12.1 GROSS INCOME (INCLUSION AND EXCLUSION)

Question 1

WHAT ARE SOME NOTE WORTHY EXCLUSIONS OF GROSS INCOME?

Answer 1

1) GROUP TERM LIFE INSURANCE UP TO 50K
1A) DIVIDENDS FROM LIFE INSURACE POLICY IS ALSO EXCLUDED.
1B) LIFE INSURANCE PROCEEDS, PAID FOR REASON OF DEATH, ARE GENERALLY ALLOWED TO EXCLUDE THE PROCEEDS FROM GROSS INCOME. (INTEREST IS TAXABLE) AN EXCEPTIONS IS IF THE POLICY WAS SOLD, THEN THE RECEPIENT WILL INCLUDE IN THEIR GROSS INCOME “TOTAL PROCEEDS - CONSIDERATION AND PREMIUM PAID”
3) IN 2019 OR LATER THE PAYER FOR ALIMONY CANNOT DEDUCT AND THE RECEPIENT DOES NOT INCLUDE,
4) ONLY TUITION, FEES, AND COURSE MATERIALS (BOOKS) ARE EXCLUDED FROM GROSS INCOME, - ROOM AND BOARD IS INCLUDED - FYI
5) HEALTH INSURANCE PROCEEDS ARE EXCLUDED FROM GROSS INCOME IF TAXPAYER PAID THE PREMIUMS
6) FOREIGN EARNED INCOME - EXCLUSION IF YOU PASS EITHER A) BONAFIDE RESIDENCE TEST “A US CITIZEN WHO IS A FOREIGN RESIDENT FOR THE ENTIRE TAXABLE YEAR” B) PHYSICAL PRESENCE TEST “A US CITIZEN WHO IS A FOREIGN RESIDENT FOR 144 DAYS IN ANY 12 MONTH PERIOD.”
7) PRIZES AND AWARD THAT PASS THE 3 CONDITIONS ARE EXCLUDED A) NO FUTURE SERVICES B) INDIVIDUAL RECEIVING AWARD WITHOUT ANY ACTION ON THEIR PART C) AWARD ASSIGNED BY THE RECEPIENT TO A GOVERNMENTAL UNIT OR QUALIFIED CHARITABLE ORGANIZATION (RECEPIENT NEVER RECEIVES AWARD)
8) FEDERAL TAX REFUNDS.
9) STATE TAX REFUNDS ARE EXCLUDED FROM GROSS INCOME UNLESS IT WAS DEDUCTED AS AN ITEMIZED DEDUCTION IN AN EARLIER YEAR THEN YOU WOULD INCLUDE THE EXCESS OF THE ITEMIZED AMOUNT DEDUCTED RESULTING IN THE REFUND,
10) MEDICAL EXPENSE REIMBURSEMENTS ARE EXCLUDED, HOWEVER IF THE TAXPAYER ITEMIZED THE EXPENSES IN PREVIOUS YEARS, THE AMOUNT EXCEEDING THE ITEMIZED PORTION IS INCLUDED IN GROSS INCOME.
12) COMPENSATORY DAMAGES FOR PHYSICAL INJURY ARE EXCLUDED
13) WORKERS COMP IS EXCLUDED
14) CANCELLATION OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS

Question 2

WHAT ARE FRINGE BENEFITS?

Answer 2

FRINGE BENEFITS ARE NONMONETARY COMPENSATION FOR SERVICES PERFORMED, UNLESS EXCLUDED BY LAW. TAXABLE FRINGE BENEFITS ARE INCLUDED IN GROSS INCOME. (E.G., GYM MEMBERSHIPS, PARKING REIMBURSEMENTS) REGARDLESS OF WHETHER THE PAYER PROVIDED THE BENEFIT TO THE RECEPIENT OR TO ANOTHER INDIVIDUAL (SPOUSE)

FRINGE BENEFITS THAT PRIMARILY ARE INCURRED FOR THE EMPLOYER’S BENEFIT ARE EXCLUDED.

