REG 1 - Gross Income: Part 1

Question 1

What are two examples of taxable interest income?

Answer 1

1) Interest income from federal bonds

2) Interest paid by the federal or state government for late payment of tax refund

Question 2

What are three examples of tax-exempt interest income?

Answer 2

1) State and local govt bonds
2) Bonds of a U.S. possession, such as Guam and Puerto Rico
3) Series EE (U.S. Savings Bonds)

Question 3

Define Series EE (U.S. Savings Bonds) issued after 1989?

Answer 3

• Used to pay for higher education
• Interest on Series EE bonds is tax-exempt
• Think of EE as Education Expenses
• Registered bonds should be registered to taxpayer (and spouse) with child as beneficiary

*Series EE bonds are phased-out when modified AGI is $78,150 for single filers and $117,250 for married filing jointly and head of house filers.

Question 4

At what value are cash and property dividends taxable?

Answer 4

1) Cash = amount received

2) Property = fair market value

Question 5

What are examples of tax-free distributions (which don’t get included in gross income)?

Answer 5

1) Return of capital
- no earnings and profits
2) Stock split
3) Stock dividend
- unless you had the option of getting cash/property (then it is taxable)
4) Life insurance dividend

Question 6

Define capital gain distributions? Are capital gain distributions included in taxable or nontaxable gross income?

Answer 6

Capital gain distributions are distributions where there is:
1) No earnings and profits
AND
2) Shareholder recovered basis

• They are treated as taxable gross income

Question 7

How are state and local tax refunds treated as they relate to taxable or nontaxable income?

Answer 7

1) Itemized deduction in prior year - state and local tax refunds are TAXABLE income this year. (Last year’s itemized less last year’s standard deduction or full refund amount - WHICHEVER IS LESSER)
2) Standard deduction in prior year - state and local tax refunds are NONTAXABLE income this year.

Question 8

How are alimony payments treated for contributing spouse and receiving spouse?

Answer 8

• Spouse contributing alimony can use as adjustment (deduction to arrive at AGI).
• Spouse receiving alimony will include as income.

Question 9

What is the criteria for payments to be deemed alimony?

Answer 9

To be deemed alimony:

1) Payments must be legally required
2) Payments must be in cash or its equivalent (e.g. pay credit card bill, pay college fees)
3) Cannot extend beyond death of payee

Question 10

How are child support payments treated for contributing spouse and receiving spouse?

Answer 10

• Spouse contributing child support - non deductible

- Spouse receiving child support - nontaxable

Question 11

How is child support treated if there are alimony payments as well?

Answer 11

If payments include child support and alimony, payment applies to child support first.

Question 12

How are distributions of deductible IRA treated?

Answer 12

When a person retires, the funds received will be taxed as ordinary income.

Question 13

How are distributions of nondeductible IRA treated?

ROTH AND TRADITIONAL

Answer 13

1) Roth IRA: All qualified benefits received from are NONTAXABLE.

2) Traditional IRA:
- Principle: NONTAXABLE
- Accumulated Earnings: TAXABLE (when withdrawn)

Question 14

Define the penalty on prematurely withdrawing IRA distribution? What is the exception to penalty on prematurely withdrawing IRA ? HIMDEAD

Answer 14

Prematurely withdrawing IRA distribution is subject to 10% penalty + regular income tax, EXCEPT:

H - Home buyer (first time) - up too $10,000
I - Insurance (medical)
M - Medical expenses in excess of 10% of AGI
D - Disability (permanent disability)
E - Education
AND
D - Death