Registered Tax Return Preparer Work Vital to Calculations Involving Investment Income

October 29, 2011 by  Filed under: Taxes 

Individuals with investment income normally have plenty of items to identify for separate tax treatment. In addition to deciding the correct tax reporting for each income type, taxpayers must verify that all forms used by automated tax preparation software are accurate. A professional with tax preparation training is usually a sound choice for such taxpayers.

The amount of extra tax preparation effort created by investments generally depends upon how much income is generated. In some cases, the process requires no additional forms. However, whenever there are capital gains or qualified dividends for the low capital gain tax rate, extra computations are necessary.

Income from interest and dividends are reported separately on Schedule B. But this form is only required if interest or dividend income is greater than $1,500. When both categories are smaller, taxpayers can report the income directly on their tax returns. They even qualify to use Form 1040A. If the income is interest only and no dividends, use of Form 1040EZ may apply.

Schedule B lists all payers of income and the amounts from each. Completion of Schedule B is a normal process in registered tax return preparer work to verify that all investment income sources are accounted for with an accurate total. If the form isn’t required with the tax filing, it is simply retained in the RTRP records.

Dividends come in two varieties. Some dividends are simply ordinary dividends, but others are qualified dividends. These are eligible for lower tax rates. Taxpayers using professionals who complete tax return preparer school are assured of identifying the qualified dividends. This leads to completion of a worksheet where the qualified dividends are taxed at only 15 percent for most taxpayers. However, many individuals have no tax on qualified dividends.

A few more details are covered in RTRP study that are easily overlooked by taxpayers preparing their own tax returns. First, anyone with a bank account or other type of financial account in a foreign country – or who is part of a foreign trust – must use Schedule B regardless of the amount of interest and dividend income. Secondly, although tax-exempt interest doesn’t affect income on Form 1040, it is reported anyway.

Another category of investment income is capital gain distributions. These gains don’t mean that a taxpayer personally sold some investment holdings. Instead, they occur when mutual funds owned by the individual sell some of the investments. These gains are distributed to mutual fund owners separately from dividends. Taxpayers should not ignore capital gain distributions just because they don’t have any investment sales to report on Schedule D. Capital gain distributions are reported directly on Form 1040 or 1040A if no Schedule D is otherwise required.

A tax preparer job follows the right process for each type of investment income. This means using the necessary forms and determining the correct tax. Tax preparation software performs the arithmetic, but the experience of a paid tax preparer accurately categorizes the different types of investment income.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for tax preparation training and tax professionals. Access to free questions for the tax preparation is available on their website.

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