Understanding Personal Tax Returns

Schedule 3 name and purpose

"Additional Credits and Payments" or "Nonrefundable Credits" Used to claim nonrefundable credits other than child tax credit or credit for other dependents, such as foreign tax credit, education credit, and general business credit

Schedule 1 name and purpose

"Additional Income and Adjustments to Income" Used to report capital gains, unemployment comp, prize/gambling money, etc. Also used to itemize deductions (student loan interest, self employment tax, educator expenses, etc.)

Schedule 2 name and purpose

"Additional Taxes" Used when tax payer owes alternative minimum tax (AMT) or needs to make an excess advance premium tax credit repayment

Schedule D Name and Purpose

"Capital Gains and Losses" Used for short/long term cap gains/losses from sale of stock, bods, properties, or other assets Included in AGI

Form 2106 Name and Purpose

"Employee Business Expenses" Used for employees (mainly commission or contractors) who have to spend $ to perform job but are not reimbursed by employer Bottom line expenses are transferred to Schedule A as itemized deduction

Schedule 6 name and purpose

"Foreign Address and Third Party Designee" Used when taxpayer has foreign address or third party designee other than the paid preparer

Schedule B Name and Purpose

"Interest and Ordinary Dividends" Summarizes interest on depository accts and dividends from stocks Included in AGI

Schedule A Name and purpose

"Itemized Deductions" Totals items that can be credited from taxes to be paid, including medical expenses, taxes, mtg interest, charity donations, casualty losses, job expenses, etc. REDUCE INCOME TAX, NOT AGI

Schedule 5 name and purpose

"Other Payments and Refundable Credits" Used when taxpayer can claim add. credits other than earned income credit, American opportunity credit, or additional child tax credit Also used when taxpayer has other payments (ex. amt paid w/request for an extension to file or excess social security tax withheld)

Schedule 4 name and purpose

"Other Taxes" Used to show other taxes (ex. household employment tax, self-employment tax, IRA/retirement plan tax, etc.

Schedule K-1

"Partners/Shareholder's Share of Income, Deductions, Credits, etc." Used to report income (loss) for partnership/S-Corp Income (loss) is entered on Schedule E and Schedule 1

Schedule C Name and Purpose

"Profit and Loss from Business" Used for unincorp business, sole proprietorship, or independent contractors w/1099 income Basically PNL Income - Expenses = Profit (Loss)

Schedule F Name and Purpose

"Profit or Loss from Farming" Basically a PNL specifically for farming Included in AGI

Schedule E Name and Purpose

"Supplemental Income and Loss" Used for income/losses from rental real estate, royalties, partnerships, S Corps, estates, and trusts Included in AGI

As of 2018, Form 2106 is only used by

- Armed Forces reservists - Qualified performing artists - Fee basis state/local gov officials - Employees w/impairment-related work expenses

Sole Proprietorship

-100% owned by an individual -Owner is personally liable for business debts -Income/loss included in AGI, so it's effectively taxed at personal income tax rates

Which of the following is an example of an asset that cannot be written off as depreciation?

A copyright

Depletion is the using up of:

A natural resource

Schedule C represents what type of financial report

A profit and loss statement

Non-taxable portions of CCC payments should be:

Added back to income.

AGI

Adjusted Gross Income

AMT

Alternative Minimum Tax

Why are homeowners insurance, mortgage insurance, and real estate taxes claimed as expenses on the Schedule E added back when calculating net rental income?

Because they are counted in the PITI

Fannie Mae's form used to reconcile tax return income

Cash Flow Analysis Form 1084

S Corporation

Corp w/less than 100 stockholders w/ limited liability (like corp) but taxed like partnership (S corp files 1120S, then income is distributed based on % ownership to stockholders on Schedule K-1, which is included in net income (loss) calc on Schedule E, which is brought through to Schedule 1 and included in AGI Essentially taxed at personal income tax rates

Examples of Non-Cash expenses used to lower income on tax returns

Depreciation, depletion, amortization

A sole proprietorship is managed by both general and limited partners that have different responsibilities and financial risk.

False

If an applicant submits a Schedule D that includes a gain on sale, that income is always added back to income on Form 91.

False

True or False: Depreciation should never be added back to borrower income.

False

Personal tax returns are defined as:

Form 1040 and all applicable schedules

When asking for tax returns from a borrower, specifically, what should the underwriter request?

Form 1040 signed by the borrower and all supporting forms and schedules

An owner of a sole proprietorship has ____ liability for the business's debts and losses.

