Module 2:Gross Income "First part of Indiv. Tax Formula" Flashcards
Gross Income Definition
First step in computing tax liability. All income from whatever source unless mentioned excluded
General Rule
Taxable events are at FMV of income and use FMV of basis. Nontaxable events have no income and a basis of NBV.
Realized vs Recognized
Realized is the receipt of an event of transaction. What really happened in the real world. Recognized is saying that the receipt must be recorded and recognized on a tax return.
Accrual vs Cash
Accrual is when revenue is taxed when earned. Cash is when revenue is taxed when received.
Taxable Gross Income (Salaries and Wages)
Money, Property, Cancellation of Debt, Guaranteed Payments to Partner (payment for services), Fringe benefits (bonuses, vacation expenses, life insurance in excess of $50,000, personally using employee vehicle)
Non-taxable Fringe Benefits aka not included in gross income calculation
Life Insurance proceeds (although interest earned is taxed)
Employer paid accidents
Meals and Lodging (if lodging is condition of employment)
Education expenses (up to $5,250)
Qualified tuition reduction, employee discounts, pension, stock bonus plan
Interest Income
Taxed unless state or local government bonds/obligations or bonds of US possession. “series EE” savings bonds.
Note: Forfeited interest (Penalty on Withdrawal from Savings) is a adjustment not gross income
Dividend Income
How each distribution is taxed
E&P current= Distribute by current year end
E&P accumulated= Distribution date
Return of Capital= No E&P
Capital gain distribution= No E&P/no basis
Taxable/Tax-free distributions
Taxable Dividends:
Cash & Property FMV
-Qualified dividends (lower tax rate held more than 60 days of 120 day period)
-Disqualified (held by ESOP, dividends by banks)
-Capital Gain Distribution (in excess of recovery of basis)
Tax rate for dividends is 0% poor 15% or 20% if rich
Tax-free Distributions:
-Return of Capital (company distributes funds but no E&P, reduces basis)
-Stock Split (original basis over total number of shares after split)
-Life Insurance Dividend (refund of prem. paid)
State/Local Tax Refunds
If itemized in prior year, refund is taxed (unless AMT made taxes paid nondeductible)
If standard deduction, refund is nontaxable (Using the 1040EZ is using standard deduction)
Payments on Divorce
Alimony paid is taxable. Child support is not taxable, and is first taken from alimony. So if alimony is not enough it at least goes nontaxable to pay for child.
Note: Property settlement is nontaxable, so no deduction for property given and not included in gross income.
Business Income/Loss
Farm Income
Gains and Losses on Disposition of Property “Disposal of Assets”
Rental Income
-Schedule C: Sole Proprietor
-Schedule F
-Schedule D:
Amount realized
=Gain or Loss Realized=
-Schedule E “real estate” passive activity
IRA Income “Retirement”
How each distribution is taxed:
-Traditional deductible IRA (taxed as ordinary income aka wages)
-Roth IRA (withdrawals are tax free, but no tax break on contributing)
-Nontraditional nondeductible IRA (partially taxed (not when contributing but when withdrawing)
Penalty Tax 10% (on early withdrawal):
-Exemptions to rule include: (but still taxed as ordinary income) Buying a home for the first time, Insurance for medical, Medical expenses in excess of 10% AGI, Disability, Education for tuition, books, fees. And death.
Note: If contribute excess, 6% excise tax until corrected
Annuities “fixed sum paid each year”
Treat interest paid as depreciation.
Social Security Income
Robinhood rule of taxed.
