Gross Income Flashcards
Pass Key
Event —– Taxable – income ( FMV) & basis (FMV)
Nontaxable – income (None) & basis (NBV)
Event —– Taxable – income ( FMV) & basis (FMV)
Nontaxable – income (None) & basis (NBV)
Realization Vs. Recognition
Realization = Real world
Recognition = Recorded
e.g. when the value of the house goes up, the realized value goes up. but is only recorded when it is sold.
when can you use accrual method
and cash method
for small business
accrual - over $25,000,000 in biz
cash - under $25,000,000 in biz
Life insurance premiums
employees can exclude from income the value of life insurance PREMIUMS up to $50,000
anything above that is taxable
life insurance proceeds are tax-free ( you die and family gets the money)
- Accident, medical and health insurance(employer paid)
- De minims fringe benefits
- meals and lodging
- employer payment of employee’s educational expenses
- Qualified tuition reduction
- Accident, medical and health insurance(employer paid)
- > not taxable to employee - De minims fringe benefits
- > not taxable to employee - meals and lodging
- > not taxable to employee if for the convenience of the employer - employer payment of employee’s educational expenses
- > upto $5250 may be excluded ( per year BS/MBA) - Qualified tuition reduction
- > may exclude the tuition reduction
1) merchandise discount
2) service discounts
3) Qualified pension, profit-sharing and stock bonus plans
4) Benefit received
1) merchandise discount
- > limited to employers gross profit
2) service discounts
- > limited to 20 percentage
3) Qualified pension, profit-sharing and stock bonus plans
- > payments made by employer ( nontaxable) : put into trust account
4) Benefit received
- > taxable ( you retire and withdraw)
Flexible spending arrangements (FSAs)
can elect to have part of their salary deposited pretax into a flexible spending account designated for them.
- > like a debit card
- > forfeit funds not used within 2 and half months after year end ( Use it or lose it)
Interest Income
GR:
all interest income is taxable, unless it is specifically excluded
Taxable:
- interest paid by federal or state gov for late payment of a tax refund
- gift received to open a bank account (FMV)
Non taxable:
- State and local government bonds/obligation
- bonds of a U.S possession (e.g Guam or Puerto Rico)
- U.S Series EE Saving Bonds used for Educational Expense of self, spouse or dependent child must be sole owner of bond over 24 years when issued reduced by tax-free scholarship
Dividend Income
Schedule B
–> corporate earnings and profits - taxable dividend ( E&P = retained earnings)
–> no earnings and profit and taxpayer had basis in stock -> non taxable and reduces the basis
(Return of Capital)
–> no earnings and profits & non stock basis -> taxable capital gain income
(capital gain distribution)
Taxable Dividends = Out of E&P
Cash = amount received
property= FMV
0%, 15%, 20%
Tax- Free distributions
- > return of capital = reduced basis - non taxable
- > stock split = non taxable
-> stock dividend (unless cash or other property option - taxable fmv)
if option: taxable
if no option given: not taxable
-> life insurance dividend = non taxable
state and local refunds
-> if itemized in prior year - taxable
limited by the amount that was deducted in the prior year, not by the actual refund if refund is more than deduction
- > if standard deduction used - non taxable
- > interest on late refund is taxable
Alimony
- divorce decree 2018 and earlier
- 2019 and after
->2018 and earlier
income to ex spouse
- must be legally required
- cash ( or equivalent) ( credit card, payment of college are equivalent)
-payment cant extend beyond death of payee spouse
- cant be made to members of the same household
-payments must not designate anything other than alimony
- the spouse maynot file the joint tax return
-> 2019 and after
not income to ex spouse
Child support & property settlement
child support is not taxable
Property settlement is not taxable
IRA
you have to start taking money from IRA when you reach age 72 - required money distribution (RMDs)
Nondeductible Traditional IRA distribution:
- principal: nontaxable
- earning: taxable
Deductible traditional IRA distribution:
- principal: taxable
- earning: taxable
Qualified Distribution from Roth IRA :
(at least 5 yrs after & age 59 and a half or older, OR disabled, OR first-time homebuyer max $10k OR paid to beneficiary after taxpayers death)
- principal: nontaxable
- earning: nontaxable
Nonqualified distribution from Roth IRA
- principal: nontaxable
- earning: taxable
Penalty tax (10 %)
exception to penalty
early withdrawal (before age 59 1/2): regular tax & 10% penalty
exception to 10% penalty ( you will still pay regular tax) HIM DEAD H- homebuyer ( first time, 10k max) I - insurance ( medical) M - medical expenses D- disability E - Education A - Adoption or birth D - death
Annuities
Contribution ( return on investment) - non taxable
Earnings - taxed as ordinary income
(1) Fixed annuity payments
e.g.
