1040 Training

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27-Dec-2021

SSN [Social Security Number]

Form SS-5 - Social Security Number (SSN)
SSN is night digit unique number
SSN doesn't start with 9
SSN will issued by SSA (Social Security Administration)

ITIN (Individual Taxpayer Identification Number)

ITIN is night digit unique number
ITIN is start with 9
4th digit of ITIN should be 7, 8, or 9
ITIN is issued by IRS (Internal Revenue Services)
ITIN can applied through Form W-7
ITIN applied for Spouse, Kids and/or any other dependents
ITIN applier can Paper File
ITIN is uses only for Federal Tax purpose not for identification

Due Dates
April 15
Extension Form 4868
Form 4868 - Get additional 6 month time of period to file the return (October
15)

Tax Free States

1) AK - Alaska
2) FL - Florida
3) NV - Nevada
4) TN - Tennessee
5) TX - Texas
6) WA - Washington
7) WY - Wyoming
8) SD - South Dakota
9) NH - New Hampshire

Tax Subjected to Citi States

1) MS - Michigan
2) NY - New York
3) PA - Pennsylvania
4) OH - Ohio
5) KY - Kentucky

Tax Subjected to County States

1) IN - Indiana
2) MD - Maryland
3) IA - Iowa

Accounting Methods
1) Cash Method
2) Accrual Method

Tax Year
1) Calendar Year (i.e., 1st January to 31st December) USA
 2) Fiscal Year (e.g., April to March) INDIA

Filing Status
1) Single
- Unmarried/Bachelor
- Divorced by court of law

2) Married Filing Jointly (MFJ)

- Married and agree to file Joint return
- In the year of death of Spouse
- MFJ filing status is more beneficial than other filing status

3) Married Filing Separately (MFS)

- Married and agree to file Separate return
- MFS filing is more beneficial when the TP and SP income is vary high
- You can amend MFS to MFJ but not MFJ to MFS

4) Head of household (HOH)

- Unmarried with Dependents
- TP must support to dependents for at-lest 50% of child
support/expenses
- Dependents should reside with TP in USA at least for 6 months

5) Qualifying widow(er) (QW)

- After TP or SP deceased in CY (Go for MFJ), they can file following 2
years of the death of date
- Should have Dependents
- Depends should reside with TP at least for 6 Month in CY
- TP should support at least for 50% of child support/expenses

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28-Dec-2021

Resident Status

1) Citizen - Required to file Form 1040

2) Resident Alien Conditions

i) Resident Alien - Required to file Form 1040
- Green Card Holder's
- Residing in US at-least 6 months (More than 183 days)
- F1 Visa holder's are treated as resident if they are staying
more than 5 years in US
- Resident by Election (Election Under IRC § 6013(g) AND §
6013(h) - Internal Revenue Service)
- § 6013(g) : Residing in US at-least 6 months
- e.g., In a Tax Year, if TP is resident and SP is
Non-resident, then Resident TP can choose to treat non-resident SP as Resident and
can file Form 1040 with MFJ status.
- Resident TP + Non-Resident SP = § 6013(g)

- § 6013(h) : In CURRENT TAX YEAR, TP and SP both are No-

Resident Aliens, but if they are Resident Aliens for the NEXT TAX YEAR, they can
file MFJ return if they satisfy the below conditions;
- Reside at least 31 days in US in CURRENT TAX YEAR
- Reside at least 6 months (More than 183 days) in
the NEXT TAX YEAR
 - Non-Resident TP + Non-Resident SP = § 6013(h)

- Substantial Presence Test (SPT)

- TP should reside in US at least for 31 days (NEED NOT TO
BE IN A RAW) in CURRENT TAX YEAR
- 183 Days Test;
- Number of days in CURRENT YEART should reside in US
at least PREVIOUS TWO YEARS in US
- Number of days in PREVIOUS YEAR (1/3)
- Number of days in PREVIOUS TO PREVIOUS YEAR (1/6)
Example;
(1) QUALIFY;
2018 - 365 Days
2019 - 365 Days
2020 - 44 Days

PPY: 365/6 = 61
PY: 365/3 = 122
CY = 44
TOTAL = 227 (i.e., Result is
more than 183 days, so TP can file Form 1040 by using Substantial Presence Test)

(2) NOT QUALIFY

2018 - 365 Days
2019 - 300 Days
2020 - 28 Days***

- First Year Choice Test (FYCT)

