R1 Gross Income Flashcards
What are the four categories of individual income?
Ordinary income (wages and salaries) Portfolio income (dividends and interest) Passive income (real estate investment and limited partnership) Capital income
Define gross income
It includes all income from whatever source derived unless specifically excluded
Name some nontaxable fringe benefits (exclusions)
- De minimis fringe benefits
- Qualified tuition reduction
- Qualified employee discounts
- Employer paid accident, medical, and health insurance
- Unless specifically excluded by law the fringe is included in gross income
Are life insurance premiums paid by an employer taxable to the employee?
Premiums on the first $50,000 is not included in gross income and premium over $50,000 should be included
Examples of exempt interest
- State and local government bonds
- Bonds in U.S possession
- Series EE (U.S Savings Bond) if used for educational expenses
- Interest on Veterans Administration insurance
What is the tax treatment of unearned income of a child who falls under the kiddie tax rules?
Net unearned income is taxed at the parents’ higher tax rate
Income Tax rate
$1000 0%
$1001 to $2000 Child rate 10 or 15
$2001 and over Parents rate
Tax treatment on property settlements in a divorce
Either monetary payment or property:
Not taxable to receiving spouse
Not deductible to transferring spouse
What are the requirements for alimony to be deductible by paying spouse and taxable by receiving spouse?
- Payments must be legally required pursuant to a written decree
- Payments must be in cash or its equivalent
- Payments cannot extend beyond the death of the payee
- Payments cannot be made to members of the same household
- Payments must not be designated to other than alimony
- The spouse may not file a joint tax return
- If any part of alimony is child support it is not taxable and payments are first applied to child support
Describe the self employment tax
- All net self-employment income is subject to 2.9% medicare tax, but only self-employment income up to $113,700 is subject to 12.4% social security tax total of 15.3%
- An adjustment of one half (7.65% up to $113,700 plus 1.45% after) of self employment tax paid
On what property do the uniform capitalization rules apply?
- Real or tangible personal property produced by taxpayer to be used in the trade or business
- Real or tangible personal property produced by taxpayer for sale to customer (manufacturer’s inventory)
- Real or tangible personal property purchased by taxpayer for resale (retail inventory)
- *Exception: rules do not apply for resale of goods if gross receipts for the last 3 years do not exceed $10 millions annually
When are funds in a nondeductible IRA taxable?
- Withdrawals are partially taxable, contributions (principal) is non taxable, accumulated earnings on the contributions are taxable when taken out.
- A pro rata allocation is applied to distributions to determine the taxable amount
What is the formula to determine the excludable portion of an annuity?
Investment in contract / age factor (in months) = excluded $
If the owner lives longer all payments after the factor months are fully taxable, if owner dies before the amount not collected is an itemized deduction on the final tax return not subject to 2% limitation
When are premature distributions of an IRA excluded to the 10% penalty? HIM DEAD
H - home buyer for first time limit is $10,000 used within 120 days
I - insurance (medical) if unemployed with 12 consecutive weeks of unemployment compensation and self employed who are otherwise eligible for unemployment compensation
M - medical expenses over 10% limit (7.5% if 65 or older) of AGI
D - disability permanent or indefinite but not temporary
E - education: tuition, books, fees etc.
And
D - death
How is rental income for a vacation home treated?
- If rented less than 15 days is personal residency
- If rented 15 or more day and personal use is not more than 14 days or 10% of days rented is rental property
- If rented 15 or more days and personal use is greater than 14 days or 10% of days rented allocate rental expenses to the extent of rental income (no loss)
- *If treated as personal income is excluded and deductions for mortgage interest and taxes are all included is schedule A. No other deductions allowed for utilities
- *If treated as rental property report income and deductions on schedule E, first allocate mortgage interest and taxes between actual months in the year, utilities are allocated using the actual months of usage rental/personal
Define passive activity and give some examples
- Is an activity in which the taxpayer does not materially participate
- Examples: rental activities, interest in limited partnerships, and S corporations