NONCASH COMPENSATION RECEIVED FROM AN EMPLOYER, OTHER THAN QUALIFIED EMPLOYEE DISCOUNT IS TAXABLE TO THE EMPLOYEE (the increase in value of a vehicle)

Question 3

WHAT IS THE TREATMENT OF INTEREST AND DIVIDENDS?

Answer 3

BOTH ARE INCLUDED IN GROSS INCOME UNLESS EXEMPTION, (E.G., MUNICIPAL INTEREST,SERIES EE FOR HIGHER EDUCATION INTEREST ARE EXCLUDED)

INTEREST ON REFUNDS AND INTEREST ON LIFE INSURANCE PROCEEDS ARE TAXABLE

DISTRIBUTION OF CASH OR PROPERTY IS TAXABLE UNLESS EXEMPT (E.G., LIFE INSURANCE DIVIDEND, STOCK DIVIDENDS, SCORP DIVIDENDS), DIVIDENDS ARE EITHER,
1) ORDINARY
2) QUALIFIED (PREFERENTIAL RATES) - SEE SCREENSHOT

Question 4

WHAT ARE THE 3 ASSET CATEGORIES?

Answer 4

THE ASSETS CHARACTER IS IMPORTANT BECAUSE IT DETERMINES THE TAX TREATMENT OF ANY GAIN OR LOSS RECOGNIZED WHEN THE ASSET IS SOLD OR DISPOSED OF.

1) ORDINARY (CURRENT BUSINESS ASSET)
* 1A) ORDINARY GAINS @ ORDINARY RATES
* 1B) ORDINARY LOSSES OFFSET ORDINARY INCOME

2) CAPITAL ASSET (NON BUSINESS ASSETS) FYI - AN INDIVIDUAL MAY DEDUCT UP TO 3K IN NET CAPITAL LOSSES AGAINST ORDINARY INCOME WITH THE REMAINING BALANCE CARRIED FORWARD INDEFINETLY
THE MOST COMMON CAPITAL ASSETS ARE INVESTMENT ASSETS AND PERSONAL USE ASSETS

• DISCLAIMER: CAPITAL ASSET LOSSES PRESUMED TO REPRESENT CONSUMPTION (NO NETTING PROCESS) (E.G., A REFRIGERATOR, A VEHICLE) HOWEVER GAINS ARE TAXABLE
• 2A) STCG AND LTCG ARE PART OF THE NETTING PROCESS
• 2B) STCL AND LTCL ARE PART OF THE NETTING PROCESS

3) SECTION 1231 (NON CURRENT BUSINESS ASSET > 1 YR) (ALL 1231 GAINS AND LOSSES ARE NETTED)
* 3A) 1231 OVERALL GAIN IS TREATED AS LTCG FOR NETTING WITH OTHER CAPITAL ASSETS
* 3B) 1231 OVERALL LOSS OFFSETS ORDINARY INCOME

Question 5

WHAT IS AN ANNUITY?

Answer 5

AN INDIVUDAL PAYS A LUMP SUM TODAY AND RECEIVES REGULAR, FIXED PAYMENTS IN THE FUTURE.
HOW THE ANNUITY IS FUNDED DETERMINES THE TAX TREATMENT OF THE DISTRIBUTIONS.
*ONLY THE EARNINGS PORTION OF POST TAX DOLLAR CONTRIBUTIONS ARE TAXABLE.

IF EMPLOYER PAYS FOR THE ANNUITY ALL OF IT IS TAXABLE

Question 6

WHAT IS THE NETTING PROCESS FOR INDIVIDUALS?

Answer 6

1. FIRST DETERMINE THE GAINS AND LOSSES SUBJECT TO THE NETTING PROCESS (CAPITAL ASSETS AND 1231 GAINS)

-IF AFTER YOU NET LT AND ST YOU DERIVE A GAIN AND LOSS, YOU NET THEM TOGETHER AND THE CHARACTER OF THE LARGEST FIGURE REMAINS
-IF AFTER YOU NET LT AND ST YOU DERIVE A GAIN FOR BOTH, THEY ARE REPORTED SEPARATELY
-IF AFTER YOU NET LT AND ST YOU DERIVE A LOSS FOR BOTH, THEY ARE REPORTED SEPARATELY AND THE 3K DEDUCTION APPLIES TO SHORT TERM FIRST.

