Gross Income 1

Question 1

Basic list of income inclusions (14)

Answer 1

(1) Wages
(2) Interest (Schedule B)
(3) Dividends (B)
(4) Capital Gain/Loss
(5) IRA Distributions
(6) Annuities/Pensions
(7) State Tax Refunds
(8) Alimony (Agreement entered before 2018)
(9) Business Income (Schedule C)
(10) Rental Income/Loss (Schedule E)
(11) K-1 Flow Through Income/Loss
(12) Unemployment Compensation
(13) SS Benefits
(14) Other Income

Question 2

Timing of income/revenue recognition for accrual and cash basis taxpayers?

Answer 2

Accrual: Recognized when earned according to the revenue recognition rules of GAAP. (Exception for Prepaid Rent)
Cash: When revenue is actually or constructively received.

Question 3

Basic list of salary/wage income forms/sources? (7)

Answer 3

(1) Money
(2) Property. FMV included as income
(3) Bargain Purchases. In excess of Qualified Employee Discounts
(4) Guaranteed Payments to Partner
(5) Taxable Fringe Benefits
(6) Employer Contribution to Roth
(7) Life Insurance Premiums paid by employer in excess of non-taxable portion of

Question 4

Basic list of nontaxable fringe benefits? (13)

Answer 4

(1) Life Insurance Premiums up to limit
(2) Accident, Medical, and Health insurance Premiums
(3) De Minimis Benefits
(4) Meals and Lodging
(5) Educational Expenses
(6) Adoption Assistance Program
(7) Dependent Care Assistance
(8) Qualified Tuition Reduction
(9) Qualified Employee Discounts
(10) Parking
(11) Transit Passes
(12) Qualified Non-Roth Retirement Plans
(13) FSAs

Question 5

How much life insurance qualifies as a nontaxable fringe benefit?

Answer 5

Employee may exclude from income life insurance premium payments by employer up to $50,000 in coverage

Question 6

Tax consequences of employer-paid accident, medical, and health insurance premiums?

Answer 6

Premium payments are generally excludable by employee but payouts on policy are generally included as income. Payments will not be included if they are reimbursements for medical expenses actually incurred by employee or they serve as compensation for the permanent loss or loss of use of a member or function of the body.

Question 7

De minimis fringe benefits explanation?

Answer 7

So minimal as would be impractical to account for such as personal use of a company computer.

Question 8

When are meals and lodging nontaxable fringe benefits?

Answer 8

Nontaxable when the meals and lodging are provided at the convenience of the employer on the employer’s premises. The lodging must be required as a condition of employment.

Question 9

When is a qualified employee discount nontaxable for a merchandise and service company?

Answer 9

For merchandise company, discount can be excluded by gross profit percentage but not below cost.
Service discount may be excluded up to 20%.

Question 10

Basic List of Taxable Interest Income Sources. (5)

Answer 10

(1) Interest from Federal Bonds
(2) Interest from Corporate Bonds
(3) Portions of installment sale proceeds
(4) Interest from federal or state government for late payment of a tax refund
(5) Amortization of bond discount or amortization of bond premium (offset)

Question 11

Basic List of Nontaxable Interest Income Sources. (3)

Answer 11

(1) State and local government bonds/obligations
(2) Bonds of a US possession (Guam/Puerto Rico)
(3) US Series EE Savings Bonds (must be used for higher education; subject to other requirements and phaseout)

Question 12

How is forfeited interest on early withdrawals from time deposits accounted for?

Answer 12

The entire interest payment will be included in income with an adjustment for the forfeited component. No offset.

Question 13

Relationship between corporate earnings and profits and tax consequences upon distribution to SH?

Answer 13

Distribution out of E&P is a taxable dividend. If no E&P, distribution is nontaxable and reduces stock. If no E&P and no stock basis, capital gain for distributee.

Question 14

How are tax rates for qualified dividends structured?

Answer 14

They are structured the same way as for capital gains. Three rates of 0%, 15%, and 20%, depending on level of income.

Question 15

How to determine nonqualified dividends?

Answer 15

Stock must be held for more than 60 days during the 120 day period beginning 60 days before the ex-dividend date.

Question 16

Basic list of nonqualified dividends? (5)

Answer 16

(1) Employer stock held by an employee stock ownership plan.
(2) Amounts taken into account as investment income.
(3) Short sale positions.
(4) Certain foreign corporations.
(5) Dividends paid by credit unions, mutual savings banks, building and loan associations, mutual insurance companies, and farm co-ops.

Question 17

Basic list of nontaxable distributions from corporation? (4)

Answer 17

(1) Return of Capital
(2) Stock Split
(3) Stock dividend
(4) Life insurance dividend

Question 18

When may a stock dividend be taxable?

Answer 18

When taxpayer has option to receive cash instead of stock.

Question 19

Taxability of distributions of principal and earnings from deductible traditional IRA?

Answer 19

Principal and earnings are both taxable at ordinary rates.

Question 20

Taxability of distributions of principal and earnings from nondeductible traditional IRA?

Answer 20

Principal is deductible but earnings are taxed at ordinary rates. Each distribution split into principal and earnings portions.

Question 21

Taxability of distributions of principal and earnings from Roth IRA?

Answer 21

Neither principal and earnings are taxable from Roth. However, there is a distribution penalty for nonqualified distributions.

Question 22

What are the requirements for a qualified distribution from a Roth IRA?

