Tax - Bryant Course Flashcards

Question

What are Employee Stock Options? Non-Statutory Stock Options? For example, if you are lucky enough to be granted 1,000 shares of stock, at an exercise price of $150 per share, and the current market value is $300 per share at the time of exercise

Answer 1

Fringe Benefits 1. Incentive stock options, 2. Employee stock purchase plan options 3. Non-Statutory (Non-qualified) Stock Options Grant * Not a taxable event Exercise 1. THIS IS WHEN TAXATION BEGINS! 2. When you exercise non-qualified stock options, the difference between the market price of the stock and the grant price (called the spread) is counted as ordinary earned income, even if you exercise your options and continue to hold the stock. 3. Earned income is subject to payroll taxes (Social Security and Medicare), as well as regular income taxes at your applicable tax rate. Calculation 1. Payroll Taxes 1. OASDI or Social Security – which is 6.2% on earnings up to the Social Security benefit base which is $118,500 in 2015 2. HI or Medicare - which is 1.45% on all earned income even amounts that exceed the benefit base. 2. If your earned income for the year already exceeds your benefit base, then your payroll taxes on gain from exercising your non-qualified stock options will be just the 1.45% attributable to Medicare. 3. If your year-to-date earned income is not already in excess of the benefit base than when you exercise nonqualified stock options, you will pay a total of 7.65% on gain amounts up until your earned income reaches the benefit base than 1.45% on earnings over the benefit base. 4. You should not exercise employee stock options strictly based on tax decisions. That being said, keep in mind that if you exercise non-qualified stock options in a year where you have no other earned income, you will pay more payroll taxes than you’ll pay if you exercise them in a year where you do have other sources of earned income and already exceed the benefit base. 5. In addition to the payroll taxes, all income from the spread is subject to ordinary income taxes. If you hold the stock after exercise, and additional gains beyond the spread are achieved, the additional gains are taxed as a capital gain (or as a capital loss if the stock went down). 6. An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code "V." See Regulations section 1.83-7. EXAMPLE - * you will have a bargain element of $150,000 (1,000 x $150). That assumes all of the shares exercised were fully vested. * Another taxable event occurs when you eventually sell the shares that you have previously exercised. Selling shares immediately, or **_less than one year of exercising the shares_** will result in the transaction being subject to short-term capital gains (or loss) rates.

Answer 2

83(a) = services, the value of that property is included in taxable wages of the taxpayer when the property is either transferable or vests — i.e., is no longer subject to a substantial risk of forfeiture 83(b) = within 30 days of the date the unvested employer stock is transferred to him or her. The holding period for long-term capital gains treatment also begins on the date the stock is transferred, if an 83(b) election is made. A section 83(b) election allows an employee that receives non-vested property from an employer to include in gross income in the year of transfer the excess of the FMV of the property at the date of transfer over the amount (if any) paid for the property. A section 83(b) election cannot be made at the date of grant of an option if such option has no readily ascertainable FMV because section 83(a) does not apply at that time. Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the later sale. Generally, restricted stock is taxed as ordinary income when it vests. On the later sale which occurs more than one year after the date of grant you recognize a taxable gain of $4.99 per share (not $5.00, because you get credit for the $.01 per share you already took into income), and pay additional tax of $99,800 (i.e., $499,000 x 20%). Your economic gain after tax? $399,804 (i.e., $500,000 minus $396 minus $99,800). NO 83(b) Election: In this example you do not file a Section 83(b) election. So you pay no tax at grant (because the shares are unvested), but instead recognize income of $100,000 when the shares vest and thus have ordinary income tax of $39,600. On the later sale which occurs more than one year after the date of vesting you recognize a taxable gain of $4.00 per share (not $5.00, because you get credit for the $1.00 per share you already took into income), and pay additional tax of $80,000 (i.e., $400,000 x 20%). Your economic gain after tax? $380,400 (i.e., $500,000 minus $39,600 minus $80,000). BENEFITS: 1. Likely reduce the overall tax burden 2. prevented a tax hit at the time of vesting, which may not be a time when cash is available to pay 3. starts your long-term capital gains holding period clock earlier – meaning that you get the long-term capital gains rate as long as the sale of your shares occurs more than a year after grant, rather than a year after vesting. POSSIBLE DRAWBACKS 1. If you receive restricted stock worth a nominal amount, it virtually always makes sense to file one. However, what if instead of receiving 100,000 shares of restricted stock worth $.01 per share, you received 100,000 shares of restricted stock worth $1.00 per share? Filing a tax code Section 83(b) election would immediately cause you tens of thousands of dollars of tax. And if the company subsequently fails, and in particular if it fails before your stock vests, you likely would have been economically better off to not have filed a Section 83(b) election. **Early Exercise Example** - 1. Send a cover letter and originally executed 83(b) form and one (1) additional copy via certified mail or Federal Express to the IRS, within 30 calendar days of the date of transfer, with a self-addressed stamped envelope. Retain receipt of mailing; 2. On Jan 1, 2017 you’ve been granted 30,000 options = the right to buy 30k shares at a price of $0.10. And this right is granted over time (4 years, the 1st 25% vested on your 1 year anniversary). 3. Scenario A 1. you’ve done nothing and just waited for your options to vest: \* On Jan 1, 2018, you receive your 1st vest: 7,500 options, i.e. the right to buy 7,500 shares at a price of $0.10. \* So you have received the option to buy 7,500 shares worth $1.00 each for $0.10. Options vesting are not a taxable event. \* But if you were to exercise these options (paying $0.10 for shares worth $1.00), as the IRS is concerned, you’ll have received ($0.90 \* 7,500) = $6,750 of income. 4. Scenario B 1. Scenario B: you’ve “early exercised” these options on 1/1/17: \* On Jan 1, 2018, you receive 7,500 options, i.e. the right to buy 7,500 shares at a price of $0.10. \* However you’ve already previously pre-paid for these options. You paid $0.10 per option a year ago, when the assessed market value was still $0.10. At the time of early-exercise, you paid $0.10 and received something valued at $0.10, so you’ve received $0 in income, and so you had $0 in extra income tax last year. \* Now on 1/1/18, 7,500 options vest, you already early-exercised them a year ago, so these are immediately “exercised” into shares. At this moment, you have on paper something worth $7,500. \* You pay NO income tax on this (by pre-paying last year, you get to recognize the transaction as $0 of extra income last year).