purchased annuity = $60k
return = $750 per month for 120 months (10 years)
Expected value of annuity = 750*120 = $90k
Annual exclusion ration = 600/900 = 66.7%
Taxable portion of each payment = 750 * ( 100-66.7%) = $249.75
(2) Life Annuity Payment
e.g.
purchased annuity = $600k
return = $600 per month for rest of his life
life expectancy = 64 years , expectancy factor - 260 months
nontaxable return of capital = $60k/ 260 months = $230.77 ( return of basis)
taxable portion each month = $600 - $230.77 = $368.23
IF lives longer than 64, the whole payment is taxable
If dies early: the remaining of unrecovered investment is deducted on the final income tax return
Unemployment Compensation
is Taxable
Social security income
low income: non txable
……other numbers in between
upper income = 85% taxable
Taxable Misc Income
(1) Prizes and Awards: FMV taxable
- exception: selected without entering and you assign it to government or charity
(2) Gambling ( winning n loss not netted)
Winnings: taxable gross income
Losses:
-only be deducted to the gambling winnings,
- schedule A as an itemized deduction but cant be more than winning
(3) Damage Awards
- loss profit - income
(4) Punitive Damages
fully taxable as ordinary income received In biz context for loss of personal reputation, injury
expectation: wrongful death
(5) Cancelation of debt( COD) income
- generally taxable
- not taxable in the following situations: debt discharged through insolvency,
cancelation of a non-recourse loan
(6) Scholarship & Fellowship
partially taxable
For degree-seeking students:
excludable - the amount spent on tuition, fees, books, and supplies ( not room & board)
For nondegree-seeking:
fully taxable at FMV
tuition reduction:
IF paired with compensation - not taxable
if tuition reduction is the only compensation - it is taxable
nontaxable misc items
(1) Life insurance proceeds - non-taxable
Interest income on installment payout - taxable
(2) Gift and inheritance: nontaxable for the person receiving it
(3) medicare benefit - nontaxable
(4) workers compensation - nontaxable
(5) (injured n sick - nontaxable
(6) foreign earned income exclusion:
2 test - bona fide test - bona fide resident of the foreign country
physical presence test (11 out of 12 months)
Business income or loss
Schedule C
Gross biz income
(business expense)
————————————
Profit or loss
Expenses:
- salaries n commission paid to others : not yourself , money you take out = draw , you are taxed on net profit
- biz meals expenses at 50 percent
- interest expense : must be incurred and paid
- bad debt actually return off on accrual
non-deductible expenses
personal portion of:
- automobile, travel, and meal expenses
- interest expenses : itemized deduction if mortgage interest or investment is paid
- state and local expense: itemized deduction on schedule A
Net income business or loss
Net income is taxable
- Income tax &
- self-employment (SE) tax
- 15.3% on self-employment earnings
- 92.35% of net SE income
e.g you have 20k self employment income
will be taxed on 92.35% * 20k = 18470
tax = 15.3% * 18470 = 2826
Net operating loss ( NOL)
after 2020 :
max loss is limited/ carryforward indefinitely excess NOL and it can offset 80% of future income
NOL 2018 2019 2020 Carryback 5 years and carryforward indefinitely no 80% limitation
Uniform Capitalization Rules
= inventory ( RM + DL + FOH) needs to be capitalized
any biz that has average gross receipts of $26m or less is exempt from this rule
long term contract
need to use percentage - of -completion method
cost incurred/ total expected cost = work done/ total work = % earned
exemption: can use completed contract method is
- small contractor
- home construction contractors
Farming income:
Schedule F
Cash basis:
Cash basis -> expense inventory
Accrual method:
Inventories must be maintained
e.g
Sales 75000
Beg inv 15600
purchase 60000
——————————-
coga 75600
end inv (14200)
——————————–
COGS (61400)
————————————————————
profit 13600
Rental income or loss
- Schedule E , passive activity
Gross rental income prepaid rental income rent cancellation payment improvement-in-lieu of rent (rental expenses) -------------------------------------------- net rental income or net rental loss
rental of residence
-> rented fewer than 15 days: excluded from income
- > rented 15 days or more: ‘
- expenses must be prorated between personal and rental
- expenses are deductible only to the extent of rental income
- no rental loss allowed
Nonresidence ( rental property)
Nonresidence ( rental property) - schedule E
- considered passive income and will be deductible only to the extent of passive income