Answer 22

(1) The distribution is made at least five years after the first contribution to the Roth; and
(2) The taxpayer is at least age 59.5;
-is disabled;
-is a first time homebuyer and uses the distribution to buy a home (max: 10,000); or
-distribution is to a beneficiary upon taxpayer’s death.

Question 23

What is the consequence of a premature distribution from any IRA?

Answer 23

Taxpayer must pay a penalty tax of 10% if distribution is before 59.5 and no exception is met.

Question 24

Basic list of exceptions for premature IRA withdrawal penalty? (10)

Answer 24

(1) First-time homebuyer
(2) Medical Insurance: may be paid with IRA money if unemployed with 12 consecutive weeks of unemployment compensation.
(3) Medical expenses (in excess of AGI floor)
(4) Disability (if permanent or indefinite)
(5) Education
(6) Adoption or Birth of child (within 1 year)
(7) Qualified natural disaster (Max 22,000)
(8) Terminal illness
(9) Emergency expenses (max 1000)
(10) Domestic abuse victims (subject to limit)

Question 25

Tax consequences of rollover from traditional IRA to Roth?

Answer 25

It will be treated as a distribution and nontaxable contribution. However, not subject to 10% penalty tax if entire amount is rolled over within 60 days.

Question 26

Tax treatment of fixed term annuity payments vs annuity payments for life

Answer 26

Fixed Term: pro rata portion of each payment is taxable based on expected gains.

Life term: taxable portion determined by IRS mortality tables. If life is longer than expected, entire distribution becomes taxable. If shorter, remaining principal amount deducted on final return.

Question 27

When are state and local tax refunds taxable?

Answer 27

Only taxable if they resulted in a tax benefit the prior period. Therefore, never applicable if standard deduction is used.

Question 28

When are alimony payments taxable?

Answer 28

They are taxable as income if pursuant to a divorce agreement executed before 2018. Subject to other requirements to be deemed alimony.

Question 29

How is business income reported on 1040?

Answer 29

Net business income is determined under Schedule C and reported as a single line item.

Question 30

How is rental income reported on 1040?

Answer 30

Net rental income is determined under Schedule E and reported as a single line item.

Question 31

What is the tax structure for Social Security payments?

Answer 31

Social security payments are taxed at 0%, 50%, or 85% depending on the MAGI of the taxpayer.

Question 32

Basic MAGI equation?

Answer 32

MAGI = AGI + Certain Tax-exempt items + 50 percent of SS benefits

Question 33

Specific items added back into AGI to reach MAGI? (6)

Answer 33

(1) Any income excluded due to foreign-earned income exclusion;
(2) Exclusion/deduction claimed for foreign housing;
(3) Any excluded interest income from Series EE bonds;
(4) Deduction claimed for student loan interest or qualified tuition and related expenses;
(5) Excluded employer-paid adoption expenses;
(6) Deduction claimed for IRA contribution.

Question 34

What items are includible and deductible for cash period taxpayers who die during the tax period?

Answer 34

Items actually or constructively received before death are included.
Items actually paid before death are deducted.

Question 35

How are medical expenses incurred before death but paid after treated on the tax return?

Answer 35

If medical expenses are paid out of the estate within 1 year of the taxpayer’s death, an election can be made to treat all payments as made when they were incurred. Can then potentially be deductible above 7.5% floor.

Question 36

What is the treatment of existing NOLs upon death?

Answer 36

Unused NOLs and capital losses may be deducted on the decedent’s final income tax return. Cannot be used by the estate’s income tax return.

Question 37

Basic list of miscellaneous income? (5)

Answer 37

(1) Prizes and Awards
(2) Gambling winnings/losses (Only deductible to extent of winnings
(3) Damages Awards
(4) Punitive Damages
(5) Cancellation of Debt income

Question 38

What is the primary exclusion for income from prizes and awards?

Answer 38

Income may be excluded if participant did not take action to enter contest and donates prize to government or charity.

Question 39

How to determine taxability of damages and punitive damage awards?

Answer 39

Punitive damages are always taxable (remote exceptions). Normal damages are taxable depending on what the damages are compensating. Lost profit would be taxable. Personal injury would be nontaxable.

Question 40

Definition of COD income and when is COD not taxable?

Answer 40

COD income is incurred when a commercial lender forgives all or part of a taxpayer’s debt.
(1) Taxpayer is insolvent when cancelled;
(2) Debt discharged through insolvency;
(3) Cancellation of nonrecourse secured loan (Treated as sale of forfeited security)
(4) Student loans forgiven by lender (2021-2025)

Question 41

What are the requirements for scholarships/fellowships to be tax free for degree-seeking students?

Answer 41

(1) Student is seeking degree;
(2) No services are performed as condition to receiving grant;
(3) Grant is not made for past, present, or future services.

Question 42

When are scholarships to non-degree seeking students taxable?

Answer 42

Scholarships are generally always taxable at FMV for non-degree seeking students.

Question 43

When are tuition reductions taxable for graduate and research assistants?

Answer 43

Taxable if tuition reduction is only compensation. Not taxable if taxpayer is receiving another form of taxable compensation.

Question 44

Basic list of miscellaneous nontaxable income. (6)

Answer 44

(1) Life insurance proceeds
(2) Gift and inheritance
(3) Medicare Benefits
(4) Workers Comp
(5) Accident insurance proceeds when premiums paid by taxpayer.
(6) Foreign earned-income exclusion