Income, Portfolio Income - Interest and Dividends - 4,5,6

Question 1

What are the types of Income?

Answer 1

1. Earned Income - W2 or Sole proprietorship
2. Portfolio Income - Interest & Dividents
3. Passive Income - Real estate rentals and businesses where the tax payer does not participate

Question 2

Is Unemployment Compensation taxable

Answer 2

Yes. Its 100% taxable

Question 3

Examples of other incomes

Answer 3

Alimony received from divorces 2018 and earlier. From 2019, Alimony received is not income and alimony paid is not deductible.

Cancellation of debt is income (Example : the credit card company forgives your debt or student loan is forgiven). That forgiveness, that cancellation of debt amount is taxable

Unemployment compensation (Collecting unemployment is like getting a W2 and is taxable)

Gambling winnings

Capital Gains (If its an income, just throw it in the pile, if its a loss then the limit is $3000 and rest can be carry forward to the next year). $3000 is the limit for all filing status - MFS, MFJ, single, HoH

Question 4

How is a profit or loss from a passive income , where the tax payer does not materially participate treated?

Answer 4

If there is a loss from one of these activities (Business where the tax payer does not materially participate / real estate rental income), the tax rules for that loss is going to be limited. But if its a income then the IRS says we will tax that just throw it into the pile.

Question 5

Alimony for divorces starting 2019 - how is alimony received and given - how is treated?

Answer 5

Alimony received is no longer income for the recipient and not deductible for the payer

Question 6

Application Questions

Question 7

Any money collected for Unemployment is ________ taxable

(a) fully
(b) partially

Answer 7

Fully

Question 8

How are Prizes treated? Are they taxable? What happens if the recipient later donates the entire award to a charity

Answer 8

Prizes are fully taxable. Even if the recipient later donates the entire award to a charity, the full amount is still taxable and they if they itemize and have enough itemized deductions they can deduct the amount as a charitable contribution.

Question 9

What is the exception as far as Prizes are concerned?

Answer 9

Never take possession of the prize. Redirect to a charity. Then its not taxable. But if you take possession of the prize and then decide to donate, its considered taxable income

Question 10

Some items are specifically omitted by tax

Examples for Nontaxable Income

Answer 10

Life insurance proceeds

Compensation for injuries (like workers compensation)

Welfare benefits received by the very poor

Child Support

Question 11

Dividend Income is taxed at ______________ rate which is a lower rate.

Interest income is taxed at the regular, ordinary income rate. What is the reason behind that?

Answer 11

Capitals gain rate, which is a lower rate.

The government encourages you to invest in Stock market and help companies grow.

Question 12

Dividend revenue is taxable at lower capital gains rate. Is this true for Cash dividends and Stock Dividends?

Answer 12

Its true only for cash dividends.

Some companies gives dividends but only stock, so no opportunity to take cash, then the shares you get are not considered taxable income. Instead they just lower your basis.

Question 13

Dividends are taxable except for the following:

Answer 13

Dividends on a life insurance policy (It means the client has fully paid on their life insurance policy and they are getting some of their premiums back as dividends)

Stock dividends - They just lower your basis

Stock Split - no tax

But cash dividends reinvested into additional shares - STILL TAXABLE

Question 14

How is the refund and interest on a Federal and State return treated?

Answer 14

The tax refund might be tax free but the interest income is taxable.

Question 15

How is interest on a Savings or Checking account treated?

Answer 15

It is taxable.

Interest Revenue is taxable

Question 16

How does a tax payer land up getting Interest on a Tax Refund from the Government?

Answer 16

If a taxpayer files a tax return late usually the fear is a penalty and interest on late paid taxes. If you are entitled to a refund, the government doesn’t care if you never file. If you file very late a year, late for example, and are entitled to a refund, the government will throw on some interest.

That interest is taxable the FOLLOWING year. Federal or State return, interest income is taxable

Question 17

Inteterst revenue on state and municipal bonds is ____________

Answer 17

Nontaxable.

If your client invests in city of Phoenix bonds or State of California bonds or county of Maricopa bonds this would result in tax free interest.

Question 18

How is the interest on US government bonds treated?

Answer 18

US government bonds result in taxable interest rather than tax exempt interest.

Question 19

Why is US government bonds taxable and State, local, county, municipal & township bonds are tax free?

Answer 19

The US government has no problem when it comes to borrowing money. So there is really no reason to give tax free income to investors.

But that’s not the case when it comes to States or other local bonds. They find it difficult to raise money. So they give an incentive of tax free income.

Question 20

Examples of Tax free interest income

Answer 20

State and Local bonds

US territories bonds - Puerto Rico bonds, Guam, US Virgin Islands.

Question 21

Examples of Taxable Income

Answer 21

US government bonds

Corporate Bonds

Interest - tax refund federal or state

Interest income from a bank account

***Interest - money damages (Example - You had some physical inquiry and entitle to a cash award. But the money got delayed because of appeals. The money was just sitting there for years before it gets to you. The award is tax free but the interest is taxable)

Interest income - Security deposit (Example - You have a security deposit with your landlord. They give it back to you at the end of the contract along with interest. The interest is taxable)

Question 22

What is workers’ compensation? Is it taxable

Answer 22

Workers’ compensation makes sure your staff are taken care of if they’re unable to work due to a work-related injury or illness. It will pay a portion of their missed paychecks and cover any medical expenses they racked up because of the incident. Plus, your employees are always protected.

Its typically not taxable.

Question 23

What is Certificate of Deposit (CD)? Is it taxable?

Answer 23

Just like deposit accounts, CDs earn interest over time until you cash them out at maturity. The amount you pay to buy the CD is generally not taxable even when you cash in; however any interest you earned on the CD before it matured is taxable income

Question 24

What is FBAR?

What is the due date for filing FBAR? What happens for failure to file?

Answer 24

FBAR is your Foreign Bank Account Report also known as FinCEN Form 114.

The due date for the filing is April 15th with a maximum six month exclusion. Civil or Criminal penalties for failure to file.

Question 25

**Who needs to file a FBAR?

Answer 25

A United States taxpayer who has a financial interest in a financial account located outside the United States must file FinCEN form 114, if the total value of such accounts exceeds $10,000 at any time during the calendar year.

Question 26

A US Taxpayer who has a foreign bank account is wondering whether to file any forms if his year end balance is $10,000 or more. What is your advice?

Answer 26

Its not the year end balance that’s important. $10,000 is the magic number. But ITS $10,000 ANY TIME during the year and you have to file the FBAR

Question 27

Which interest is taxable?

a. Interest from a State Refund
b. Interest from a State Bond

Answer 27

Answer

a. Interest from a State Refund

Question 28

SERIES EE BONDS INTEREST

Interest Revenue on US EE Bonds is nontaxable if certain conditions are met. What are those conditions?

Answer 28

1. Bonds were bought by the taxpayer or spouse
2. Taxpayer was 24 or older when buying the bonds.
3. Proceeds are used for higher education costs (usually college costs) for taxpayer, spouse or dependent
4. This tax advantage is lost if taxpayer’s income is too high approx $80,000(Single)/$120,000(MFJ)
5. Tax exempt amount is received by scholarships received.

Question 29

Interest on US savings bonds are taxable. But if its a Series EE bonds, then there is a chance of tax exempt if certain conditions are met. True or False

Answer 29

True. If certain conditions are met Series EE bond Interest is tax exempt.

TIP : EE - Education Exempt (to remember)

Question 30

Series EE Bonds must remain in the _______________’s name to be tax exempt. The proceeds must be used to pay ______________ in order for a tax exempt status

Answer 30

Taxpayer

Education costs