Income Flashcards
Gross Income
Any income considered to be taxable unless specifically excluded by the tax law
*Taxable differs from accounting income
Tax Rates
Individuals: 10, 15, 25, 28, 33, 35, 39.6%
Corporations: 15, 25, 34, 35%
Constructive Receipt Rule
- IF amount is readily available
- NO substantial restrictions
- RECORD as income
Assignment of Income
Income is taxed to the individual who earned the income
Claim of Right Doctrine
- Contested income
- Period claim materializes, must include in income
- Later repayment = deduction BUT no influence on income recognition
Tax Benefit Rule
- Include an expense reimbursement in income IF the expense was deducted in a prior period that reduced taxable income
- IF 1040EZ, no benefit, so not included in income
Income - INCLUSIONS (interest)
Interest Income
- municipal interst - NOT taxable (bonds state/local gov’ts, “state obligations”) IF sold at a gain, then TAXABLE… only the interest is excluded
- Prepaid interest - taxed when recieved, even for accrual
- US Treasury notes,/bonds
- Fed/State tax refunds
- Mortgages (oyu’ve extended)
- Series EE Bonds - interest is paid at MATURITY, taxed at maturity (excludes higher education costs for 24yrs or older, spouse, dependent)
Income - INCLUSIONS (Qualified dividends)
Not taxed if you are in the 10-15% tax bracket
*Either at 15 or 20% + 3.8% IF in higher bracket
Qualified - Received from a domestic corp or a foreign corp that is traded on a US stock exchange
- Only to the extent of E&P
- Disribution reduces basis in stock
- Capital gain (after basis = 0)
E.g. distribution 10,000
E/P 4,000
Basis 5,000
10,000 dist. (4,000) e/p 6,000 (5,000) basis Basis = 0 Cap Gain = 1,000
Income - INCLUSIONS (STOCK dividends)
Common - NOT taxable
Preferred - TAXABLE
- Overall basis will stay the same, BUT basis per share will be altered
- MUST be proportionate for ALL shareholders
E.g. (100 shares)
yr 1: $10,000
yr 3: 2 for 1 split (fmv 120)
yr 3: sells 100 ($65/share)
Pre-Split: 10,000/100 = $100/share
Post-Split: 10,000/200 = $50/share
Basis in sold: 100 * $50 = $5,000.00
Inclusions - ALIMONY
Receiver - pays tax Person paying - gets deduciton HAS TO BE: - in cash or via expense payment - contingent on life of recipient**** - required by a writted agreement/decree - CANNOT be specified as something else
Inclusions - CHILD SUPPORT
Receiver - No tax
Person paying - Not deductible
Inclusions - DAMAGES/INSURANCE BENEFITS
Excluded:
*physical injuries, *physical sickness, *worker’s comp, *benefits form accident/health policies, *benefits from disability/ *long term care plans - UNLESS premiums paid by employer; employee did NOT pick up as income, *Medical insurance prem. paid by employer
TAXABLE:
*unemployment, *emotional distress, *discrimination, *injury to reputation, *punitive damages
Inclusions - ANNUITIES
Each payment = part income/ part return of capital
Retirement payout:
expected return? (life expectancy)
- Compute exclusion ratio *stays same
- Once basis = 0, payment is ENTIRELY taxable
- unrecovered cost IS deductible on financial return
EXCLUDED PORTION = [COST OF ANNUITY/EXPECTED RETURN (# of yrs*$/yr)] * PAYMENT/yr
Inclusions - Jury Duty
Includible in Income
**IF paid by the employer during duty, BUT pay from the state is given to the employer
THEN there is a deduction for AGI to offset this income
Exclsuions - Prizes/Awards
FMV - in income EXCLUSION exception: 1. for an achievement 2. No action, no services performed for 3. Paid directly to tax exempt or gov't organization
Exclusions - Gifts/inheritances
Excluded from the income of the recipient
- determined by the intent of the donor
Exclusions - Scholarships
- for tuition, fees, books, supplies
Exclusions - Life Insurance
Due to death, Excluded
Also excluded for some accelerated death benefits
Exclusions - Social Security Benefits
- Generally excluded
- IF provisional income exceeds specific amounts, then it can be taxed up to 85%
Provisional Inc = AGI + Tax Exempt Int + 50% SSB
Joint 32,000 (< NO), 44,000 (= or > ) YES
Single 25,000 (< NO), 34,000 (= or >) YES
In between 50%ish taxable
Exclusions - Forgiveness of Debt
Generally included in income unless a gift
EXCEPTIONS:
- bankruptcy - excluded only to the extent of insolvency
- NO income but you lose other tax benefits such as NOL, credit carryovers, basis (all reduced)
- Insolvency- only to extent of debt are you able to exclude
Bond Premium Amortization
IF a taxpayer buys a taxabke bond at a premium
- Election can be made to amortize the prem.
