R1 - Big topic 3/3 - individual tax - Gross Income Flashcards
I. Gross Income in general
Gross income = All income from whatever source derived.
Taxable -> basis = FMV
Nontaxable -> basis = adjusted basis (Net book value)
- *Characterization of Income (4 Baskets of income)
1. Ordinary income (salaries, wages, self-employment (schedule c) income)
2. Portfolio (interests and dividends)
3. Passive (Rental activity) **only passive losses can offset passive income. -> rental income and Benefits from S Corp
4. Capital (capital gain and capital loss)
II. Specific items of income and exclusions
A. Salaries and wages B. Interest Income (Schedule B) C. Dividends Income (Schedule B) D. Stat and local tax refund E. Payments pursuant to a Divorce F. Business income or loss, (Schedule C or C-EZ) G. Farming Income H. Gains and losses on disposition of property I. IRA Income J. Annuities K. Rental income (passive income) L. Unemployment Compensation M. Social Security Income N. Taxable Miscellaneous Income O. Partially Taxable Miscellaneous Items - Scholarships and Fellowships P. Nontaxable miscellaneous Items
II. Specific items of income and exclusions
A. Salaries and wages
- Money
- Property (taxable so it is fair market value)
- Cancellation of Debt
- Bargain purchase (FMV - Employee bargain price = taxable income)
- Guaranteed payment to a par (partnership, reasonable compensation)
- taxable fringe benefits
- > the FMV of a fringe benefits that not excluded by law = taxable) example: employee use of a company car. - partially taxable fringe benefits
- > employer paid life insurance policy, the first $50,000 is NOT taxable. AFTER $50,000 -> TAXABLE.
II. Specific items of income and exclusions A. Salaries and wages - taxable fringe - partially taxable fringe - nontaxable fringe
taxable fringe = not law excluded (required) benefits
partially taxable = life insurance, first 50,000 (coverage amount) not taxable. over 50,000 coverage = paid taxable MAX COVERAGE = 50,000
example -
50,000 coverage, paid 500 -> tax free
60,000 coverage, paid 600 -> 100 taxable and in W2
nontaxable taxable =
1. life insurance proceeds (because of death) = nontaxable
BUT, interests on income element on deferred payout arrangements is fully taxable. (interests income, reinvestment)
2. Employer paid Accident, medical, and health insurance (nontaxable)
3. Employer payment of employee educational exp - nontaxable
max = 5,250, BS and MBA are OK/
4. Pension plan (401k)
-> nontaxable when employer contributing
-> taxable when you withdrawal the money
- Flexible Spending Arrangement (FSA)
deduct from pre-tax salary by employer. Deposit. and to pay for qualified health care and/or qualified dependent care costs.
II. Specific items of income and exclusions
B. Interest income (schedule B)
- taxable interests income
Bonds (federal, industrial, corporate),
Premium received for opening a saving account (Prize)
Interests paid by the federal or state government for late payment of tax refund
amortization of bond premium -> decrease bond int.; decrease bond basis; decrease tax （premium会三低）
amortization of bond discount -> increase bond int. increase bond basis, increase tax （discount会三高）
- nontaxable interests income
(reportable but not taxable)
- interests on state and local government bonds (tax free)
- Series EE (US Saving bond) “pay for educational expenses”
- Veterans admin insurance - Kiddie tax (unearned income of a kid)
GR - under 18 kids, net unearned income taxed at parent’s rate.
net unearned income kid
0 - 1,000 tax free
1001 - 2000 kid’s rate
2001 + parent’s rate
short answer: total kids unearned income - 2000 = tax at parent’s rate
- Forfeited interest
small interests but with early withdrawal penalty of savings.
C. Dividends Income
current e&p - taxable
accumulated e&p - taxable
return of capital - non taxable
capital gain (no basis) - taxable
Stock split = nontaxable
Stock dividends = non taxable (IF there is a OPTION of choosing CASH or Other Property) you dont have to elect that option, but if there is an option. then stock dividends is taxable @ FMV.
D. State and local tax refund
Itemized in prior year = state or local refund is taxable
Standard deduction (1040 EZ) used in prior year = non taxable ** **taxed paid did not result in a tax benefit in prior year.
