R1 (3) - N D I V I D U A L T A X A T I O N - G r o s s I n c o m e Flashcards
I. GROSS I NCOME I N GEN ERAL
1- Income is determined by the amount of cash, property (FMV), or services obtained.
2- In order to be taxable, the gain must be both realized and recognized.
3- Characterizations of Income (Ordinary - Portfolio - Passive like rental income - Capital)
A. Salaries & Wages - General
1- Money 2- Property 3- Cancellation of Debt 4- Partially Taxable Fringe Benefits- 5- Nontaxable Fringe Benefits
A. Salaries & Wages - Partially Taxable Fringe Benefits
1- Premiums paid by an employer on a group-term life insurance policy
2- Premiums above first $50,000 of coverage are taxable income to recipient included in W-2 wages.
A. Salaries & Wages - General - Nontaxable Fringe Benefits
1- Life Insurance Proceeds
2- Accident, Medical,Health Insurance (employer paid)
3- Meals and Lodging
4- Employer Payment Employee’s Educational Expenses
5- Qualified Tuition Reductions
6- Qualified Employee Discounts
7.Qualified Pension,Profit-sharing, and Stock Bonus Plans
8- Flexible Spending Arrangements (FSAs)
B. Interest Income - Taxable
1- Federal bonds
2- Industrial development bonds
3- Corporate bonds
4- Premiums received for opening a savings account (e.g., prizes and awards) are included at FMV
5- Interest paid by the federal or state government for late payment of a tax refund
B. Interest Income - Tax Exempt (reportable but not taxable)
1- State and Local Government Bonds/Obligations
2- Bonds of a U.S. Possession
3- Series EE(U. S. savings bond) = Educational Expenses
a). It is used for higher education
b).Phase out starts when modified AGI exceeds
indexed amount (77,200 single: 115,750 household
4- Veterans قدامى المحاربين Administration Insurance
B. Interest Income - Unearned Income of a Child under 18 (“kiddie tax”)
The net unearned income of a dependent child under 18 years of age (or, a child age 18 to under age 24 who does not provide over half of his/her own support and is a full-time student) is taxed at the parent’s higher tax rate.
B. Interest Income - Forfeited Interest (Adjustment)
Penalty on Withdrawal From Savings - see R2
C. Dividend Income - Sources
1- Earnings & Profits = Distribute by Current Year-End
2- Earnings & Profits/Accumulated = Distribution Date
3-Return of Capital = No Earnings & Profits
4-Capital Gain Distributions=No Earnings/No Basis
C. Dividend Income - Taxable
(a) Cash Received
(b) . Property = FMV
C. Dividend Income - Tax rate
1- 15 % - most tax payers
2- 0% low income taxpayers
3- 20% High income taxpayers
C. Dividend Income - Exempt (tax free distributions)
(1 ) .Return of Capital
(2) .Stock Split
(3) . Stock Dividend
(4) . Life I nsurance Dividend
C. Dividend Income - Taxable Capital Gain Distribution
Distributions by a corporation that has no earnings and profits, and for which the shareholder has recovered his or her entire basis, are treated as taxable gross
income
D. State and Local Tax Refunds
1- Itemized in prior year - TAXABLE
2- Standard deduction used in prior year - NONTAXABLE
E. Payments Pursuant to a Divorce - Alimony/Spousal Support (income)
a- Payments legally required pursuant to written divorce
b. Payments must be in cash (or its equivalent);
c. Payments can’t extend beyond death of payee-spouse.
d .Payments can’t made to members of same household
e. Payments must not as anything other than alimony
f. The spouses may not file a joint tax return.
E.Payments Pursuant to a Divorce - Child Support
1-. Nontaxable - to ex-spouse receiving the $
2- Payment Applies fist to Child support.
3- Property Settlements (nontaxable).
F. Business Income or Loss
Part 1 - Income Part 2- Expenses Part 3- Cost of goods sold Part 4 - Information on your vehicle Part 5 - Other expenses .
F. Business Income or Loss - Income Recognition
1- Percentage-of-Completion Method Required for Tax for Non-Exempt Long-term Contracts
F. Business Income or Loss -exemption Income Recognition
1- Small contractors (projects that are expected to last no more than two years and are performed by a taxpayer who has average annual gross receipts not exceeding $ 1 0 million for the three years that precede the
tax year in question).
2- Home construction contractors
3- A long-term construction contract that includes land and where less than 1 0% of the total contract costs relates to the actual construction of
property on the land.
4- Services performed by architects, engineers, designers, construction management advisors, and software implementation personnel related
to the long-term project
5- Services performed under warranty and maintenance agreements related to the long-term contract
F. Business Income or Loss - Expenses highlights
1- Business meal and entertainment expenses at SO%
2-Interest expense paid in advance b y a cash basis taxpayer cannot be deducted until the tax year/period to which the interest relates
3- Bad debts actually written off for an accrual basis taxpayer only
4- The direct write off method, not the allowance method, is used for tax purposes
F. Business Income or Loss - Nondeductible Expenses
1- Salaries paid to sole proprietor considered a (draw”).