Full

Which of the following are true regarding a general partner?

He or she has unlimited personal liability for the entire business.

Limited Liability Company (LLC)

Hybrid form of business Has tax efficiencies of partnership and limited liability advantages of corp

Freddie Mac's form used to reconcile tax return income

Income Calculations (Schedule Analysis Method) Form 91

The income from a sole proprietorship is taxed at what IRS rate?

Individual tax rate

Analyzing the Schedule B provides an opportunity to cross-check which of the following?

Interest and dividends reported against amount of assets listed on the loan application to review for consistency.

What statement best describes Form 1040?

It summarizes income and losses from all other tax schedules.

Amortization

Loss in value to intangible asset (ex. patents, copyrights, etc.)

Depletion

Loss of value (or reduction of) a natural resource (ex. coal, timber, natural gas, etc.)

Depreciation

Loss of value of a physical (tangible) asset

Sole proprietorships can be owned by up to what number of individuals?

One

When should Schedule F be filed?

Only when an individual operates a farm as a sole proprietorship

If the business structure is a(n) _____________, the income or loss is the sum of ordinary income or loss, net rental real estate income or loss, and guaranteed payments.

Partnership

Home mortgage interest and real estate taxes reported on Schedule A should be cross-checked with what information on the loan application?

Real estate owned

Select all that apply. Schedule A gives the underwriter an opportunity to cross-check which of the following against information in the real estate owned section of the loan application?

Real estate taxes

Page 2 of Form 1040 includes:

Refund info, income info, AGI info

Select all that apply. Part V, Line 41 on Schedule E shows total supplemental income and loss. Income from which of the following may contribute toward the total income or loss on Schedule E?

Rental real estate, royalties, partnership

Select all that apply. In which of the following scenarios would personal tax returns be required? Jane is a high school teacher, and her salary is her primary source of qualifying income. In addition, she has her own small business selling hand-made jewelry on Etsy, but she is not depending on this income to qualify. Amber is a real estate investor whose income derives largely from rental properties and partially from interest, dividends, and capital gains. Amber is a real estate investor whose income derives largely from rental properties and partially from interest, dividends, and capital gains. Leo works as an underwriter in his brother's mortgage banking firm. His sole source of qualifying income is his salary.

Required for all but Jane

When are personal tax returns required?

Required when borrower: - receives income from sole proprietorship (or any business structure in which borrower has a 25% or more ownership interest) - is employed by family business or by interested parties to the subject property - owns rental property - derives income from tips, dividends and interest, capital gains, royalty payments, or a trust - uses foreign income to qualify

Select all that apply. Which of the following tax return forms should be cross-checked to ascertain ordinary business income from a partnership?

Schedule E (Form 1040) and Schedule K-1 (Form 1065)

Corporation

State chartered legal entity that exists separate from owners (shareholders) Corp income taxed at corp tax rates, then portion of corp income (shareholder's salary and dividends) are taxed again at personal income tax rates

Profit and Loss Statement

Statement that provides snapshot of business finances during certain period of time

Capital gains/losses can result from selling:

Stocks or bonds, farm property, real estate

What prompted the revision of the 1040 and what was the goal?

Tax Cuts and Jobs Act of 2017 Uses "building block" approach to simplify federal tax return

How are partnerships taxed?

Taxed at personal income tax rates. Income (loss) from Schedule K-1 is reported on Schedule E, then net income from Schedule E is brought through to Schedule 1 which is included in AGI

Select the statement that best expresses why underwriters need to review and adjust income reported on an applicant's tax returns in order to determine qualifying income?

The IRS considers all income, regardless of whether it's regular or recurring.

Schedule A lists deductions that an individual can take:

To reduce taxes

True or False: The meals and entertainment exclusion from Schedule C should always be subtracted from income on Form 91.

True

True or false: GSE documentation requirements for loans to self-employed borrowers include a documented analysis of income reported on the borrower's tax returns. Fannie Mae and Freddie Mac will accept each other's cash flow analysis forms, or any form submitted by a lender, as long as it shows a detailed analysis of the tax returns.

True

Partnership

Unincorp business formed by 2+ individuals that are either general (unlimited personal liability) or limited (liability limited to amount of investment) parners File Form 1065 Partners taxed at personal income tax rates

What can tax returns be used for in addition to verifying income

Whether the borrower owns additional properties; whether the borrower is involved in other businesses