Answer 3

**_What is the Effect of Making an 83(i) election_**? If an eligible employee has a stock option or RSU to acquire qualified stock, the employee can make an 83(i) election to convert the qualified stock into “deferral stock” within 30 days of the date when the stock option or RSU vests. 1. FMV - The fair market value of the deferral stock on the date the deferral stock is transferred to the employee (less any amount the employee paid for the deferral stock) will not be taxed until the first to occur of the following events: 1. The first date the deferral stock becomes transferable (including to the employer), 2. The date the qualified employee first becomes an “excluded employee,” 3. The first date the corporation’s stock becomes readily tradable on an established securities market, 4. Five years after the first date the employee’s qualified equity grant vests or becomes transferable, whichever is earlier, **_OR_** 5. The date the employee revokes his or her election with respect to his or her deferral stock 2. Holding Period: 1. The deferral stock will be treated as a capital asset and the holding period for long-term capital gain begins on the date the qualified stock is converted to deferral stock. If the deferral stock is held for at least 12 months, then the fair market value of the deferral stock on the date of the sale, minus the fair market value of the qualified stock on the date it vested or was transferred to the employee, whichever is later, will be taxed at the favorable rates for long-term capital gains. **_Who can make qualified equity grants?_** An “eligible corporation” is: 1. a privately held company (i.e., no stock is traded on an established securities market), 2. that has a written plan that provides stock options or RSUs, to acquire “qualified stock,” 3. to at least 80% of its employees in the United States, 4. with the same rights and privileges under the plan as required under Code section 423(b)(5) for qualified employee stock purchase plans. **_Who is eligible to receive qualified equity grants and make an 83(i) election?_** The term “qualified employee” is defined as an employee who is not an “excluded employee.” An excluded employee is an employee who: 1. Has been a one-percent owner at any time during the calendar year or during the ten preceding calendar years; 2. Has been at any time the chief executive officer or chief financial officer, or an individual acting in either capacity; 3. Is a spouse, child, grandchild or parent of any individual listed in the two categories above; OR 4. Is one of the four highest compensated officers of the company for the taxable year or for any of the ten preceding taxable years. 5. THUS = 1. qualified equity grant may not be awarded to an independent contractor 2. It appears that employers have full flexibility to define which employees will be excluded from the plan, as long as no more than 20% of the eligible employees of the US corporation are excluded. **_What is Qualified Stock?_** 1. The option or RSU must have been granted by the employer in connection with the employee’s performance of services during the calendar year in which the corporation was an “eligible corporation.” Moreover, the stock is not considered “qualified stock” if the employee can sell the stock to the company or receive cash in lieu of stock when the employee’s right to such stock becomes transferable or not subject to a substantial risk of forfeiture (i.e., vested) When? 1. If a stock option or RSU meets all the conditions to be a qualified equity grant, an eligible employee must proactively choose to defer the tax associated with the qualified stock within 30 days of the first date the employee’s rights to the qualified stock are transferable or are vested, whichever comes first **_Disqualifications:_** 1. An employee may not make an election under section 83(i) if he or she has made a section 83(b) election with respect to the qualified stock. 2. This deferral election is also not available if the company has repurchased any of its outstanding stock in the year before the date the employee’s rights to the qualified stock are transferable or vested, unless at least 25% of the total dollar amount is “deferral stock” (i.e. stock that was elected to be deferred under section 83(i)), and the determination of which individuals from whom such stock is purchased is made on a reasonable basis. 3. However, these two conditions — the 25% requirement and determination of whom the stock is purchased from – shall be treated as met if the employer purchases all outstanding deferral stock. Employers are also required to report on their tax returns the total dollar amount of their outstanding stock purchased during the calendar year FICA = Social Security Tax, Medicare, and 0.9% Medicare Surtax **When an employee makes the deferral election, the employee will still be responsible for paying (and the employer will be responsible for withholding) Social Security and Medicare taxes.**

Answer 4

The value of the business use of an employer-provided cell phone, provided primarily for _noncompensatory business reasons_, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. The term "cell phone" also includes other similar telecommunications equipment. For the rules relating to these types of benefits, see De Minimis (Minimal) Benefits , earlier in this section, and Working Condition Benefits , later in this section. Non-Compensatory Business Reasons * You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Examples of substantial business reasons include the employer's: * Need to contact the employee at all times for work-related emergencies, * Requirement that the employee be available to speak with clients at times when the employee is away from the office, and * Need to speak with clients located in other time zones at times outside the employee's normal workday.

Answer 5

_Exclusion from wages._ You can generally exclude the cost of up to _$50,000 of group-term life insurance_ coverage from the wages of an insured employee. You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. In addition, you don't have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. _Coverage over the limit._ You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. _Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, show it in box 12 with code "C." The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax._ _Example_ The yearly cost of $150,000 of coverage is * IRS Cost Per $1,000 of Protection for 1 Month x Excess Coverage x 12 * Yearly Cost = $270 * Tom pays $100 for insurance * Answer: * The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code "C."

Answer 6

Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount isn't more than $2,000. If the face amount is greater than $2,000, the dependent coverage may be excludable from income as a de minimis fringe benefit if the excess (if any) of the cost of insurance over the amount the employee paid for it on an after-tax basis is so small that accounting for it is unreasonable or administratively impracticable.

Answer 7

Fringe Benefit Exclusion -Cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax, if you reasonably believe that the employee can exclude the benefits from gross income. * For 2019, you can contribute up to * $3,500 for self-only coverage under an HDHP or * $7,000 for family coverage under an HDHP to a qualified individual's HSA. The contribution amounts listed above are increased by $1,000 for a qualified individual who is age 55 or older at any time during the year. For two qualified individuals who are married to each other and who each are age 55 or older at any time during the year, each spouse's contribution limit is increased by $1,000 provided each spouse has a separate HSA. No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. _A qualified individual must be_ (1) covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care (2) For calendar year 2019, HDHP Deductible Limits: * Self Only = $1,350 * Family = $6,750 (3) Must limit annual out-of-pocket expenses of the beneficiary to * Self Only = $6,750 * Family $13,500 (3)(a) - _Out of Pocket Expenses_ = The most you have to pay for covered services in a plan year. After you spend this amount on deductibles, copayments, and coinsurance, your health plan pays 100% of the costs of covered benefits There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. Exceptions: 1. An individual isn't a qualified individual if he or she can be claimed as a dependent on another person's tax return 2. Also, an employee's participation in a health FSA or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA. 3. However, an individual may qualify to participate in an HSA if he or she is participating in only a limited-purpose FSA or HRA or a post-deductible FSA Cafeteria Plans: 1. You may contribute to an employee's HSA using a cafeteria plan and your contributions aren't subject to the statutory comparability rules. However, cafeteria plan nondiscrimination rules still apply. For example, contributions under a cafeteria plan to employee HSAs can't be greater for higher-paid employees than they are for lower-paid employees. Contributions that favor lower-paid employees aren't prohibited. Nondiscrimination Rules 1. Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs 2. For guidance on employer comparable contributions to HSAs under section 4980G in instances where an employee hasn't established an HSA by December 31 and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses, see Regulations section 54.4980G-4 Exception: The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.

Answer 8

.42 States Common Law 9 Community Property Law In community property states, income may be either separate or community. Community income is considered to belong equally to the spouses. *_In all community property states, the income from the personal efforts of either spouse is considered to belong equally to the spouses_*. Furthermore, income from community property is considered to be community income. Thus, if a wife's salary is used to purchase stock, subsequent dividends are community income Separate Property in Community Property States: 1. Prior to Marriage 1. Separate property consists of all property owned before marriage 2. After Marriage 1. Separate property consists of gifts and inheritances acquired after marriage. Income from Community Property: 1. Whether income from separate property is community or separate depends on the state 1. In Idaho, Louisiana, and Texas, income from separate property is community income. 2. In Arizona, California, Nevada, New Mexico, and Washington, such income is separate income

Answer 9

You can deduct $1,633.50 for your trip, including the cost of round-trip transportation to and from New Orleans. The deduction for your non-entertainment related meals is subject to the 50% limit on meals mentioned earlier.

