Taxable and Nontaxable Income

Question 1

What is excluded income?

Answer 1

It retains nontaxable character without regard to the amount of the taxpayer’s income. Most do not have to be reported on a tax return, with the exception of municipal bond interest

Question 2

Gross Income

Answer 2

all income a taxpayer receives in the form of money, goods, property, and services not exempt from tax. Gross income includes other forms of compensation such as dividends, capital gains, taxable fringe benefits, and stock options.

Question 3

AGI

Answer 3

Helps determine eligibility for certain deductions and credits.

Subtracting from gross income certain specific deductions or adjustments

Deductions include certain IRA contributions , certain expenses for self employed individuals, deductible student loan interest and penalties paid to banks on early withdrawals of savings.

Question 4

Taxable Income

Answer 4

Subtract additional deductions from AGI

Question 5

agi calculation

Answer 5

Start with gross income
subtract adjustments to income (“Above the line”) deductions

Question 6

Taxable income calculation

Answer 6

Subtract greater of itemized deductions or the standard deduction

Question 7

Gross tax liability

Answer 7

Taxable income * tax rate

Question 8

net tax liability or refund receivable (based on amount of prepaid tax, if any)

Answer 8

Gross tax liability - credits

Question 9

Earned income

Answer 9

Wages, salaries, tips, professional fees, or self employment for services to be received or performed.

Subject to social security and Medicare taxes (FICA TAXES)

Question 10

Unearned income

Answer 10

Includes interest, dividends, , retirement income, taxable alimony, and disability benefits.

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Question 11

Self employment

Answer 11

Any income received valuing at $400 or more will need to be reported on a Schedule C regardless if you did not get a 1099 NEC

Question 12

constructive receipt of income

Answer 12

Cash basis tax payers be taxed on income when it becomes available and is not subject to substantial limitations or restrictions regardless of whether it is actually in physical possession. Income received by an agent for a taxpayer is constructively received in the year the agent receives it.

Question 13

Accrual basis taxpayers - constructive reciept of income

Answer 13

recognize income when earned than when received (or when available)

Question 14

FICA

Answer 14

Federal Insurance Contributions Act.

Includes Social Security and Medicare tax. The rate changes every year.

Social Security
- Employer: 6.2%
- Employee: 6.2%

Medicare
-Employer: 1.45%
-Employee: 1.45%

Over withholding of social security across multiple jobs will result in a credit to the taxpayer

Question 15

1099 nec

Answer 15

Form is issued to contract work from employers. Only issued if income is more than $600 or more

Question 16

Adjustments for W2 Employment with Self Employment income

Answer 16

Social security wages are paid first
Taxpayer’s net earnings from self employment are reduced by 7.65%
Taxpayer can deduct employer equivalent portion of self employment tax in determining adjusted gross income

Question 17

Self Employment and More than 1 business

Answer 17

Business owner must net the profit or loss from each business to determine the total earnings subject to Self employment tax.

Married taxpayers cannot combine their income or loss from self employment to determine individual earnings subject to SE tax

Question 18

Employees

Answer 18

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Question 19

Independent contractors

Answer 19

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