- Amortization REDUCES the basis of the bond
- Amortization OFFSETS the interest income from the bond
- The amortized bond prem is computed using the constant yield to maturity method
Bond Discount Amortization
Amortized using the effective interest rate method
Amortization INCREASES interest income
For short-term bonds, the discount is taxed at MATURITY as ordinary income (cash basis) and reported as earned (accrual)
Gifts/Inheritances
Excluded from the income of the recipient; INTENT of donor detrmines if the transaction is a gift
50$ to student who cut grass; just doing it for goodwill vs paying for services; WHY there is no such thing as a gift from employer to employee
Cash Basis
No A/R
Accrual Basis
Unearned Income - usually recognized in the year recieved rather than the year earned
BECAUSE uncle sam wants your money as soon as you have it
MAY Elect to defer recognition of service income into next year IF the service is to be provided within the following year (needs to be same for financial reporting)
Rental Income - Prepaid rent, taxed when received
- Deposits - not income to company if supposed to be returned to you, if keep tho, then the company will recognize
- Leasehold improvements - tenant wants to add deck, INCLUDE in income IF in LIEU of rent
Method of Accounting
C Corp, partnerships w/ c corp partners, and tax shelters CANNOT be cash basis
- IF gross receipts do NOT exceed million (3 yr period) you can use cash, BUT if fail can never go back. NOT FOR TAX SHELTERS
Inventory Accounting
Account for purchases (cogs) and sales - MUST use ACCRUAL method
Can use a hybrid methodoes not need to worry abou
LIFO can be used for tax if used for Financial Reporting
WHen prices are rising, higher cogs, lower taxable income
Lower or Cost of Market - market is replacement cost
Uniform Capitalization Method
Manufacturers and certain retailers and wholesalers are required to use this
to capitalize all the direct and indirect costs
IF a SMALL personal prop dealer (10 mill or less in gross preceeding 3 years) does not need to worry about this
Storage costs (offsite) included, quality control, taxes, utitlities, repairs, rent, depreciation all included
Marketing, selling, research, ad, distribution, admin NOT included
Changes in accounting methods
Voluntary change - spread income effect over four years (less than 25,000 can elect to include all in first year)
Involuntary - IRS will make you include in earliest year
Short Year Returns
Period less than 12 months
- Income is first multiplied by 12mo/5mo - to annualize the income for 12 months
- Corporate tax liability is then computed on this amount for the FULL 12 months
- That amount is then multiplied by 5/12 to prorate for the short tax year
Reimbursements of Employee Expenses
INCLUDED in the income of the employee
UNLESS an ACCOUNTABLE plan.. then it is NOT included in income
Discrimination Rules (fringe benefits)
Generally, employee benefits are excluded from income, as long as the plans DO NOT discriminate in favor of highly compensated employees
IF They do, the highly compensated employeesmust include these benefits in income
Life Insurance
The limit on this exclusion is the amount of premiums necessary for a group-term policy of $50,000 face value
For amounts over 50,000 the insurance benefits are taxable based on the rates in the IRS table. The rates are based on the age of the taxpayer
IF employer pays premiums on a whole-life insurance policy for an employee the value of those premiums are included in income
Health Insurance Premiums
Paid by an employer are EXCLUDED from income
- Same for long term care policies
- Wage continuation - HOWEVER, will be included
Disability Insurance Summary
- Premiums paid by Taxpayer - NOT deductible
- Prem. paid by employer, EXCLUDED from income, DEDUCTIBLE by employer
- Benefits received by taxpayer from a policy paid for by the taxpayer - EXCLUDED from income
- Benefits received by taxpayer from policy paid by emploYER - INCLUDED in income
Meals & Lodging
EXCLUDED IF:
- Furnished for the convenience of the employer
- On employer’s premises (nurse/doctor)
- Melas must be in-kind (food not $)
- Lodging must be a condition of employment (forest ranger cabin)
Child and Dependent Care
up to 5,000, 2,500 IF married filing separately can be EXCLUDED from gross income
IF the employer provides the services so that the employee can work
Education Costs
Tuition and fees up to 5,250 if employer is providing reimbursements
for grad or undergrad
Tuition Waivers
Employees of NONPROFIT and educational insitutions may exclude UNDERGRAD tuition waivers for themselves, spouses, dependent children from gross income
IF institution has a qualified tuition reduction plan
Grad teaching assistant - to extent of tuition waiver is excluded also
Cafeteria Plans
Employer can present an array of benefits and employee can pick and choose what they want.
