Unit 10 - Other Taxable Income

Question 1

Schedule one – what is reported on it

Answer 1

Additional income and adjustments to income

Any income that does not have a designated line on the form 1040 is typically recorded on schedule one - considered other income

Examples include miscellaneous income, taxable, alimony, unemployment, compensation, jury duty pay, and gambling winnings

Question 2

Taxable recoveries – what is a recovery?

Answer 2

A return of an amount, a taxpayer deducted or took a credit for an earlier year

Question 3

Including a recovery as income

Most common recoveries

What form is received?

Answer 3

The most common recoveries are state, tax refunds, medical reimbursements, and rebates of deductions that were previously reported on schedule A

The entity issuing the refund will provide a form 1099G – certain government payments – a copy is also sent to the IRS

Question 4

Taxable recoveries – income tax refunds from state and local governments

How is it taxed?

Answer 4

The income is only taxable if the taxpayer itemized deductions in the year, they overpaid those taxes

And only to the extent the amount paid in the previous year, reduced their tax liability

Question 5

Taxable alimony – what is the treatment of alimony regarding taxable income, and deductions

Answer 5

Starting in 2019 alimony payments are non-deductible to the payer and non-taxable to the recipient

Divorce and separation agreements entered into before 2019 are grandfathered

The alimony payments are deductible, and the alimony received is taxable income

Question 6

Child support – is it tax deductible?

Answer 6

Child support is never taxable income to the receiver and not deductible by the payer

Question 7

Payments made to ex spouses that do not qualify as alimony:

Answer 7

Repayment of loan

share of income from community property

Payments to keep up the payers property or free use of the payers property

If payments continue after death - not alimony

Non-property settlements, and any payments made other than in cash

Question 8

When alimony payment is subject to reduction based on a contingency related to a child – attaining a certain age, Marrying, and going to college

Answer 8

The amount that is subject to a reduction is treated as child support and not alimony for tax purposes

Example

Current alimony is 4000
Will reduce to 1000 when child turns 18
Technically only 1000 per month is alimony
Only need to report the 1000 as taxable income

Really only applies to the grandfathered decrees

Question 9

Both alimony and child support included in one divorce agreement

How are partial payments treated

Answer 9

Payments are considered child support until all the child support obligations are fully paid

Additional amounts paid are treated as alimony

Question 10

QDRO

Answer 10

Qualified domestic relations order

A court judgment or court order that is used to legally assigned company provided benefits to an alternate payee

Typically, as part of divorce or marital separation proceedings

An ex spouse may roll over tax-free all or part of a distribution from a qualified retirement plan that they received under a QDRO

Question 11

Payments to a third-party – considered alimony

Answer 11

If under the terms of a divorce agreement – a husband is required to pay the medical bills, a cash payment to the hospital can count as alimony

Payments must be made based on their written divorce or separation agreement in order to be classified as alimony

Question 12

Government benefits – welfare benefits, including food, stamps, heating assistance, programs, and poverty assistance

Answer 12

Are exempt from federal taxation

Question 13

Government benefits – Worker’s Compensation

Answer 13

A form of insurance that provides wage replacement and medical benefits to workers who are injured on the job

Is not subject to federal income tax

Question 14

Government benefits – unemployment compensation

Answer 14

Is taxable income – reported on schedule 1

Question 15

Social Security income – what is it?

What form?

Answer 15

A type of government benefit that applies to individuals who have earned enough Social Security credits and are at least 62 years of age

Social Security income is reported to taxpayers on form SSA – 1099 Social Security benefit statement

Question 16

SSI

Answer 16

Supplemental security income payments

Not taxable

Monthly payments to adults and children with a permanent disability or blindness who have income and resources below specific financial limits

Question 17

How are Social Security benefits taxed?

Answer 17

The portion of benefits that are taxable depends on the taxpayers income and filing status

Taxpayer must compare the base threshold amount for their filing status with the total of :

1/2 of their Social Security benefits

Plus

All of the taxpayers, other income, including tax exempt interest

If the sum is less than the base amount for their status – none of the Social Security is taxable

If the sum is more than the base amount, a percentage of the Social Security may be taxable

The taxable portion of Social Security benefits is never more than 85%

Question 18

Social Security benefits – what are the base amounts for calculating taxability

Answer 18

Married filing jointly – $32,000

MFS (if lived together during year) - $0

Single, HOH, QSS, or MFS (live part whole year) – $25,000

Question 19

Gambling income – what does it include and how is it reported to a taxpayer

How is income and losses reported?