- TP should stay in US for more than 31 days in CURRENT TAX
YEAR (IN A RAW/CONTINUE)
- TP should stay in US for more than 6 Months (More than
183 days) in the NEXT TAX YEAR

ii) Non-Resident Alien - Need to file Form 1040-NR

iii) Dual Resident Alien

Qualifying Child and Qualifying Relatives

1) Qualifying Child
a) Relationship Test
- Own Child, Adopted Child, Grand Child, etc.
- Own Brother, Half Brother, etc.
b) Age Test
- Generally under 19 Years
- Full Time Student 24 Years
- Handicap no age limit
c) Residency Test
- Child should stay with TP at-least for 6 months (More than 183
days)
d) Support Test
- TP should support 50% of child expenses

2) Qualifying Relatives
a) Relationship Test
- Parents or In-Laws
- Other Relatives
b) Gross Income Test
- Gross income of dependent should NOT be more than $4,300.
 c) Residency Test
- Dependent should stay with TP at-least for 6 months (More than
183 days)
- Exception for PARENTS
d) Support Test
- TP should support 50% of Dependents expenses

Penalties
1) Late Filing Penalties
- After Original Due Date (i.e., April-15 if NOT file an extension by
filing Form 4868 or the extended due date October-15)
- It's 5% (On Tax Dues)

2) Late Payment Penalties

- After Original Due Date (i.e., April-15)
- It's 0.5% (On Tax Dues)

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29-Dec-2021

Form W-2

Box 1 Wages, tips, other compensation

- $ 180,000
Box 2 Federal income tax withheld
- $ 18,000
- Employer will give Form W-4 for all Tax Withheld information is
provided
Box 3 Social security wages
- $ 180,000
Box 4 Social security tax withheld [6.2% of Box 3]
- Limit $ 142,800 [Need to pay tax up to $142,800. No need to pay any
tax above the threshold limit $142,800]
- $ 8,854
Box 5 Medicare wages and tips
- 180,000
Box 6 Medicare tax withheld [1.45% of Box 5]
- $2,610
Box 10 Dependent care benefits
- Conditions apply [$5,000]
Box 12
- 12D: 401K Plan
- 12DD: Health Care Plan
- 12W: HSA [Health Savings Accounts]

Form 1040
Incomes
[1] Wages - Income received from (January to December) employer will
report on Form W-2.
- Source Documents: Form W-2, Form W-2C, Form 4852 (i.e.,
Substitute W-2)
- Form W-2C Corrected form of Form W-2
- Substitute W-2 (i.e., Form 4852)
[2] Interest
a) Tax-exempt Interest
- No need to pay tax on this type interest. (i.e., Interest
on 'Municipal Bond Invt', OR 'Treasury Bond Invt')
 - Form 1099-INT, Box 8
b) Taxable Interest
- Interest received from Savings Account, Current Account,
Fixed Deposit, etc.
- Source Documents: Form 1099-INT, Brokerage Statement
- Form 1099-INT, Box 1
[3] Dividend - i.e, Part of profits of the organization will
distributable to the shareholders.
a) Qualified Dividends
- Less/Low Tax Rates
- Form 1099-DIV, Box 1b
- Source Document: Form 1099-DIV
b) Ordinary Dividends
- Normal Tax Rates
- Form 1099-DIV, Box 1a
- Source Document: Form 1099-DIV
[4] IRA Distributions (distributions is nothing but withdraw/Income)
- IRA distributions are TAXABLE
- Types of IRAs [Individual Retirement Arrangements]
- Traditional IRA
- Roth IRA
- SAP IRA
- Simple IRA
[5] Pensions and Annuities
[6] Social Security Benefits
- After the age of retirement Taxpayer will receive the benefits
from SSA (Social Security Administration) and which is TAXABLE.

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03-Jan-2022

Form 1040
Incomes
[7] Capital Gains or Losses
i) Short-Term
- Held capital assets for ONE YEAR OR LESS
- Short-term capital Gains
- Short-term capital Losses
ii) Long-Term
- Held capital assets for MORE THAN ONE YEAR
- Long-term capital Gains
- Long-term capital Losses

- GAINS: All gains are TAXABLE

- LOSSES: Losses can be DEDUCTIBLE depends on the filing status

- $1500 : Married Filing Separately (MFS)
- $3000 : For all other filing status
- If losses is more than $1500 or $3000, it will
carried forward to NEXT TAX YEAR
- Carried forward losses can be deductible until it
gets set-off
Tax Rates:
- Long-term capital gains are treated with LESS TAX RATES
- Short-term capital gains are treated with NORMAL TAX
RATES (Regular tax rates)
 Source Document: 1099-B (Brokerage)
Reporting Form: Form 8949

Examples:
1] 2018 : Purchase of 100 shares at $10 per share [100 *
10 = $1,000]
2020 : Sold 100 shares at $20 per share [100 * 20 =
$2,000]
Result: Long-term capital gain of $1000

2] 2019 December : Purchase 10 shares at $1000 per

share. [10 * 1000 = $10,000]
2020 January : Sold 10 shares at $500 per share [10 *
500 = $5,000]
Result: Short-term capital losses of $5,000
- Losses can be deductible up to $1500 or
$3000 based on filing status

