Section 2: Unit 4: Taxable and Nontaxable Income

Question 1

Threshold for SE Income Tax

Answer 1

$400

Question 2

Threshold for contractor 1099-NEC (non-employee comp) work Tax

Answer 2

$600

Question 3

Threshold for “Claim of Right Doctrine”

Answer 3

> $3,000. Can claim as a credit in the year the refund is claimed, does not have to amend prior return

Question 4

Sch C/F vs. Sch SE

Answer 4

C: Income from SE business. If MFJ, you must file 2 schedule C’s for each spouse (FICA & Medicare tax).

F: Farmer’s self-employment income

SE: FICA & Medicare calculated on this form

Question 5

Form SS-8 with 8919

Answer 5

SS-8: An employee can filed this if their wages were miscategorized - 1099 instead of W-2.
8919: To pay for the share of FICA & Medicare

Question 6

If you recieve $___ or more in tips per month, you need to report this to their employer. ALL tip income is taxable, just dependent on if you need to report it to the ER or not.

Answer 6

$20+/month

Question 7

Taxable Fringe Benefits

Answer 7

While most fringe benefits are not subject to taxes, there are some exceptions. These include certain entertainment expenses, which are no longer deductible for employers. This means that any entertainment provided to employees, such as tickets to sporting events, must now be included in their
taxable income.Some other examples of taxable fringe benefits include:
* Off-site athletic facilities and health club memberships,
* Concert and athletic event tickets,
* The value of employer-provided life insurance over $50,000,
* Any cash benefit in the form of a credit card or gift card (an exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours),
* Transportation benefits exceeding the monthly maximum ($300 per month in 2023),
* Employer-provided vehicles, if they are used for personal purposes. There is an exception for
qualified nonpersonal use vehicles (i.e., police cars, school buses, transit buses, etc.).

Question 8

Nontaxable Fringe Benefits

Answer 8

Cafeteria & Retirement Plans (401ks, FSAs)

Question 9

Publication 15-B defines “key employees” as any of the following:

Answer 9

• A company officer having annual pay of more than $215,000 in 2023 (in this case, the officer
  does not have to be an owner of the company).
• An employee who is either of the following:
  o A 5% owner of the business, or;
  o A 1% owner of the business whose annual pay is more than $150,000 in 2023.

Question 10

Per Publication 15-B, a “highly compensated
employee” is for 2023 is defined as:

Answer 10

• A company officer (i.e., company president, vice-president, treasurer).
• A 5% (or greater) shareholder in the current or prior year;
• An employee paid $150,000 or more for 2023,
• A spouse or close family member of one of the persons described above, regardless of salary
  level.

Question 11

A plan is considered to have improperly “favored” HCEs and key employees if more than __% of all
the benefits are given to those employees. If a cafeteria plan or a retirement plan fails to pass IRS non-
discrimination testing, highly compensated employees and key employees may lose the tax benefits of
participating in the plan.

Answer 11

A plan is considered to have improperly “favored” HCEs and key employees if more than 25% of all
the benefits are given to those employees. If a cafeteria plan or a retirement plan fails to pass IRS non-
discrimination testing, highly compensated employees and key employees may lose the tax benefits of
participating in the plan.

Question 12

Combat Pay:
Ashton is an Air Force pilot who served in a combat zone from January 1, 2023, to November
3, 2023. If he wanted to treat his income as nontaxable, what months would be excludable?

Answer 12

He is only required to report his income for December, because all of the other income is excluded from taxation as combat-zone pay.
Even though Ashton only served three days in November in a combat zone, his income for the entire month of November is excluded.

Question 13

1. Question ID: 94850327 (Topic: Self-Employed Taxpayers)
   Aimee is a self-employed computer programmer with multiple clients. She works as an independent contractor for Dillon Fireworks, Inc. The company sent Aimee a Form 1099-NEC that shows she received $32,000 for the work she did for them. She received a separate check for $2,800 from Dillon Fireworks for an Accountable Plan Reimbursement for mileage that she incurred while working at a satellite office that Dillon Fireworks also owns. She also received cash payments of $3,500 throughout the year for several small programming jobs. She did not receive any Forms 1099 for the $3,500. How much income should Aimee report on her Schedule C?

A. $32,000
B. $35,500
C. $34,800
D. $38,300

Answer 13

Correct Answer Explanation for B:

Aimee must include the $3,500 cash payments on her Schedule C as self-employment income along with the $32,000 that was reported on Form 1099-NEC. The amounts that she received under a qualified accountable plan as a reimbursement would not be taxable.

