Income Tax Fundamentals and calculation: Gross income Inclusions

Question 1

What is the tax formula?

Answer 1

Question 2

Gross income is broadly defined. What does that mean?

Answer 2

All income from what ever sourced derived

Question 3

Is gross income limited to cash received

Answer 3

No, maybe realized in any form whether in money, property or services

Question 4

In a taxable sale or exchange, what is the seller permitted to recover from the investment?

Answer 4

Seller is permitted to recover the investment or other adjusted basis before gain or loss is recognized

Question 5

Is income from alimony received part of gross income?

Answer 5

Yes, but only if divorce prior to 2019

Question 6

What part of an annuities income is including gross income?

Answer 6

Earnings portion of the payment

Question 7

What is the business purpose doctrine?

Answer 7

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

Question 8

What is the substance over form doctrine with taxes?

Answer 8

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

Question 9

What is the assignment of income doctrine?

Answer 9

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

Question 10

What is the tax benefit rule or doctrine?

Answer 10

Converts otherwise non-taxable receipts into taxable income

Question 11

What is the constructive receipt doctrine or rule?

Answer 11

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

Question 12

If a taxpayer sell stock after a dividend has been declared, but before the record date, the dividend will be tax to who?

Answer 12

Will be tax to the purchaser instead of the seller determined by the date of record

Question 13

What is phantom income?

Answer 13

Income is taxable income that has not yet been received in cash

Question 14

Are partnerships and S corporations, pass-through entities?

Answer 14

Yes

Question 15

How is income from a partnership taxed to the partners?

Answer 15

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

Question 16

Income from a general partnership on the K-1 is typically what?

Answer 16

Self-employment income

Question 17

Who pays the tax on an S corporation income?

Answer 17

Shareholders rather than the corporation

Question 18

How are shareholders taxed in an S corporation?

Answer 18

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

Question 19

Income in respect of a descendent is taxable to who and what is it

Answer 19

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.

Question 20

How is the decedents basis in the income treated concerning income in respect of a decedent?

Answer 20

Basis in the income carries over to the taxpayer, no step up or step down in fair market value at the date of death

Question 21

How is trust income distributed from the trust to the beneficiaries taxed?

Answer 21

Taxable to the beneficiaries

Question 22

How was income treated for each spouse and community property states?

Answer 22

1/2 of the earnings of each spouse during marriage is considered to be owned by the other spouse

Question 23

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?

Answer 23

Conduit for others, the income is not his own

Question 24

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?

Answer 24

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

Question 25

The imputed interest rules apply to the following types of below market rate loans

Answer 25

Gift loans

Compensated related loans

Corporation shareholder loans

Question 26

What are the imputed interest rules on a gift loan?

Answer 26

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

Question 27

What is a compensation related loan and how is it taxed?

Answer 27

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

Question 28

What are corporation shareholder loans and how are they taxed?

Answer 28

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

Question 29

What are exceptions and limitations to the imputed interest rules?

Answer 29

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

Question 30

Cash and the fair market value of prizes and awards are included in employees, gross income unless what

Answer 30

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

Question 31

What is the tax treatment of annuity payments received on and after the annuity starting date and what are the formulas?

Answer 31

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

Question 32

How are payments from an annuity treated if an individual lives beyond the projected life expectancy

Answer 32

Fully taxable

Question 33

If the annuitant dies before life expectancy and has not completely recovered the basis, what happens to the unrecovered basis for taxes

Answer 33

Is deductible on the annuitants final income tax return as a miscellaneous itemized deduction

Question 34

How much of group term life insurance can employees exclude before they have to recognize the income

Answer 34

$50,000 and then it’s a cost per $1000

Question 35

Our partners proprietors and greater than 2% S corporation owners eligible for the group term life insurance exclusion?

Answer 35

No

Question 36

Is unemployment compensation benefits included in gross income?

Answer 36

Yes

Question 37

What is provisional income?

Answer 37

AGI from all sources +50% of Social Security benefits received, foreign income, previously excluded, and any tax exempt interest income

Question 38

As much as 85% of Social Security benefits may be included in gross income if provisional income exceeds what?

Answer 38

$44,000 for married filing jointly

Zero for Married taxpayers filing separately

$34,000 for all other filing statuses

Question 39

Up to 50% of Social Security benefits are subject to taxation if the taxpayers provisional income exceeds what?

Answer 39

$32,000 for married filing jointly

Zero for Married taxpayers filing separately

$25,000 for all other filing statuses

Question 40

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?

Answer 40

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

Question 41

Amount paid by an employer upon an employees death to the employees beneficiaries are tax how to the beneficiary?

Answer 41

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.

Question 42

What is a structured settlement?

Answer 42

Method of compensating a victim for injuries arising in most cases as a result of a personal injury lawsuit

Question 43

What are compensatory damages and how are they taxed?

Answer 43

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

Question 44

What are punitive damages and how are they taxed?

Answer 44

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

Question 45

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?

Answer 45

Nontaxable