Question 7

WHAT IS A RECAPTURED SECTION 1245 GAIN

Answer 7

** DEPRECIABLE PERSONAL PROPERTY**

THE REALIZED GAIN FROM THE ASSET MUST BE COMPARED WITH THE ACCUMULATED DEPRECIATION, THE SMALLER OF THE TWO FIGURES IS CONSIDERED TO BE THE DEPRECIATION RECAPTURE. THE RECAPTURE IS CONSIDERED ORDINARY INCOME (TAXED AT ORDINARY RATES). IF THEIR IS ANY GAIN REMAINING AFTER THE SMALLER OF THE TWO IS TAXED AT ORDINARY RATES, THE REMAINING AMOUNT IS TREATED AS A CAPITAL GAIN.

IF A RECAPTURE OCCURS FOR AN SCORP OR PARTNERSHIP IT IS REPORTED AS A NON-SEPARATELY STATED ITEM.

Question 8

WHAT IS AN UNRECAPTURED SECTION 1250 GAIN?

Answer 8

DEPRECIABLE REAL PROPERTY

• AN UNRECAPTURED 1250 GAIN OCCURS WHEN THE SALE OF A 1250 ASSEST RESULTS IN A GAIN,
• THE GAINS ATTRIBUTED TO THE LOWER OF A/D AND THE REALIZED GAIN IS TAXED AT 25%, AND ANY REMAINING GAINS ARE SUBJECT TO LTCG RATES.
• THE JUSTIFICATION FOR THE GAIN IS TO OFFSET THE BENEFIT OF PREVIOUSLY USED DEPRECIATION ALLOWANCES.

WHEN THERE IS A NET SECTION 1231 GAIN, REAL PROPERTY SOLD AT A GAIN BY AN INDIVIDUAL HAVE UNRECAPTURED 1250 GAIN. THE LESSER OF THE GAIN OR THE AMOUNT CAUSED BY DEPRECIATION DEDUCTIONS IS TAXED AT A MAXIMUM RATE OF 25% (TAXED AT ORDINARY RATE IF LOWER THAN 25%) THE REMAINING AMOUNT IS TAXED AT THE LTCG PREFERRED RATES.

IF A RECAPTURE OCCURS FOR AN SCORP OR PARTNERSHIP IT IS REPORTED AS A NON-SEPARATELY STATED ITEM.

Question 9

WHAT IS THE ORDERING PROCEDURE FOR NETTING CAPITAL LOSS AGAINST CAPITAL GAINS?

Answer 9

SEE SCREENSHOT

Question 10

SEE EXAMPLE OF THE NETTING PROCESS AND ORDERING PROCEDURE

Answer 10

SEE SCREENSHOT

Question 11

WHAT ARE THE 3 EXCEPTIONS FOR THE GENERAL RULE FOR CAPITAL ASSET HOLDING PERIOD?

Answer 11

1) INHERITED ASSETS ARE ALWAYS LONG TERM
2) NONBUSINESS BAD DEBT WRITEOFFS ARE ALWAYS SHORT TERM LOSSES
3) A WORTHLESS SECURITY’S HOLDING PERIOD IS CALUCLATED BY TREATING THE PROPERTY AS IF IT HAD BEEN SOLD ON THE LAST DAY OF THE TAX YEAR IN WHICH IT BECOMES WORTHLESS IT IS TREATED AS IF IT WERE SOLD FOR $0

Question 12

WHAT IS THE TREATMENT OF CRYPTOCURRENCY?

Answer 12

SUBJECT TO CAPITAL GAIN OR LOSSES

SEE SCREENSHOT

Question 13

WHAT IS THE TREATMENT OF SOCIAL SECURITY BENEFITS?