Answer 10

1. _Unreimbursed Moving Expenses No Longer Deductible to Employees_. Employee costs for a business move that are not reimbursed by employers are no longer deductible under the "Miscellaneous Expenses" section of Schedule A. 1. _Reimbursed Moving Expenses Taxable to Employees._ In previous years, if the company's reimbursement program was an accountable plan (as described below), the employee benefit wasn't taxable to the employee. Now (2018-2025) these benefits are always taxable to employees. You must withhold and pay all employment taxes and include these costs on the employee's W-2 form and with 1. _Moving Expenses Still Deductible to Employers_. Whether or not you have an accountable plan, the expense of moving employees for business reasons is still a deductible expense for your business. 1. Employees Can No Longer Deduct Unreimbursed Business Expenses 1. Prior to the Act, an employee who itemized tax deductions could deduct unreimbursed employee business expenses as a miscellaneous itemized deduction (to the extent that the aggregate miscellaneous itemized deductions exceeded 2% of the employee’s adjusted gross income). However, beginning January 1, 2018 miscellaneous itemized deductions are no longer allowed. That means that if an employer reimburses an employee for a business expense, the reimbursement is tax-free to the employee. However, if the employer does not reimburse the employee’s business expense, the employee no longer will be able to claim a tax deduction for the expense.

Answer 11

Section 125 cafeteria plans must be created by an employer. Once a plan is created, the benefits are available to employees, their spouses and dependents. Depending on the circumstances and details of the plan, section 125 benefits may also extend to former employees, but the plan cannot exist primarily for them. On the employer side, section 125 plans offer lots of tax-saving benefits. For each participant in the plan, employers save on the Federal Insurance Contributions Act (FICA) tax, the Federal Unemployment Tax Act (FUTA) tax, the State Unemployment Tax Act (SUTA) tax and workers' compensation insurance premiums. Employers on average save $115 per participant on FICA alone. Combined with the other tax savings, the section 125 plan usually funds itself, as the cost to open the plan is low. For example, if an employee elects to have $600 per year deducted from his or her pay and placed into the plan and the company has 24 pay periods, then $25 per pay period is automatically deducted tax-free. The money gets sent to the plan's third-party administrator to be held. It can then be distributed for reimbursement upon request for qualified expenses. A wide variety of medical and child care expenses is eligible for reimbursement under a section 125 cafeteria plan. As for medical items and treatments, there are dozens of eligible expenses that can be reimbursed. The following are eligible expenses: acupuncture, alcoholism treatment, ambulance services, birth control, chiropractic services, dental and doctors' fees, eye exams, fertility treatment, hearing aids, long-term care services, nursing homes, operations, prescription drugs, psychiatric services, sterilization, wigs and wheelchairs. But this is not an all-inclusive list. There are also a large variety of eligible over-the-counter items. Allergy medicines, cold medicines, contact lens solutions, first aid kits, pain relievers, pregnancy tests, sleeping aids and throat lozenges are among the dozens of eligible items. Many dual-purpose items are eligible, such as dietary supplements, orthopedic shoes, prenatal vitamins and sunscreen. EXAMPLE - Here is an example. Assume that you placed $1,000 in your section 125 plan. At the end of the year, you notice that you have $100 remaining in the account. If you are in the 28% marginal tax bracket, you have already saved $280 on taxes, or ($1,000 x 28%). Forfeiting the $100 means that you still have a net benefit of $180. While this simple example shows the possible scenario, in reality, there is a new carryover provision that was implemented in 2013. With the provision, plan participants can carry over $500 of unused funds from one year to the next. Cafeteria plans have different levels of benefits. 1. A premium-only plan (POP) allows employees to pay their portion of insurance on a pretax basis. 2. The flexible spending account (FSA) version allows for out-of-pocket qualified expenses to be paid pretax, which is the style of plan described above. 3. The full-blown plan is called a consumer-driven health care (CDHC) plan and involves a credit system the employee can use on a discretionary basis for qualified expenses. Employees can then supplement the CDHC with their own money and use it to buy additional benefits or coverage. Employers must hire and partner with a qualified section 125 third-party administrator, who can provide the most up-to-date documentation for plan setup and update the employer on the latest requirements necessary for compliance. Typical third-party administrators provide employers with an up-to-date plan document, summary plan descriptions, corporate resolution, any customized forms, legal review, attorney opinion letters, discrimination testing, signatory-ready Form 5500, if required, and employee education. **Generally**: * Under cafeteria plans, employees may select from a list of nontaxable fringe benefits. On the other hand, employees who so choose may receive cash in lieu of some or all of the nontaxable benefits. Thus, each employee selects what he or she wants most. One common result is that high-tax-rate employees select the non-taxable fringe benefits, whereas other employees choose to receive cash. * An employer-sponsored cafeteria plan allows you to select among certain employee benefits, including health, life, and disability insurance. You normally pay for these benefits on a pretax basis. Sometimes, however, your employer pays the premium for the benefits you choose (up to a certain amount), and if you choose additional benefits, you pay for extra coverage using either pretax or after-tax dollars.

Answer 12

1. Consider selling enough shares, each year, to max out your retirement account contributions to a 401(k) and maybe your spouse’s retirement plan as well. 1. I often recommend that clients sell a specified percentage of their stock options each year. For my best-paid executive clients, they tend to get more grants year-after-year. Even after selling, their net account balance in company stock have tended to increase over time. The important thing is their overall investment allocation risk was lowered by funding retirement and other investment accounts. Additionally, a date is set each year to sell a percentage of their stock options (e.g. 10%) regardless of whether the stock is up or down that day.

Answer 13

Good 401K 1. Employer Match 1. “A 100% match on contributions easily outweighs investments with slightly higher investment expenses.” 2. Vesting 1. “Some employers’ matches are 100% vested immediately, some occur over time,” he said. “The faster the vesting schedule, the higher the probability that you will retain the full employer match.” 3. Plan and Investment Fees 1. Another important factor to consider is cost. Lower costs generally lead to better returns, so prioritizing whichever 401(k) allows you to minimize costs may be a good idea. 4. Investment Options 1. some 401(k)s have a relatively limited set of investment options while others allow you to choose from among thousands of mutual funds in a self-directed portfolio, which may make it easier for you to implement your desired strategy in a cost-effective way. 5. Availability of Roth IRA 1. “While it’s not right for everyone, the tax advantages of Roth contributions are quite powerful,” said Ian Bloom, founder of Open World Financial Life Planning. “Potentially tax-advantaged savings with tax-free money in retirement? Having access to that is a big deal.” 401K Stinks 1. Match- 1. Still always take the max matching amount 2. Priotize other Tax Advantage Accounts 1. Either Traditional or Roth IRA 3. HSA 1. If you’re eligible, another great option is a health savings account. These accounts offer special tax benefits when used for medical expenses, but in the right situations they can also be a powerful retirement account. You can get help finding a health savings account here. 4. Self-Employed 1. Finally, if you have any self-employment income, even if it’s on the side of your day job, you can look into the self-employed retirement accounts available to you. Like with IRAs, you have a lot of control over the fees and investment options, and some of these accounts allow you to contribute up to $54,000 per year. Talk about turbocharging your retirement savings! 5. Pay down debt 1. Let’s say you have student loans with a 6.8% interest rate. If you pay it off, you’ll essentially earn a 6.8% return on that money (because you won’t have to pay all that interest). That’s in line with what many experts are forecasting for long-term stock market returns, and paying it off comes without any risk that you won’t actually get that return. Every extra dollar you put towards that debt automatically saves you 6.8% in interest. 6. Taxable Investment Account 1. The question of whether it’s better to use a taxable investment account than a 401(k) is a complicated one that depends heavily on the specifics of your situation. But here are a few things to consider: 1. Your 401(k) would have to be excessively expensive for the fees to outweigh the tax benefits over a taxable investment account. 2. The longer you plan to stay with your current company, the more of an impact those fees will have. Meaning a taxable investment account would start to be more appealing. 3. The tax deduction and tax-free growth within a 401(k) will be more advantageous in higher tax brackets.