Answer 19

Include winnings from lotteries, raffles, horse, races, and casinos

Reported to taxpayer on form W – 2G, certain gambling winnings

All gambling winnings are taxable regardless if you receive a form W – 2G

Gambling losses are deductible on schedule a as a miscellaneous itemized deduction - but limited to the amount of gambling winnings for the year

Question 20

Professional gamblers – generating a net operating loss

Answer 20

Regardless, if gambling profit and loss is for personal or professional

Losses can only offset winnings

They cannot generate a loss on schedule C

Question 21

Gambling winnings – recordkeeping

Answer 21

Taxpayer must keep an accurate diary or record of gambling winnings, and losses

Along with tickets, receipts, canceled checks, and other documentation

Need to retain in case of an audit

Question 22

1099 – C

Answer 22

Cancellation of debt

In cases where property is surrendered or repossessed, like in a foreclosure

If a lender cancels a debt – issue form 1099 – C

The lender will indicate on the form if the borrower was personally liable for repayment of the debt

The tax impact depends on the type of debt, and whether the loan is recourse or non-recourse

Question 23

Recourse debt vs non-recourse

Answer 23

Recourse debt holds the borrower personally liable

All other debt is considered non-recourse

If a lender fore closes on property subject to a recourse set – and cancels the portion of debt in excess of the FMV

The canceled portion is treated as taxable income

Most home mortgages are non-recourse loans

Question 24

Canceled debt – intended as a gift

Answer 24

There is no taxable income

Example – owes parents money, but they choose to forgive the dead

Question 25

Where is the cancellation of debt amount reported?

Answer 25

If the original debt is a non-business debt… the canceled debt amount is

Reported as other income online 8C of schedule one form 1040

Question 26

Calculating debt forgiveness income for recourse loan

Answer 26

Equals the outstanding debt minus the FMV at time of repossession or foreclosure

Treated as a sale for tax purposes

Any loss is nondeductible

Question 27

Exclusions to cancel debt income – including recourse loans

Answer 27

Bankruptcy or insolvency

Cancellation of qualified, indebtedness, or qualified real property business indebtedness

Cancellation of student loan debt

Cancellation of qualified principal residence indebtedness

Must attach form 982, reduction of tax attributes due to discharge of indebtedness

Question 28

HELOC

Answer 28

Home equity loan

Question 29

Non-taxable canceled debt – insolvency

How is it calculated and determined if canceled debt is taxable or non-taxable

Answer 29

Insolvency is a condition in which the fair market value of all assets is less than the total of one’s liabilities

Legally insolvent, when total debts exceeded the value of total assets immediately prior to the discharge of the debt

If a taxpayer is insolvent – the cancel debt is not taxable – but only to the extent of the insolvency

Example
Insolvency amount equals 20,000
Cancel debt equals 30,000
Taxable amount equals 10,000

Need to report debt forgiven on return and the excluded amount on form 982

Question 30

QPRI

Answer 30

Qualified principal residence indebtedness

A mortgage secured by a taxpayers principal residence that was taken out to buy, build, or substantially improve that residence,

and may also include debt from refinancing

Cannot be more than the cost of the home plus improvements

Canceled mortgage debt is tax-free up to $750,000 ($375,000 for MFS)

Must report the amount of debt forgiven on form 982

QPRI Exclusion only applies to a main home – not a second home, raw land, rental properties, or vacation homes

Question 31

Canceled mortgage debt – how to qualify to exclude it from income

Answer 31

1. Qualified principal residence indebtedness exclusion QPRI.
2. Bankruptcy.
3. Insolvency.

Question 32

Cancellation of student loans

Answer 32

All federal student loans, and some certain private loans and institutional loans are excluded from taxation when canceled

Regardless of whether you receive a 1099-C or not

Question 33

Qualified farm indebtedness

Is canceled debt taxable or non-taxable

Answer 33

If debt is incurred in a farming business – it generally not considered taxable income

Question 34

Canceled debt that is otherwise deductible

Taxable or not taxable

Answer 34

If a taxpayer recognizes a canceled debt income, that would have otherwise been a deductible expense

Do not need to include the cancel debt

Example – a bill for a CPA firm that you can’t pay. Would have been a business expense had it been paid

Question 35

Hobby income

How is it calculated?
Where is it reported and how is it taxed?

