Dependency, Filing Status, and Income Documents
Most Common Income Documents
Form W-2, Form 1099-R, and SSA-1099
Form W-2: Wages and Salaries
Employers must report wages and other employee compensation on Form W-2. Most VITA taxpayers who worked during the year will have a W-2. Wages reported on Form W-2 are classified as earned income
Key Boxes for Form W-2
- Box b–Every employer has a unique, 9 digit employer identification number (EIN) that we will enter into the tax software each time we start a return.
- Box 1—Taxable Income the taxpayer received from their employer during the year
- Box 2—Reflect the total amount of withholding or the total amount of taxes the taxpayer has already paid during the year.
- This is determined by how the taxpayer completes Form W-4 Taxpayers may adjust their withholding at any time during the year and should do so if their withholding is too low to cover their tax burden.
- Many taxpayers owe money on their tax returns because they did not complete Form W-4 correctly, causing them to not have enough withholding taken out of their paycheck.
- Boxes 3-6—Social Security/Medicare Income and Social Security/Medicare Taxes paid. This section is generally completed automatically by the employer.
- Boxes 7 & 8– Social Security and Allocated Tips
- Box 10—Dependent Care Benefits
- Indicates the taxpayer receives benefits to help pay for their
- Not common for VITA taxpayers
- Box 12
- Box 12 simply codes benefits that an employee might receive, such as health insurance and a retirement plan
- The most common codes are C, D, and DD
- These codes may impact the tax return
- See page D-6 in the Pub 4012 for a common list of Box 12 codes
- Box 13
- Either clarifies what is listed in box 12 r indicates that the taxpayer is a statutory employee
- See your site coordinator in these circumstances.
- Box 14
- Non-standard codes that rarely impact the tax return
- Box 15-20—Contains local and state income taxes
- Pay special attention to the State EIN and make sure it only gets entered in once
- The state wages or local wages amount may differ from the amount in box 1 of the W-2
- Some individuals pay taxes to multiple localities.
- Be sure to review the taxpayer’s documents closely to ensure you are not missing anything.
Form 1099-R: Retirement Income
Retirement income can include Social Security benefits as well as benefits from annuities, retirement or profit-sharing plans, insurance contracts, IRAs, etc. Retirement income may be fully or partially taxable. Retirement income is typically considered unearned income unless the taxpayer receives the retirement because they are disabled and would be otherwise working (see the retirement topic associated with this lesson for more information. Retirement may also be listed on forms other than a Form 1099-R.
Key Boxes for Form 1099-R
- Box 1—Gross Distribution Reported on line 4a and 4c of the 1040
- The total amount of income the taxpayer received during the year from the retirement product
- Box 2—Taxable Income Reported on line 4b or 4d of the 1040
- Can be equal to or less than the amount in box 1
- Sometimes it may be empty
- Check to see if there is an amount in box 9b
- If so, we will need to calculate the taxable amount
- If not, the gross distribution will be fully taxable
- Box 9b—Total Employee Contributions
- The full amount the taxpayer contributed to the retirement plan in their lifetime
- May help you calculate the taxable amount if no amount in box 2a
•Box 4—Federal Income Tax Withheld Just like with income from wages on a Form W-2, a taxpayer can elect to have taxes taken out of their retirement account as they receive it
- Box 7—Distribution Code(s)
- Tells you more about how the taxpayer is receiving the retirement account
- Distribution codes are listed in the Pub 4012 Most Common Distribution Codes
- D-39 of the Pub 4012
- Code 7
- Code 1
- Code 3
- The above codes are some of the more common distribution codes. You don’t need to memorize these codes, but always check the Pub 4012 if dealing with an unfamiliar code.
- Code 7
- Reflects a normal retirement distribution
- Code 3
- Reflects a distribution from the retirement account due to disability
- If the taxpayer is considered to be under the retirement age by their employer, the income is considered earned income
- Typically if the taxpayer has
- Code 1
- Typically means the taxpayer took out a distribution from their retirement account before they reached the retirement age for their company (typically 59 1/2)
- The distribution may be subject to a 10% additional tax penalty
W-2 and 1099 Walkthrough
Form SSA-1099: Social Security Benefits
- Box 5—The total amount of benefits the taxpayer received in the tax year
- Box 6—Federal Income Tax Withheld
- “Description of Amount in Box 3”
- If the taxpayer also pays Medicare premiums, the premiums may be taken directly out of the Social Security Benefits
- Typically, you will see the amount for Medicare Part B and Medicare Part D
- Add these numbers together, and add them into the tax software
Forms 1099-INT, 1099-DIV, and Form 1099-G
Common sources of taxable interest income are checking and savings accounts, certificates of deposit
(CDs), savings certificates, U.S. government bonds, interest on insurance proceeds, and loans that
the taxpayer makes to others. Some savings and loans, credit unions, and banks call their distributions
“dividends.” These distributions are actually interest and are reported correctly as interest on Form 1099-INT. While interest income is quite common at VITA sites, it is rarely a large amount and is quite simple to enter into the tax software.
Like interest income, dividends are quite simple for most VITA taxpayers and easy to enter into the tax software. In most cases, the taxpayer will either have ordinary or qualified dividends.
Ordinary dividends are corporate distributions paid out of the earnings and profits of a corporation. Any
dividend received on common or preferred stock is an ordinary dividend unless the paying corporation
states otherwise. Qualified dividends are ordinary dividends that qualify for lower, long-term capital gains tax rates. The determination as to whether a dividend is ordinary or qualified is already made when the financial institution issues the Form 1099-DIV, and their is nothing special you need to complete. =
Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state in the U.S. Unemployment is considered taxable income at the federal level, and at the state level in Kentucky and Indiana.