Answer 14

1. The numbers show that the Roth favors those savers more than conventional wisdom would suggest, and the differences are most extreme when tax savings from the traditional IRA contributions are not also separately invested themselves. 2. **Maximum contributions always favor the Roth if traditional IRA tax savings aren’t invested separately**. The analysis finds no tax scenarios in which the value of a traditional IRA at retirement beats the value of a Roth IRA, assuming both accounts receive maximum contributions and the traditional IRA tax savings aren’t invested in a separate investment vehicle. 3. **Investors who pay the highest tax rates in retirement stand to benefit (or lose) the most**. The additional value amassed in Roth IRAs is most significant for investors facing the highest effective income tax rates at retirement; they stand to net an additional $184,364 over a 30-year period. IF YOUR TAX RATES DROP IN RETIREMENT, YOU WILL BENEFIT FROM TRADITIONAL IRA 4. **Investing tax savings can help the traditional IRA.** If you invest 100% of the tax savings from each annual traditional IRA contribution, most tax scenarios still favor the Roth IRA. It is worth noting, however, that savers with very high tax rates during their careers and very low rates in retirement can also come out significantly ahead with a traditional IRA if they reinvest their tax savings — see the tables below for details. DOING THE MATH 1. Roth IRA contributions are made with after-tax dollars, which means every contribution has a higher effective cost: To make a $5,500 contribution — the current annual contribution limit — at a tax rate of 25%, you’ll also have to pay an additional $1,833 in taxes. 2. If you put $5,500 into a traditional IRA, that money goes in pretax, which means the cost to you is $5,500. If you’re eligible for a deduction, the cost is offset by the value of that tax savings. That makes the traditional IRA a better deal in the short run. And it’s likely one reason why most savers opt for a traditional IRA. According to 2016 data from the Investment Company Institute, 25% of U.S. households have a traditional IRA, while only 17% have a Roth. Even though those numbers include all income levels, among those who meet Roth eligibility limits, the traditional IRA still leads by a significant margin. 3. When everything regarding taxes is considered, the question of which account will net a higher after-tax balance may hinge on whether the saver invests the traditional IRA tax savings each year. When $30,000 is withdrawn from a traditional IRA, the IRS takes a cut; exactly how much depends on unknown future tax rates, but will likely be several thousand dollars. But when $30,000 comes out of a Roth IRA in retirement, the full $30,000 reaches the retiree because the taxes were already paid when the contribution was made. WHEN THE SAVE INVESTS THE TAX SAVINGS: 1. Because the contribution limit on these accounts is the same — $5,500 is the combined annual maximum for all IRA contributions — there is one way to possibly make a traditional IRA competitive with a Roth IRA in the case of maximum contributions: Invest the tax savings netted by the traditional IRA contribution in a separate investment account. That supplemental brokerage account should be invested in a way that mirrors the investments in the IRA. (Note that in scenarios in which the saver doesn’t make the maximum annual contribution to a traditional IRA, investing the tax savings may not require opening a separate brokerage account.) 2. In some scenarios, particularly in which the retiree’s tax rate stays at 25% or below, investing 100% of the taxes saved makes the traditional IRA a more valuable option than the Roth IRA. IRS data show that the majority of American taxpayers fall into brackets at or below the 25% level.

Answer 15

Fringe Benefits You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests. 1. **It is furnished on your business premises.** 1. your business premises is generally your employee's place of work. For example, if you're a household employer, then lodging furnished in your home to a household employee would be considered lodging furnished on your business premises. 2. **It is furnished for your convenience.** 1. ****Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the lodging is furnished as pay. However, a written statement that the lodging is furnished for your convenience isn't sufficient. 3. **The employee must accept it as a condition of employment.** 1. Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Examples include employees who must be available at all times and employees who couldn't perform their required duties without being furnished the lodging. **Exceptions** 1. If you allow your employee to choose to receive additional pay instead of lodging, then the lodging, if chosen, isn’t excluded. The exclusion also doesn't apply to cash allowances for lodging. **Example 1** 1. You may exclude the lodging that you provide from Sam's wages. Additionally, since sufficient eating facilities aren’t available near your place of employment, you may also exclude meals you provide to Sam from his wages Example 2 1. A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital can't exclude the value of the lodging from her wages because she isn't required to live at the hospital to properly perform the duties of her employment.

Answer 16

Fringe Benefit for Employees 1. This exclusion applies to a service you provide to an employee if it doesn't cause you to incur any substantial additional costs. The service must be offered to customers in the ordinary course of the line of business in which the employee performs substantial services. 2. Such substantial additional costs include foregone revenue and the cost of labor. The service is a no-additional cost service regardless of whether it is offered at no charge or at a reduced rate. 3. Services that aren't eligible for treatment as no-additional-cost services are non-excess capacity services, such as the facilitation by a stock brokerage firm of the purchase of stock by employees. These services may however be eligible for a qualified employee discount of up to 20% of the value of the service provided. Aren't Eligible 1. A commercial airline allows its employees to take personal flights on the airline at no charge and receive reserved seating. Because the employer gives up potential revenue by allowing the employees to reserve seats, employees receiving such free flights aren’t eligible for the no-additional-cost exclusion. Examples 1. No-additional-cost services are excess capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free, at a reduced price, or through a cash rebate to employees working in those lines of business. 2. Athletic/Recreational Facilities 3. Complimentary and Discounted Tickets to Athletic and Entertainment Events 4. Communication Services 1. University provided free electronic mail services, internet access, and local and long-distance telephone service, are considered no-additional cost services fringe benefits, as the university is using excess capacity that it has already purchased. In addition, the university is not incurring any substantial additional cost in providing the service because the university does not spend a substantial amount of time in providing the service to employees, over that time spent in providing the service to its main customers, students.

Answer 17

Fringe Benefits **Exclusion from Wages:** You can generally exclude the value of transportation benefits that you provide to an employee during 2019 from the employee's wages up to the following limits. 1. $265 per month for combined commuter highway vehicle transportation and transit passes. 2. $265 per month for qualified parking. **Applies to the following benefits** 1. A ride in a commuter highway vehicle between the employee's home and work place. 2. A transit pass. 3. Qualified parking. **Transit Pass** A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate, on one of the following. 1. On mass transit. 2. In a vehicle that seats at least 6 adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it. **Commuter Highway Vehicle** A commuter highway vehicle is any highway vehicle that seats at least 6 adults (not including the driver). In addition, you must reasonably expect that at least 80% of the vehicle mileage will be for transporting employees between their homes and work place with employees occupying at least one-half the vehicle's seats (not including the driver's).

Answer 18

Fringe Benefit Type of Qualified Transporation Benefits: **Exclusion from wages.** 1. You can generally exclude the value of transportation benefits that you provide to an employee during 2019 from the employee's wages up to the following limits. 1. $265 per month for combined commuter highway vehicle transportation and transit passes. 2. $265 per month for qualified parking. Qualified parking is parking you provide to your employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles, or carpools. It doesn't include parking at or near your employee's home.