- *late tax refund interests is taxable.
- *1040 EZ is for standard deduction.
E. Payment pursuant to a divorce
- Alimony = INCOME to the spouse receiving the payment, –> taxable for receiver. adjustment for distributor
* *legally required
* *must be in cash or equivalent
* *cannot extend the death - Child support
- nontaxable
- first come to child support then to alimony 顺序 - Divorce property settlement (nontaxable)
amount realized
- adj basis give out
= gain (HIDE IT)
F. Business income or loss (schedule C or C-EZ)
Self employed
- gross income and expenses
CORE Formula (self employment, Sole proprietorship)
Gross Business income
- (business expenses)
= profit / loss
**Gross Income (Cash, Property@FMV, and COD)
- *Expenses
- cost of goods
- salaries paid to others
- state and local business taxes paid
- office supplies
- actual auto expense OR standard mileage rate
- 50% of business meal and entertainment (MUST Direct relate to business)
- depreciation of business assets
- INTEREST PAID on business loan (必须是accrual 花哪儿算哪儿 不能pay in advance 然后全deduct掉）
- employee benefits
- legal and professional services
- bad debts must be direct write off method (must use direct w/o, not allowance method for tax)
- *Not deductible in expenses
- salaries for yourself
- federal income tax
- personal portion of automobile, travel, vacation expenses
- bad debt expense for cash basis taxpayer (who never report the income in the first place)
- *health insurance of sole proprietor (not deductible in expenses, but it is deductible in adjustments)
- *charitable contribution - not deductible in expenses, but it is an itemized deduction.
F. Business income or loss (schedule C or C-EZ)
Self employed
- gain and loss
back to the core formula
gross business income
- business expenses
= gain or losses
Gain = two taxes
- income tax (“employer half”)
- federal self-employment (S/E) Tax (“employee half”)
Loss =deductible and can offset other incomes
excess loss = cb 2, cf 20
***延伸
corporate capital loss
1. can only offset capital gain
2. cb 3 cf 5
corporate operating loss
- no offset
- cb 2 cf 20
individual capital loss
- deductible others max 3000
- cb 0 cf unlimited
individual operating loss
- deductible others
- cb 2 cf 20
F. Business income or loss (schedule C or C-EZ)
Self employed
- uniform capitalization rule
Capitalized as Inventory
- DM
- DL
- Factory Overhead
Periodic expense
- Selling
- General
- Administrative
- Research and development
F. Business income or loss (schedule C or C-EZ)
Self employed
- long term contracts
GR - must use percentage method (accrual gain as going)
Exceptions (can use completion method)
- small contractors
- home construction contractors
- service performed by architects, engineers, designers, construction management advisor, software implementation personnel related to the long term project
- services performed under warranty and maintenance agreements related to the long term contract
**long term contract period define
start date: the date incurs cost
end date: the end of completion
**percentage method income recognition
cost-to-cost method:
total actual cost to-date / total est. cost = c-to-c ratio
c-to-c ratio X (Sales price - total est cost) = total income to date
total income to date - prior year income = this year income
G. Farming income (schedule F)
GR - using Schedule F, farming activities is treated the same as income from other business activities.
cash basis
- most farmer use cash method
- no inventory; cost of inventory = pure expenses, deduct from income
accrual basis
- required for certain corp and partnership and for all farming tax shelters
- inventory = inventory
H. Gains and losses on disposition of property
amount realized
- adjusted basis of asset sold
= gain/ loss
I. IRA Income
(withdrawing funds from IRA)
GR
Exceptions: HIMＤＥａＤ
GR - cannot withdrawn until 59 and 1/2 years old.
Taxation on distribution (benefits) = 1 regular tax + 1 penalty tax for early withdrawal
1. Regular tax
ordinary income (taxable)
Roth IRA - withdrawal tax free
traditional IRA - principal (taxfree); interest (taxable)
- Penalty 10% tax
Exceptions to penalty tax (HIMDEaD) H - 1st time Home buyers - 10,000 max exclusion if distribution used to buy 1st house I - Insurance (medical) M - Medical expenses in excess 10% of AGI D - Disability E - Education a - and D - Death