3] 2019: Purchase 1000 shares at $10 per share [1000 *

10 = $10,000]
2020: Sold 1000 shares at $12 per share [1000 * 12 =
$12,000]
Assume Long-term capital gain of $2,000
2019 December: Purchase 1000 shares at $10 per share
[1000 * 10 = $10,000]
2020: Sold 1000 shares at $12 per share [1000 * 9 =
$9,000]
Assume: Short-term capital losses of $1,000
Over all Result: $1000 of capital gain

[8] Other income from Schedule 1

Schedule 1
Additional Income
1) Taxable refunds
- Federal refunds are NOT TAXABLE (generally
exempt)
- State refunds:
- NOT TAXABLE if you filed with
Standard Deduction
- TAXABLE if you filed with Itemize
Deduction
- Source Document: 1099-G (Certain
Government Payments)

2) Alimony received
- Compensation paid by one spouse to another
spouse is TAXABLE (it applies before 2018)
- Source Document: Court or Decree

3) Business income or (loss). Attach Schedule C

- Reporting of incomes and losses in Schedule C
- Form 8829: Home office using for business
purpose. Expenses incurred for home office can be DEDUCTIBLE.
- All GAINS are TAXABLE
- All LOSSES are DEDUCTIBLE
- Source Document: P&L Statement AND Form 1099-
NEC
- Reporting Form: Schedule C
 4) Other gains or (losses). Attach Form 4797

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04-Jan-2022

Form 1040
Incomes
[8] Other income from Schedule 1
Schedule 1
Additional Income
4) Other gains or (losses). Attach Form 4797
- Gains are TAXABLE with some threshold limit
- Losses are not DEDUCTIBLE

5) Rental Real Estate, Royalties, Partnerships, S

Corporations, Trusts, etc. Attach Schedule E
- Rental Incomes: Reported on Schedule E and
it's TAXABLE
- Rental Expenses: can be DEDUCTIBLE (i.e.,
Advertising, Cleaning and maintenance, etc)
- There are two categories;
- Active
- Major source of income from
Rental activities
- Rental looses can be DEDUCTIBLE
up to $25,000
- Additional looses can be carried
forward to NEXT TAX YEAR
- Passive
- Losses can not be DEDUCTIBLE but
it can be carried forward to NEXT TAX YEAR
- Source Income for Rental: Form 1099-MISC
(From third party who is managed the Property)
- Reporting Form: Form 8825

6) Farm income or (loss). Attach Schedule F

- If Taxpayer is having any Farm income, it
will be reported on Schedule F.

7) Unemployment compensation
- If Taxpayer is unemployed in US, government
will release the funds to survive in US.
- Source Document: Form 1099-G
- Unemployment benefits generally count as
taxable income

8) Other income:
***
reported on Schedule 1, Line 8b
are restricted to the income)
Schedule A - Itemized Deduction
a) Net operating loss
b) Gambling income
- Source Document: Form W-2G
- Gambling income is TAXABLE and will be
- Gambling losses are DEDUCTIBLE (losses
- Gambling losses can be shown on
- Gambling losses CAN NOT be carried
forward

c) Cancellation of debt
- Taxpayer is no longer liable to re-pay the
debt (e.g. Mortgage, Loan, etc). So, it will be considered as Income.
- Source Document: Form 1099-C

*** d) Foreign earned income exclusion from Form

2555

*** e) Taxable Health Savings Account distribution

- Distributions are TAXABLE if it is
other than Medical purpose

f) Alaska Permanent Fund dividends

g) Jury duty pay

h) Prizes and awards

- If Taxpayer receives any Gift and
Awards are TAXABLE

Adjustments to Income
11) Educator expenses
- If Taxpayer is Teacher or in Teaching
profession they can get $250 DEDUCTION (If TP and SP both are in teaching
profession, Individually they can claim $250 each i.e., $500 MFJ)

12) Certain business expenses

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06-Jan-2022

Form 1040
Incomes
[8] Other income from Schedule 1
Schedule 1
Adjustments to Income
13) Health savings account (HSA) deduction. Attach
Form 8889
- HSA Contribution: It's a health insurance
plan. TP can contribute for self, spouse and dependents.
- Contribution Limit: Self $3600 and Family:
$7200
Note: If TP age is more than 55 years,
they can contribute additional $1000.
- April 15th is the last day to contribute
- For additional contribution, 6% is the
penalties.
- Early distribution [other than
medical/pharmacy usages], 20% is the penalties.
- Source Document: Form 1099-SA

14) Moving expenses for members of the Armed Forces.

