Chapter 12 - Questions (Other Income and Adjustments) Flashcards
List examples of nontaxable income
Most gifts (bequests) and inheritances Certain foster care payments Child support payments Disaster relief payments Federal income tax refunds Insurance proceeds or court judgments received for personal injury or illness.
Life insurance proceeds paid due to the death of the insured.
Most medical or health insurance proceeds
Rebates
Most veteran’s benefits
Welfare benefits
Worker’s Compensation
Where can you find info on whether a type of income is taxable or nontaxable
IRS Publication 525 Taxable and Nontaxable Income
What is unemployment compensation?
Benefits under a state or federal unemployment insurance program used when there is a period of unemployment.
What form reports unemployment compensation to the taxpayer
1099-G Certain Government Payments, box 1
Is unemployment compensation taxable?
Yes.
If a taxpayer wants to withhold 10% of the benefits from each check to go toward their tax liability what do they file?
Form W-4V (Voluntary Withholding Request)
If there is withholding on the 1099-G where does it show up?
Box 4
If a taxpayer receives too much unemployment compensation, what happens?
Taxpayer is required to repay it.
Taxpayer can reduce, dollar for dollar, the amount shown on box 1 of 1099-G
What happens if during the current tax year, the taxpayer repays unemployment benefits received in a previous year?
It is complicated, get a more experienced tax professional.
What are Alaska Permanent Fund dividends
Dividends paid to Alaska residents who lived in the state for a full calendar year. Amount varies.
Is an Alaska Permanent Fund Dividend taxable?
Yes, but not as a dividend on Form 1099-DIV. Is reported as income on line 13 of Form 1040A
What is the difference between a scholarship and fellowship?
Scholarship is intended to help fund a student’s college studies. Fellowship is used to help the recipient conduct some form of study or research.
When are scholarships and fellowships tax-free
If the student is a candidate for a degree at an eligible educational institution.
Can a scholarship or fellowship be taxable?
Yes, can be fully or partially taxable if certain conditions apply. If student is a non-degree candidate or is not attending an eligible educational institution, then it is fully taxable.
What is used to determine the taxable amount of a student’s scholarship or fellowship?
Worksheet 1, Taxable Scholarship and Fellowship Grant Income, which can be found in IRS Pub 970, Tax Benefits for Education.
If someone receives a W-2 for scholarship or fellowship info, what does that mean.
The income is fully taxable.
Are stipends for interns and doctors taxable?
Yes, they are compensation and are reported on Form W-2
What form are scholarships and fellowships generally reported on?
Form 1098-T (box 5)
Is a taxpayer required to report taxable scholarships or fellowships in all cases?
No, whether a taxpayer is required to report this income depends on whether the taxpayer is required to file a return. If the taxpayer is not required to file a return, then is not required to report this income.
If required to file a return and have scholarship or fellowship income, where is that income reported?
Line 7 for 1040A and 1040. (line 1 for 1040EZ). Use the code “SCH” to the left of the form line to indicate.
Is long-term disability income taxable?
It depends on who paid the premiums, and whether they were paid with pre- or after-tax dollars.
If a taxpayer retires on disability and paid premiums with after-tax dollars, is the income taxable?
No, the income is tax-free.
If a taxpayer retires on disability and paid premiums with pre-tax dollars, is that income taxable?
Yes.
What form is used for reporting payments received from disability income
1099-R
How is disability pension income identified on Form 1099-R
Distribution code of 3
Before a taxpayer reaches minimum retirement age, taxable disability pension payments are reported where?
Form 1099-R Box 2a, Taxable Amount. Entered as wage income on 1040/A line 7.
Once a taxpayer reaches minimum retirement age, disability pension payments are reported where on 1040?
1040A lines 12a and 12b. 1040 lines 16a and 16b.
What screen in blockworks do you use to enter form 1099-R?
Pensions input screen.
Is disability income considered income for the EITC?
Yes. The employer must have paid the premiums not the taxpayer. If the taxpayer paid (either after-tax or pre-tax) then not considered earned income, even if taxpayer has not reached minimum retirement age.
Is Social Security Disability Income earned income?
No, regardless of age, it is never reported as wage income, nor is it considered earned income. Reported as social security benefits received, subject to those rules.
What form is received for Social Security disability Income?
Form SSA-1099.
What types of income are Other Income reported on Form 1040
Gambling winnings, alimony, prizes and awards, jury duty, and hobby income.
What should a first-year tax professional do if other types of income that are only reported on Form 1040 are encountered?
Hand off return to a more experienced person.
Are gambling winnings taxable?
Yes. Includes lotteries, casinos, races, raffles.
What form may a taxpayer receive for gambling winnings?
Form W-2G Certain Gambling Winnings.
Where are gambling winnings reported?
Form 1040, line 21
Is income tax withheld on gambling winnings?
From certain gambling winnings it is required.
What is Alimony
A payment made to a person as reported in an agreement or a court decree of divorce or separation.
Where is alimony reported?
Form 1040, line 11
What types of income are only reported on Form 1040, line 21?
Prizes and awards for which no services were performed.
Jury duty
Canceled debts
Rental of personal property
Taxable distributions fron an HSA or an Archer MSA
Amounts deemed to be income from an HSA because the taxpayer did not remain an eligible individual during the testing period.
Credit card insurance (credit card disability or unemployment benefits)
Hobby income
Medical trial income
If a prize or an award is compensation for services performed for an employer, how is that reported?
