Tax Preparer Guide to 1040 Chapter 4 Wages Salaries and Other Earnings

Question 1

Form 4070

Answer 1

Employee’s Report of Tips to Employer

Question 2

Reporting tips to the Employer

Answer 2

Even though all tips are taxable, employees must report tips totaling at least $20 per month to the employer by the tenth day of the following month.

Question 3

Clergy

Answer 3

Includes priests, ministers, rabbis, cantors, and anyone else “ duly ordained, licensed, or commissioned” who performs service in the exercise of his or her ministry. Generally income earned by a member of the clergy is taxable. This includes wages as well as offerings and fees received for performing marriages, baptisms, funerals, masses, and other rites.

Question 4

Housing rules for the clergy

Answer 4

The rental value of housing (including utilities) or a designed housing allowance is excludable from taxable income provided it is used to pay for rent (including furnishings and utilities) that does not exceed the fair rental value of the home or apartment.

Question 5

Vows of Poverty

Answer 5

The vow of poverty is often accompanied by the vow of chastity and the vow of obedience. … When an individual takes the vow of poverty, he or she chooses to renounce personal worldly possessions and instead engage in communal sharing of resources.
Members of religious orders who take a vow of poverty (renounce earnings and turn them over to the orders) can be treated in one of two ways):

1. If the member receives payments for services performed for the order and turns the amounts over to the order, the payments are excluded from income. Also any payments received for services performed at another religious institution are excludable from income if the services were performed at the direction of the member’s order.
2. If services are performed outside the order, the earnings are not income only if (a) they are the kind of services that are ordinarily the duties of members of the order and (b) they are part of the duties that the member must exercise for, or on behalf of, the religious order as it’s agent

Question 6

Payments to Military

Answer 6

Payments received by a member of the military generally are taxable as wages.
Taxable payments include:
Basic pay for active duty, back pay, drills, reserve training, and training duty. Enlistment and reenlistment bonuses.
Tax-free payments include:
Combat pay, Basic allowance for housing
Housing and cost of living allowances abroad
death allowances for burial
defense counseling payments.

Question 7

Statutory Employees

Answer 7

Statutory Employees are workers who are treated under statutory rules instead of common law rules. Statutory employees include:
Full-time life insurance salespersons 
Certain agent or commission drivers
Traveling salespersons
Certain homeowners

Earnings of statutory employees are reported on Form W-2 (Box 13), but the earnings are not taxed as wages for income tax purposes.
A statutory employee can also deduct expenses on schedule c that are related to the employee’s work as a statutory employee.
Because Social Security and Medicare taxes should have already been withheld and shown on the employee’s Form W-2, statutory employees do not pay self-employment tax on their earnings.

Question 8

Form 1116, Foreign Tax Credit

Answer 8

to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession. If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.

Question 9

Eligibility for foreign income exclusion

Answer 9

To qualify for the exclusion, a taxpayer must have a tax home in a foreign country and meet either the bona fide resident test or physical presence test.

Question 10

Housing Exclusion and Deduction

Answer 10

A taxpayer with foreign income and foreign housing expenses may be able to elect to exclude or deduct a housing amount. Eligibility for the exclusion or deduction depends on whether the taxpayer is an employee or is self-employed.

Question 11

What is Form 1099-MISC and what is it used for?

Answer 11

Employers use Form 1099-MISC, Miscellaneous Income to:

Report payments made in the course of a trade or business to a person who’s not an employee.
Report payments of $10 or more in gross royalties or $600 or more in rents or for other specified purposes.
Report payment information to the IRS and the person or business that received the payment.