Attach Form 3903

15) Deductible part of self-employment tax. Attach

Schedule SE
Schedule 2
4) Self-employment tax. Attach Schedule
SE
- 15.3 %
- 6.2 Social Security + 1.45
Medicare [Employer + Employee i.e., 15.3%]
- 50% of Schedule 2, Line 4 tax can be deducted
to avoid double taxation

*** 16) Self-employed SEP, SIMPLE, and qualified plans

17) Self-employed health insurance deduction

18) Penalty on early withdrawal of savings

- Example: To break the Fixed Deposit in banks,
TP will have to pay penalty to the bank. So, it will deductible from the return.

19) Alimony paid

*** 20) IRA deduction

21) Student loan interest deduction

- $2500 Maximum deduction limit PER DEPENDENT
- Loan must be taken from USA only
- Can take deduction for TP, SP, and/or
Dependents
- Source Document: Form 1098-E

23) Archer MSA deduction

24) Other adjustments

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10-Jan-2022

Form 1040
Incomes
[8] Other income from Schedule 1
Schedule 1
Adjustments to Income
20) IRA deduction (Individual Retirement
Arrangements)
- Types of IRAs
- Traditional IRA
- Roth IRA
- Maximum contribution limit is up to $6000 for
each Taxpayer
- If TP age is more than 50 years, they can get
additional $1000 contribution
- TP CANNOT withdraw before 59 and half years.
Early withdraw of IRA, rates to regular taxes PLUS 10% of additional tax penalties
- Time period to contribution : April 15 of the
NEXT TAX YEAR
- Early withdraw of penalties doesn't apply if
the distribution (Withdraw) for below purposes;
- Medical purpose
 - Higher education purpose
- First Time Home Purchase, etc...

i) Traditional IRA
- Maximum contribution limit is up to
$6000 for each Taxpayer
- If TP is more than 50 Years of age,
they can get additional $1000 contribution
- Deductible

ii) Roth IRA

- Maximum contribution limit is up to
$6000 for each Taxpayer
- If TP is more than 50 Years of age,
they can get additional $1000 contribution
- NON-Deductible

Rollover:
- Transferring of money from Traditional
IRA to Roth IRA to avoid 10% of penalties

Schedule 2
[1] Alternative Minimum Tax (AMT)

[2] Excess advance premium tax credit repayment. Attach Form 8962

[4] Self-employment tax. Attach Schedule SE

[5] Social security and Medicare tax on unreported tip income. Attach Form
4137

[6] Uncollected social security and Medicare tax on wages. Attach Form 8919

[8] Additional tax on IRAs or other tax-favored accounts. Attach Form 5329

[11] Additional Medicare Tax. Attach Form 8959

- 0.9 % depends on IRS threshold

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11-Jan-2022

Discussion about Tax Preparation Process and assigned practice return.

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12-Jan-2022

Form 1040
[12a] Standard deduction or itemized deductions
- Standard deductions are defined by the IRS depends on Filing Status.
- Single $12,550
- MFS $12,550
- HOH $18,800
- MFJ $25,100
- QWDC $25,100
 - Itemized deductions, if expenses are more than the Standard
deduction, Taxpayer can claim Itemized deduction.

SCHEDULE A
Medical and Dental Expenses
- Expenses of more than 7.5% of AGI is only eligible to
claim/deduct through itemized deduction.
- Up to 7.5% of AGI, Medical and Dental Expenses are not
deductible.

Taxes You Paid

State and local taxes: Maximum limit is $10,000 ($5,000 if
MFS)
(5a) IF TP received any refund from State and Local
Income Taxes or General Sales Taxes.

Interest You Paid

Source Document: Form 1098
*** $750,000

Gifts to Charity
No limitation to take deduction on Schedule A

Casualty and Theft Losses

Normal 'Casualty and Theft Losses' CANNOT be deductible
It should be declared by the IRS ONLY

Other Itemized Deductions

Gambling losses
Other miscellaneous expenses
Tax preparation fees [ONLY FOR CA]
Investment/Brokerage expenses [ONLY FOR CA]

[12b] Charitable contributions if you take the standard deduction

[13] Qualified business income deduction from Form 8995 or Form 8995-A

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13-Jan-2022

Form 1040
[13] Qualified business income deduction from Form 8995 or Form 8995-A
20% of Taxable income is deductible

Schedule 3
[1] Foreign tax credit. Attach Form 1116
- May or may not get full foreign tax credit in CURRENT YEAR. It is
based on CURRENT YEAR return data.
- Additional foreign tax can be carried forward to NEXT TAX YEAR

[2] Credit for child and dependent care expenses. Attach Form 2441
- TP and SP should be working
- Qualifying child should under age 13
- Reporting Form 2441
- Care provider must be qualifying organization or Person should have a
valid SSN
- Refundable Credit
- Maximum $8000 Per Child/Dependent (Max up to $16,000)