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Step 2 - Verification

Match security descriptions

You can select the settings to allocate Tax Exempt Income for state purposes. The system captures muni-bond data based on your firm-wide settings or customizes it for individual binders. This article will explain the criteria used to match securities, which determine whether the security is marked as state taxable or non-taxable.
You can select from 1 of the 3 options:
  1. SurePrep automatically determines state taxability
  2. State non-taxable
  3. State taxable
When you create a binder, the firm-level options are selected by default across the firm. However, you can select a different option during the binder creation process.

Tax-exempt income: automatically determine state taxability

Auto-calculation of muni bond interest as state taxable/non-taxable for tax exempt dividends/interest and bond premium
If you select
Automatically determine state taxability
, then 1040SCAN follows these steps. It matches the security descriptions with a predefined list during the Pre-Verification process.
The Verification Wizard displays the security descriptions according to the following criteria:
  • The security description matches the predefined list
  • Recognizes the security description based on the state
Security description matches with the predefined list
.
The system places an icon next to the security description when it matches the source document description provided in the predefined list. This icon indicates that the system has automatically calculated the percentage in the
Exempt% or Amount
 column, based on the amount captured by the OCR in the
State Exempt Amount
 column.
Hover over the icon to see the tooltip:
Exempt% determined based on Description
.
The
Security Description
 gets replaced automatically with the security description found in the predefined list.
If the
Security Description
 matches with more than 1 security description from the predefined list, the highest matched security description among the two or more matches found will be considered for calculating the Exempt % or Amount.
Recognition of Security Description based on State
.
1040SCAN will check for the proforma resident state code (Home State) and consider that as a base state. It when then search for the base state name, state abbreviation, or state short form in
Security Description
 captured during the OCR process (for example, California, CA).
  • Home State = California
  • Search for
    California
     or
    CA
     in
    Security Description
    .
When 1040SCAN finds the state name, abbreviation, or short form, it displays an icon near the
Security Description
 field. This icon indicates that the taxability is determined based on the state.
Hover over the icon to see the following message: Deemed Non-Taxable as Resident State is found in the Description or Deemed Taxable as Non-Resident State is found in the Description.
You'll need a space after or before a match, and it should not have any spaces or special characters between them.
Deemed non-taxable as resident state is found in the description
.
The taxability is determined based on the resident state. The
Security Description
 is marked as state taxable or state exempt based on the resident state.
If the security description is matched with the proforma'd resident state then:
  • State Exempt Amount
     = State Non-Taxable
  • Exempt % or Amount
     = 1 (to indicate state non-taxable)
  • The
    State Taxable
     checkmark won’t be cleared.
For
Puerto Rico, Guam, Virgin Islands, and Samoa
, the
Security Description
 field will be considered State Non-Taxable:
  • State Exempt Amount
     field =
    State Non-Taxable
  • Exempt % or Amount
     field = 1 (to indicate state non-taxable)
  • In the
    State Taxable
     option the checkmark won’t be cleared.
Deemed Taxable as Non-Resident State is found in the Description.
The system determines the taxability based on the non-resident state if the security description doesn’t contain any resident states. It then marks the security description as either state taxable or state exempt.
If the system finds any state name, short form, or abbreviation other than the resident state name in the security description, it considers the
State Exempt Amount
 as
State Taxable
. The system populates 0 in the Exempt % or Amount column, and it automatically checks the
State Taxable
 checkbox.
If the proforma'd resident state found is NJ and the OCR-captured security description contains 2 state abbreviations, NJ and NY, then NJ will be considered since it matches the resident state. Consequently, the State Exempt Amount will be calculated as Fully Exempt.
The security descriptions that neither match with the predefined security description or isn't read as certain by OCR will directly appear in the Verification wizard
.
  • If no state name, abbreviation, or short form is found in the security descriptions and no proforma'd state information is provided, then the security description will be displayed under the verification wizard. The amount will be shown under the State Exempt Amount as State Nontaxable.
The system starts matching the corrected description with the security descriptions in the predefined list when the verifier corrects the description and presses the tab key or select
Enter
. The process ends once the verifier enters any value in the
Exempt % or Amount
 or proceeds to the next security description.
  • Exempt % or Amount
     is editable. If the security description is state taxable then 0 appears automatically in that field along with a check mark in the
    State Taxable
     checkbox. Once you edit
    Exempt % or Amount
    , the checkmark for
    State Taxable
     will be removed.
  • If you enter [0.1 to 1.0] in
    Exempt % or Amount
    , it will be treated as an Exempt percentage and more than 1 will be treated as an Exempt amount. If you enter a negative amount, a message 'Invalid amount or %' is displayed.
  • By verifying the certain or uncertain description in the verification wizard,
    Calculate State Taxability
     will get turned on.
  • If you don’t make any changes in this wizard,
    Calculate State Taxability
     will remain inactive. However it will let you move to the next sheet, page, or form without sending the certain security description for determining the state taxability.
  • After verifying security descriptions and State Exempt Amount (certain or uncertain), the process for determining taxability of only edited security descriptions will start and it will end after all the previous-mentioned steps are run in the verification wizard.
  • Those security descriptions matched with the predefined list will have an icon on the right side of the security description and those which are determined based on state will have an icon on the right side of the security description.
  • If the verifier selects
    Submit
     without verifying the uncertain security description, a message pops up for verification 'There are some uncertain fields to verify. Would you like to skip verification and continue?'
  • If the verifier selects
    Yes
    , then all the uncertain security descriptions will get converted to certain, but won’t be processed for the determination of taxability. Selecting
    No
     will take the verifier to the uncertain security descriptions.
  • Alternatively, you can also change the security transactions as
    State Taxable
     or
    State Exempt
     manually by entering 0/0.1 in
    Exempt % or Amount
     to make the whole State Exempt Amount as
    State Taxable
     or
    State Exempt
     or can also enter the calculated exempt amount or percentage (should not be a negative amount) and the balance will be considered as
    State Taxable
    .

