R1-M2 Gross Income 1

Question 1

what are types of salaries & wages?

Answer 1

• money: received, credited, available
• property: FMV
• Bargain Purchases: employers sell property to employees at price less than its FMV. the difference is income to employees
• guaranteed payments to partners: subject to self employment tax
• taxable fringe benefits (non statutory): anything not specifically excluded is includable in income. ex: employee’s personal use of a company car is included as wages in employee’s income. even if employee’s spouse uses the car only
• portion of life insurance premiums: not income to employees up to the cost on the first $50k of coverage per employee

Question 2

what are nontaxable fringe benefits?

Answer 2

• Life insurance coverage: up to $50k
• accident, medical, and health insurance (employer-paid)
• de minimis fringe benefits
• meals and lodging
• employer payment of employee’s educational expenses: up to $5,250
• employee adoption assistance program
• dependent care assistance
• qualified tuition reduction:
• qualified employee discounts
• employer-provided parking: up to $300/month
• transit passes
• qualified retirement plans
• flexible spending arrangement

Question 3

what are type of interest income?

Answer 3

• interest from below is Taxable:
  + federal bonds such as U.U. Treasury bonds
  + industrial development bonds
  + corporate bonds
  + part of proceeds from an installment sale
  + federal & state government for late payment of a tax refund
• interest from below is tax-exempt interest
  + state and local government bonds/obligations such as municipal bonds
  + bonds of U.S possession
  + U.S series EE (education expense) savings bonds: issued after 1989 is exempt when
  
  • used to pay for higher education (reduce by tax-free scholarships) of taxpayer, spouse, or dependents
  • taxpayer is 24 yrs old when bold is issued
  • purchaser of the bonds must be the sole owner of the bonds (or joint with his or her spouse)
  • a married taxpayer files a joint return; and
  • taxpayer meets certain income requirements
  • phased out applied when modified AGI reaches a certain level
• Forfeited interest: penalty on withdrawal from saving. treated as an adjustment as a separate deduction not netted with interest income

Question 4

what are dividend income?

Answer 4

• corporate E&P
• no E&P and taxpayer has basis in stock: nontaxable and reduces basis of stock = return of capital
• no E&P and no stock basis: taxable capital gain income
• Qualified dividend if stock must be held for more than 60 days during the 120-day period
• stock dividend: regardless of choice, it is taxable
• life insurance dividend: nontaxable

Question 5

what are types of IRA distributions

Answer 5

• Traditional IRA:
  + nondeductible traditional IRA distribution
  + deductible traditional IRA distribution
• Roth IRA:
  + Qualified Roth IRA distribution (hold for at least 5 years)
  + non-qualified Roth IRA distribution

Question 6

what are the 10% penalty rule for IRA?

Answer 6

• Early withdraw : subject to regular tax + 10% penalty
• exemption to 10% penalty but still pay regular tax: HIM DEAD
  + first time Home buyer: max $10k
  + Insurance: medical
  + Medical
  + Disability: $22k max
  + Education: college tuition, books, fees, etc
  + Adoption or birth: $5k max
  + Death or terminal illness

Question 7

what should taxpayer report as gross income?

Answer 7

income is either actually or constructively received, whether in cash or in property during the year

Question 8

what information to know about annuities?

Answer 8

• It is a contract b/w taxpayers and insurance companies, in which taxpayers contribute a lump-sum or a series of payments to the insurance company and receive annuity payments in return
• each payment received by taxpayers consists of:
  + return on investment (contribution): nontaxable
  + earnings: taxed as ordinary income
• 2 types:
  + fixed period annuities: payments are received over a fixed period of time.
  
  • expected value of annuity = amount of each payment x numbers of payments
  • calculate annuity exclusion (nontaxable) ratio = original investment / expected value
    + life annuities: payments are received over the taxpayer’s life time
  • nontaxable return of capital = original investment / IRS life expectancy factor
  • taxable portion = amount each payment - nontaxable return of capital

Question 9

what information to know about social security income?

Answer 9

• taxpayers are classified into five categories depending on level of modified AGI (AGI + tax-exempt interest + 50% SS benefits)
• 5 categories:
  + low income: SS benefits are not taxable if income equal to or less than $25k for single; or equal or less than $32k for MFJ
  + low middle income: less than 50% of SS benefits are taxable
  + middle income: 50% of SS benefits are taxable (income over $25k for single and $32k for MFJ)
  + Upper middle income: between 50-85% of SS benefits are taxable
  + Upper income: 85% of SS benefits are taxable ($34k for single and $44k for MFJ)