Individual Taxation: Gross Income

Question 1

1. Health insurance coverage
2. Fringe benefits incurred for the employer’s benefit
3. Scholarships spent on tuition and books and class supplies
4. Incentive stock options

These are 4 examples of…

Answer 1

Nontaxable income (not included in gross income)

• Scholarships cannot be compensation for required services
• ISOs become taxable once sold (for AMT, it’s taxable when exercised)

Question 2

Group term life insurance coverage in excess of $50,000 is considered…

Answer 2

Included in income

*Group term life insurance coverage up to $50,000 is nontaxable

Question 3

1. Unemployment compensation
2. Prizes and Awards
3. Illegal drug income
4. Bargain discount from exercising an employer’s stock option

Describe each as either “Included in income” or “Not included in Income”

Answer 3

1. Included in income
2. Included in income, unless it is tangible personal property given for years of employment or safety achievement
3. Included in income (net of COGS)
4. Included in income (only ISOs are not income until sold)

Question 4

What are the 4 conditions which make injury awards includable in income?

Answer 4

Injury Awards that are for:

1. Punitive damages
2. Lost business profits
3. Non-physical injuries (like age or race discrimination)
4. Emotional distress (unless the emotional distress leads to physical injury or sickness)

• Non-physical= taxable
• Bodily Injury= not taxable

Question 5

1. Gifts
2. Inheritances
3. Life insurance proceeds paid upon death
4. Child Support
5. Property Settlement
6. Alimony

Describe each as either “Included in income” or “Not included in Income”

Answer 5

1. Not included in income
2. Not included in income
3. Not included in income
4. Not included in income
5. Not included in income
6. Not included in income (TCJA)

Question 6

State and local muni bonds interest are 1. ______ while all other government interest (Federal bonds, T-bills) are 2._____.

Answer 6

1. Interest from state and local muni bonds are not taxable
2. All other government interest is taxable
   * Series EE savings bonds are not taxable only if used for higher education (tuition and fees qualify for exemption, room and board do not qualify for exemption)

Question 7

Dividends are taxable unless….

Answer 7

They are:

1. Life insurance dividend (return of premium)
2. Received from an S corp
3. Stock dividends or stock splits on common stock
4. Liquidating dividend

Question 8

What is Provisional Income for and how do you calculate it?

Answer 8

Provisional income is the threshold for what rate Social Security Benefits will be taxed at.

Provisional Income = Gross Income + Tax exempt interest (like muni bonds) + 50% of SS received

Question 9

What are the thresholds and rates for Social Security Benefits?

Answer 9

Provisional Income < $25,000; Social Security is not included in income

Provisional Income > $60,000; 85% of Social Security benefits (the maximum amount) is included in income

Question 10

Pensions and Annuities: Part of an annuity may be taxable. How do you determine/calculate the portion that is not taxable?

Answer 10

You take the percent of the annuity that is related to your cost of the annuity. This percent of each annuity payment is excluded from taxes.

Step 1. (Cost of Annuity, the amount you paid ÷ Expected total annuity Payment) = % Non Taxable

Step 2. % Non Taxable X Annuity Payment = Amount Excluded from Income