TYPES OF INCOME Flashcards
Constructive Income
cash basis taxpayer
any value of property should be recognized in the period in which they gained the right to it in
Tax Benefit Rule
T/P to include an expense reimbursement in income of the CY if that expense was taken in the PY as a deduction and it decreased the T/P taxable income
i. e. usually interest with a state tax refund
i. e. using standard deduction = not using itemized which includes state tax refund in calc = no benefit = do not include in income
Interest Income taxable events and items
Mortgage, fed/state tax refunds, US notes and bonds, prepaid interest income
Always taxable except for municipal bonds (by state and local govts) and mutual funds if the funds own municipal bonds
If the municipal bond is sold = taxable
Series EE Bonds
interest paid and taxed at maturity - can elect to tax annually
can exclude from income if at least 24 years old; used to pay higher education expenses
purchaser must be sole owner of the bond (t/p or spouse)
Alimony vs Child Support
Alimony is taxable to the person who receives payment
Child support is NOT taxable to the person who receives payment
Dividend Income
If 0-15% bracket = 0% tax
most = 15% tax
if 39.6% bracket = 20%
3.8% tax could apply depending on AGI
Order:
- Extent of E&P
- Reduced by basis in stock
- Capital gain
Preferred vs Common Stock Dividends
Preferred is taxable
Common is not taxable
Taxable Bonds
Can elect to amortize bond if bought at a premium
Nontaxable bond bought at a premium must be amortized
Amortization - used to offset bond’s basis using constant yield to maturity
Taxable bonds is an offsetting deduction for interest received
Alimony Qualifications
- Must be in cash or expense payment (mortgage)
- Contingent upon life of recipient - terminates when they die
- Must be required by written agreement
- It is not child support or considered non-alimony
List the Damage & Insurance Benefits that are either excluded or included in income
Included:
- unemployment comp (think about same as wages)
- damages received for emotional distress, discrimination, injury to reputation
- punitive damages
Excluded
- worker’s comp - physical injury or sickness
- accident & health policy benefits
- disability plans unless premiums not taxed to employee
- medical insurance premiums
- benefits received under LT care
Annuity Formula
Excludable portion =
(Cost of annuity / expected return) * payment
Prizes & Awards
FMV is included - can be excluded if for civic, artistic, scientific, educational, or literary AND:
- selected without action (i.e. not applying for scholarship)
- not required to perform services
- amount paid directly to tax-exempt or govt organization
Scholarship
Excluded if covers - tuition, books, supplies and equipment required
Included if for room & board
Social Security Benefits formula and rule
Provisional Income = AGI + Tax-Exempt + 50% (SSB)
If over $34,000 take lesser of:
1. 85% * SSB OR
2. [85% * (PI - 34,000)] PLUS lesser of:
50% (SSB) OR
4,500 (single); 6,000 (mfj)
Accrual Basis
Unearned income - recognized in year received - action before dollar
can elect to defer service income in next year if service is to be provided in the next year
can defer advance payment for goods if tax and f/s methods are the same
