Chapter 1 Section 3: Gross Income

Question 1

What can passive losses offset?

Answer 1

Only passive income

Question 2

What creates capital gains or losses?

Answer 2

Selling capital assets

Question 3

What value do you record property at?

Answer 3

FMV

Question 4

What portion of partially taxable fringe benefits (life insurance premiums) are taxable?

Answer 4

Premiums above the first $50,000 of coverage are taxable income to the recipient and are usually included in the W-2

Question 5

Are life insurance proceeds taxable?

Answer 5

No

The interest income on a deferred payout is

Question 6

How are accident, medical, and health insurance premiums handled when paid by the employer?

Answer 6

They are excludable from the employee’s income

Question 7

What portion of employer payment of employee’s educational expenses is excludable?

Answer 7

Up to $5,250

Question 8

When is money from qualified pension, profit-sharing, and stock bonus plans taxable?

Answer 8

The payments by the employer (401K) are not taxable

Benefits received are taxable

Question 9

Explain an FSA

Answer 9

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.

Question 10

Is interest paid by federal or state governments for late payments of refunds taxable?

Answer 10

Yes

Question 11

Is interest on state or local government bonds and obligations taxable?

Answer 11

No

Question 12

Is interest on Series EE Bonds taxable?

What is it?

Answer 12

No, but it does have a phaseout and becomes taxable after a certain amount of AGI
It is used to pay for educational expenses

Question 13

Explain the kiddie tax

Answer 13

Unearned income of a child under 18 (or 24 when a college student) is taxed at the parent’s higher rate

Question 14

What dividends are tax free?

Answer 14

Return of capital (when there is no E and P)
Stock split
Stock dividend
Life insurance dividend

Question 15

When are state and local refunds taxable or not taxable?

Answer 15

Taxable if they itemized the prior year

Not taxable if they took the standard deduction the prior year

Question 16

When do you file a 1040 EZ?

Answer 16

When you take the standard deduction

Question 17

What are the requirements for a payment to be considered alimony?
Is it taxable?

Answer 17

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

Question 18

Is child support taxable?

What is its relationship to alimony?

Answer 18

No, it’s not taxable, and it’s not deductible.

A lump sum payment must first address child support. The remainder is alimony.

Question 19

When is a Schedule C used?

Answer 19

When you are self-employed

Question 20

What items go into gross income on a schedule C?

Answer 20

Cash
Property
Cancellation of debt

Question 21

What expenses are nondeductible on a schedule C?

Answer 21

Salaries paid to the sole proprietor
Federal income tax
Any personal payments (considered draws)

Question 22

What are the two taxes on net business income or loss under a schedule C?

Answer 22

Income tax

Federal self employment tax

Question 23

What can net taxable losses be offset against?

Answer 23

Other income

If there’s more, you can do a 2 year carryback and 20 year carryforward

Question 24

What do uniform capitalization rules mean for sole proprietors?

Answer 24

Capitalize direct materials, direct labor, and overhead to inventory
Expense selling, general, administrative and R and D expenses

Question 25

What method is generally required for sole proprietors regarding long-term construction contracts?
What’s the exception?

Answer 25

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.

Question 26

What are the start and end dates for a long-term construction contract?

Answer 26

Start: when costs are first incurred
End: when the work is complete

Question 27

What basis do most farmers use?

Answer 27

Cash, but some are required to use accrual.

Question 28

How do you handle inventory for farming, depending on each method?

Answer 28

Cash: expense it
Accrual: use and maintain inventory (livestock etc)

Question 29

How do you calculate gain or loss on disposal of property?

Answer 29

Amount realized less adjusted basis of assets sold

Question 30

When is IRA income taxable?

Answer 30

When withdrawn.

You need to be 59 1/2

Question 31

What types of IRA are not taxable?

Answer 31

Roth or traditional nontaxable.

For a traditional nontaxable IRA, the principle is nontaxable, but accumulated earnings are taxable when withdrawn.

Question 32

What are the exceptions to the penalty tax for early withdrawal from an IRA?

HIM DEAD

Answer 32

Home buyer (1st time)
Insurance (medical)
Medical expenses in excess of 10% of AGI
Disability
Education
and
Death

Question 33

How are annuities handled?
What if you live longer than the payout period?
What if you die before full recovery?

Answer 33

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

Question 34

What goes on a schedule E?

Answer 34

Passive income:
Rental real estate
Royalties
Partnerships and LLCs
S Corps
Estates
Trusts

Question 35

What is the basic formula to get net rental income or loss?

Answer 35

Gross rental income
\+ Prepaid rental income (non-refundable deposit)
\+ Rent cancellation payment
\+ Improvement in lieu of payment
- Rental expense

Question 36

What are the two thresholds for rental income from a vacation home?

Answer 36

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.

Question 37

What do you do with nondeductible passive activity losses?

Answer 37

Carry forward forever, until you sell it. Then it’s fully tax deductible.

Question 38

What are the exceptions to PAL rules?

Answer 38

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.

Question 39

Is unemployment comp taxable?

Is workers comp?

Answer 39

Unemployment: no
Workers: yes

Question 40

What do you do with gambling losses?

Answer 40

They can only be deducted up to the amount of gambling winnings. The deductible amount is an itemized deduction on schedule A

Question 41

Are business recoveries taxable?

Answer 41

If the damage award is compensation for lost profit, yes

Question 42

Are punitive damages taxable?

Answer 42

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.

Question 43

Are scholarships and grants taxable?

Answer 43

No, unless it’s for room and board or you’re working for it.

Question 44

Are life insurance proceeds taxable?

Answer 44

No, but interest income on deferred payouts is.