Ind. Inc. Tax: Income

Question 1

Taxpayers are presumed to be engaged in a hobby if…

Answer 1

1. The operation fails to earn a profit in any three of the most recent five years including the tax year in question.

Question 2

Are expenses related to a hobby deductible?

Answer 2

To the extent of revenues earned by that hobby.

Question 3

Is child support taxable income?

Answer 3

No.

Question 4

Are child care reimbursements taxable income?

Answer 4

Yes.

Question 5

Is the cost of the group-term life insurance taxable income?

Answer 5

1. Not unless the coverage is above $50,000 of benefit.

2. Only the amount of coverage above $50,000 is taxable.

Question 6

Are unemployment compensation benefits taxable?

Answer 6

Yes.

Question 7

Is employer-provided health insurance taxable income?

Answer 7

No, it is viewed by the government as a tax-free fringe benefit.

Question 8

Is debt forgiven taxable income?

Answer 8

Yes, particularly when forgiven by an employer.

Question 9

other items included in income

Answer 9

1. breach of contract damages,
2. compensation for services,
3. jury duty fees
4. AND unemployment compensation.

Question 10

other items excluded in income

Answer 10

1. include gifts,
2. inheritance,
3. AND workers’ compensation.
   None of these are viewed as compensation for work done.

Question 11

Are stock dividends issued on common stock taxable?

Answer 11

Usu. not, but the cost of the original shares must be spread over all the shares (old and new) because that is the taxpayer’s actual cost.

Question 12

When are stock dividends taxable?

Answer 12

If the taxpayer has the right to:

1. choose cash instead of the stock
2. OR the dividend is on preferred stock.

Question 13

Normally, when are employee benefits included in TI?

Answer 13

Normally, employees who have the option of receiving benefits or cash must include the cash value in TI.

Question 14

For cafeteria plans, when are employee benefits included in TI?

Answer 14

Employees are only required to include cash value in TI when they opt to receive cash in lieu of the benefit.

Question 15

How are gambling winnings and gambling losses handled for tax purposes?

Answer 15

1. Gambling winnings are TI.

2. Gambling losses are misc. itemized deductions only up to the amount of gambling winnings.

Question 16

Is interest on U.S. T-bonds taxable?

Answer 16

Yes.

Question 17

Is interest on U.S. Series EE bonds taxable?

Answer 17

No.

Question 18

Are passive activity losses deductible on an ind. IT return?

Answer 18

No. They are carried over and used to offset passive income in the future until used up.

Question 19

passive activity

Answer 19

1. business in which the taxpayer serves as an owner but does does not materially participate in the operation.
2. Rental activities and limited partnerships are always included in this category.

Question 20

passive activity losses for rental activities

Answer 20

1. Normally not deductible b/c rental activities are always considered passive activities.
2. However, passive losses on rental activities are deductible up to $25,000 as long as the owner is an active participant in the management.
3. This deduction is lost gradually if the taxpayer’s income is especially high.

Question 21

revenue reported for tax purposes is equal to…

Answer 21

1. the value of items actually received (cash received + FV of non-cash items received in exchange for services)
2. This is true unless the asset(s) received is/are likely to have to be returned.

Question 22

How are passive activity G/L handled for tax purposes?

Answer 22

1. Netted together.
2. A passive gain is taxable in curr. yr.
3. A passive loss is carried forward.

Question 23

Is unemployment compensation always taxable?

Answer 23

Usually, although Congress has changed that rule for short periods of time or occasions.

Question 24

Criteria for Series EE bonds to be tax-free:

Answer 24

1. Must be over 24 when buying bonds.
2. Proceeds from cashing these bonds is used to pay college costs for yourself, a spouse, or a dependent.
3. Your TI is not extremely high.

Question 25

purpose of Series EE bond laws

Answer 25

To encourage parents to save money to pay for the cost of college for their children.

Question 26

Taxability of soc. sec. benefits:

Answer 26

1. At low income levels, SS benefits payments are tax-free.
2. At a relatively small transitional level of income, SS benefits are taxed at 50%.
3. At a relatively high level of income, SS benefits are taxed at 85%.

Question 27

taxability of scholarships

Answer 27

1. Scholarships that cover college tuition are tax-free.
2. Scholarships are taxable when the person is not seeking a degree,
3. OR, if the person is required to perform work in exchange for the scholarship.

Question 28

How are prizes and awards handled for tax purposes?

Answer 28

Prizes and awards are viewed as TI, regardless of the recipient’s efforts (or lack thereof) to win.

Question 29

In a divorce settlement, what amount is TI to recipient?

Answer 29

1. Any amount considered alimony, which includes any part of payment not intended for child support.
2. Does not include any payment made before the decree or any payment made as a final property settlement.

Question 30

How are Series EE bonds taxed when tax-free requirements are not met?

Answer 30

The interest in the bond (amount received - cost) is added to TI.

Question 31

Do ordinary and necessary bus. expenses include advertising exp?

Answer 31

Yes.

Question 32

Do ordinary and necessary bus. expenses include repayment of loan principal? Or loan interest?

Answer 32

No and No.

Question 33

In what circumstance is rental revenue not includable nor rental expenses deductible?

Answer 33

When rental property is rented out for less than 15 days.

Question 34

Is interest from a state tax refund taxable on the federal tax return?

Answer 34

1. Yes.
2. The state income tax refund is also taxable but only if the taxpayers itemized their deductions in the previous tax year.

Question 35

Criteria for accum. interest on Series EE bonds to be tax-free:

Answer 35

1. Bonds must be issued after December 31, 1989.
2. Be purchased by the sole (or joint owner) and the buyer must be at least 24 years old when bonds are purchased.
3. The proceeds of the bonds must be used to pay the higher education tuition and fees for taxpayer, spouse, or dependent.
4. The bond will indicate the name of the owner but not the eventual recipient of the proceeds.

Question 36

Difference between ordinary and qualified dividends?

Answer 36

1. On the Form 1040, the IRS wants to know the total amount of dividends that have been received and that amount is known as ordinary dividends.
2. Then, they want to know the portion of those dividends that qualify for a lower tax rate. That figure is reported as the qualifying dividends.