Income Tax Fundamentals and calculation: Gross income Inclusions Flashcards
What is the tax formula?
Gross income is broadly defined. What does that mean?
All income from what ever sourced derived
Is gross income limited to cash received
No, maybe realized in any form whether in money, property or services
In a taxable sale or exchange, what is the seller permitted to recover from the investment?
Seller is permitted to recover the investment or other adjusted basis before gain or loss is recognized
Is income from alimony received part of gross income?
Yes, but only if divorce prior to 2019
What part of an annuities income is including gross income?
Earnings portion of the payment
What is the business purpose doctrine?
Stipulates that a transaction will not be affective for income tax purposes, unless it is intended to achieve a genuine business purpose, other than tax avoidance
What is the substance over form doctrine with taxes?
If the substance differs from the form, the IRS will determine the tax consequences of the transaction on the basis of its reality rather than its illusion
What is the assignment of income doctrine?
The fruit and the tree
Taxpayer who earns income and is the source of that income, cannot assign that income to someone else for income tax purposes taxpayer will be taxed on that income
What is the tax benefit rule or doctrine?
Converts otherwise non-taxable receipts into taxable income
What is the constructive receipt doctrine or rule?
If there is no substantial, limitation or restriction on a taxpayers right to bring the funds under personal control, the income is tax to a taxpayer as though it had actually been received
If a taxpayer sell stock after a dividend has been declared, but before the record date, the dividend will be tax to who?
Will be tax to the purchaser instead of the seller determined by the date of record
What is phantom income?
Income is taxable income that has not yet been received in cash
Are partnerships and S corporations, pass-through entities?
Yes
How is income from a partnership taxed to the partners?
Taxed to the partners at their own individual rates
Partnership files return 1065
Each partner receives a K-1, indicating his share of the partnership income
Income from a general partnership on the K-1 is typically what?
Self-employment income
Who pays the tax on an S corporation income?
Shareholders rather than the corporation
How are shareholders taxed in an S corporation?
File form 1120 S
Receives a K-1 indicating share of corporations income
Employees shareholder of the S corporation will receive a W-2 for the earned income wages
Income in respect of a descendent is taxable to who and what is it
Generally taxable
Examples include, rents that have been accrued at death, but have not yet been received, salary earned, but not paid before the decedent death, etc.
How is the decedents basis in the income treated concerning income in respect of a decedent?
Basis in the income carries over to the taxpayer, no step up or step down in fair market value at the date of death
How is trust income distributed from the trust to the beneficiaries taxed?
Taxable to the beneficiaries
How was income treated for each spouse and community property states?
1/2 of the earnings of each spouse during marriage is considered to be owned by the other spouse
A professor conducts a seminar for the public, but because he does it as an employee of the university he must turn over the student fees to the university because he is only a what?
Conduit for others, the income is not his own
If the interest charge on the loan is less than the federal rate, the imputed interest is the difference in interest, determine using the federal rate and the interest determined using the actual rate. What are the consequences of this?
Lender may be required to impute (recognize) interest income, or the borrower may receive an interest expense deduction when, in fact, no interest had been received or paid
The imputed interest rules apply to the following types of below market rate loans
Gift loans
Compensated related loans
Corporation shareholder loans
What are the imputed interest rules on a gift loan?
Lender has interest income borrower has interest expense to the extent of imputed interest
Gift has been made to the borrower in the amount of imputed interest
Only occurs between individuals
What is a compensation related loan and how is it taxed?
Employer loans to employee
Corporation has interest, income and compensation expense for the amount of imputed interest
The borrower will have compensation income and interest expense
What are corporation shareholder loans and how are they taxed?
Given to a non-employee shareholder by the corporation
Corporation will have interest income and a dividend distribution for the amount of the imputed interest
Shareholder borrower will have dividend income and interest expense
What are exceptions and limitations to the imputed interest rules?