Question 14

. Question ID: 94815821 (Topic: Self-Employed Taxpayers)
Self-employment tax applies to which of the following individuals?

A. Investors who report only interest and dividend income.
B. Ministers reporting net earnings from self-employment of $100.
C. Independent contractors reporting net earnings from self-employment of $400 or more.
D. An individual with $2,000 in hobby income.

Answer 14

Correct Answer Explanation for C:

Independent Contractors reporting net earnings from self-employment of $400 or more would be subject to self-employment tax. Unearned income, such as capital gains, interest, dividends, and non-business income (such as hobby income, prizes, or income from a lawsuit, etc.) are typically not subject to self-employment taxes. The starting point for self-employment income to trigger self-employment tax is $400 in net profit. If your self-employment income is less than $400 for the year, you don’t need to pay self-employment taxes.

Question 15

Penny is self-employed as a massage therapist. Some of her clients are disabled, so she regularly travels to their homes to give them massages. She tracks the mileage from these business-related trips, but does not keep track of her personal miles. Which of the following is true of her mileage deduction?

A. Penny can deduct the mileage related to these trips at the standard mileage rate.
B. Penny may not deduct the mileage related to these trips.
C. Penny can only deduct actual expenses from these trips, such as gasoline costs.
D. Penny cannot deduct the mileage for these trips, because she must keep track of her personal mileage, as well.

Answer 15

Correct Answer Explanation for A:

Penny can deduct the mileage related to these trips to customers at the standard mileage rate. To learn more about deductible automobile expenses, see IRS Topic No. 510 Business Use of Car.

Question 16

Question ID: 94850144 (Topic: Taxation for Clergy and Military)
Perry is an ordained minister of the Holy Revival Church in Florida. In the current year, he receives the following:

W-2 salary from the church: $50,000
Housing allowance for rent and utilities: $20,000
Fees for performing weddings and funerals: $5,000
How are these amounts taxed under the special rules for members of the clergy?

A. Perry has to pay both income tax and self-employment tax on his salary and the fees for performing weddings and funerals. He has to pay self-employment tax for the housing allowance, but it is not subject to income tax.
B. Because he is an ordained minister, Perry’s salary and housing allowance are not subject to income tax. However, he must pay self-employment tax on both his salary and the housing allowance.
C. Perry must claim the salary, housing allowance, and fees as income on his tax return. The salary and fees are subject to income tax and self-employment tax. However, the housing allowance is subject to income tax only.
D. Because his church is tax-exempt, Perry does not have to report any wages received from the church. However, the fees for performing weddings and funerals are taxable income.

Answer 16

Correct Answer Explanation for A:

All the income received by Perry is taxable income. However, only the wages and fees are subject to both income tax and self-employment tax. The housing allowance is exempt from income tax, but subject to self-employment tax. The exclusion for housing is limited to the lesser of:

Fair market rental value (including utilities), or
The actual cost to provide the home.
For more information about the special rules that apply to clergy, see IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Question 17

Question ID: 95394566 (Topic: Taxation for Clergy and Military)
Reverend Gerald Jones is a full-time minister for Kensington Church, a qualified religious organization. The church allows Gerald to use a home that has an annual fair rental value of $24,000. The church also pays him an annual salary of $67,000, of which $7,500 is designated for utility costs. Gerald’s actual utility costs during the year were $7,000, for which he has receipts. What is Gerald’s income for income tax purposes? And what is his income for self-employment tax purposes?

A. For income tax purposes, Gerald will report $60,000. His income for SE tax purposes, is $91,000.
B. For income tax purposes, Gerald will report $60,000. His income for SE tax purposes, is $74,000.
C. For income tax purposes, Gerald will report $66,500. His income for SE tax purposes, is $84,000.
D. For income tax purposes, Gerald will report $67,000. His income for SE tax purposes, is $91,500.

Answer 17

Correct Answer Explanation for A:

For income tax purposes, Reverend Gerald Jones excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Therefore, for income tax purposes, Gerald will report $60,000 ($59,500 salary plus $500 of his unused utility allowance). His income for SE tax purposes, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). This example is taken directly from Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Question 18

Question ID: 94850097 (Topic: Taxation for Clergy and Military)
Renart is an ordained minister in the Blessed Church of Portland. He owns his own home and his monthly house payment is $1,900. His monthly utilities are an additional $450. Fair rental value in his neighborhood is $2,000. He receives a housing allowance from his church in the amount of $1,950 per month. How much of his housing allowance is subject to income tax?

