INDIVIDUAL - TOTAL INCOME Flashcards
Cash-basis taxpayers are taxed on income when it is reported. True or False?
False.
Cash-basis taxpayers are taxed on income when it is received – this may be “actual” or “constructive” receipt.
Constructive Receipt occurs when the money is made available to the taxpayer without significant restrictions or limitations, regardless of whether or not they choose to get it.
Jury Duty pay is not included in gross income. True or False.
False.
Jury duty pay is included in gross income and only deductible for calculating adjusted gross income (AGI) if it is surrendered to the employer in exchange for receiving the salary during the time of jury service.
Compensation: Does an Accountable Expense Plan provided by your employer result in compensation income?
NO, so long as these 3 criteria are met:
- The plan establishes a business connection for the travel, AND
- The employee substantiates the expenses, AND
- The employee returns amounts in excess of substantiated expenses.
Compensation: Does an Non-accountable Expense Plan provided by your employer result in compensation income?
YES, because all the money given to the employee by the employer can be spent in anyway the employee sees fit.
All payments from the employer to the employee to reimburse travel expenses are taxable compensation income. That is the case even if the employee voluntarily returns unused expense reimbursement payments to the employer.
So don’t ever return Non-accountable Expense Plan funds.
Interest income from state and Local government issued debt securities (ie. Municipal Bonds) is tax-exempt. True or False.
True.
An example is Municipal Bonds. Their interest is exempt from federal taxes, and if you buy bonds issued in your state, they’re also exempt from state income taxes.
Dividends are taxed as ordinary income. True or False?
True.
Dividends that are received on insurance policies are not considered to be a dividend. True or False?
True.
Qualified dividends are taxed at a higher tax rate. True or False?
False.
Some dividends (called qualified dividends) are taxed at a lower tax rate – the capital gains tax rates.
They must meet the holding period requirement.
State and local Tax Refunds are included as taxable income in the year the refund is received. True or False?
True.
Any item that provided a previous tax deduction and is refunded is includable in taxable income in the year refunded.
How is Net Self-Employment income calculated?
Net Self-Employment income is the gross income from the taxpayers business minus the allowable deductions related to that gross business income.
A self-employed taxpayer is required to report their gross self-employment income. True or False.
False.
If the taxpayer is self-employed, they must report their NET self-employment income. Not gross SE income.
Are Director’s fees considered to be self-employment income. Yes or No?
Yes.
What is the limit allowed for bad debt expense deductions for cash-basis taxpayers.
None. Cash-basis taxpayers are not allowed bad debt expense deductions since they do not include receivables in income for tax purpose.
Even if a business is illegal, you’re still allowed to deduct marketing expenses, and overhead. True or False?
False.
If the object of the business is illegal, only the cost of merchandise may be deducted from revenues in calculating income.
For an individual, capital losses that exceed the limit in a given year can only be carried forward for 5 years. True or False?
False.
Any capital losses that are not deductible because they exceed the limit in the current year can be carried forward indefinitely for an individual.
Rent received from real estate is taxable when it is received. True or False?
True.
Side Note: If a residence is used for both personal residence and rental activities, the expenses of the property must be allocated between the residential use and the rental use when calculating net rental income.
Any use of a rental property qualifies rental expenses to be deductible. True or False?
False.
The deductibility of vacation home rental expenses depends on the use of the property. If the property is rented for less than 15 days, no rental expenses are deductible, and no rental income is recognized.
Unemployment compensation is partially taxable. True or False?
False.
Unemployment compensation is normally fully taxable.
The distributive share of partnership or S Corp. income is taxable. True or False.
True.
Since an S-Corp does not pay taxes itself, the IRS requires all income and losses to be allocated to a shareholder, even if the corporation decides to keep some of the profits in the bank to pay for future expenses instead of distributing them to shareholders.
Life Insurance proceeds are not taxable. True or False?
False.
Life insurance proceeds are taxable when the beneficiary of the policy and the heir of the estate for the insured person are different people.
This assumes an exchange or a sale of the policy has occurred.
ALSO, The proceeds from the insurance payout in excess of the cost of the policy are income for the taxpayer.
When is Jury Duty Pay deductible?
Jury Duty Pay is always included in gross income, but can then be deductible for calculating adjusted gross income (AGI) IF it is surrendered to the employer in exchange for receiving the salary during the time of jury service.
