When You Should Use Schedule D

You should use schedule D to report the sale or exchange of capital assets. Most property held for personal purposes, pleasure, or investment is a capital asset. Many transactions that, in previous years, would have been reported on schedule D or D-1 must be reported on Form 8949 if they occur in 2015. Schedule D-1 is no longer in use as Form 8949 replaces it. You must now use Form 8949 to list all capital gain and loss transactions;

The subtotals from this form will then be carried over to schedule D (Form 1040), where gain or loss will be calculated in aggregate. The transactions reportable on this schedule include the following:

• Sales, exchanges, or involuntary conversions of capital asstes
• Capital gain distributions not reported directly on Form 1040
• Nonbusiness bad debts 

You also should use schedule D:

• To figure the overall gain or loss from transactions reported on Form 8949,
• To report certain transactions you don't have to report on Form 8949,
• To report a gain from Form 2439 or Form 6252 or Part I of Form 4797,
• To report a gain or loss from Form 4684, Form 6781, or Form 8824,
• To report a gain or loss from a partnership, S corporation, estate or trust,
• To report capital gain distributions not reported directly on Form 1040, line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, line 14), and
• To report a capital loss carryover from 2014 to 2015.

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When You Should Use Schedule C-EZ

You should use Schedule C-EZ if you have a small business that does not have a loss and all these following situations:

• Business expenses of $5,000 or less
• Must use the cash method of accounting
• Cannot have an inventory at any time during the year
• Must have only one business as a sole proprietor, qualified joint venture, or statutory employee
• Cannot have employees
• Cannot deduct expenses for business use of home
• Cannot have prior year unallowed passive activity losses from the business
• Cannot be required to file form 4562 - Depreciation and Amortization for the business

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When You Should Use Schedule A?

You should use schedule A when itemized deductions exceed the amount of the standard deduction, you attache Schedule A to form 1040 in order to claim the higher amount.

If you itemize, you can deduct a part of your medical and dental expenses and unreimbursed employee business expenses, and amounts you paid for certain taxes, interest, contributions, and miscellaneous expenses. You can also deduct certain casualty and theft losses. 

Taxes You Can't Deduct 

• Federal income and most excise taxes. 
• Social security, Medicare, federal unemployment (FUTA), and railroad retirement (RRTA) taxes. 
• Customs duties. 
• Federal estate and gift taxes. 
• Certain state and local taxes, including: tax on gasoline, car inspection fees, assessments for sidewalks or other improvements to your property, tax you paid for someone else, and license fees (marriage, driver's, dog, etc.).

If you and your spouse paid expenses jointly and are filing separate returns for 2015, see Pub. 504 to figure the portion of joint expenses that you can claim as itemized deductions.

If you have Adjusted Gross Income above $154,950, your itemized deduction may be reduced.

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When You Should Use Schedule EIC

If you are claiming Earned Income Credit and have one or more qualifying child(ren) use Schedule EIC to give the IRS information about your qualifying child(ren).

Qualifying Child Requirements for EIC Purposes

For purposes of the Earned Income Credit, your child must meet ALL four of the following tests to be considered a qualifying child.

1. Relationship – The child must be your son, daughter, stepchild, foster child, or a descendant of any of them (for example, a grandchild), brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, niece or nephew).
2. Age – The child must meet one of the following age requirements.
   • Under age 19 as of December 31^st of the current tax year, and younger than you or your spouse if filing joint;
   • Under age 24 at the end of the current tax year and younger than you or your spouse (if filing joint) and a full time student for 5 months or more;
   • Any age if your dependent is permanently and totally disabled.
3. Residency – Your child must have lived with you in the United States for more than half of the current tax year. If your dependent is a resident of Puerto Rico, Guam, or any other country outside the United States, they will not qualify for EIC. Children who were born or died during the year are treated as living with you for the entire year.
4. Support – Your child did not provide more than one-half of his/her own support during the year.

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When you should complete Schedule B

You need to complete the schedule B if any of the following conditions apply:

• You have over $1,500 of taxable interest or ordinary dividends
• Receipt of interest from a seller-financed mortgage and the buyer used the property as a personal residence
• You have accrued interest from a bond
• You report original issue discount (OID) less than the amount shown on Form 1099-OID
• You reduce interest income on a bond by the amount of amortizable bond premium
• You claim an exclusion of interest from series EE or I U.S. savings  bonds issued after 1989
• You receive interest or ordinary dividends as a nominee.
• You have certain interest in a financial account in a foreign country or a foreign trust

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You May Pay Less Tax Filing Form 1040

Yes, you may pay less tax filing Form 1040 because of the ability to claim itemized deductions, additional adjustments to income, an credits not available on Form 1040A or Form 1040EZ. You must use form 1040 if any of the following apply:

• Taxable income is $100,000 or more
• You will itemize deductions
• You have income that cannot be reported on Form 1040EZ or Form 1040A, including tax-exempt interest from private activity bonds issued after August 7, 1986
• You claim any credits or adjustments to gross income not allowed on Form 1040A.
• You have form W-2 that shows either of the following:
• Uncollected employee tax (social security and Medicare tax) on tips or group-term life insurance
• Income from Non-qualified deferred compensation plans (box 12 with a code Z)
• You received $20 or more in unreported tips in any 1 month
• You were a bona fide resident of Puerto Rico and excludes income from Puerto Rico sources.
• You owe excise tax on insider stock compensation from an expatriated corporation
• You have a qualified health savings account funding distribution from their IRA
• You are an employee and your employer did not withhold social security and Medicare tax
• It is necessary to file other forms with the return to report certain exclusions, taxes, or transactions
• You are a debtor in a bankruptcy case filed after October 16, 2005.
• You have a net disaster loss attributable to a federally declared disaster
• You must recapture the first-time homebuyer credit
• You received a refund or credit of certain taxes or net disaster loss claimed as part of your standard deduction