Tax-exempt income: State non-taxable

When
State Non-Taxable
 is selected in the
Create new binder
 window or through the
Admin, Tax Return
 tab, then it won’t follow the previous-mentioned steps.
  • The security descriptions as captured by the OCR appears in
    Description
    .
  • State Exempt Amount
     displays the amount of the tax exempt interest.
  • Exempt % or Amount
     is populated with 1 indicating the amount as
    State Non Taxable
    .
  • The
    State Taxable
     checkbox will be unchecked.
  • To change the security descriptions as
    State Taxable
    , you can enter 0 (not a negative number) in
    Exempt % or Amount
    . Once you enter 0 in
    Exempt % or Amount
    , the checkbox for
    State Taxable
     will be automatically checked
  • If you enter any amount which is more than 1, it will be treated as an
    Exempt Amount
     and the balance will be treated as
    State Taxable
    . In this case, the checkbox won't be checked.

Tax-exempt income: State taxable

When
State Taxable
 is selected in the
Create New Binder
 window or through
Admin
,
Tax Return
, then
Tax Exempt Income
 section then it won’t follow the previous-mentioned processes.
  • The security descriptions as captured by the OCR appear in
    Description
    .
  • The State Exempt Amount field displays the amount of the tax exempt interest.
  • The
    Exempt % or Amount
     is populated with 0 indicating the amount as
    State Taxable
    .
  • The
    State Taxable
     checkbox will be checked.
  • To change the security transactions as
    State Non-Taxable
    , you can enter [0.1 - 1] and it will be treated as a percentage equal to or more than 1, and the same will be treated as an exempt amount, but it should be less than or equal to the State Exempt Amount. This will remove the checkmark in
    State Taxable
    .
  • If you enter the Exempt percentage or Amount in the
    Exempt% or Amount
    , the checkmark will be removed and the
    State Exempt Amount
     will break down on the basis of the exempt percentage or the amount entered and the checkbox of
    State Taxable
     will be inactive.
  • If the verifier doesn’t verify the uncertain description in the Verification wizard and submits the wizard, then the same security transactions will be displayed in the Tax Exempt Interest Income Wizard.

This article applies to:

  • Product: SurePrep

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