Answer 19

Examples 1. Pick up trucks 2. Vans 3. Education 4. Outplacement Services 5. Product Testing Exclusion from wages. 1. You can generally exclude the value of a working condition benefit you provide to an employee from the employee's wages. This exclusion applies to property and services you provide to an employee so that the employee can perform his or her job. It applies to the extent the cost of the property or services would be allowable as a business expense or depreciation expense deduction to the employee if he or she had paid for it. The employee must meet any substantiation requirements that apply to the deduction. Examples of working condition benefits include an employee's use of a company car for business, an employer-provided cell phone provided primarily for noncompensatory business purposes (discussed earlier), and job-related education provided to an employee. This exclusion also applies to a cash payment you provide for an employee's expenses for a specific or prearranged business activity if such expenses would otherwise be allowable as a business expense or depreciation expense deduction to the employee. You must require the employee to verify that the payment is actually used for those expenses and to return any unused part of the payment. The exclusion doesn't apply to the following items. 1. A service or property provided under a flexible spending account in which you agree to provide the employee, over a time period, a certain level of unspecified noncash benefits with a predetermined cash value. 2. A physical examination program you provide, even if mandatory. 3. Any item to the extent the payment would be allowable as a deduction to the employee as an expense for a trade or business other than your trade or business. For more information, see Regulations section 1.132-5(a)(2).

Answer 20

Reported in the year the taxpayer actually or constructively receives the income rather than in the year the income is earned.

Answer 21

Income is reported in the year it is earned Accrual basis is a method of recording accounting transactions for revenue when earned and expenses when incurred. The accrual basis requires the use of allowances for sales returns, bad debts, and inventory obsolescence, which are in advance of such items actually occurring. An example of accrual basis accounting is to record revenue as soon as the related invoice is issued to the customer. A key advantage of the accrual basis is that it matches revenues with related expenses, so that the complete impact of a business transaction can be seen within a single reporting period. Auditors will only certify financial statements if they have been prepared using the accrual basis of accounting. The alternative method for recording accounting transactions is the cash basis. Type of Business: 1. Inventory 2. C-Corps 3. Partnerships with Corporate Partners 4. Tax Shelters 5. Certain Trusts Inventory Exception: 1. $1,000,000 or Less Inventory 2. However, the IRS recently ruled that taxpayers whose annual gross receipts for the three prior years averaged $1 million or less are exempt from this requirement and may use the cash method. Another Example 1. Businesses with income from long-term contracts (such as construction firms and manufacturers), which generally must use the percentage-of-completion method.

Answer 22

The hybrid method is a combination of the cash and accrual methods of accounting. The IRS says, you can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. Although most businesses use either the cash or accrual method of accounting, the hybrid method is sometimes used by businesses with inventory. Unless the business qualifies for the small-inventory-business exception, tax law requires businesses to use the accrual method of accounting to account for inventory and its sale, but many businesses with inventory also use a cash basis for all other income and expenses because of its simplicity. However, the same accounting method must be used to report both income and expenses.

Answer 23

1. Establish that the item is not income 1. a return of capital 2. unrealized income 3. self-help income 4. rental value of personal-use property 5. gross selling price of property 2. Establish a specific exclusion 1. Statutory Exclusions 2. Administrative Exclusions 1. A liberal interpretation of the statute by the IRS may result in a broad definition of what constitutes an exclusion, and such a broad definition may reasonably be termed as an administrative exclusion 3. Judicial Exclusions 1. Although the courts cannot create exclusions, they can interpret the statute and decide whether a particular item is covered by a statutory exclusion

Answer 24

1. Gifts and inheritances 2. Life insurance proceeds 3. Public assistance programs 4. Qualified adoption expenses 5. Payments for personal physical sickness and injury 6. Discharge of indebtedness during bankruptcy or insolvency 7. Gain on sale of personal residence 8. Partial exclusions for Social Security benefits 9. Alimony for divorces after December 31, 2018

Answer 25

The answer depends on the true value of the services performed by the son. If the son truly performs services that are commensurate with the salary paid, the payment may properly be classified as a salary. On the other hand, if the son is paid an amount that exceeds the value of the services, the excess amount will be treated as a gift

Answer 26

He receives $10,000 per year tax-free ($100,000 / 10), but the remaining $3,000 per year is taxable as interest OR none of the 100,000 is taxable EXCEPTIONS 1. Consideration - exclusion generally is not available if the insurance policy is obtained by the beneficiary in exchange for valuable consideration from a person other than the insurance company 1. Jim is the owner and beneficiary of a $100,000 policy on the life of his father. 2. Jim sells the policy to his brother Bob for $10,000. Bob subsequently pays premiums of $12,000. Upon his father's death, Bob must include $78,000 ($100,000 -$10,000 - $12,000) in gross income. 3. However, if Jim gave the policy to his brother, all of the proceeds would be excluded from gross income because the gift of the policy does not constitute valuable consideration **EXAMPLE 2** - 1. _Portion Taxed as Income_ - This is calculated as the policy’s cash value minus the amount you’ve paid in premiums. Since term life insurance policies don’t have a cash value, this figure would be zero. 2. _Portion Taxed as Capital Gains_ - First, you determine your total gain on the settlement by subtracting the total premium you’ve paid from the settlement you’ve received. You then subtract the amount that is subject to income tax, the previous result, to arrive at the portion that is taxable as capital gains. 3. The portion that would be taxed as income would be $25,000 since that is the difference between the policy’s cash value and what you’ve paid in premiums. To calculate the portion that would be taxed as capital gains, you subtract the premiums you’ve paid from the settlement you received, leaving you with $75,000. Then, you subtract the amount that is subject to income tax, which is $25,000 in our example. The remaining $50,000 would be subject to capital gains tax.

Answer 27

**_Publication 525_** - Taxable and Nontaxable Income **Sick pay**. Pay you receive from your employer while you're sick or injured is part of your salary or wages. In addition, you must include in your income _sick pay benefits_ received from any of the following payers. * A welfare fund. * A state sickness or disability fund. * An association of employers or employees. * An insurance company, if your _employer_ paid for the plan. * If the coverage is provided through a cafeteria plan, the _employer_, not the employee, is considered to have paid the premiums; thus, the benefits are included in income. However, if _you_ paid the premiums on an accident or health insurance policy, the benefits you receive under the policy aren’t taxable. Many other amounts you receive as compensation for sickness or injury aren't taxable. These include the following amounts: * Compensatory damages you receive for physical _injury or physical sickness_, whether paid in a lump sum or in periodic payments. Court awards. * Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. * Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. * Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits aren't taxable even if your employer pays for the accident and health plan that provides these benefits. **Workers Compensation**? * Exempt * Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if They're paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. * Non-Exempt * The exemption, however, doesn't apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury * Mix * If your disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities, part of it may be workers' compensation. That part is exempt from tax. The rest of your pension, based on years of service, is taxable as pension or annuity income. If you die, the part of your survivors' benefit that is a continuation of the workers' compensation is exempt from tax

Answer 28

The benefits of tax-qualified long term care insurance policies are generally received tax-free by the policyholder. WATCHOUT * However, if your contract pays a set dollar amount per day (per diem), the tax-free treatment is subject to a certain limit, indexed annually for inflation. Benefits over and above this limit are generally considered taxable income. Under this limit, the amount of your LTCI benefits that is excluded from taxation in a given period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts: * The actual cost of qualified long-term care services during the period * The dollar limit for the period ($360 per day for any period in 2018) It's a different story if you have a nonqualified LTCI policy, though. Such benefits may be subject to income tax.

Answer 29

**Premiums Paid by Employer** 1. Premiums not included in employee's gross income 2. Benefits 1. Excluded from employee's gross income except when benefits exceed actual expenses **Premiums Paid by Employee** 1. Premiums deductible as medical expense subject to 10% of AGI limitation 2. Benefits 1. Excluded from gross income

Answer 30

**Premiums Paid by Employer** 1. Premiums not included in employee's gross income. Premiums deductible by employer. 2. Benefits 1. Included in employee's gross income. May qualify for credit for elderly and disabled **Premiums Paid by Employee** 1. Not Deductible 2. Benefits 1. Excluded from gross income It comes down to this: If you never use your disability benefits, you'll save money by paying your premiums with pretax dollars. But if you do use your disability benefits, using after-tax dollars to pay your premiums places you in a better position. Consult your tax professional for advice.

