2A- Income Flashcards
Income
- Gross income means all income from whatever source, including but not limited to:
a. Wages, salaries, and commissions
b. Service income
c. Investment income: interest, dividends, capital gains
d. Rental income and pass‐through income (partnerships/S corp/trust income)
f. Gambling income
g. Foreign income
h. Constructive receipt of income
i. State and local tax refunds
* Real Estate Investment Trust (REIT)- REIT retains long-term capital gains and pays tax on them even though they are not distributed.
Income-Miscellaneous Items
- Supplemental unemployment benefits received from an employer‐financed fund
- Noncash gifts or services for making deposits or opening an account in a savings institution
are reported as interest income - Sick pay benefits are includible in gross income if received from:
a. Employer
b. Welfare fund
c. Association of employers or employees
d. Insurance company if the employer paid for the plan - All tips received by the taxpayer
Income- Rental
- Rental income received from the use or occupation of property is includible as rent income
- Other forms of rental income include but are not limited to:
a. Advance rent, which is included in the year received regardless of the period covered
or the method of accounting used by the taxpayer
b. Rental property expenses paid by the tenant; the expenses are deductible by the owner.
c. Security deposits are not included in rental income when it is received if the amount is
to be returned to the tenant at the end of the lease. - Rental income from a personal dwelling unit (i.e., your home) is reported on Schedule E.
a. The expenses are allocated based on the personal and rental usage of the dwelling.
b. But there are exceptions: If the dwelling is rented for less than 15 days during the year:
(1) None of the rental fee is includible and
(2) None of the rental expense is deductible
Income-Rental from a Personal dwelling (your Home) Sch.E- exceptions
If the dwelling is rented for less than 15 days during the year:
(1) None of the rental fee is includible and
(2) None of the rental expense is deductible
Income-Exclusion
- Interest on a bond issued by a state or municipality (referred to as a Muni bond) is generally
excludible from gross income for federal income taxes. - Non dividend distribution (not paid out of earning and profits)
* A distribution is not taxed until the basis in the stock is fully recovered, after which, it is fully taxable. - Sick pay benefits are not includible if the employee paid for the plan
Income-Retirement-Social Security Benefits (SSBs)
Social Security benefits (SSBs) become taxable when a person’s modified income (Adjusted Gross Income) exceeds
the base amount of their filing status:
a. Modified income equals one‐half of the SSB plus all other income, including any taxexempt
income.
b. Base amount equals:
(1) $25,000 for filing single or head of household
(2) $32,000 for filing married joint
(3) $0 for filing married separate
2. Be aware that the base amount for SSBs is not adjusted for inflation. Hence, it has not
changed.
3. If modified income exceeds the base amounts, there is a secondary base (or threshold)
amount that if exceeded will make 85% of the SSBs taxable. That is:
a. 50% of SSB is included in gross income if modified income falls between the base and
threshold amounts, which are:
(1) $32,000 and $44,000 if filing married joint
(2) $25,000 and $34,000 if filing single or head of household
Income-Retirement-IRA (Individual Retirement Arrangements)
Traditional IRAs: Distributions may be fully or partially taxable.
a. If the taxpayer made only deductible contributions or rollovers, then the entire distribution
amount is taxed as ordinary income.
b. If the taxpayer made any nondeductible contributions to any of their traditional IRAs,
then part of the distribution is taxed as ordinary income.
2. Other Traditional IRA Distributions: There are other distributions from an IRA that are not
included in gross income, including those that are:
a. Rolled over from a qualified plan or another IRA
b. Qualified charitable contributions
c. Timely withdrawals of excess contributions
d. Return of nondeductible contributions
3. A qualified charitable distribution (QCD) is generally a nontaxable distribution if:
a. It is made directly by the trustee of a taxpayer’s IRA to an organization eligible to receive
tax‐deductible contributions,
b. The taxpayer is at least 70½ when the distribution was made,
c. The total QCD does not exceed $100,000, and
d. The QCD amount is limited to the amount of the distribution that would be included in
income.
4. For 2023, a taxpayer must by December 31st take a required minimum distribution (RMD)
from their traditional IRAs after they reach age 73 (if 72 after 12/31/2022).
5. One exception is the first distribution can be made as late as April 1st of the year after
reaching 73
Income-Retirement-Roth IRAS
A qualified distribution from a Roth IRA is not taxable if:
1. It is made after the 5‐year period beginning with the first taxable year for which a contribution
was made to a Roth IRA and
2. The payment or distribution is:
a. Made on or after the date you reach age 59½,
b. Made because you are disabled,
c. Made to a beneficiary or to your estate after your death, or
d. To buy, build, or rebuild a new home that satisfies the exception requirements and does
not exceed the $10,000 lifetime limit.
Income-Retirement-Rollover
A person can make only 1 rollover from an IRA to the same or another IRA within any 1‐year
period (i.e., 365+ days).
- Note: Trustee‐to‐trustee transfers are not considered rollovers; hence, you can make as
many of them without adhering to the 1 rollover per year rule.
2. In general, to roll over an eligible rollover distribution of property, the taxpayer must either:
a. Roll over the actual property distributed or
b. Sell it and roll over the proceeds.
3. The taxpayer cannot keep the distributed property and roll over cash or other property
Income-Adjustments to Income
There are some adjustments to gross income in determining the adjusted gross income (AGI)
of a taxpayer, including but not limited to:
a. One-half of self-employment tax
b. Retirement contributions
c. Student loan interest
d. Contributions to a health savings account
Income-Adjustments to Income-Self Employment Tax
- One-Half of Social Security, medicare and railroad retirement-Employee
- Can be included in business deductions for self employed personal
Income-Adjustments to Income-Retirement
Retirement contributions are another adjustment to gross income, which include the selfemployed
persons’ contributions made to a:
a. SEP plan
b. SIMPLE plan or some other plan
c. Qualified retirement plan
Income-Adjustments to Income-Student loan interest
Student loan interest may be a deduction to gross income, depending on the taxpayer’s
modified AGI (MAGI)-Modified Adjusted Gross Income:.
2. The deduction is gradually phased out for a taxpayer with a MAGI between:
a. $155,000 and $185,000 if the taxpayer is married and filing a joint tax return and
b. $75,000 and $90,000 for all other taxpayers.
3. Note: Taxpayers cannot claim the deduction if their Modified Adjusted Gross Incom (MAGI) is $90,000 or more ($185,000 or
more if filing a joint tax return).
Income-Adjustments to Income-Alimony
Taxpayers paying alimony for divorces finalized prior to January 1, 2019, can deduct qualified
payments.
2. Qualified alimony payments include payments that are:
a. Required by a divorce or separation instrument,
b. Made in cash,
c. Not designated in the instrument as not alimony (note the double negative),
d. Not treated as child support, and
e. Not required after the death of the former spouse.
3. For divorces finalized after December 31, 2018, alimony payments are no longer deductible
or includible as a result of the TCJA (Tax Cuts and Jobs Act of 2017).
