REG 1 - Gross Income: Part 1

Question 1

How are annuities treated as they relate to taxable and nontaxable income?

Answer 1

Treat investment (amount paid to you) as depreciation

Example: Annuitant invests $60,000 to be paid starting at 64 years old over 260 months:

$60,000 / 260 = $230.77

• $230.77 is nontaxable, but amounts paid greater than that are taxable.

Question 2

What is the outcome of an annuitant living longer than payout period? What is the outcome of an annuitant dying earlier than full recovery of payout?

Answer 2

• If annuitant lives longer than payout period, then all amounts of payout are taxable.
• If annuitant dies before payout period ends, then the amount not recovered is a miscellaneous itemized deduction NOT subject to 2 percent of AGI floor.

Question 3

Define the difference between unemployment compensation and workers’ compensation?

Answer 3

• Unemployment compensation is included in gross income

- Workers’ compensation is tax-free

Question 4

How are social security benefits taxed?

Answer 4

Low income = no social security benefits are taxable

High income = 85% of social security benefits are taxable

Question 5

How are gambling winnings and losses taxed?

Answer 5

• Gambling winnings are included in gross income.

- Gambling losses may be deducted as itemized deductions, to the extent of gamblings winnings.

Question 6

How are punitive damages taxed?

Answer 6

Punitive damages received are fully taxed as ordinary income.

Exception: punitive damages received are not taxable if there is a wrongful death

Question 7

How are scholarships taxed?

Answer 7

1) Nontaxable - tuition, fees, books, and supplies
2) Taxable - room and board, AND if services are required
* Tuition reduction - taxed on REDUCTION if that is the only compensation (teaching assistant)

Question 8

Are gifts and inheritances included in gross income?

Answer 8

Gifts and inheritances are nontaxable and are not included in gross income.