REG - Included In GI

Question 1

How is property value determined for inclusion in GI?

Answer 1

Property received as compensation is included in income at FMV on the date of receipt.

Question 2

What value is a bargain purchase from an employer by an employee included in GI at?

Answer 2

FMV less amount paid.

Question 3

Are life insurance premiums paid by an employer included in GI?

Answer 3

Yes, except for group-term life insurance coverage of $50K or less.

Question 4

Are employee expenses paid or reimbursed by the employer included in GI?

Answer 4

Yes, unless the employee has to account to the employer for the expenses and they would qualify as deductible business expenses for the employee.

Question 5

What amount must be included in GI for tips?

Answer 5

If amount received is less than $20 while working for one employer during one month, the tips do not need to be reported to the employer, but must be included in individual’s GI.
If amount is $20 or more while working at one employer during one month, must report total amount of tips to employer by the 10th day of the following month for withholding and SS tax. Total amount of tips must be included for the month reported to the employer.

Question 6

Are amounts received from partnerships included in GI?

Answer 6

The distributive share of partnership or S Corporation income is included in GI.

Question 7

What is the treatment of bond premium for GI?

Answer 7

If TP elects to amortize bond premium on taxable bonds acquired after 1987, any bond premium amortization is treated as an offset against the interest earned on the bond. The amortization of bond premium reduces taxable income (by offsetting interest income) as well as the bond’s basis.

Question 8

What is the income treatment for imputed interest from interest-free loans?

Answer 8

1) Borrower is treated as making imputed interest payments (subject to same deduction restrictions as actual payments) and lender reports as interest income.
2) Lender is treated as making gifts (for personal loans) or paying salary or dividends (for business-related loans or corp-shareholder loans) to the borrower.
3) Rate used to impute the interest is tied to average yield on certain federal securities and is compounded semiannually. If federal rate greater than rate on a low-interest loan, interest only imputed for excess. (a) for demand loans, the deemed transfers are generally treated as occurring at the end of each year, and will fluctuate with interest rates. (b) for term loans, the interest payments are determined at the date of the loan and then allocated over the term of the loan; lender’s payments are treated as made on the date of the loan.
4) No interest is imputed to either the borrower or the lender for any day on which the aggregate amount of loans between such individuals (and their spouses) does not exceed $10,000.
5) For any day that the aggregate amount of loans between borrower and the lender (and their spouses) does not exceed $100,000, imputed interest is limited to borrower’s “net investment income”; no interest is imputed if borrower’s net investment income does not exceed $1,000.

Question 9

What is the income treatment for Alimony (and separate maintenance payments)?

Answer 9

Alimony is included in the recipient’s GI and is deductible toward AGI by the payor.

Question 10

What are requirements for payments to be considered alimony?

Answer 10

(1) Made pursuant to a decree of divorce or written separation instrument
(2) Made in cash and received by or on behalf of the payee’s spouse
(3) Terminate upon death of the recipient
(4) Not be made to a member of the same household at the time the payments are made
(5) Not be made to a person with whom the TP is filing a joint return
(6) Not be characterized in the decree or written instrument as other than alimony (such as child support)

Question 11

What is the alimony recapture rule?

Answer 11

Alimony recapture may occur if payments sharply decline in the second or third years. The payor reports the recaptured alimony from the first and second years as income (allowing the payee to deduct the same amount) in the third year.
-recapture for the 2nd year occurs to the extent that alimony paid in 2nd year exceeds 3rd year alimony by more than $15K.
-recapture for 1st year occurs to extent that alimony paid in 1st year exceeds average alimony paid in the 2nd year (reduced by the recapture for that year) and 3rd year by more than $15K.
(recapture does not apply to any year where payments terminate as a result of the death of either spouse or the remarriage of the payee)
(recapture does not apply to payments that may fluctuate over three years or more and are not within the control of the payor spouse [e.g., 20% of the net income from a business]).

Question 12

How is child support treated for income purposes?

Answer 12

Child support is NOT gross income to the payee and is NOT deductible by the payor.

• if the decree/instrument specifies both alimony and child support but the spouse pays less than required, amounts are first allocated to child support, and any remainder is allocated to alimony.
• if specified amount of alimony is reduced upon the happening of some contingency relating to a child, then the amount equal to the specified reduction is treated as child support instead of alimony.

Question 13

What amount of social security, pensions, annuities (other than the excluded recovery of capital) is included in GI?

Answer 13

Up to 50% of social security retirement benefits may be included in GI if the TP’s provisional income exceeds threshold. The amount to include in GI is the lesser of
(1) 50% of the social security benefits, or
(2) 50% of the excess of the TP’s provisional income over the base amount.
Up to 85% of the social security retirement benefits may be included in GI for TP’s with provisional income above a higher 2nd threshold:
(1) 85% of TP’s social security benefits, or
(2) The sum of (a) 85% of the excess of the TP’s provisional income above the applicable higher threshold amount plus (b) the smaller of (i)amount of benefits included in lower threshold, or (ii) $4,500 for single TPs or $6,000 for married filing jointly.

Question 14

What are the provisional income thresholds for social security benefit inclusion in GI?

Answer 14

Lower threshold = $32K for joint return, $0 for married filing separately, and $25K for all other TPs.
Higher threshold = $44K for joint return, $0 for married filing separately, $34K for all other TPs.