How is Jury Duty Pay taxed?
Jury Duty Pay is included in gross income and then deductible for calculating adjusted gross income (AGI) if it is surrendered to the employer in exchange for receiving the salary during the time of jury service.
Discharged Indebtedness
Discharged debt is not taxable. True or False?
False.
Income from the discharge of indebtedness is taxable unless the discharge is the result of a bankruptcy or a gift.
Also, if there is a discharge relating to the purchase or improvement of a taxpayer’s primary residence, up to $2 million dollars of discharge can be excluded from income.
All rental activities are considered to be passive unless the rental owner actively participates in the rental activity. True or False?
False.
All rental activities are considered to be passive even if the taxpayer actively participates in the rental activity.
Define Passive Activity Loss.
Passive Activity Loss is the loss that comes from the conduct of a passive business. One that the taxpayer does not materially participate in.
Any passive activity losses can be carried forward indefinitely, or until the property is sold. When it is sold, the passive losses are recognized.
Rental Activity Exception: If the taxpayer actively participates in the rental activity, $25,000 of rental losses are deductible from regular income.
Real Estate Professional Exception: Real estate professionals are able to offset NO passive income with their rental real estate losses.
What are 4 examples of distributions that MAY be taxable?
Health Savings Accounts (HSA)
Archer Medical Savings Accounts (Archer MSA)
Coverdell Education Savings Programs
Qualified Tuition Program (529s)
What is the potential penalty for an employee not reporting tips to their employer?
If the employee did not report tips to the employer as required, the employee may be charged a penalty equal to 50% of the Social Security and Medicare tax due on those tips. IRS Form 4137.
Tips received in Dec, but reported in January are still considered income from Dec. True or False?
False.
Tips that are reported, as required by the 10th day of the month following the month they were received, are considered income in the month they were reported. Therefore, tips received in December and reported before the 10th of January, are considered income for January.
Child support is considered income. True or False?
False.
Child support is excluded from gross income.
What is Form 4137 used for in relation to tips earned?
Use Form 4137 only to figure the social security and Medicare tax owed on tips you did not report to your employer, including any allocated tips shown on your Form(s) W-2 that you must report as income.
However, Form 4137 should not be used to report tips received for work covered by the Railroad Retirement Tax Act. In order to get railroad retirement credit, the taxpayer must report these tips to his or her employer.
When must an employer assign “Allocated Tips?”
An employer must assign Allocated Tips only if:
- an employee worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees
- the tips reported to your employer were less than your share of 8% of food and drink sales
- an employee did not participate in the employer’s Attributed Tip Income Program (ATIP).
What are allocated tips?
- All tips that you receive.
- Tips that your employer assigned to you in addition to the tips you reported to your employer for the year.
- Only tips that you did not report.
- Tips that you reported to your employer.
- Tips that your employer assigned to you in addition to the tips you reported to your employer for the year.
Explanation:
Allocated tips are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. Your employer will have done this only if:
- You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees
- The tips you reported to your employer were less than your share of 8% of food and drink sales
- You did not participate in your employer’s Attributed Tip Income Program (ATIP).
Tips not reported to the employer constitute gross income in the year when?
- Received
- Reported
- Realized
- Recognized
- Received
Explanation:
Tips the employee did not report to his or her employer on time or did not report at all are considered income in the month actually received. For example, tips received in December 20X1 that are not reported to the employer by January 10, 20X2, are considered income in 20X1 because they were not reported to the employer on time. IRS Form 4137.
Marge works as a waitress for less than minimum wage and gets a lot of tips in small change. Which of the following statements is true?
- Marge’s tips are not subject to social security and Medicare tax.
- Marge’s tips are subject to social security and Medicare tax.
- Marge’s tips are hers to keep and do not have to be reported because she does not make minimum wage.
- Marge only has to report $20 of those tips each month to her employer.
- Marge’s tips are subject to social security and Medicare tax.
Explanation:
Tip income is subject to social security and Medicare tax. The taxpayer must give his employer a written report of cash and charge tips if he receives $20 or more in tips during a month. A taxpayer uses Form 4137 to figure the social security and Medicare tax owed on tips he did not report to his employer, including any allocated tips shown on Form(s) W-2 that he must report as income.
Nancy works two part-time waitressing jobs. Last month her tips at the first restaurant only totaled $15, but they totaled $50 at the second restaurant. Which of the following statements is true?
