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REG - Federal Taxation > Income > Flashcards

Income Flashcards

1
Q

Gross Income

A

Any income considered to be taxable unless specifically excluded by the tax law
*Taxable differs from accounting income

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2
Q

Tax Rates

A

Individuals: 10, 15, 25, 28, 33, 35, 39.6%
Corporations: 15, 25, 34, 35%

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3
Q

Constructive Receipt Rule

A
  • IF amount is readily available
  • NO substantial restrictions
  • RECORD as income
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4
Q

Assignment of Income

A

Income is taxed to the individual who earned the income

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5
Q

Claim of Right Doctrine

A
  • Contested income
  • Period claim materializes, must include in income
  • Later repayment = deduction BUT no influence on income recognition
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6
Q

Tax Benefit Rule

A
  • 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
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7
Q

Income - INCLUSIONS (interest)

A

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)
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8
Q

Income - INCLUSIONS (Qualified dividends)

A

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

  1. Only to the extent of E&P
  2. Disribution reduces basis in stock
  3. 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
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9
Q

Income - INCLUSIONS (STOCK dividends)

A

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

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10
Q

Inclusions - ALIMONY

A 
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
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11
Q

Inclusions - CHILD SUPPORT

A

Receiver - No tax

Person paying - Not deductible

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12
Q

Inclusions - DAMAGES/INSURANCE BENEFITS

A

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

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13
Q

Inclusions - ANNUITIES

A

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

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14
Q

Inclusions - Jury Duty

A

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

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15
Q

Exclsuions - Prizes/Awards

A 
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
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16
Q

Exclusions - Gifts/inheritances

A

Excluded from the income of the recipient

- determined by the intent of the donor

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17
Q

Exclusions - Scholarships

A
  • for tuition, fees, books, supplies
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18
Q

Exclusions - Life Insurance

A

Due to death, Excluded

Also excluded for some accelerated death benefits

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19
Q

Exclusions - Social Security Benefits

A
  • 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

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20
Q

Exclusions - Forgiveness of Debt

A

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

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21
Q

Bond Premium Amortization

A

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
22
Q

Bond Discount Amortization

A

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)

23
Q

Gifts/Inheritances

A

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

24
Q

Cash Basis

25
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
26
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
27
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
28
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
29
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
30
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
31
Reimbursements of Employee Expenses
INCLUDED in the income of the employee UNLESS an ACCOUNTABLE plan.. then it is NOT included in income
32
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
33
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
34
Health Insurance Premiums
Paid by an employer are EXCLUDED from income * Same for long term care policies * Wage continuation - HOWEVER, will be included
35
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
36
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)
37
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
38
Education Costs
Tuition and fees up to 5,250 if employer is providing reimbursements for grad or undergrad
39
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
40
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
41
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
42
Non-Qualified Stock Option -
On the exercise date, the employee recognizes Ordinary Income = to (FMV of stock - Exercise Price)* # of shares exercised
43
Incentive Stock Options -
Gain on sale is LTCG if the acquired stock is 1. held for more than one year 2. 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
44
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
45
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 2. 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
46
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
47
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
48
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
49
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
50
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
51
SEP - Simplified Employee Pension Plan
Individual retirement plan established by an employer - employer contributions MUST be made to EACH SEP of EACH employee who: 1. Reached age 21 2. Performed service for the employer during at least 3 of last 5 years 3. 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
52
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)

REG - Federal Taxation (16 decks)

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