No interest is imputed on total outstanding gift loans less than $10,000 between individuals unless used to purchase income producing property
On loans between individuals greater than $10,000 and less than or equal to $100,000 imputed interest cannot exceed the borrowers investment income from all sources for the year
If the purpose of the loan is tax avoidance, none of the exceptions apply
Cash and the fair market value of prizes and awards are included in employees, gross income unless what
Employee achievement awards less than $400 per year
Winner receives the award for religious charitable, scientific, educational, artistic, literary or civic achievement in terms of proceeds over to a government unit or qualifying charity
What is the tax treatment of annuity payments received on and after the annuity starting date and what are the formulas?
Can exclude from taxation portion of each payment that represents the return of investment basis
Exclusion amount for a fixed annuity is calculated as follows
(Investment basis / expected return) x annuity payment
Exclusion amount for a variable annuity is calculated as follows
Investment basis / life expectancy factor
How are payments from an annuity treated if an individual lives beyond the projected life expectancy
Fully taxable
If the annuitant dies before life expectancy and has not completely recovered the basis, what happens to the unrecovered basis for taxes
Is deductible on the annuitants final income tax return as a miscellaneous itemized deduction
How much of group term life insurance can employees exclude before they have to recognize the income
$50,000 and then it’s a cost per $1000
Our partners proprietors and greater than 2% S corporation owners eligible for the group term life insurance exclusion?
No
Is unemployment compensation benefits included in gross income?
Yes
What is provisional income?
AGI from all sources +50% of Social Security benefits received, foreign income, previously excluded, and any tax exempt interest income
As much as 85% of Social Security benefits may be included in gross income if provisional income exceeds what?
$44,000 for married filing jointly
Zero for Married taxpayers filing separately
$34,000 for all other filing statuses
Up to 50% of Social Security benefits are subject to taxation if the taxpayers provisional income exceeds what?
$32,000 for married filing jointly
Zero for Married taxpayers filing separately
$25,000 for all other filing statuses
FICA consist of Social Security tax (OASDI) and the Medicare tax (HI). What are the tax rates and how are they applied for employer, employee, and self-employed?
FICA (OASDI) Is 6.2% applied to wages for the employer share and 6.2% for the employee share with a base of 168,600
Self-employed individuals pay both sides of FICA for a total of 12.4%
Medicare tax has no ceilings for earnings and both the employee and the employee pay 1.45% each
Self-employed pays all of it at 2.9% on income
Total self-employment taxes are 15.3%. That is the 12.4% plus the 2.9%. When calculating self-employment tax taxpayer reduces net earnings from self-employment by 7.65% in addition, the self-employed taxpayer made deduct the employer share of the self-employment tax paid as a deduction for AGI
Additional Medicare tax .9% applies to self-employed individuals who have a combined income greater than $200,000 if single and 250,000 if married filing jointly who earn wages in excess of these threshold will see this deduction made by their employers there are no employer share for the additional Medicare tax of .9%. This tax is imposed on the earnings in excess of the thresholds, no cap
Amount paid by an employer upon an employees death to the employees beneficiaries are tax how to the beneficiary?
Fully includable in the beneficiaries income
They are not a life insurance policy, death benefit to the family. They are a cash fringe benefit paid by the employer upon the employees death.
What is a structured settlement?
Method of compensating a victim for injuries arising in most cases as a result of a personal injury lawsuit
What are compensatory damages and how are they taxed?
Considered to only make the injured party whole
Income tax, free to the injured party exception is when damages received in age, sex, or racial discrimination cases are generally taxable
What are punitive damages and how are they taxed?
Damages arising out of a personal injury lawsuit intended to punish the offender for her act are generally taxable
Exception to the rule are punitive damages awarded as a result of a wrongful death suit by the plaintive these damages are income tax free
Where the victim has no control over the investment of the present value lump sum amount all the annuity payments and earnings on the fund are taxable or non-taxable, which is it?
Nontaxable