2- Federal income tax
3- Personal portion
4- Bad debt expense of a cash basis taxpayer
5- Charitable contributions
F. Business Income or Loss - Change in accounting method
cannot be changed for the contract without consent of the I RS
F. Business Income or Loss - Unique “ rules for personal property contracts
item that is made specifically for a customer and could not be sold to others, is not generally part of a taxpayer’s
normal inventory, and requires significant pre production costs
G. Farming Income - Cash Basis
1 ) Most farmers use the cash basis
2). Inventories of produce, livestock, are not considered
G. Farming Income - Accrual Basis
(1) . The accrual method is required for certain corporate and partnership farmers as well as for all farming tax shelters.
(2) . inventories must be used and maintained
H. Gains and Losses on Disposition of Property
(covered in detail in the R4 lecture)
I. IRA Income صندوق معاشات - Regular Tax
1- retirement money cannot be withdrawn until the individual reaches the age of 59.5
2- Taxpayer is required to start withdrawal is by the age of 70.5
3-When a person retires, the funds will be taxed as ordinary income when received
I. IRA Income - Roth IRA (صناديق معاشات خاص)
All qualified benefits received from a Roth IRA are nontaxable
I. IRA Income - Traditional Non-deductible IRA (صناديق معاشات خاص
(i) Principal-nontaxable
ii) Accumulated earn ings-taxable (when withdrawn
what is Penalty Tax
ضريبه 10% على توزيع المعاشات السابق لاوانه .
Exception to penalty Tax
1- .Home buyer ( 1 st time): $ 1 0,000 maximum exclusion applies if the distribution is used toward purchase of first home (within 1 20 days of the distribution)
2. insurance (medical 3- Medical expenses in excess of 1 0% of AGI 4- Disability 5- Education 6- Death
J . Annuities
contract between you and an insurance company in which you make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future
The goal of annuities is to provide a steady stream of income during retirement. Funds accrue on a tax deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59.5
J . Annuities - Calculation
If the investment in the contract is $60,000 and the annuitant is 64 years old (the factor is 260 months) at the
start of the payout period, then: $60,000
= $230.77 excludable from each of the first 260 payments
what if Annuitant Live Longer than Actuarial Payout Period
further payments are fully taxable
what if Annuitant Died before Full Recovery
unrecovered portion is a miscellaneous itemized deduction on the annuitant’s final income tax return not subject to the 2% of AG I floor
K - Rental Income
Net Rental Income
G ross Rental Income
Prepaid Rental Income
Rent Cancellation Payment
Improvement In-Lieu-of Rent
K - Rental Income - Rental of Vacation Home
1- Rented Less than 1 5 Days - The rental income is excluded
2- Rented 1 5 or More Days -
a) Expenses must be prorated b) Rental use expenses deductible to extent of rental income.
K - Rental Income - Passive Activity Losses
A passive activity is any activity in which the taxpayer does not materially participate. Such activities include rental activities
what if net passive activity result in loss
1- DEDUCTED only to the extent of income from all passive activities.
2- TAKE CARE it is not be deducted against wages…etc
3- UNUSED passive activity losses - .Suspended losses are used to offset passive income in future years (carry forwarded)
4- IF STILL unused, suspended losses become fully tax deductible in the year the property is disposed of (sold).
what is exception for net passive loss ?
Read Page R1 44.
L.Unemployment Compensation
include in gross income the full amount received
M .Social Security Income
1 . Low Income No taxable (below single $25,000
MFJ $32,000).
2 . Lower Middle Income = Less than 50% of are taxable.
- Middle Income = 50% of are taxable (income over: single $25,000/MFJ $32,000).
- Upper Middle Income = Between 50% and 85% of are taxable.
- Upper Income = 85% of are taxable (income over: single $34,000/MFJ $44,000).
N .Taxable Miscellaneous Income - Prizes and Awards
An exclusion from income for certain prizes and awards applies where the winner is selected for the award without entering into a contest (i.e., without any action on the winner’s part) and assigns the award directly to a governmental unit or charitable organization .
N .Taxable Miscellaneous Income - Gambling Winnings and Losses
1- gambling losses deducted to the extent of gambling winnings.
2- Deductible on Schedule A as an itemized deduction, BUT the amount is not subject to the 2% of AG I limitation on miscellaneous itemized deductions.
N .Taxable Miscellaneous Income - Business Recoveries
if a damage award is compensation for lost profit,
the award is income
N .Taxable Miscellaneous Income - Punitive Damages
Punitive d a mages are fully taxable if received in a business context or for loss of personal reputation . Punitive damages received by an individual in a personal injury case are also taxable except in wrongful death cases where state law has limited wrongful death awards to punitive damages only
O. Partially Taxable M miscellaneous Items-Scholarships and fellowships
are excludable only up to amounts actually spent on
tuition, fees, books, and supplies (not room and board) provided:-
a.The grant is made to a degree-seeking student
b.No services are to be performed as a condition to receiving the grant
P. Nontaxable Miscellaneous Items
1- Life Insurance Proceeds
2- Gifts and Inheritances
3- Medicare Benefits
4 -Workers’ Compensation
5- Personal (Physical) Injury or Illness Award
6- Accident Insurance-Premiums Paid by Taxpayer
7- Foreign-earned Income Exclusion
