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

Question 1

I. GROSS I NCOME I N GEN ERAL

Answer 1

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)

Question 2

A. Salaries & Wages - General

Answer 2

1- Money
2- Property
3- Cancellation of Debt
4- Partially Taxable Fringe Benefits-
5- Nontaxable Fringe Benefits

Question 3

A. Salaries & Wages - Partially Taxable Fringe Benefits

Answer 3

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.

Question 4

A. Salaries & Wages - General - Nontaxable Fringe Benefits

Answer 4

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)

Question 5

B. Interest Income - Taxable

Answer 5

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

Question 6

B. Interest Income - Tax Exempt (reportable but not taxable)

Answer 6

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

Question 7

B. Interest Income - Unearned Income of a Child under 18 (“kiddie tax”)

Answer 7

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.

Question 8

B. Interest Income - Forfeited Interest (Adjustment)

Answer 8

Penalty on Withdrawal From Savings - see R2

Question 9

C. Dividend Income - Sources

Answer 9

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

Question 10

C. Dividend Income - Taxable

Answer 10

(a) Cash Received

(b) . Property = FMV

Question 11

C. Dividend Income - Tax rate

Answer 11

1- 15 % - most tax payers
2- 0% low income taxpayers
3- 20% High income taxpayers

Question 12

C. Dividend Income - Exempt (tax free distributions)

Answer 12

(1 ) .Return of Capital

(2) .Stock Split
(3) . Stock Dividend
(4) . Life I nsurance Dividend

Question 13

C. Dividend Income - Taxable Capital Gain Distribution

Answer 13

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

Question 14

D. State and Local Tax Refunds

Answer 14

1- Itemized in prior year - TAXABLE

2- Standard deduction used in prior year - NONTAXABLE

Question 15

E. Payments Pursuant to a Divorce - Alimony/Spousal Support (income)

Answer 15

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.

Question 16

E.Payments Pursuant to a Divorce - Child Support

Answer 16

1-. Nontaxable - to ex-spouse receiving the $
2- Payment Applies fist to Child support.
3- Property Settlements (nontaxable).

Question 17

F. Business Income or Loss

Answer 17

Part 1 - Income 
Part 2- Expenses 
Part 3- Cost of goods sold
Part 4 - Information on your vehicle
Part 5 - Other expenses .

Question 18

F. Business Income or Loss - Income Recognition

Answer 18

1- Percentage-of-Completion Method Required for Tax for Non-Exempt Long-term Contracts

Question 19

F. Business Income or Loss -exemption Income Recognition

Answer 19

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

Question 20

F. Business Income or Loss - Expenses highlights

Answer 20

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

Question 21

F. Business Income or Loss - Nondeductible Expenses

Answer 21

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

Question 22

F. Business Income or Loss - Change in accounting method

Answer 22

cannot be changed for the contract without consent of the I RS

Question 23

F. Business Income or Loss - Unique “ rules for personal property contracts

Answer 23

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

Question 24

G. Farming Income - Cash Basis

Answer 24

1 ) Most farmers use the cash basis

2). Inventories of produce, livestock, are not considered

Question 25

G. Farming Income - Accrual Basis

Answer 25

(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

Question 26

H. Gains and Losses on Disposition of Property

Answer 26

(covered in detail in the R4 lecture)

Question 27

I. IRA Income صندوق معاشات - Regular Tax

Answer 27

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

Question 28

I. IRA Income - Roth IRA (صناديق معاشات خاص)

Answer 28

All qualified benefits received from a Roth IRA are nontaxable

Question 29

I. IRA Income - Traditional Non-deductible IRA (صناديق معاشات خاص

Answer 29

(i) Principal-nontaxable

ii) Accumulated earn ings-taxable (when withdrawn

Question 30

what is Penalty Tax

Answer 30

ضريبه 10% على توزيع المعاشات السابق لاوانه .

Question 31

Exception to penalty Tax

Answer 31

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

Question 32

J . Annuities

Answer 32

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

Question 33

J . Annuities - Calculation

Answer 33

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

Question 34

what if Annuitant Live Longer than Actuarial Payout Period

Answer 34

further payments are fully taxable

Question 35

what if Annuitant Died before Full Recovery

Answer 35

unrecovered portion is a miscellaneous itemized deduction on the annuitant’s final income tax return not subject to the 2% of AG I floor

Question 36

K - Rental Income

Answer 36

Net Rental Income
G ross Rental Income
Prepaid Rental Income
Rent Cancellation Payment
Improvement In-Lieu-of Rent

Question 37

K - Rental Income - Rental of Vacation Home

Answer 37

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.

Question 38

K - Rental Income - Passive Activity Losses

Answer 38

A passive activity is any activity in which the taxpayer does not materially participate. Such activities include rental activities

Question 39

what if net passive activity result in loss

Answer 39

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).

Question 40

what is exception for net passive loss ?

Answer 40

Read Page R1 44.

Question 41

L.Unemployment Compensation

Answer 41

include in gross income the full amount received

Question 42

M .Social Security Income

Answer 42

1 . Low Income No taxable (below single $25,000
MFJ $32,000).

2 . Lower Middle Income = Less than 50% of are taxable.

3. Middle Income = 50% of are taxable (income over: single $25,000/MFJ $32,000).
4. Upper Middle Income = Between 50% and 85% of are taxable.
5. Upper Income = 85% of are taxable (income over: single $34,000/MFJ $44,000).

Question 43

N .Taxable Miscellaneous Income - Prizes and Awards

Answer 43

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 .

Question 44

N .Taxable Miscellaneous Income - Gambling Winnings and Losses

Answer 44

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.

Question 45

N .Taxable Miscellaneous Income - Business Recoveries

Answer 45

if a damage award is compensation for lost profit,

the award is income

Question 46

N .Taxable Miscellaneous Income - Punitive Damages

Answer 46

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

Question 47

O. Partially Taxable M miscellaneous Items-Scholarships and fellowships

Answer 47

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

Question 48

P. Nontaxable Miscellaneous Items

Answer 48

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