Answer 13

SEE SCREENSHOT

Question 14

WHAT IS THE TREATMENT OF A GAIN ON SALE OF PRINCIPAL RESIDENCE?

Answer 14

COST + IMPROVEMENTS - SELLING PRICE - COMMISSIONS - REALIZED GAIN

UP TO 250K FOR AN INDIVIDUAL OR 500K FOR MARRIED AND FILLING JOINTLY.

2 YEARS DURING 5 YEAR PERIOD

Question 15

WHAT IS THE EXCEPTION TO THE DEDUCTION OF GAIN ON A SALE OF A HOME?

Answer 15

IF THE TAXPAYER IS FORCED TO SELL AND DOES NOT MEET THE 2 YEAR REQUIREMENT A PRO RATA AMOUNT OF THE EXCLUSION APPLIES.

IF A TAXPAYER QUALIFIES FOR THE DEDUCTION BUT DID NOT PARTIALLY LIVE IN THE HOME FOR THE TWO YEAR REQUIREMENT, THE NON QUALIFYING YEARS TRIGGER A GAIN SUBJECT OT TAX, THE REMAINING GAIN IS EXCLUDED IF UNDER THE 250K REMAINING BALANCE.

Question 16

WHAT IS THE TREATMENT OF GROSS INCOME WITH A DECEDENT?

Answer 16

THE FINAL RETURN INCLUDES ALL INCOME, DEDUCTIONS AND ELGIBLE CREDITS UP TO THE DATE OF DEATH.

IRD - INCOME IN RESPECT OF A DECEDENT - REFERS TO INCOME THE DECEDENT HAD EARNED OR HAD A RIGHT TO RECEIVE DURING THEIR LIFETIME, THAT WASNT PROPERLY INCLUDIBLE IN THEIR FINAL INCOME TAX RETURN BECAUSE OF THE DECEDENTS METHOD OF ACCOUNTING. IT IS TYPICALLY TAXED TO THE ESTATE OR THE BENFICIARY WHO COLLECT THE IRD

*NOL CANNOT BE CARRIED AND USED BY THE ESTATE UP TO ITS FINAL RETURN, -

WHEN A SPOUSE DIES DURING THE YEAR, THE REMAINING SPOUSE IS CONSIDERED MARRIED FOR THE ENTIRE YEAR FOR FEDERAL INCOME TAX PURPOSES, PROVIDED THE REMAINING SPOUSE DOESNT REMARRY THAT YEAR. A JOINT RETURN CAN BE FILLED BUT IS NOT REQUIRED.

Question 17

WHAT DETERMINES SOLVENCY FOR DEFERAL TAX PURPOSES?

Answer 17

WHEN DEBT IS DISCHARGED DEBTORS REALIZE INCOME OF THE AMOUNT DISCHARGED, INSOLVENT DEBTORS MAY QUALIFY TO EXCLUDE DISCHARGED INCOME FROM RECOGNITION.

Question 18

DEBT CANCELLATION IS INCLUDED IN GROSS INCOME HOW IS IT CALCULATED?

Answer 18

FORGIVEN DEBT - ADJUSTED BASIS - RECOGNIZED INCOME

Question 19

WHAT ARE THE RULES FOR ALIMONY INCLUSION AND EXCLUSION?

Answer 19

DIVORCE SETTLEMENTS PRIOR TO 2019 THAT HAVE NOT BEEN ALTERED/MODIFIED,

PRIOR TO 2019 THE PAYER HAS ADVANTAGE
THE PAYER MAY DEDUCT THE PAYMENTS.
THE RECEPIENT MUST INCLUDE THE PAYMENT IN GROSS INCOME

AFTER 2019 THE RECEPEINT HAS ADVANTAGE,
THE PAYER MAY NO LONGER ALLOWED TO DEDUCT PAYMENTS
AND THE RECEPEINT NO LONGER HAS TO INCLUDE THE PAYMENT IN GROSS INCOME

IN ADDITION ONLY CASH AND CASH EQUIVALENT ARE APPLICABLE.

