Income Flashcards
Tip income
- All tips (cash or FMV of property) are subject to federal income tax, SS, and Medicare.
- A penalty equal to 50% of unpaid SS and Medicare taxes due on unreported tips.
- Report cash and charge tips to the employer by the 10th of the following month if $20 or more.
- Tips reported to the employer on time are considered income in month reported. Tips that are not reported on time are considered income in month actually received.
- Report non-cash tips to IRS, not employer. No SS or Medicare on non-cash tips.
Group term life insurance
The cost of up to $50,000 of group term life insurance coverage provided by an employer is not included in income. The employee’s income shall include premiums paid by the employer for more than $50,000 of coverage.
Disability income
The amount received due to employer-paid plan premiums is taxable.
Sick pay
Pay received from an employer while sick or injured is part of salary or wages. Include sick pay benefits received from other sources in income if the employee did not pay premiums to receive the benefit.
Advance commissions
Include advance commissions or other amounts for future services as income in the year received.
Foreign income
U.S. citizens and resident aliens must report income from sources outside the United States (foreign income) on their tax return unless it is exempt by U.S. law.
Working for a foreign employer in the United States
Employees of an international organization or a foreign government in the United States are exempt from Social Security and Medicare employee taxes. However, such an employee must pay self-employment taxes on earnings from services performed in the United States, even though the employee is not self-employed.
Clergy Income - Subject to Federal Income Tax
Include – any salary and fees received for masses, marriages, baptisms, funerals, etc. (payments to the religious institution are not included).
Exclude – Rental value of home (including utilities) or housing allowance, up to the actual cost, is excludable (but must be included as earnings from self-employment).
Original Issue Discount (OID)
- OID is the difference between the stated redemption price at maturity and the issue price.
- Include a portion of the discount in income as it accrues.
- OID rules do not apply to tax-exempt obligations, U.S. savings bonds, or if the maturity date is 1 year or less from issue date.
- No need to report if the discount is less than one-fourth of 1% (.0025) of the redemption price at maturity multiplied by the number of full years from the date of original issue to maturity.
Ordinary vs. Qualified dividends
-Ordinary dividends are taxed at ordinary income rates.
Qualified dividends are subject to a maximum 20% rate if the regular tax rate that would apply is 37%. If the regular tax rate that would apply is less than 37% but greater than 15%, qualified dividends are subject to the 15% rate. The tax rate is 0% on any amount that otherwise would be taxed at a regular rate of 15% or less.
Distributions in stock or stock rights
Generally not taxable unless if any of the following apply:
- Shareholders have the choice to receive cash or other property.
- Some shareholders receive cash or other property.
- The distribution is in convertible preferred stock, resulting in a change of ownership.
- Some Direct payments to the religious institution are not taxable.
- The distribution is on preferred stock.
Non-dividend distribution
When a corporation makes a distribution but does not have earnings it is a return of an investment in the stock of the company and reduces the basis of the stock. It is not taxable until the taxpayer fully recovers their cost basis.
Reinvested dividends
Report dividends in income even if reinvested in stock through a dividend reinvestment plan instead of receiving the dividends in cash.
Provisional income
Provisional income – 1/2 social security benefits + all other income (including tax exempt interest). Compare to threshold to determine amount of benefits subject to tax:
MFJ – 50% threshold $32,000, 85% threshold $44,000
All others – 50% threshold $25,000, 85% threshold $34,000
Taxable amount of Social Security Benefits
Exclude all benefits from income if provisional income is below $25,000 ($32,000 MFJ). A maximum of 85% of benefits may be subject to tax when provisional income is above $34,000 ($44,000 MFJ).
MFS taxpayers who live with spouse- always lower of 85% provisional or 85% SS bene
Court awards
Include punitive damages (punishment) in income. Do not include compensatory damages (compensation) for personal physical injury, physical sickness, or emotional distress.
Gambling winnings
Include gambling winnings in income. This includes cash and the fair value of property received. Can claim gambling losses as an itemized deduction on Schedule A but only to the extent of gambling winnings. Cannot report a net loss from gambling.
Unemployment benefits
Include unemployment compensation in income if received under federal or state unemployment law.
Canceled debt
Include the amount of canceled debt in income.
EXCEPTION: If forgiveness of debt is a gift it is not income.
EXCEPTION: Bankruptcy, insolvency, purchase price reduction, certain student loans, certain qualified indebtedness (business real property, principal residence, or farm)
Bartering income
Report fair market value of property or services received in bartering as income.
Passive activity limits for rental property
The IRS generally considers rental real estate a passive activity. Passive losses can only offset passive income.
EXCEPTION: Rental losses up to $25,000 can offset ordinary income if taxpayer or spouse actively participates (management decisions such as approving tenants, rental terms, approving expenditures, etc.) and has MAGI below $150,000.
EXCEPTION: A real estate professional with more than 750 hours of material participation in a real property business may deduct losses against ordinary income.
At-risk limit on rental activity
A taxpayer is at risk in an activity to the extent of cash and the adjusted basis of other property contributions and certain amounts borrowed. Loss not allowed if not at risk. Losses disallowed because of the at-risk limits are deductions from the same activity in the next tax year.
De minimis safe harbor
May elect to deduct, rather than capitalize, the cost of improvement property if the cost is less than $2,500. The limit is $5,000 with an applicable financial statement.
Materials and supplies
Generally, deduct as expenses and do not capitalize if useful life 12 months or less, or cost $200 or less.
Prepaid expenses
Cannot deduct payments of more than 12 months in advance.
Amounts in lieu of rent
Include the fair value of tenant provided property, services, or payment of expenses in place of rent.
Depreciation of real property
Residential real property 27.5 years, non-residential real property 39 years.
Advance rent
Income when received regardless of the period covered or accounting method.
Personal vs. rental use
If not used as home by taxpayer (more than 14 days or 10% of rental days) – report all rental income and expenses up to the amount of rental income.
If used as home by taxpayer (more than 14 days or 10% of rental days)
- Rented less than 15 days – do not report any rental income or expenses.
- Rented more than 15 days – report all rental income and allocate expenses between rental and personal use (including family members or anyone for less than fair value).
