Chapter 1 - Wages, Income, and Taxes Flashcards
Gross Income
Gross income means all worldwide income from whatever source derived, unless specifically excluded from taxation by law. Gross income includes income realized in any form, whether in money, property, or services.
Can be broken down into earned income and unearned income.
Earned income
is received for services performed.
salaries, wages, tips, professional fees, taxable scholarship and fellowship grants reported on form W2, and amounts received for work performed which includes self-employment and farming income.
Disability retirement benefits
Disability retirement benefits qualify as earned income until the taxpayer reaches minimum retirement age. Minimum retirement age is the earliest age the taxpayer could have received a pension from their employer or an annuity if they did not have the disability. Social security disability payments, Social Security Disability Insurance (SSDI) payments, and military disability pension payments are not considered earned income.
Unearned income
is taxable income that does not meet the definition of earned income. It includes money received for the investment of money or other property, such as interest, dividends, capital gains, rents, and royalties. (This is often referred to as “investment income.”), pensions, unemployment compensation, taxable social security benefits, annuities, alimony, taxable scholarship and fellowship grants NOT reported on form W2.
Social security benefits
Social security benefits may be included in taxable income. Benefits are included in the taxable income (to the extent they are taxable) of the person who has the legal right to receive the benefits. You will learn more about social security benefits when you learn about retirement distributions.
Alimony and separate maintenance payments executed or modified after 2018.
Excluded from gross income.
As a result of the Tax Cuts and Jobs Act, for divorces initiated or modified after 2018, alimony will be neither taxable to the spouse receiving it, nor deductible by the spouse paying it, and it is not included in gross income.
(Certain) foster care payments.
Excluded from gross income.
Certain qualified foster care payments are not included in gross income. A qualified foster care payment is one made pursuant to a foster care program of a State or political subdivision thereof and paid for the care of a qualified foster individual or is paid as a difficulty care payment.
Certain income from the discharge of indebtedness.
Excluded from gross income.
Normally, discharge of indebtedness is included in income unless it is meets certain qualifications. This includes debt discharged by Title 11 bankruptcy, insolvency, qualified farm indebtedness, and qualified principal residence indebtedness. Additionally, certain student loans that are canceled under the Public Service Loan Forgiveness Program are included. This was expanded by the Tax Cuts and Jobs Act (2017) and adds a new provision that student loan debt forgiveness due to death or permanent and total disability is excludable from income. Form 982, Reduction of Tax Attributes Due to Discharge or Indebtedness (and Section 1082 Basis Adjustment), is used to compute the amount of discharged indebtedness included, or excluded, from gross income.
Child Support
Excluded from gross income.
Amounts received as child support are not included as gross income.
Damages (other than punitive damages) received for personal injuries and physical sickness.
Excluded from gross income.
Emotional damage is not considered a physical injury unless damages were paid for emotional distress attributable to an excluded physical injury or physical sickness. A best practice is to have the taxpayer’s attorney provide specific instruction on what the legal settlement agreement is based on.
Educational assistance programs.
Excluded from gross income.
Employees who receive educational assistance from their employers from a qualified educational assistance program. There is a maximum exclusion amount of $5,250. Publication 970, Tax Benefits for Education, provides more information.
Disaster relief payments.
Excluded from gross income.
Income received from a qualified disaster relief payment is excluded from income. These include reimbursements that are reasonable and necessary for the following if they are the result of, or due to, a qualified disaster:
· Personal, family, living, or funeral expenses.
· Repair or rehabilitation of a home or repair or replacement of the home’s contents.
Employer-purchased medical insurance premiums and reimbursements.
Excluded from gross income.
Employer-provided coverage under an accident or health plan such as contributions to Archer MSAs, long-term care benefits provided through flexible spending accounts, and contributions to Health Savings Accounts (HSAs).
“Reimbursements by an employer of amounts paid by an employee for medicines and drugs purchased by the employee without a physician’s prescription are excludable from gross income under IRC §105(b). However, amounts paid by an employee for dietary supplements that are merely beneficial to the general health of the employee or the employee’s spouse or dependents, are not reimbursable or excludable from gross income under § 105(b).” Rev. Rul. 2003-102
Federal income tax refund.
Excluded from gross income.
The amount of tax overpaid and returned to a taxpayer as a refund is not included as gross income. It is a return of an overpayment of tax.
Fringe Benefits
Fringe benefits are included in income unless they are excluded by law. These nontaxable fringe benefits may include:
Company car. An employer provided a vehicle exclusively for business purposes, not personal use or commuting. De minimis (meaning too trivial to be considered, especially with regard to legal matters) personal use may also be excluded from gross income. An example would be doing a quick personal errand en route to an appointment.
De minimis fringe benefits. The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.
Purchase discounts. To be excludable, the property or service must be offered to the public in the ordinary course of business. Certain limitations to the amount of the discount apply.
No-additional-cost-to-employer services, such as: free travel for airline employees; hotel rooms for hotel employees; and use of facilities by spa or hotel employees.
Transportation. This includes transportation in a commuter highway vehicle, transit pass, qualified parking, and any qualified bicycle commuting reimbursement, as long as they meet the necessary requirements.
Other: Occasional coffee, donuts, office party, etc.
