Chapter 1 Section 3: Gross Income Flashcards
What can passive losses offset?
Only passive income
What creates capital gains or losses?
Selling capital assets
What value do you record property at?
FMV
What portion of partially taxable fringe benefits (life insurance premiums) are taxable?
Premiums above the first $50,000 of coverage are taxable income to the recipient and are usually included in the W-2
Are life insurance proceeds taxable?
No
The interest income on a deferred payout is
How are accident, medical, and health insurance premiums handled when paid by the employer?
They are excludable from the employee’s income
What portion of employer payment of employee’s educational expenses is excludable?
Up to $5,250
When is money from qualified pension, profit-sharing, and stock bonus plans taxable?
The payments by the employer (401K) are not taxable
Benefits received are taxable
Explain an FSA
Employees can elect to have money from their salary deposited pretax into an account designated for them, and they can use that money for medical expenses.
If you don’t use it within 2 1/2 months after year-end, you lose it.
Is interest paid by federal or state governments for late payments of refunds taxable?
Yes
Is interest on state or local government bonds and obligations taxable?
No
Is interest on Series EE Bonds taxable?
What is it?
No, but it does have a phaseout and becomes taxable after a certain amount of AGI
It is used to pay for educational expenses
Explain the kiddie tax
Unearned income of a child under 18 (or 24 when a college student) is taxed at the parent’s higher rate
What dividends are tax free?
Return of capital (when there is no E and P)
Stock split
Stock dividend
Life insurance dividend
When are state and local refunds taxable or not taxable?
Taxable if they itemized the prior year
Not taxable if they took the standard deduction the prior year
When do you file a 1040 EZ?
When you take the standard deduction
What are the requirements for a payment to be considered alimony?
Is it taxable?
Must be legally required to pay
Must be in cash or cash equivalents
Can’t extend beyond their death
It is taxable income to the recipient, and deductible to the payer
Is child support taxable?
What is its relationship to alimony?
No, it’s not taxable, and it’s not deductible.
A lump sum payment must first address child support. The remainder is alimony.
When is a Schedule C used?
When you are self-employed
What items go into gross income on a schedule C?
Cash
Property
Cancellation of debt
What expenses are nondeductible on a schedule C?
Salaries paid to the sole proprietor
Federal income tax
Any personal payments (considered draws)
What are the two taxes on net business income or loss under a schedule C?
Income tax
Federal self employment tax
What can net taxable losses be offset against?
Other income
If there’s more, you can do a 2 year carryback and 20 year carryforward
What do uniform capitalization rules mean for sole proprietors?
Capitalize direct materials, direct labor, and overhead to inventory
Expense selling, general, administrative and R and D expenses
What method is generally required for sole proprietors regarding long-term construction contracts?
What’s the exception?
Percentage of completion
Unless you are a small contractor, home construction contractor, are performing professional services related to the project, or performing services under warranty or maintenance agreements. Then you can use completed contract.
What are the start and end dates for a long-term construction contract?
Start: when costs are first incurred
End: when the work is complete
What basis do most farmers use?
Cash, but some are required to use accrual.
How do you handle inventory for farming, depending on each method?
Cash: expense it
Accrual: use and maintain inventory (livestock etc)
How do you calculate gain or loss on disposal of property?
Amount realized less adjusted basis of assets sold
When is IRA income taxable?
When withdrawn.
You need to be 59 1/2
What types of IRA are not taxable?
Roth or traditional nontaxable.
For a traditional nontaxable IRA, the principle is nontaxable, but accumulated earnings are taxable when withdrawn.
What are the exceptions to the penalty tax for early withdrawal from an IRA?
HIM DEAD
Home buyer (1st time) Insurance (medical) Medical expenses in excess of 10% of AGI Disability Education and Death
How are annuities handled?
What if you live longer than the payout period?
What if you die before full recovery?
Treat like depreciation. Divide the contract amount by the factor, and exclude that amount.
If you live longer, then further payments are fully taxable.
If you die sooner, the unrecovered portion is a miscellaneous itemized deduction
What goes on a schedule E?
Passive income: Rental real estate Royalties Partnerships and LLCs S Corps Estates Trusts
What is the basic formula to get net rental income or loss?
Gross rental income \+ Prepaid rental income (non-refundable deposit) \+ Rent cancellation payment \+ Improvement in lieu of payment - Rental expense
What are the two thresholds for rental income from a vacation home?
If it’s rented less than 15 days, exclude it
If it’s rented 15 or more days, prorate it. Rental expenses are deductible only up until rental income. No losses.
What do you do with nondeductible passive activity losses?
Carry forward forever, until you sell it. Then it’s fully tax deductible.
What are the exceptions to PAL rules?
Mom and Pop Exception
You can deduct up to 25,000 of net passive losses if you actively manage. It’s phased out by 50% when the AGI exceeds 100,000, and is gone when the AGI is 150,000.
Real Estate Professional
If you’re a real estate professional, you can have losses.
Is unemployment comp taxable?
Is workers comp?
Unemployment: no
Workers: yes
What do you do with gambling losses?
They can only be deducted up to the amount of gambling winnings. The deductible amount is an itemized deduction on schedule A
Are business recoveries taxable?
If the damage award is compensation for lost profit, yes
Are punitive damages taxable?
Yes, if received in a business context of for loss of personal reputation.
If it’s for personal injuries, it’s taxable unless it’s for wrongful death.
Are scholarships and grants taxable?
No, unless it’s for room and board or you’re working for it.
Are life insurance proceeds taxable?
No, but interest income on deferred payouts is.