A. $2,000
B. $1,900
C. $0
D. $100

Answer 18

Correct Answer Explanation for C:

Ministers may exclude from gross income the rental value of a home or a rental allowance to the extent the allowance is used to provide a home, even if deductions are taken for home expenses paid with the allowance. Since the allowance did not exceed his costs, it is excludable from income tax (but not excludable from self-employment tax). For more information about the special rules that apply to clergy, see IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Question 19

Question ID: 94850145 (Topic: Taxation for Clergy and Military)
Gerald is an ordained minister for the Presbyterian Church. He owns his own home. In addition, he receives a monthly housing allowance from his church that isn’t subject to income tax. He pays regular mortgage interest and property taxes on the home. Which of the following is true regarding the deductibility of these expenses?

A. Gerald can still deduct his real estate taxes and home mortgage interest. The minister does not have to reduce their deductions by the nontaxable amount of the housing allowance.
B. Gerald can still deduct his real estate taxes and home mortgage interest. However, he must reduce his allowable deductions by the nontaxable amount of the housing allowance.
C. Gerald can still deduct his real estate taxes and home mortgage interest, but the housing allowance becomes taxable by the amount of deductible expenses that are reportable on Schedule A.
D. The mortgage interest and property taxes are not deductible by Gerald, because he receives a nontaxable housing allowance.

Answer 19

Correct Answer Explanation for A:

If a minister receives a housing allowance that isn’t taxable, the minister can still deduct their real estate taxes and home mortgage interest. The minister does not have to reduce their deductions by the nontaxable amount of the housing allowance. For more information about the special rules that apply to clergy, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Question 20

Question ID: 94815893 (Topic: Taxation for Clergy and Military)
Levar is on extended active duty in the U.S. Air Force. He is currently stationed overseas in Portugal. He is not in a Combat Zone. For U.S. tax purposes, where is Levar deemed to have his official “tax home”?

A. Levar’s tax home is deemed to be suspended.
B. Levar’s tax home is deemed to be in Portugal.
C. Levar’s tax home is deemed to be in the United States.
D. Levar’s tax home is deemed to be his last official change of station.

Answer 20

Correct Answer Explanation for C:

Levar’s tax home is deemed to be in the United States. Members of the military on extended active duty outside the United States are considered to have their main home in the United States for tax purposes.

Question 21

Question ID: 94849527 (Topic: How Much Income to Report)
Samuel, a degree candidate at Amlo Community College, had education-related expenses and received financial assistance as follows:

Tuition: $3,000
Required activity fees: $ 300
Books and supplies: $ 900
Room and board: $3,500
Academic scholarship: $2,500
Food stamps: $1,000
Scholarship from a veteran’s organization: $2,500
How much taxable income does he have, if any?

A. $0
B. $5,000
C. $4,200
D. $800

Answer 21

Correct Answer Explanation for D:

Samuel has $800 in taxable income. The answer is figured as follows:

Tuition $3,000
Fees $300
Books and supplies $900
Qualifying educational expenses $4,200
Scholarships ($2,500 + $2,500) $5,000
Taxable amount $800
Scholarships that pay for qualified educational costs at eligible educational institutions are not considered taxable income. The two scholarships Samuel received can offset his qualifying educational expenses. The amounts for room and board are not qualifying educational expenses. If any part of a scholarship was used for room and board, travel, or personal living expenses, etc., that portion is taxable. (This question is based on a prior-year EA exam question).

Question 22

Question ID: 94849528 (Topic: How Much Income to Report)
Gene had the following potentially taxable transactions. How much income, if any, should be included on his 2023 return?

$200 in interest credited to his savings account on December 31. He did not withdraw any money from the account during the entire year.
$2,000 withheld from his paycheck by his employer to satisfy a garnishment for past-due child support.
$1,000 winnings from a scratch-off ticket.
$500 check received on December 25 from an individual for one of Gene’s original drawings. Gene didn’t cash or deposit the check until the next year
$6,000 inheritance from his deceased father
A. $1,700
B. $9,700
C. $3,200
D. $3,700

Answer 22

Correct Answer Explanation for D:

All of the amounts are taxable income, except for the $6,000 inheritance from his deceased father, which is not taxable. The answer is figured as follows:

Interest $200
Garnished wages $2,000
Lottery winnings $1,000
Payment for painting $500
Taxable amount $3,700
(This question is based on a prior-year EA exam question).