Answer 35

The use of Hobby expenses to offset hobby related income is not permitted – but still allowed to deduct COGS in order to arrive at taxable income

Hobby income is taxable and reported on form 1040, schedule 1

Hobby income is not subject to self-employment tax

Question 36

Hobby income versus self-employment income for profit

How to tell the difference

Answer 36

Under the IRS safe Harbor test – an activity is presumed to be operated for profit if it generates a profit at least three out of the last five years, including the current year

The safe Harbor is two out of the last seven years for activities involving horse, breeding or racing

Requiring the taxpayer to report on schedule C and pay self-employment tax

Question 37

Taxation of court awards and damages

What types are taxable and which ones are non-taxable

Answer 37

Taxable:

Core awards for compensation for loss, wages, or profits ,

Punitive damages (always) - other income on schedule 1

Interest on settlements

Emotional distress not for physical injury (but any cost for medical treatment excluded)

Sexual harassment or abuse

Non taxable:

Personal physical injury or physical sickness

Emotional distress due to physical injury

Wrongful incarceration

Question 38

Sexual harassment or sexual abuse settlements with a nondisclosure agreement - deducting expenses

Answer 38

No tax deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if the payments are subject to a nondisclosure agreement

Question 39

Prizes and awards

What’s taxable and where is it reported

Answer 39

Prizes and awards are taxable (with the exception of safety or length of service awards with specific limits)

Reported on form 1040 as other income line 8i of schedule 1

The winner may avoid taxation of the award by rejecting the prize, or having the payer directly transfer the prize to a charity or other nonprofit organization

Question 40

Tax-free education assistance

What’s included?

Answer 40

Includes scholarships, pell, grants, and employer provided educational assistance

Qualified EAP’s – qualifying educational assistance plans

Include the payments of tuition and fees, as well as student loans up to an annual maximum of $5250

Question 41

Scholarships, Pell grants, and fellowships are tax-free only if…

Answer 41

The taxpayer is a degree candidate at an eligible educational institution

The amounts do not exceed qualified, educational expenses

It is not designated for other purposes, such as room and board

It does not represent payment for teaching, research, or other personal expenses

Question 42

Veterans educational benefits – what’s taxable?

Answer 42

VA benefits for education are tax free if administered by the department of veteran affairs

Payments from all G.I. bill programs are tax-free

Including the service member, as well as dependence or surviving spouses who die in the line of duty

Question 43

Qualified tuition programs – what are they?

Answer 43

Also known as QTPs and section 529 plans

Established and maintained by state or educational institutions

These plans allow taxpayer to contribute to an account that will be used to pay future, educational expenses, usually for a beneficiary such as a child

Question 44

Section 529

How established
Who can be a Beneficiary
Age limits
Income limits
Contribution limits
Contributions tax deductible?
How are distributions reported
Eligible institutions
Student loans qualify?
Qualifying expenses
Penalties
What is taxed?

Answer 44

State or Educational Institution

Beneficiary can be anyone the taxpayer designates

No age limits

No income limits

Contributions are treated as gifts – donor can contribute up to $17,000 per beneficiary without incurring any gift tax

Contributions are not tax deductible, but grow tax-free

reported on form 1099 – Q

Eligible institutions include …
Accredited colleges/universities, vocational schools, and post secondary educational institutions
Public private or religious elementary or secondary schools
Qualifying apprenticeship programs

Can also be used to pay off student loans up to $10,000 for the designated beneficiary or a sibling

Qualified expenses don’t include room/board

If the distribution is greater than qualified expenses - an additional excise tax of 10% applies to the taxable amount

Amounts not applied to education taxable, but not the contribution basis

Question 45

Coverdell Education Savings accounts (ESA)

How established
Who can be a Beneficiary
Age limits
Income limits
Contribution limits
Contributions tax deductible?
How are distributions reported
Eligible institutions
Student loans qualify?
Qualifying expenses
Penalties
What is taxed?

Answer 45

The Coverdale ESA is a self-directed tax advantage investment account

Any designated beneficiary

Contributions must be made before the beneficiary reaches age 18 – and the use of the account must be made by age 30 unless special needs

The contributors MAGI is subject to an income phase out range of $95,000-$110,000 or MFJ is $190,000-$220,000

No limit to the number of accounts that can be established but total contributions for all accounts cannot exceed $2000 per year

Contributions that exceed $2000 per year, will have a 6% excise tax

Contributions are not tax deductible, but amount deposited grow tax-free

Reported on form 1099-Q

Not eligible for student loan payments

Does not include room and board

Contributions must be made by the due date of the tax return not including extensions – April 15

If a portion of the distribution is taxable – reported as other income on schedule, one and a penalty tax of 10% applies to distributions that are not used for qualifying educational expenses

Only amounts over the contributors basis can be taxable

Exceptions for death or disability of the beneficiary

Question 46

Miscellaneous other income reported on schedule 1…

Answer 46

Union strike benefits

Jury duty pay – when it is not turned over to the employer and deducted as an adjustment to income

Alaska permanent fund dividends

Fees paid by an estate to a personal representative/executor

Gifts or gratuities received by a host or hostess of a party or event where sales are made