 

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When You Should Use Form 1040A

A common reason to file Form 1040A is to claim the head of household filing status, which usually results in a lower tax than filing with a status of single. You must meet ALL the following conditions:

• Taxable income must be less than $100,000
• In addition to the income available for a 1040EZ filer, those using form 1040A may also have income from the following sources: IRA distributions, pensions and annuities, interest, ordinary dividends, capital gain distributions (but not unrecaptured section 1250 gain, section 1202 gain, or collectibles gain), taxable social security and railroad retirement benefits
• Adjustments to income cannot be for anything other than the following items:
• IRA deduction
• Student loan interest deduction
• Educator expenses
• Tuition and fees deduction
• You cannot itemize deductions
• Taxes can only come from the following items:
• Tax Table
• Alternative minimum tax
• Recapture of an education credit
• Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,000
•  Qualified Dividends and Capital Gain Tax Worksheet
• You can only claim the following tax credits:
• The credit for child and dependent care expenses
• The credit for the elderly or the disabled
• The child tax credit
• The additional child tax credit
• The education credits
• The retirement savings contributions credit
• The earned income credit
• You cannot have an alternative minimum tax adjustment on stock acquired from the exercise of an incentive stock option

The limitations of Form 1040A include the lack of ability to itemize deductions or report business income.

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When You Should Use Form 1040EZ

Form 1040EZ is the easiest to file, but it does not apply to all situations. Only single and joint filers with no dependents are able to use Form 1040EZ. In order to file with form 1040EZ you must meet ALL of the following conditions:

• Taxable income must be less than $100,000
• Cannot claim any dependents 
• Filing status must be single or married filing jointly. If you were a nonresident alien at any time last year, your filing status must be married filing jointly
• You (and your spouse) must be under age 65 and not blind at the end of the last year.
• Income must be only from wages, salaries, tips, unemployment compensation, Alaska Permanent Fund dividends, taxable scholarship and fellowship grants, and taxable interest of $1,500 or less
• You cannot claim any adjustments to income, such as a deduction for IRA contributions or student loan interest
• No credits allowed other than the earned income credit
• You cannot owe household employment taxes on wages for a household employee
• Cannot claim the additional standard deduction

Form 1040EZ is the most limited in scope. It is useful only for taxpayers with simple returns.

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If you claim standard deduction...

If you claim standard deduction, you cannot itemized deductions. 

The standard and itemized deduction is a dollar amount that reduces your taxable income, but you cannot claim both. You should claim whichever one is higher. 

Certain taxpayers cannot use the standard deduction:

• A married individual filing as married filing separately whose spouse itemizes deductions.
• An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
• An individual who was a nonresident alien or a dual-status alien during the year. Nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction. 
• An estate or trust, common trust fund, or partnership; 

Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses. You may also include gifts to charity and part of the amount you paid for medical and dental expenses. You would usually benefit by itemizing on Form 1040, Schedule A, if you:

• Cannot use the standard deduction
• Had large uninsured medical and dental expenses
• Paid interest or taxes on your home
• Had large unreimbursed employee business expenses
• Had large uninsured casualty or theft losses, or
• Made large charitable contributions

Your itemized deductions may be limited and your total itemized deductions may be phased out (reduced) if your adjusted gross income for 2015 exceeds the following threshold amounts for your filing status.

If you have any questions, send us a message or leave a comment. We will be more than happy to help you.

 

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Are you a Resident or Nonresident Alien for Tax Purposes?

If you are not a U.S citizen, it is important to know if you are a resident or nonresident alien because this affect your tax return. Most U.S. source income a nonresident alien receives is subject to withholding with a tax rate of 30%. Nonresident aliens must file and pay any tax due using Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents. A nonresident alien who is married to a U.S. citizen or resident at the end of the year can choose tax treatment as a U.S resident.

Generally, the IRS considers a person a resident alien if he or she meets either the green card test or the substantial presence test.

To meet the substantial presence test, the nonresident alien must be physically present in the United States (U.S.) on at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   • All the days you were present in the current year, and
   • 1/3 of the days you were present in the first year before the current year, and
   • 1/6 of the days you were present in the second year before the current year.

For purposes of the substantial presence test, the term "United States" includes all 50 states and the District of Columbia, territorial waters, and the seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources. The term does not include U.S. possessions and territories or U.S. airspace.

If one spouse is a nonresident alien and the other is a resident alien or a U.S. citizen, the nonresident alien can choose to be treated as U.S. resident alien. and file joint return. A nonresident alien can elect taxation as a U.S. resident for the whole year if all of the following apply:

• He or she is married;
• His or her spouse is a U.S. citizen or a resident alien on the last day of the tax year;
• He or she files a joint return for the year of the election using form 1040, 1040A or 1040EZ.

If you become a U.S. resident, you stay a resident until you leave the United States,

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Does a Small Business Need to Pay Estimated Tax?

You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you had a tax liability for the prior year, you may have to pay estimated tax for the current year. The IRS rule is that you must pay at least 90% of income taxes (and self-employment taxes) during the year or 100% of income taxes from last year, to avoid fines and penalties.

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

Remember, because the business owner owes the tax, the owner must pay from his personal account. 

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