Question 15

What is the provisional income formula for determination of social security benefits inclusion in GI?

Answer 15

AGI + tax-exempt income + 50% of the social security benefits.

Question 16

What is the “rule of thumb” regarding social security retirement benefits?

Answer 16

Fully excluded by low-income TPs (provisional income < $25K).
85% of benefits included by high-income TPs (provisional income > $60K)

Question 17

Are lump-sum distributions from pension, profit-sharing, stock bonus, and Keogh plans (not IRAs) eligible for special tax treatments?

Answer 17

Yes, the portion of the distribution allocable to pre-1974 years is eligible for long-term capital gain treatment.

• if EE born before 1936 may elect ten-year averaging
• Alternatively, the distribution may be rolled over tax-free (within 60 days) to a traditional IRA, but subsequent distributions from the IRA will be treated as ordinary income.

Question 18

What is income in respect of a decedent?

Answer 18

Income that would have been income of the decedent before death but was not includable in income under the decedent’s method of accounting (e.g., installment payments that are paid to a decedent’s estate after his/her death).
-the income has the same character as it would have had if the decedent had lived and must be included in Gi by the person receiving it.

Question 19

Are supplemental unemployment benefits income?

Answer 19

Yes, employer paid supplemental unemployment benefits or strike benefits from union funds are included in income.

Question 20

Are fees received for jury duty included as income?

Answer 20

Yes, so are fees received as executor, administrator, director, and precinct election board duty.

Question 21

Does an incentive stock option get included in GI?

Answer 21

Yes, but receives favorable tax treatment if it meets certain technical requirements to qualify.

• no income is recognized by the employee when option is granted or exercised.
• if EE holds the stock acquired through exercise of the option at least 2 years from date option granted, and holds the stock itself at least one year, then EE’s realized gain will be long-term capital gain. The employer receives no deduction.
• if holding period requirements are not met, EE has ordinary income to the extent the FMV at date of exercise exceeds option price. (1) remainder of gain is short-term or long-term capital gain; (2) employer receives a deduction equal to the amount EE reports as ordinary income.
• incentive stock option may be treated as a nonqualified stock option if a corporation so elects at the time the option is issued.

Question 22

Is a nonqualified stock option included in income?

Answer 22

Yes, it is included in income when received if the option has a determinable FMV.

1) if no ascertainable FV when received, then income arises when option is exercised; to the extent of the difference between the FV when exercised and the option price.
2) amount recognized (at receipt or when exercised) is treated as ordinary income to EE; employer is allowed a deduction equal to amount included in EE’s income.

Question 23

How are options obtained through an employee stock purchase plan treated for income purposes?

Answer 23

A plan that does not discriminate against rank and file EEs:

• no income when EE receives or exercises option
• if EE holds stock at least 2 years after option granted and at least 1 year after exercise, then (1) EE has ordinary income to extent of the lesser of (a) FMV at time option granted over option price, or (b) FMV at disposition over option price; and (2) capital gain to the extent realized gain exceeds ordinary income.
• if stock not held for required time, then (a) EE has ordinary income at the time of sale for the difference between FV when exercised and the option price (this amount also increases basis), and (b) capital gain or loss of the difference between selling price and increased basis.

Question 24

Can prizes or awards be excluded from gross income?

Answer 24

Prizes and awards received for religious, charitable, scientific, educational, artistic, literary, or civic achievement can be excluded only if the recipient:
1) was selected w/o any action on their part
2) is not required to render substantial future services
3) designates that the prize or award is to be transferred by the payor to a governmental unit or a tax-exempt charitable, educational, or religious organization
The prize or award is excluded, but no deduction is allowed for the transferred amount.

Question 25

Are employee achievement awards included in income?

Answer 25

Employee achievement awards are excluded from EE’s income if the cost to the employer does not exceed the amount allowable as a deduction (generally from $400 to $1,600).

• award must be for length of service or safety achievement and must be tangible personal property (cash not qualified)
• if cost of award exceeds amount allowable as deduction to employer, EE must include in GI the greater of (a) portion of cost not allowable, or (b) excess of award’s FMV over the amount allowable as a deduction.

Question 26

What is the tax benefit rule?

Answer 26

A recovery of an item deducted in an earlier year must be included in GI to the extent that a tax benefit was derived from the prior deduction of the recovered item.

• tax benefit derived if the previous deduction reduced the TP’s income tax
• recovery is excluded from GI to the extent that the previous deduction did not reduce the TP’s income tax (e.g., TP subject to alternative minimum tax and the deduction was not allowed in computing AMTI, certain items deductible on Schedule A but the TP did not itemize that year).

Question 27

When is the FMV of property or services received as payment determined for income purposes?

Answer 27

FMV on date of receipt is used for income reporting.

Question 28

Are payments received for foster care of a child considered income?

Answer 28

No, no amount is treated as income to the foster care providers.

Question 29

Are deposits on rental property included in income?

Answer 29

Only if non-refundable deposits.

Question 30

When are tips considered income?

Answer 30

In the month they are reported to business owner (if needed to report) or in month received if not needed to report.

Question 31

When is rental income included in GI?

Answer 31

When received regardless of if it is paid in advance.