Question 20

WHAT IS THE TREATMENT OF TIPS?

Answer 20

TIPS < THAN $20 DO NOT HAVE TO BE REPORTED,
TIPS > $20 MUST BE REPORTED BY THE 10TH DAY OF THE NEXT MONTH. THE DAY YOU REPORT THE TIPS IS THE DAY YOU RECOGNIZE THE TIPS IN GROSS INCOME.

Question 21

WHAT IS A AFFIRMATION AGREEMENT?

Answer 21

THE DEBTOR AGREES TO REPAY ALL OR PART OF AN EXISTING DEBT AFTER THE BANKRUPTCY PROCEEDINGS ARE OVER.IN GENERAL REAFFIRMATION AGREEMENTS MUST TAKE PLACE BEOFRE THE DISCHARGE IS GRANTED AND IT MUST BE APPROVED BY THE BANKRUPTCY COURT THE DEBTOR IS GIVEN 60 DAYS TO RECIND THE REAFFIRMATION AFTER SHE/HE AGREES TO IT.

Question 22

12.1 WHAT IS A STOCK SPLIT?

Answer 22

THE IMPORTANT THING TO KNOW IS THAT A STOCK SPLIT IS A NONTAXABLE EVENT,
“YOU MUST ALLOCATE THE ORIGINAL BASIS OF THE STOCK OWNED BEFORE THE SPLIT AMONG THE TOTAL SHARES HELF AFTER THE SPLIT”

FOR EXAMPLE 1K SHARES OF $10 BECOMES 2K SHARES OF $5 - THE FMV IS IRRELEVANT

Question 23

WHAT IS THE INTERESTING THING ABOUT STUDENT LOAN INTEREST?

Answer 23

STUDENT LOAN INTEREST IS EXCLUDED FROM GROSS INCOME IF PROCEEDS WHERE USED FOR QUALIFIED EXPENSES “TUITION , FEES, BOOKS”
IF INTEREST EARNED TO PAY FOR ROOM AND BOARD, THE INTEREST IS INCLUDED IN GROSS INCOME.

FURTHERMORE, YOU ARE ALLOWED TO DEDUCT STUDENT LOAN INTEREST AS AN ADJUSTMENT FOR AGI. THE INTEREST YOU CAN DEDUCT IS TUITION, FEES, BOOKS AND ROOM AND BOARD.

Question 24

WHAT IS THE TREATMENT FOR LIFE INSURANCE PROCEEDS IF RECEIVED IN INSTALLMENTS?

Answer 24

AS WE KNOW PROCEEDS ARE TAX EXEMPT HOWEVER IF RECEIVING INSTALLNMENTS WE RECEIVE MORE THAN THE FACE VALUE THEREFORE THE EARNING PORTION IS TAXABLE (SIMILAR TO AN ANNUITY)

Question 25

WHAT IS THE EXCLUSION FOR AWARDS RECEIVED FROM EMPLOYER FOR YEARS OF SERVICE?

Answer 25

AWARDS UP TO $400 RECEIVED FROM EMPLOYERS FOR YEARS OF SERVICE OR ACHIEVING SAFETY ONJECTIVES ARE NOT TAXABLE.

Question 26

WHAT IS A BONA FIDE DEBT?

Answer 26

1. PARTIAL LOSSES RELATED TO BONA FIDE BUSINESS DEBTS ARE REGONIZED THE YEAR INCURRED
2. PARTIAL LOSSES RELATED TO BONA FIDE NONBUSINESS DEBT ARE NOT ALLOWED
3. BONA FIDE NONBUSINESS DEBT IS TREATED AS A LOSS ONLY THE YEAR IT BECOMES WHOLLY WORTHLESS

Question 27

HOW DO WE DETERMINE ACCRUAL BASE PURCHASES?

Answer 27

THE THOUGHT PROCESS HERE IS TO CREATE T ACCOUNTS AND JOURNAL ENTRIES TO DETERMINE X