Answer 31

Premiums paid by Employer? What are the benefits? 1. Included in employee's gross income (except for limited exclusion applicable to group term life insurance). Premiums deductible by employer (assuming employer is not the beneficiary). 2. Benefits 1. Excluded from gross income. Premiums paid by Employee? What are the benefits? 1. Not deductible 2. Benefits 1. Excluded from gross income.

Answer 32

Since his salary is taxable and the insurance is not offered through a cafeteria plan, the premiums are paid on an after-tax basis.

Answer 33

Because the premiums are excludable, Kay does not have to report the premiums as income.

Answer 34

Primary = Credit * In general, the income of U.S. citizens is subject to the U.S. income tax even if the income is derived from sources outside the United States. The foreign income of U.S. citizens may also be taxed by the host country possibly leading to a substantial double tax on the same income. *_The double tax is mitigated by a foreign tax credit*_. _*Subject to limitations, U.S. citizens may subtract from their U.S. income tax liability the income taxes they pay to foreign countries_*. Alternate=$104,000 Exclusions * In the case of foreign-earned income, individuals have available the alternative option for 2018 excluding the first $104,100 of foreign-earned income from gross income. This exclusion amount is indexed for inflation. The exclusion is available in lieu of the foreign tax credit. If both a husband and wife have foreign-earned income, they may each claim an exclusion. The principal reasons for the exclusion are to encourage U.S. businesses to operate in foreign countries and to hire U.S. citizens and resident aliens to manage the businesses.

Answer 35

1. If a debt is canceled as a gift or bequest to the recipient or as part of a renegotiation of a purchase price, such debt cancellation would not be a taxable event because the underlying cause of the debt cancellation is not a taxable event. 1. Bankruptcy 1. If a debt is reduced during bankruptcy proceedings, the taxpayer recognizes no income even if the reduction in debt exceeds the available tax attributes. 2. Insolvency 1. In the case of an insolvent taxpayer, no income is recognized as long as the taxpayer is insolvent after the reduction in debt takes place. A taxpayer is insolvent if the debts owed by the taxpayer exceed the Fair Market Value of assets owned. Thus, an insolvent taxpayer reduces the tax attributes to the point of solvency. 2. From that point on, any reduction in debt results in the recognition of income even if all tax attributes have not been offset. 3. Student Debt 1. Under Section 108(f)(2), the discharge of certain student loans is excluded from gross income if the discharge is contingent on the individual's performing certain public services. 2. The loans must have been made by governmental, educational, or charitable organizations, and the loan proceeds must have been used to pay the cost of attending an educational institution or used to refinance outstanding student loans. 3. Further, the loan forgiveness must be contingent upon the individual's working for a specified time period in certain professions, and the services must normally be performed for someone other than the lender.

Answer 36

Example 1 - You don’t have to report any of that money as income on your tax return. Example 2 - You don’t have to report $10,000 of the income, but you will have to report $4,000 as income on your tax return. And you have to fill out Form 982 to demonstrate to the IRS why you aren’t including the amount listed on the 1099-C in your taxable income.

Answer 37

Taxpayer may exclude up to $250,000 ($500,000 in the case of a married couple filing a joint return) of gain from the sale of personal residence.

Answer 38

Military personnel may exclude disability pay, combat pay (noncommissioned personnel only), and housing allowances.

Answer 39

While employees receive the greatest income tax benefit from the exclusion of fringe benefits from gross income, employers receive a small benefit from the fact that fringe benefits are not subject to Social Security and Medicare taxes.

Answer 40

The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Gift Loan 1. Gift loan is any below-market loan where the forgone interest is in the nature of a gift. 2. Foregone Interest is treated as Gift to borrower and treated as income to the lender... Demand Loan 1. A demand loan is a loan payable in full at any time upon demand by the lender. 2. Foregone interest is treated as a dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Term Loan 1. A term loan is any loan that is not a demand loan. A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. 2. The lender must report the annual part of the OID as interest income. The borrower may be able to deduct the OID as interest expense. NOTE - 1. Regardless of the interest rate you intend to charge (if any), you want to be able to prove that you intended the transaction to be a loan rather than an outright gift. That way if the loan goes bad, you can claim a non-business bad debt deduction on your Form 1040 for the year you get the bad news. 2. _Losses from non-business bad debts are classified as short-term capital losses_. 3. Capital losses are valuable because they can offset capital gains and potentially up to $3,000 of income from other sources

Answer 41

You may be subject to the NIIT. The NIIT is a 3.8% tax on the lesser of 1. your net investment income OR 2. the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Thresholds = 1. MFJ = $250,000 2. MFS = $125,000 3. Single = $200,000 4. HoH = $200,000 5. QW = $250,000

Answer 42

have more than $2,100 of unearned income; are required to file a tax return; meet certain age/earned-income/self-support threshold; have at least one parent alive at the end of the year; and don’t file a joint return for the year. However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Use Form 8814, Parents’ Election To Report Child’s Interest and Dividends, for this purpose.

Answer 43

Your investment income generally is not subject to regular withholding. However, it may be subject to backup withholding to ensure that income tax is collected on the income. Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Backup withholding applies if: You do not give the payer your identification number TIN in the required manner, The IRS notifies the payer that you gave an incorrect TIN, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3).

Answer 44

An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax.

Answer 45

Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.

Answer 46

Interest on Instruments under 1 year 1. Must include the interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. 2. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Interest on Instruments over 1 year 1. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

Answer 47

The bank gives you a Form 1099-INT for 2018 showing the $575 interest you earned. The bank also gives you a statement showing that you paid $310 interest for 2018. You must include the $575 in your income. If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Limitations on the Deduction: 1. The amount of interest that can be deducted in any particular year is limited to a taxpayer's net investment income for that same year. It can't exceed that amount. Investment Interest 1. Investment interest is interest paid on a loan where the proceeds were used to purchase property you held for investment. Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. It also includes property that produces gain or loss. 2. Investment interest should also be deducted when you're calculating the 3.8 percent unearned income Medicare contribution tax on net investment income. How to Calculate Your Investment Income 1. Investment income means investment income minus investment expenses, other than any interest expenses that were incurred only for purposes of calculating the investment interest deduction. 2. Investment expense deductions can include accounting fees, legal fees, fees for automatic investment services, fees for investment advice, and safe deposit box costs. The Capital Gains Election 1. Taxpayers can elect to include qualified dividends and net capital gains in the calculation of net investment income for the year for the purpose of deducting investment interest. This election is accomplished by choosing how much of your qualified dividends and net capital gains you want to include in net investment income on line 4(g) of Form 4952. 2. The effect of this election is that qualified dividends and net capital gains included in net investment income are taxed at ordinary tax rates, not at the lower long-term capital gains tax rates. But another effect of this election is that you could have higher net investment income and thus a higher deduction for investment interest.

