Form 1040 – Income


Out of Scope by [line number]:

  • [7] Income from a foreign employer
  • [7] Ministers/Clergy
  • [8-9] (See Schedule B resource page)
  • [10] State refund for a tax year other than the immediately preceding one (See exceptions below)
  • [14] Other gains or losses (requires form 4797)
  • [15] Taxpayers using the General rule
  • [15] SIMPLE and SEP IRA distributions EXCEPTION FOR AARP
  • [15] Taxable ROTH (early) distributions
  • [15] Early distributions or excess contributions subject to additional tax
  • [15] Distributions from IRAs to which non-deductible contributions were made (Form 8606) EXCEPTION FOR AARP
  • [15] IRA rollovers that do not meet tax-free requirements
  • [15] Required Minimum Distributions (RMD) not taken EXCEPTION FOR AARP
  • [16] Pension Lump sum distributions (Form 4972) (SSA lump sum distributions are in scope)
  • [16] General Rule was used to figure taxable portion of pensions and/or annuities for past years
  • [16] Foreign retirement arrangements that may need special reporting (Form 8938)
  • [18] Farm income or loss
  • [21] TP is insolvent.
  • [21] Cancellation of debt on Home Mortgages may be OOS for your District or site

Tax Slayer entry:

Federal Section > Income


[7] Wages and Salaries (W-2):

  • W-2 codes
  • Employee name mismatch – override a mis-spelled or maiden name.
  • Employee address mismatch – override if the address differs. Do not worry about “St” vs “Street”, etc.
  • SSN mismatch – the TP must ask for a corrected W-2 form from their employer before filing. DO NOT USE AN INCORRECT SSN.
  • TP has an ITIN but the W-2 shows an SSN. An additional field for the SSN will appear. Enter the SSN from the W-2.
  • If any automatically filled entries do not match, manually correct them..
  • State ID number – dashes are not important and will be removed if entered.
  • If there is an entry in box 11, there is a software error that may miscalculate the CO tax. It should carry to the CO pension/annuity subtraction. Verify it does and that it doesn’t increase the subtraction more than it should. If it does the latter, go here to fix.
  • If a Medicaid Waiver Payment, see line 21 below. (2014 and later).
  • Unreported tip income is normally reported on the W-2 TS entry page. If there is no W-2, then on the Federal Section > Income > Other Taxes > Tax on Unreported Tip Income (Form 4137) TS page.

[8] Interest: (See Schedule B)


[9] Dividends: (See Schedule B)


[10] Taxable State Refunds:

  1. State refunds are only taxable if used in the previous year as a Schedule A deduction.
  2. If estimated taxes were paid in this tax year for the previous tax year, any refund amount is pro-rated to the two years.
    1. The refund to be tested for taxability in this tax year will be less than the amount received from the state.
    2. The tax paid in this tax year for the preceding tax year is added to the amount paid but decreased by it’s pro-rated refund.
    3. ⚠ CAUTION : Tax Slayer does not provide this calculation. In this case, use the Refund Calculator.
  3. The lesser of the two following amounts is taxable.
    1. The amount that itemized deduction exceeded the standard deduction.
    2. The amount that the state withholding exceeded the sales tax.
    3. The amount that itemized deductions exceeded the standard deduction.
    4. The refunded amount reduced by a taxable amount that is negative.
    5. Tax Credits that were available but not fully used to reduce tax.
  4. ⚠ CAUTION : Tax Slayer does not provide the latter 2 calculations. In those cases, use the Refund Calculator.
  5. If the sales tax figure is unavailable (typical),  the IRS provides a web site to calculate the state sales tax for previous years.
  6. Refunds from other than the previous year are  OUT OF SCOPE  unless the taxpayer agrees that it is either 100% taxable, or the taxpayer claimed the standard deduction or claimed the sales tax deduction for that year.
  7. Note that Colorado sales tax TABOR surplus refunds are not a refund of income tax.

