come out to be 3,000*.535 = $1,605

Expenses

If Susan uses the expenses paid to calculate her car deduction then Form 4562 will be filled out instead of Part 4 of the Schedule C. First Step would be to find the business use of the car. With 3,000 miles for business and 6,000 total other miles (2,000 commuting + 4,000 other), the business use would be 33%. This means 33% of the expenses would be deductible. Total expenses on the car were $1,450 (1000 repairs, 300 oil, 100 licensing, and 50 tolls). This makes Susan’s Car and Truck Expense $478.50.

For Susan it would be smarter to take the deduction based off mileage. Leaving Part 4 of the Schedule C waiting to be filled out.

Part 5: Other Expenses

If there are expenses that don’t fall into one of the categories shown on lines 8-26 the expenses can go on line 27 Other Expenses. Each extra/miscellaneous expense should be reported here. To report the expenses start with the name of the expense, then the expense amount next to it. Total the line items and add the amount to line 27a.

How to Fill out Form 1040- Part 3: Lines 10-12

Continuing with the Income section of the 1040, there are documents and forms needed to be filled out with lines 10-12 on Form 1040. For line 10, the form used is Form 1099-G. For line 12, the additional document is the Schedule C.

Line 10: Taxable refunds, credits, or offsets of state and local income taxes

An individual is not required to report their tax refund if during the previous year they did not itemize their deductions or if they elected to deduct sales tax instead of income taxes.

If it is required to report the tax refund amount, then the individual should receive a Form 1099-G. On Form 1099-G Box 2: State or Local Income Tax Refunds, Credits, or Offsets is where someone can find the amount to report on line 10 of the 1040.

If a 1099-G was not mailed to the individual for the previous tax year, it is possible that the document was only made available online. An individual can check the status of the 1099-G with the government agency that made the payments to them.

Line 11: Alimony Received

On line 11, the Alimony received throughout the year is reported. Alimony is a husband’s or wife’s financial support or a spouse after separation or divorce, used in cases of child support.

Along with reporting the alimony received, it is important to obtain the receivers’ social security number for the payer. If this is not done, there could be a penalty for the receiver.

Line 12: Business Income or (Loss). Attach Schedule C or C-EZ

If an individual owns and operates a business, such as a sole proprietorship, then all of the income and expenses will be reported on Schedule C. After all the income and expenses are on the Schedule C the net income or loss of the business will be added to the 1040 on line 12. The net income or loss can be found at the bottom, on line 31, of the Schedule C.

Partnerships and Corporations are not required to fill out Schedule C. A business return, Form 1065, or a K-1 will be filled out for them. These will also not be reported line 12 of the 1040.

How to Fill out Form 1040- Part 2: Lines 7-9

Income Section of the 1040

After filing out the personal information section on the 1040 it is time for the income section of the 1040. For lines 7 through 9 there are multiple documents and forms that help to fill out the line amounts. Some of the different documents that an individual could obtain are W-2, 1099-INT, 1099-OID, and 1099-DIV. A form that might also be needed to help fill out the 1040 lines 8 and 9 is Schedule B.

Line 7: Wages, Salaries, Tips, Etc.

When looking at your W-2 at the end of the year it is important to know what numbers to use on the tax return. Box 1 on the W-2 is your wages. This number goes on line 7 of your 1040. If you have multiple W-2s it is important to add all the numbers found in box 1 on the W-2. More of the W-2 is used later on the 1040, but only box 1 is used on line 7 for the 1040.

It is also important to make sure there is a copy of all the W-2s attached to the 1040 before filing the return.

Schedule B

For lines 8 and 9 on the 1040 it is possible that a Schedule B is needed to also be filed. Schedule B is the Interest and Ordinary Dividends form. The form is easy to fill out and is separated into 3 parts. Part 1-Interest, Part 2-Ordinary Dividends, and Part 3-Foreign Accounts and Trusts. For line 8, only Part 1 will be used, and for line 9 only Part 2 will be used.

These are only if Schedule B is needed. Some of the different reasons a schedule B is required are:

  • Income over $1,500 of taxable interest or ordinary dividends.
  • Received interest from a seller-financed mortgage and the buyer used the property as a personal residence.
  • Had accrued interest from a bond.
  • You are reporting a lesser income than the amount shown on Forms 1099-OID and 1099-INT.
  • Having received interest or ordinary dividends as a nominee.
  • A nominee, in this case, is an individual or company whose name is given as having title to a stock, real estate, etc., but who is not the actual owner.
  • You had a financial interest in an account in a foreign country or you received a distribution from a foreign trust.

Line 8a: Taxable Interest

If you receive a 1099-INT or a 1099-OID at the end of the year, then you probably have some taxable interest.

On Form 1099-INT Box 1: Interest Income is the most common box filled out for individuals. This amount would be put on Line 8a on the 1040. Also Box 3: Interest on U.S. Savings Bonds and Treas. Obligations would go onto line 8a.

On Form 1099-OID boxes 1 and 2 are the interest income used for line 8a on the 1040.