- She does not have to report her tips to her employers at all as long as she declares them as income at the end of the year.
- She needs to report both sets of tips, because the total was more than $20 for the month.
- She does not have to report the $15 in tips to the first employer, but does have to report the $50 in tips to the second employer.
- She should ask the employer of the lower-tipping restaurant to report the $15 in tips as allocated tips on her W-2.
- She does not have to report the $15 in tips to the first employer, but does have to report the $50 in tips to the second employer.
Explanation:
If, in any month, you worked for two or more employers and received tips while working for each, the $20 rule applies separately to the tips you received while working for each employer and not to the total you received.
Emilio received tips on December 26 and reported them to his employer on January 9. His employer also reported allocated tips on his Form W-2. Which of the following statements is true?
- The tips he reported are considered part of his income for December and will go on this year’s tax return and Form 4137.
- The tips he reported are considered income for January and will go on next year’s tax return and Form 4137.
- It does not matter when the tips were reported, they are considered income when they are received.
- Emilio can file Form 4137 to report those tips for either tax year.
- The tips he reported are considered income for January and will go on next year’s tax return and Form 4137.
Explanation:
Tips that are reported, as required by the 10th day of the month following the month they were received, are considered income in the month they were reported. Therefore, tips received in December and reported before the 10th of January, are considered income for January.
A taxpayer must file Form 4137 if they received cash and charge tips of $20 or more in a calendar month and didn’t report all of those tips to their employer. Taxpayer also must file Form 4137 if their Form(s) W-2, box 8, shows allocated tips that they must report as income.
Leighton considers himself an employee of Olivia’s business. However, Leighton did not receive a W-2. Instead, he received a 1099-MISC. Which form should Leighton complete and attach to his tax return?
- Form 1040
- Form 4137
- Form 5130
- Form 8919
- Form 8919
Explanation:
If you are an employee and you received Form 1099-MISC, Miscellaneous Income, instead of Form W-2, Wage and Tax Statement, because your employer did not consider you an employee, use Form 8919 to report Uncollected Social Security and Medicare Tax on Wages.
TIPS NOTE:
You must file Form 4137 if you received cash and charge tips of $20 or more in a calendar month and did not report all of those tips to your employer. You must also file Form 4137 if box 8 of your Form(s) W-2 shows allocated tips that you must report as income.
Merry got a $10 tip from a customer at the bakery. That was the only tip she received all month. Which of the following statements is true?
- Unless her employer asks, she does not have to report the $10 tip as income.
- She does not have to report the tip to her employer if her tips total less than $20 for the month.
- She can wait until the end of the year to report the tip to her employer.
- She never has to report tips earned while working in a bakery.
- She does not have to report the tip to her employer if her tips total less than $20 for the month.
Explanation:
All tips received are income and are subject to federal income tax.
Employees must give their employers a written report of cash and charge tips if they received $20 or more in tips during the month. Employees should use Form 4137 to figure social security and Medicare taxes on tips not reported to the employer.
Joyce, a cash basis taxpayer, sells high-end jewelry and works on a commission basis. When business is slow she is allowed to receive advances on her commissions. In June Joyce received an advance of $3,500 and in August she received an advance of $5,000. In addition to these advances, her commissions earned and received during the 20X1 year were $73,000. She paid the advances back on January 3 of the following year after she received her December commissions. How much income should Joyce report for 20X1?
- $81,500
- $78,000
- $73,000
- $76,500
- $81,500
Explanation:
Under the cash method, a taxpayer receiving advance commissions or other amounts for future services must include these amounts as income in the year received.
When Noelle was fired from her job, she was offered a choice of either $2,000 severance pay or $1000 severance pay and outplacement services. Noelle chose to receive $1,000 and the outplacement services. How much should she report as income for her severance package?
- $0. Severance pay is not taxable.
- $1000
- $1000 plus the fair market value of the outplacement services
- $2000
- $2000
Explanation:
A taxpayer must include in income amounts received as severance pay. If the taxpayer chooses to accept a reduced amount of severance pay so she can receive outplacement services (such as training in resume writing and interview techniques), she must include the unreduced amount of the severance pay in income. Noelle must include the full $2,000 severance pay in her income.
Lincoln works in a restaurant as a busboy and receives a portion of the tips that are pooled at the end of each evening. His employer reported these as allocated tips on his W-2. Which of the following statements is true?