[12] Business Income: (See Schedule C)


[13] Capital Gain or loss: (See Schedule D)


[15-16] IRA Distributions, Pensions and Annuities:

  • 1099-R codes (If the code in box 7 is not listed, it is  OUT OF SCOPE .)
  • Early IRA distribution exception codes
  • IRA Rollover/transfers
  • Non-deductible IRA contributions (Form 8606)
  • Make sure the employee name and SSN match. You may have to override a maiden name. [TSQuestion] If the TP has an ITIN and the SSN doesn’t match, the return must be filed by paper.
  • If the amount taxable is greater than the gross amount distributed, it may be the result of cashing in a life insurance policy and the extra taxable amount is likely due to dividends that have grown tax-free during the life of the policy.

Simplified Method:

If taxable amount is not known and there is an entry in box 9b:

  • Use the Simplified method to determine the non-taxable amount.
  • Use the Annuity calculator to figure the taxpayer’s age and joint ages if it is a survivor pension.
  • If last year’s tax return is available, check to see that the exclusion per month is the same as you figured.
  • If this is the final return for a taxpayer, and pension payments end (i.e., no surviving spouse), any remaining exclusion not taken can be entered as a Schedule A Miscellaneous deduction (not subject to the 2%).
  • If there is a surviving spouse, the exclusion continues at the same rate (i.e., continue to use both ages/birthdates).

Other Exclusions:

  •  Public safety officer health insurance up to $3,000 can be excluded.
    • Simply subtract the amount from the taxable amount after any simplified method calculation.
    • Anything in excess of that can be included in the Schedule A medical insurance.
    • The exclusion does not extend to the spouse after the officer’s death.
  • Reverse mortgage distributions are not taxable..
  • Non-deductible contributions to an IRA, use Form 8606 to exclude a portion of those contributions from tax. After determining the exclusion amount, subtract the amount from the taxable amount.
    • ⚠ CAUTION : In TaxSlayer, you will have to create the return PDF, find the Form 8606 and subtract the amount in line 13 from the Gross Amount and enter into the Taxable amount – it does not carry across to the 1099-R for the IRA

Box 7 code notes:

  • Early pension/IRA distributions, whether or not additional taxes are due, are IN SCOPE.
  • If it is an early distribution (code 1 in box 7), check to see if there might be an exception to prevent the 10% tax penalty.
  • If the code in box 7 is 3 (disability), be sure to ask when the minimum retirement age for the company is. If the client is younger, check “disabled” to move the payment to the 1040 earned income line – it may add Earned Income Credit for the client.

Required Minimum Distributions not taken.

  • See the RMD table or the AARP RMD calculator.
  • Out of scope for VITA/TCE but AARP is permitted to complete Form 5329 to [TSQuestion] request a waiver for penalties to the taxpayer. This can be sent in independently of the tax return after the fact.
  • Note that 401Ks do not require a minimum distribution if the taxpayer is still working and older than 70 1/2 – different from IRAs.
  • The Box 5 amount only includes Medicare B and D. Enter this as a medical deduction – it does not carry across automatically.
  • Ask the TP if additional insurance is being withheld – the amount for January is usually different than February through December so you need both rates.
  • Click for a visual of the CSA-1099R.
  • What’s the Tier 1 and Tier 2 all about? See this if you’re curious.
  • There is a separate TS entry form for Railroad Retirement Tier 2 benefits but the Tier 1 (social security equivalent) is not distinguished from other social security amounts. This produces erroneous results for the CO state return. Correct this using the RRB Worksheet.

[17] Rental real estate, royalties, etc: (See Schedule E)


[19] Unemployment compensation

  • Verify the taxpayers health insurance coverage during the period of unemployment (e.g. COBRA?) and who was covered, for ACA purposes.