Line 8b: Tax-Exempt Interest

Similar to Taxable Interest, on Form 1099-INT there is a box for tax-exempt interest, this is box 8 on the 1099-INT. This number flows though to line 8b on the 1040. This income can be from tax-free securities such as municipal bonds.

On the 1099-OID form, there is a box for non-taxable interest as well. Box 11- Tax-exempt OID, this box will also go onto line 8b along with the interest income from any 1099-INT that is non-taxable.

This number does not affect the individuals AGI. However, the tax-exempt interest helps to determine the taxable amount of social security benefits.

Any interest that is reported on line 8b also must not be recorded on line 8a. Make sure the two lines do not have crossing-over numbers. There is no interest amount that is both taxable and non-taxable.

Line 9a: Ordinary Dividends

What is a dividend? A dividend is an amount of money paid to shareholders of a company. Dividends are typically paid quarterly and come out of the profits of the business.

Another form you might receive at the end of the year is a 1099-DIV. Box 1 on the 1099 is the number that is put on line 9a for ordinary dividends.

Line 9b: Qualified Dividends

When you receive a 1099-DIV box 2 has the Qualified Dividends amount. This amount goes on line 9b of the 1040.

If you have more than one 1099-Div make sure all of the box 1’s are added to go on line 9a and all of the box 2’s are added for line 9b.

 

Blog Series: How to fill out Form 1040- Personal Information, Filing Status, and Exemptions

When looking at the top of the form 1040 there are three sections before you even get to numbers. These sections can help let the IRS help identify each individual, and figure out how much should be deducted on the tax return for everyone.

Personal Information

In the personal information, it starts with the taxpayer and spouses (if filling a joint return) full names and social security numbers. After that, it goes into the taxpayers address, city, state, and zip code. For 2017, there was also a box that could be checked if you wanted to put three dollars to the presidential election campaign.

Filing Status

Filing status is broken into 5 sections:

1. Single

2. Married filing jointly

3. Married filing separately

4. Head of Household

5. Qualifying Widow(er)

If you are a single individual with no dependants, you check the box next to single. However, if you are un-married and have dependants, the correct box to check is “Head of Household.” If you are married, you can choose between married filing jointly or married filing separately as a filing status. This is up to the taxpayer and spouse, both must file using the same status, one cannot choose joint and the other choose separate. When filing joint, it combines all of your income and expenses onto the 1040, where if you file separate returns it is similar to filing a single tax return.

Exemptions

There is also a section on exemptions. This starts by checking the box for yourself and your spouse, if applicable. Then any dependents that you and your spouse potentially have get added. Similar to the “Personal Information” section dependent’s information includes full name, social security numbers, and relationship to taxpayer.

After filing out the dependents section and checking the boxes for yourself and spouse, (if necessary) there is one last step. On the side of the exemptions box there are five lines. The top one is the number of checks you made. This number could be a one or a two. A one is for single, head of household, and married filing separately. While a two is entered for married filing jointly.

The next three lines are for number of dependents. Line 1 is for dependents who lived with the taxpayer during the year. The second line is for dependents who did not live with you due to divorce or separation. The third is for dependents that were not listed in the above two sections.

The 5th line is for the total number of exemptions. You can find this number by adding all of the above lines together.

How to Report Gambling Income and Losses

Finally, after 18 years, you can to join the army, call yourself an adult, and you can go to a casino and gamble. However, win or lose, did you know you have to report that money to the IRS on your tax return. Do you know where to report gambling winnings? In addition, what if you are a professional gambler is it all the same?

Where to report: Casual Gambler

If you are just going to the casino for some fun, and you have no intent on surviving on the winning you make then you are not a professional gambler. For a casual gambler you will report your winnings on line 21 of Form 1040, as “Other Income”. Now if you have a loss then you report that amount on Schedule A, Itemized Deductions Line 28, Gambling Losses.

This means that all income is reported, however losses from gambling are only helpful if you have enough to itemize your deductions. To understand more on itemized deductions versus the standard deduction look for our blog post, “Standard vs. Itemized deductions”

Where to report: Professional Gambler

Now if you are a gambler and carry out the activity in a businesslike manner and the winnings and losses effect how you are living you are a professional. This is now a trade or business to the IRS. You report your winnings and losses on the Schedule C, Self-Employed Income.

Professional gamblers can also deduct ordinary and necessary business expenses in addition to their wagering losses. However, wagering losses cannot exceed gambling winnings. This shows that once someone is a professional gambler, that person cannot take a loss on their taxes from the losses.

Going to the casino and gambling can be fun. From the slot machines to the poker tables, there are winners all around the room, and the smell of potential winnings is in the air. When filing your tax return for the year, just remember the winnings and losses need to be reported to the IRS. If you are in the casino as a profession and report income as self-employment income, or if you finally made it to the age to have some fun at a casino, filing the return is different.

Standard Versus Itemized Deductions

Paying to much in taxes? Making sure you take the best deductions is important so then you can maximize your tax refund. And knowing the difference between the standard deduction and itemized deductions is the start. Continue reading…