Employee HAS to have the option of taking CASH to be “cafeteria plan”under the tax law. CASH will be taxable as wages. Benefits will be excluded
Stock Options
Incentive Stock Option -
Grant date - None
Exercise date - None (except alt. min tax)
Sale date - Ordinary Income/Cap Gain (amt. adj. reverses)
Non-Qualified Stock Option -
Grant date - None
Exercise date - Ordinary Income
Sale date - Capital Gain
*Corporation receives deduction for Ordinary Income portion ONLY
Non-Qualified Stock Option -
On the exercise date, the employee recognizes Ordinary Income = to
(FMV of stock - Exercise Price)* # of shares exercised
Incentive Stock Options -
Gain on sale is LTCG if the acquired stock is
- held for more than one year
- NOT sold until after two years from the GRANT date
*IF NOT MET, then very similar to non-qualified
**CANNOT be grnated “in the money” ….exercise $ must be at least FMV
Quilified Plans (retirement plans)
The income from contributions of salary to these are deferred until distributions are made from the pension
Earnings are not taxed until distributed
Early withdrawals (before age 59 1/2) triggers a penalty in addition to the taxation of the withdrawal
Traditional IRAs
Contribution is limited to the lower of:
1. Annual ceiling (5,500; over 50 6,500) married filing joint at least 11,000 of earnings a contribution can be made for both spouses
- Compensation - Earned Income
* IF NOT a participant in a qualified plan the IRA contributions can be DEDUCTED FOR agi
Contributions MUST be made by due date of the tax return (Apr 15th)
Nondeductible contributions - form 8606 - get basis for these contributions
WITHDRAWALS must start at age 70 1/2
Roth IRSs
usually a better investment
Contributions are NOT deductible but can only be made if modified AGI does not exceed certain levels
WITHDRAWALS of income accumulated are NOT TAXED as income if the distribution IF:
- Occured 5years or more from the date of initial contribution
- Is made on or after an individual attains age 59 1/2
- NOT required to start at age 70 1/2
- *penalty of 10% and taxed if withdraw early
Traditional IRA ——> Roth IRA
Taxpayer MUST recognize gain at the time of the conversion to the extent that the conversion amount exceeds the tax basis in the IRA
Reported on Form 8606
Same for converting 401(k) to Roth IRA
Distributions
Payments from retirement plans are included in income, ecept to the extent employee has basis
BASIS to the extent employee has made NONdeductible contributions to the plan
*deductible employee cont, employer cont, and earnings all DO NOT create BASIS
Keough Plans
For self employed tax payers
Contributions limited to the lesser of the annual limitation or 100% of earned income
Earned income = net earning from self emp. less 50% of self employment tax less allowable contribution
Amount you can deduct is limited to 25% of earned income
401(k) Plans
Allows voluntary employee contributions to reduce taxable salary up to an anual limit + catch-up amount for those over the age of 50 (17,500 limit; catch up 5,500)
Employers often times match a certain percentage of employee contributions made to these plans
SEP - Simplified Employee Pension Plan
Individual retirement plan established by an employer
- employer contributions MUST be made to EACH SEP of EACH employee who:
- Reached age 21
- Performed service for the employer during at least 3 of last 5 years
- Has received a certain level of compensation
*MAX amount employer can contribute
25% compensation
50,000 max limit
Can be made UP to EXTENDED due date of RETURN
Section 529 Plans
Contributions are NOT deductible, AND a beneficiary MUST be specified
States typically allow lifetime contributions to the plan of as much as 250,000
Earnings in the plan are tax deferred
Distributions are EXCLUDED from income to the extent they are being used to pay for tuition, books, fees, etc and reasonable room and board costs (or income taxation and a 10% penalty)