Answer 48

Applicable federal rates are published as Revenue Rulings by the IRS each month in the Internal Revenue Bulletin. The Internal Revenue Bulletin is available through IRS.gov/ IRB. You also can find applicable federal rates in the Index of Applicable Federal Rates (AFR) Rulings at IRS.gov/FederalRates. Rates are: 1. Short-term = 3 years or less 2. Mid-term = 3 years 1 day to 9 years 3. Long-term = more than 9 years Also divided by period for compounding: 1. Annual, Semi-Annual, Quarterly, Monthly June 2019 1. Semi-Annual Short-Term: 1. AFR = 2.36% 2. Semi-Annual Mid-Term: 1. AFR = 2.37% 3. Semi-Annual Long-Term: 1. AFR = 2.74%

Answer 49

you are treated as if you made a gift to the borrower. This gift is the difference between the AFR and the interest you actually charged, if any. The borrower is then deemed to have paid that amount back to you as interest (this is the imputed interest). You must report the imputed interest as income on your income tax returns. The borrower may get a deduction depending on what the funds were used for.

Answer 50

treated as parents making gift to both their son and daughter in law $15,000.00 of mortgage principal forgiveness, per year, until the loan is fully satisfied and the recognition / deduction of interest income.

Answer 51

1. **Exception for loans of $10,000 or less.** 1. ****The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. This exception applies only to: 1. Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, an 2. Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. 2. NOTE-- Won't apply to Term Loan now reduced below $10,000 1. **Limit on forgone interest for gift loans of $100,000 or less.** 1. For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. 2. Doesn't apply to Gift Tax Consequences but should fall within the annual exclusion.

Answer 52

These bonds were issued at face value. Unlike EE bonds, HH bonds are current-income securities. You paid face value and receive interest payments by direct deposit to your checking or savings account every six months until maturity or redemption. Interest is paid twice a year by direct deposit to your bank account. If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Series HH bonds were first offered in 1980 and last offered in August 2004. Before 1980, Series H bonds were issued. All have matured. Series H bonds are treated the same as Series HH bonds. If you are a cash method taxpayer, you must report the interest when you receive it. Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years. The last Series H bonds matured in 2009. The last Series HH bonds will mature in 2024. **_TAX_** * Interest earnings are exempt from state and local income taxes but are subject to federal, state, and local estate, inheritance, gift, and other excise taxes. * Interest earnings are subject to federal income tax.

Answer 53

**Series EE Bonds** 1. Paper Series EE bonds are issued at a discount. The face value is payable to you at maturity. Electronic Series EE bonds are issued at their face value. The face value plus accrued interest is payable to you at maturity. As of January 1, 2012, paper savings bonds are no longer sold at financial institutions. **Series I Bonds** 1. Series I bonds were first offered in 1998. These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. The face value plus all accrued interest is payable to you at maturity. **Reporting options for cash method taxpayers.** If you use the cash method of reporting income, you can report the interest on Series EE, Series E, and Series I bonds in either of the following ways. 1. Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. (However, see Savings bonds traded , later.) 1. Note. Series EE bonds issued in 1988 matured in 2018. If you have used method 1, you generally must report the interest on these bonds on your 2018 return. The last Series E bonds were issued in 1980 and matured in 2010. If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. 2. Method 2. Choose to report the increase in redemption value as interest each year. 1. You must use the same method for all Series EE, Series E, and Series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. 2. If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. To learn how, see Education Savings Bond Program, later.

Answer 54

THEN the interest must be reported by ... 1. You 2. the person for whom you bought the bond. 3. both you and the other co-owner, in proportion to the amount each paid for the bond. 4. you and your spouse. If you file separate returns, both you and your spouse generally report half of the interest.

Answer 55

These bills generally have a 1. 4-week, 2. 13-week, 3. 26-week, or 4. 52-week maturity period. They generally are issued at a discount in the amount of $100 and multiples of $100. The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Generally, you report this interest income when the bill is paid at maturity. If you paid a premium for a bill (more than face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity. If you reinvest your Treasury bill at its maturity in a new Treasury bill, note, or bond, you will receive payment for the difference between the proceeds of the maturing bill (par amount less any tax withheld) and the purchase price of the new Treasury security. However, you must report the full amount of the interest income on each of your Treasury bills at the time it reaches maturity.

Answer 56

Treasury Notes have maturity periods of more than 1 year, ranging up to 10 years. Treasury Bonds have a maturity longer than 10 years. Both generally are issued in denominations of $100 to $1 million and both generally pay interest every 6 months. Generally, you report this interest for the year paid. When the notes or bonds mature, you can redeem these securities for face value or use the proceeds from the maturing note or bond to reinvest in another note or bond of the same type and term. If you do nothing, the proceeds from the maturing note or bond will be deposited in your bank account. Treasury notes and bonds are sold by auction. Two types of bids are accepted: 1. competitive bids and 2. noncompetitive bids. If you make a competitive bid and a determination is made that the purchase price is less than the face value, you will receive a refund for the difference between the purchase price and the face value. This amount is considered original issue discount. However, the original issue discount rules (discussed later) do not apply if the discount is less than one-fourth of 1% (0.0025) of the face amount, multiplied by the number of full years from the date of original issue to maturity. See De minimis OID , later. If the purchase price is determined to be more than the face amount, the difference is a premium. (See Bond Premium Amortization in

Answer 57

These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. Interest payments from Treasury Inflation-Protected Securities (TIPS), **_and_** increases in the principal of TIPS, are subject to federal tax, but exempt from state and local income taxes. Form 1099-INT shows the sum of the semiannual interest payments made in a given year. Form 1099-OID shows the amount by which the principal of your TIPS increased due to inflation or decreased due to deflation. Increases in principal are taxable for the year in which they occur, even if your TIPS hasn't matured, so you haven't yet received a payment of principal.

Answer 58

Part of sale represents interest accrued to the date of sale = interest income If you are the buyer, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you on the next interest payment date, treat it as a return of capital and reduce the basis in your bond.

Answer 59

Life insurance proceeds paid to you as the beneficiary of the insured person usually are not taxable. But if you receive the proceeds in installments, you usually must report part of each installment payment as interest income. Options 1. Interest Income Option 2. Fixed Period Option 3. Fixed Amount Option 4. Life Income Option 5. Specific Income Option 6. Joint and Survivor Option

Answer 60

Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a U.S. possession, or any of their political subdivisions. Political subdivisions include: * Port authorities, * Toll road commissions, * Utility services authorities, * Community redevelopment agencies, and * Qualified volunteer fire departments (for certain obligations issued after 1980). There are other requirements for tax-exempt bonds. Contact the issuing state or local government agency or see sections 103 and 141 through 150 of the Internal Revenue Code and the related regulations.

Answer 61

Interest on a private activity bond that is not a qualified bond (defined below) is taxable. Generally, a private activity bond is part of a state or local government bond issue that meets both the following requirements. 1. More than 10% of the proceeds of the issue is to be used for a private business use. 2. More than 10% of the payment of the principal or interest is: 1. Secured by an interest in property to be used for a private business use (or payments for this property), or 2. Derived from payments for the property (or borrowed money) used for a private business use. Qualified bond. 1. Interest on a private activity bond that is a qualified bond is tax exempt. A qualified bond is an exempt-facility bond (including an enterprise zone facility bond, a New York Liberty bond, a Midwestern disaster area bond, a Hurricane Ike disaster area bond, a Gulf Opportunity Zone bond treated as an exempt-facility bond, or any recovery zone facility bond issued after February 17, 2009, and before January 1, 2011), qualified student loan bond, qualified small issue bond (including a tribal manufacturing facility bond), qualified redevelopment bond, qualified mortgage bond (including a Gulf Opportunity Zone bond, a Midwestern disaster area bond, or a Hurricane Ike disaster area bond treated as a qualified mortgage bond), qualified veterans' mortgage bond, or qualified 501(c)(3) bond (a bond issued for the benefit of certain tax-exempt organizations). 2. Interest you receive on these tax-exempt bonds, if issued after August 7, 1986, generally is a "tax preference item" and may be subject to the alternative minimum tax. See Form 6251 and its instructions for more information. 3. The interest on the following bonds is not a tax preference item and is not subject to the alternative minimum tax. 1. Qualified 501(c)(3) bonds. 2. New York Liberty bonds. 3. Gulf Opportunity Zone bonds. 4. Midwestern disaster area bonds. 5. Hurricane Ike disaster area bonds. 6. Exempt facility bonds issued after July 30, 2008. 7. Qualified mortgage bonds issued after July 30, 2008. 8. Qualified veterans' mortgage bonds issued after July 30, 2008.

