Gross Income Flashcards
Define Gross Income.
Gross income includes all income from whatever source derived, unless specifically excluded.
What are the four categories of individual income?
1) Ordinary (wages, salaries)
2) Portfolio (dividends, interest)
3) Passive (real estate investment and limited partnership income
4) Capital
Name some nontaxable fringe benefits (exclusions)
- De minimis fringe benefit
- Qualified tuition reduction
- Qualified employee discounts
- Employer paid accident, medical, and health insurance
Unless specifically excluded by law, the fringe is includible in gross income.
Are life insurance premiums paid by an employer taxable to the employee?
Premiums on the first $50,000 (face amount) of group term life insurance are not includible in gross income. Premiums paid for coverage above $50,000 should be included in gross income.
What are some examples of exempt interest?
- State & Local government bonds
- Bonds of a U.S. possession
- Series EE (U.S. Savings Bonds) if used for higher education
- Interest on Veterans Administration insurance.
What is the tax treatment of unearned income of a child who falls under the “Kiddie Tax” rules?
Net unearned income of a dependent child who falls under the “Kiddie Tax” rules is taxed at his parents higher tax rate.
Net unearned income = Child’s total unearned income less the child’s standard deduction of $950 (in 2012) ( or investment expenses, if greater) less and additional $950 ( which is generally taxed at the child’s rate of 10% or 15%)
State the tax treatment of property settlements in a divorce.
For a property settlement in a divorce, the transferring spouses gets no deduction for payments made ( or property transferred ) and the payments are not includible in the gross income of the spouse receiving the payment or property.
What are the requirements for alimony to be deductible by the paying former spouse and includible by the recipient?
- Payments must be legally required pursuant to a written decree.
- Payments must be in cash
- Payments cannot extend beyond death of payee
- Payments cannot be made to members of the same household.
- No joint tax return filed.
Before alimony is taxable by the recipient any child support due must be paid.
Describe the self-employment tax.
All net self-employment income is subject to the 2.9% Medicare tax, but only self-employment income up to $110,000 (in 2012) is subject to the 12.4% Social Security tax.
An adjustment to income for one-half (7.65% on up to $110,000 self employment income for 2012) of self-employment tax (Medicare plus Social Security) paid.
On what property do the uniform capitalization rules apply?
- Real or tangible personal property produced by the taxpayer for use in his trade or business.
- Real or tangible personal property produced by the taxpayer for sale to customers. (manufacturer’s inventory)
- Real or tangible personal property purchased by the taxpayer for resale (retailers inventory)Exception: The uniform capitalization rules do not apply to (retailers inventory) property purchased for resale if the taxpayer’s gross receipts for the preceding three tax years do not exceed $10,000,000 annually.
When are funds in a non deductible IRA Taxable?
- Withdrawals from nondeductible IRAs are partially taxable.
- When withdrawn, amounts previously contributed (principle) are nontaxable. Any earnings on those contributions are taxable when withdrawn.
- A pro rata allocation is generally applied to the distribution to determine the taxable amount.
What is the formula to determine the excludable portion of an annuity?
Excludable amount in current year =
Investment in contract / Age factor (in months)
Note: If the annuitant lives longer than the factor in months, further payments are fully taxable/ If the annuitant dies before the factor payments are collected, the unrecovered portion of the investment is a misc. itemized deduction on the annuitant’s final tax return (not subject to the two percent limitation)
In premature distributions of an IRA, what are the exceptions to the penalty tax?
“HIM DEAD”
Home buyer (first time): $10,000 max if used toward first home (within 120 days)
Insurance (medical)
- Unemployed with 12 consecutive weeks of unemployment compensation. - Self-employed (who are otherwise eligible for unemployment compensation.
Medical Expenses in excess of 7.5% AGI
Disability
Education: College, tuition, books, fees
and
Death
How is rental income from a vacation house treated?
- If rented fewer than 15 days: Treat as personal residence
- If rented 15 or more days and personal use is not more than 14 days or 10% of days rented, if greater: Treat as rental property.
- If rented more than 15 days and personal use is the greater of 14 days or 10% of days rented: Allocate rental expenses to extent of rental income.
If treated as personal, income is excluded and deductions for mortgage interest and taxes are reported on Schedule A. Other expenses are not deductible.
If the vacation property is treated as a rental property, the taxpayer reports income and deductions on Schedule E.
Define passive active. Give examples of passive activities.
A passive activity is any activity in which the taxpayer does not materially participate.
Examples are:
Rental activities, interest in limited partnerships, and S corps.