Should be included in the wages of the recipient.
Is jury duty pay taxable?
Yes. However if an employee is required to surrender it to their employer in exchange for regular pay, the amount surrendered may be deducted as an adjustment to income on Form 1040.
What would the taxpayer receive for a cancelled debt?
Form 1099-C Cancellation of Debt.
How many adjustments may a taxpayer have to reduce their gross income to arrive at their AIG on Form 1040A?
There are four
What are the adjustments to income for Form 1040A?
Educator expenses
IRA Deduction
Student Loan Interest Deduction
Tuition and Fees Deduction
What is The Educator Expenses adjustment to gross income?
An eligible educator may deduct up to $250 of qualified educator expenses paid in 2017.
What is the IRA Deduction adjustment to gross income?
A taxpayer or spouse who made contributions to a traditional IRA may be eligible to deduct the lesser of their total IRA contributions, or $5500/$6500 from their gross income.
Is a traditional IRA contribution always deductible as an adjustment to gross income?
No, their contribution deduction may be reduced or phased out based on their modified adjusted gross income and their filing status.
What is the Student Loan Interest Deduction Adjustment to gross income?
Payments on a qualified student loan may be entitled to claim a max deduction of $2500 for the interest paid. This is allowed only if the taxpayer is legally obligated to pay the loan, and is not a dependent of another taxpayer. This deduction may be reduced or phased out based on MAGI and filing status.
What is the Tuition and Fees Deduction as an adjustment to gross income.
If a taxpayer incurred qualified education expenses for themselves, their spouse, or their dependent, they can claim an adjustment to income. Expenses must be required for enrollment or attendance at an eligible educational institution and is calculated on Form 8917 Tuition and Fees Deduction. The maximum amount is dependent on the MAGI and filing status.
What form is used to report tuition and fees?
Form 1098-T
What is the maximum deduction for Tuition and fees
$4000, $2000, or 0, depending on MAGI and filing status.
What is an eligible educator?
Someone who worked at least 900 hours during the school year as a teacher, instructor, teacher’s aide, conselor, principal, or administrator in an elementary or secondary school.
What are Qualified expenses for educators?
Books, equipment, computer software, classroom supplies, and other supplemental instructional materials and services used in the classroom.
Do Qualified expenses include homeschooling expenses?
No
Do Qualified expenses include expenses for nonathletic supplies for courses in health or physical education?
No
What can reduce qualified education expenses?
Reimbursements received that were not included in box 1 of the W-2. Excludible US Series EE and I Savings Bond Interest. Nontaxable earnings from Coverdell Education Savings Accounts, nontaxable qualified tuition program earnings or distributions.
If an educator has more than $250 in qualified educator expenses, what may occur?
Qualified out-of-pocket educator expenses that exceed the $250 adjustment limit may qualify as a miscellaneous itemized deduction.
What are the requirements for student loan interest to qualify for the deduction?
The proceeds of the loan must have been used exclusively to pay qualified higher education expenses at an eligible educational institution for an eligible student.
What expenses qualify as education expenses in terms of the student loan interest deduction?
Loan must be taken out for the taxpayer, the spouse, or a person who was the taxpayer’s dependent when the loan was taken out.
Paid or incurred within a reasonable period of time before or after the taxpayer took out the loan.
For education provided during an academic period for an eligible student.
Do loans from a relative count for the student loan interest deduction?
No
Do loans from a qualified employer plan count for the student loan interest deduction?
No
What are the exceptions to the general rules for student loan interest deduction for dependents?
An individual may be the taxpayer’s dependent even if the taxpayer is a dependent of another taxpayer, the individual files a joint return with a spouse, the individual had gross income equal to or more than their exemption amount for the year ($4050).
Who is an eligible student in terms of the student loan interest deduction?
A student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
What are Qualified education expenses for the student loan interest deduction?
The total cost of attending an eligible educational institution. Includes tuition and fees, room and board, books, supplies and other equipment, other necessary expenses.
What are the rules about room and board for qualified education expenses?
Cost qualifies to the extent that it is not more than the greater of:
The allowance as determined by the eligible educational institution, that was included in the cost of attendance for a particular academic period and living arrangement of the student.
The actual amount charged if a student is residing in housing owned or operated by the eligible institution.
When determining student loan interest deduction, taxpayer is required to do what?
Reduce their total qualified education expenses by the amount of tax-free funds that were used to pay qualified education expenses.
What are some tax-free funds that reduce qualified education expenses?
Employer-provided educational assistance, tax-free distributions from a Coverdell Education Savings Acct, Tax-free distribution of earnings from a Qualified Tuition Program, US Savings bond interest excluded from income because it is used to pay qualified education expenses, tax-free part of scholarships and fellowships, veterans’ educational assistance, Any other non-taxable payments received as educational assistance.
Requirements to claim the student loan interest deduction
Any filing status except MFS.
Cannot be claimed as a dependent
Must be legally obligated to pay interest on qualified student loan.
Paid interest on qualified student loan.
If another taxpayer makes payments on behalf of legally responsible taxpayer, how is that treated?
Taxpayer is treated as receiving the interest payments from the other taxpayer and paying the interest themselves.
What is the formula for MFJ with MAGI between $135000 and $165000 to reduce the student loan interest deduction?
$30000
What is the formula for filing statuses other than MFJ and MFS to reduce the student loan interest deduction?
$15000
What is the maximum allowable deduction for student loan interest?
$2500