Answer 62

A debt instrument, such as a bond, note, debenture, or other evidence of indebtedness, that bears no interest or bears interest at a lower than current market rate usually will be issued at less than its face amount. This discount is, in effect, additional interest income. The following are some types of discounted debt instruments. 1. U.S. Treasury bonds. 2. Corporate bonds. 3. Municipal bonds. 4. Certificates of deposit. 5. Notes between individuals. 6. Stripped bonds and coupons. 7. Collateralized debt obligations (CDOs). The discount on these instruments (except municipal bonds) is taxable in most instances. The discount on municipal bonds generally is not taxable (unless it falls under an exception, i.e. interest on federally guaranteed state/local obligations issued after 1983 provided its not one of the excepted federal agencies (e.g. FHA, FNMA, GNMC)

Answer 63

OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price. All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments. The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue).

Answer 64

You can treat the discount as zero if it is less than one-fourth of 1% (0.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. This small discount is known as "de minimis" OID. Example 1 = One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Because the $20 discount is less than $25, the OID is treated as zero. (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain.) Example 2 = Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond.

Answer 65

**Example 1** - Foregone Interest is treated as a gift. No gift tax will be due since it is below the annual $15,000 exclusion, and dad owes no tax on the forgone interest if the son has $1,000 or less of net investment income. **Example 2** - You’ll have taxable interest income based on that rate for the life of the loan. Your nephew will have an equal amount of interest expense — which may or may not be deductible depending on how the loan proceeds are used. Tax-wise, that’s all you need to know about the interest rate issue. So if you decide to charge the AFR, you can ignore most of the rest **Example 3** - Your taxable imputed interest income is zero. However if your niece’s net investment income is $1,200, your imputed interest income is $1,200. In most cases, the borrower will have under $1,000 of net investment income. If so, you’ll have zero imputed interest income under the tax rules. Good! Gift tax consequences under this loophole: The gift tax results under the $100,000 loophole are tricky, but they will almost never have any meaningful impact under the current federal gift and estate tax regime. Reason: the unified federal gift and estate tax exemption for 2019 is $11.4 million, and the exemption is scheduled be even bigger next year thanks to an inflation adjustment.

Answer 66

No, everyone is eligible. The out-of-pocket limit doesn't include your monthly premiums. It also doesn't include anything you spend for services your plan doesn't cover. **Example** - 1. You pay the first $1,300 of covered medical expenses (your deductible). 2. Your 20% coinsurance on the rest of the costs ($18,700) comes to $3,740. 3. So your total costs would be $5,040. That's $1,300 (your deductible) plus $3,740 (coinsurance). 4. But your out-of-pocket maximum is $4,400. Your insurance company pays all covered costs above $4,400 — for this surgery and any covered care you get for the rest of the plan year. 5. Generally, plans with lower monthly premiums have higher out-of-pocket limits. Plans with higher premiums usually have lower out-of-pocket maximums.

Answer 67

The percentage of costs of a covered health care service you pay (20%, for example) after you've paid your deductible. You'd pay all of the first $3,000 (your deductible). You'll pay 20% of the remaining $9,000, or $1,800 (your coinsurance). So your total out-of-pocket costs would be $4,800 — your $3,000 deductible plus your $1,800 coinsurance. If your total out-of-pocket costs reach $6,850, you'd pay only that amount, including your deductible and coinsurance. The insurance company would pay for all covered services for the rest of your plan year. Generally speaking, plans with low monthly premiums have higher coinsurance, and plans with higher monthly premiums have lower coinsurance.

Answer 68

Employees can wait to exercise the stock option until the employer’s stock can be sold on a securities exchange, or in a corporate transaction, when the employee can sell shares to cover the related income and employment taxes.

Answer 69

At first glance, it may appear great that the employee has stock valued at $50,000, but the rub is that these are shares in a private corporation with no market to sell the shares. Unless this employee has really skyrocketed up the corporate ladder, he or she probably does not have the funds readily available to pay the taxes due on $50,000 of nontransferable and non-marketable employer stock. By making a timely 83(i) election, the startup vice president does not have to pay any money out of pocket at the time of vesting. Five years is a long time in startup land for a liquidity event (sale, IPO, merger, etc.) to occur and put cash in the employee’s pocket to pay the taxes. Also, if during the five-year period the value of the stock increased to $20 per share (or $200,000), the employee would only pay ordinary income taxes on the deferred amount of $50,000 and would pay long-term capital gains rates on the remaining $150,000 in value. Downside Risk There are still some potential downside issues to consider when making an 83(i) election, which are very similar to the issues a person must consider when making an 83(b) election. First, even if the value of the deferral stock decreases in value during the deferral period, the amount of income taxes due on the deferral stock at the end of the deferral period will still be based on the value when the 83(i) election was made. In the example above, if the vice president makes an 83(i) election when the value of the qualified stock is $50,000, and during the deferral period the value of those shares decreases to $30,000, the employee will still owe income taxes on $50,000 at the end of the deferral period.

Answer 70

**100% of prior year** = The total of your withholding and timely estimated tax payments was at least as much as your 2017 tax. **90% of 2017 Tax** = The tax balance due on your 2018 return is no more than 10% of your total 2018 tax, and you paid all required estimated tax payments on time. Your total tax for 2018 minus your withholding is less than $1,000. You didn’t have a tax liability for 2017. You didn’t have any withholding taxes and your current year tax (less any household employment taxes) is less than $1,000.

Answer 71

Fixed annuities pay a guaranteed minimum rate of return and provide a fixed series of payments under conditions determined when you buy the annuity. During the accumulation phase, the insurance company invests the premiums in high-quality, fixed-income investments like bonds. Because your rate of return is guaranteed, the insurance company bears all of the investment risk with fixed annuities. A multi-year guarantee annuity (MYGA) is a type of deferred fixed-rate annuity that's "great for conservative investors who want guaranteed principal protection," Nuss says. It works much like a certificate of deposit by guaranteeing a rate over a fixed period. However, unlike CD interest, the interest on a MYGA isn't taxed annually but rather allowed to grow tax-deferred until withdrawal.

Answer 72

The general rule, set forth in §105(a), is that amounts received by an employee for personal injuries or sickness through accident and health insurance are taxable if such amounts are paid by the employer or are attributable to employer contributions not included in the gross income of the employee. Exceptions: 1. _Amounts Expanded for Medical Care_ - medical expense reimbursements under §105(b); and 2. _Payments are unrelated to absence from work_ - permanent injury payments within the meaning of §105(c). Section 105 supplements §104(a)(3), which excludes only sickness and personal injury benefits not financed by an employer. If both the employer and the employee(s) pay the premiums on accident or health insurance or contribute to a noninsured accident or health plan, it is necessary to determine what portion of a benefit is subject to §104(a)(3) and what portion to §105. Under Reg. §1.105-1(c)(1), each benefit received is divided in proportion to the amounts contributed (or the premiums paid) by the respective sources.