[20] Social Security benefits: (See Form SSA-1099)

Tax Slayer entry is in the IRA/Pension Distributions category

  • USA
  • Beginning in 2014, if the Medicare Part B is not the typical 12 month amount, it may indicate partial year coverage and you need to determine if the taxpayer (and family) had qualified insurance coverage in other months.
  • Canada
  • Canada Pension Plan (CPP), Quebec Pension Plan (QPP) and Old Age Security (OAS), received by US residents, are treated as Social Security Benefits and reported on Wkt1.
  • If there is any tax withholding, it was in error and the taxpayer can request a refund from Canada. It is not considered “foreign tax paid”.
  • Canadian RRSPs (similar to an IRA) are  OUT OF SCOPE 
  • Germany
  • German pension plans, received by US residents, are treated as Social Security Benefits and reported on Wk1.
  • Other
  •  OUT OF SCOPE 

[21] Miscellaneous Income

Gambling, bingo, lotteries, etc.
  • [TSQuestion] If no W-2G, add a scratch pad to the Gambling Winnings line.
  • The gambling winnings do not calculate correctly to offset losses from other W-2Gs deductible on Schedule A. You will have to add a scratchpad to Schedule A to reflect any losses related to the 1040 line 21 scratch pad winnings.
  • For gambling winnings on slots without a W-2G net the gains and losses together for data entry.
Scholarships
  • If the scholarship amount is more than qualified expenses, enter on the Other Income > Other Compensation > Scholarships and Grants TS page.
  • See the Education resource  page for more on scholarships.
Household Employee
  • If no W-2 or 1099-MISC, enter on the Other Income > Other Compensation > Household Employee Income TS page.
Cash Income Federal Section > Income > Other Income > Other Inc. Not Reported Elsewhere

  • If more than $400, should this be Self-Employment income?
Jury Duty Pay Federal Section > Income > Other Income > Other Inc. Not Reported Elsewhere

  • Enter the total amount received and describe as “JURY DUTY PAY”.
  • Any payment for travel, food or lodging is not included in income.
  • If part of the jury duty pay was given to the employer, enter that amount on 1040 line 36 as an adjustment.
Cancelation of Debt
  • May be reported on Form 1099-C (not required if under $600)
  • COD for non-business Credit Cards is in scope and part of the Advanced training but  OUT OF SCOPE  if:
    • interest shown
    • bankruptcy indicated
    • insolvency prior to COD
  • COD for Home Mortgage Foreclosure is in scope but may be  OUT OF SCOPE  for your District or site. Check to be sure. See the flowchart aid for details. Fill out Form 982 to exclude from income.
Medicaid Waiver Payments
  • ☣ SOFTWARE ERROR  – This must currently be entered as Other Compensation > Prisoner income.
  • The taxpayer must reside with the person affected for the amount to be excludable from income.
  • If reported on a 1099-MISC see instructions below and also add an entry for line 21 “Notice 2014-7” with the excludable portion amount as a negative number.
  • If reported on a W-2, see the instructions for W-2.
  • If reported on Schedule C as business income, do not deduct it here.
  • Prior years can be amended.

Form 1099-MISC:

After entering a Form 1099-MISC, you will be prompted for its disposition:

  • Amount in box 1 (if no depreciation or expense) or 2, prompts for a Schedule E
  • Amount in box 3, produces no prompt but is added to the Other Income > Other Inc. Not Reported Elsewhere TS page (1040 line 21).
  • Amount in box 7, prompts for a Schedule C . Answer yes unless:
    • it is a sporadic activity which purpose is not a business (for example, a hobby or occasional activity).
    • it is a payment reported by an agency for care of a family member (unless in that business, then use answer yes to use Schedule C).
    • the recipient is a newspaper carrier under age 18.
    • ☣ SOFTWARE ERROR – If you don’t choose Sched C, the amount does not go to the 1040 line 21 nor anywhere else! Add it manually to the Other Income > Other Inc. Not Reported Elsewhere TS page (1040 line 21) described as from 1099-MISC.
  • All other income boxes are  OUT OF SCOPE .