- He needs to file Form 4137 for the allocated tips.
- He does not have to file Form 4137 because the employer reported them on his W-2.
- He does not have to report tips because the tips were not specifically for his services.
- He does not have to report those tips as income.
- He needs to file Form 4137 for the allocated tips.
Explanation:
You must file Form 4137 if box 8 of your Form(s) W-2 shows allocated tips that you must report as income. You must also file Form 4137 if you received cash and charge tips of $20 or more in a calendar month and did not report all of those tips to your employer.
Form 8919
Form 8919 is used to report Uncollected Social Security and Medicare Tax on Wages that are reported on a 1099-MISC.
Childcare providers, including babysitters, must include their pay in their gross income. True or False?
True.
Taxpayers who are not employees must include payments for services on Schedule C (Form 1040) and complete Schedule 1. This applies to babysitting, even if only periodically or just for relatives.
US citizens and resident aliens residing OUTSIDE the United States may be able to exclude all or part of their foreign source earned income. True or False?
True.
When are Passive Activity Losses realized?
Any passive activity losses can be carried forward indefinitely, or until the property is sold. When it is sold, the passive losses are recognized.
NOTE: Real Estate Professional Exception: Real estate professionals are NOT able to offset passive income with their rental real estate losses.
What is defined as Earned Income? (S, W, T, PF, TS, FG)
Salaries, Wages, tips, professional fees, taxable scholarships, and fellowship grants.
What is defined as Unearned Income? (9 categories)
UE, SS, P, A, CD, T, I, D, CG
- Unemployment compensation
- Taxable Social Security benefits
- Taxable Pensions
- Annuity Income
- Cancelled Debt
- Unearned Income from a Trust
- Taxable Interest
- Dividends, and
- Capital gains.
Gross Income Threasholds for Standard Deductions
Single = $12,200 Single >65 = $13,850 MFJ both = $24,400 MFJ one > 65 = $25,700 MFJ both >65 = $27,000 MFS = $5 HOH = $18350 HOH >65 = $20,000 QW = $24,400 QW >65 = $25,700
Why file a tax return even if you’re not legally obligated to?
To get a refund of any Federal Income Tax withheld.
Or, if you're eligible for any of the following: EIC (Earned Income Credit) ACTC (Additional Child Tax Credit) AOTC (American Opportunity Tax Credit) PTC (Premium Tax Credit) HCTC (Health Coverage Tax Credit) Credit for Federal Taxes Paid on Fuels
Tips reported to the employer will be included in the employee’s _________?
- W-2
- W-4
- W-9
- 1099
- W-2
EXPLANATION:
Form W-2 will include the tips reported by the employee to his or her employer, as well as the taxes withheld. If there was not enough money to cover the Social Security and Medicare tax (or railroad retirement tax), the Form W-2 will also show the tax due in box 12 with codes A and B. IRS Form 4137.
Generally, a taxpayer must report to his or her employer tips received in excess of _________?
- $20 per month
- $50 per month
- $200 per year
- $500 per year
- $20 per month
EXPLANATION:
If the taxpayer received cash and charge tips of $20 or more in a calendar month, he or she must report the amount received to the employer. IRS Form 4137.
Reportable tips include _________?
- Cash received from customers
- Charges distributed by the employer
- Tip-sharing arrangements
- All of the above
- All of the above
EXPLANATION
The taxpayer must report any tip exceeding $20 per month to his or her employer. This includes all tips, including cash tips received from customers, charged tips distributed by the employer, and tips received from other employees under any tip-sharing arrangement. IRS Form 4137.
Penny had income from the following sources, which one is excluded from gross income:
- Hourly wages from her job as a tipped employee
- Child support from her son’s father
- Money earned from babysitting her neighbor 2 days per week
- Severance pay from her first job which downsized due to the economy
- Child support from her son’s father
EXPLANATION
Child support is excluded from gross income. Wages, even if a tipped employee, babysitting earnings and severance pay are all included in gross income.
A taxpayer should use the following form to figure the social security and Medicare tax owed on tips he did not report to his employer:
- Form 2137
- Form 3137
- Form 4137
- Form 5137
- Form 4137
EXPLANATION
A taxpayer uses Form 4137 to figure the social security and Medicare tax owed on tips he did not report to his employer, including any allocated tips shown on Form(s) W-2 that he must report as income.