Unit 10 - Other Taxable Income Flashcards
Schedule one – what is reported on it
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
Taxable recoveries – what is a recovery?
A return of an amount, a taxpayer deducted or took a credit for an earlier year
Including a recovery as income
Most common recoveries
What form is received?
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
Taxable recoveries – income tax refunds from state and local governments
How is it taxed?
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
Taxable alimony – what is the treatment of alimony regarding taxable income, and deductions
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
Child support – is it tax deductible?
Child support is never taxable income to the receiver and not deductible by the payer
Payments made to ex spouses that do not qualify as alimony:
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
When alimony payment is subject to reduction based on a contingency related to a child – attaining a certain age, Marrying, and going to college
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
Both alimony and child support included in one divorce agreement
How are partial payments treated
Payments are considered child support until all the child support obligations are fully paid
Additional amounts paid are treated as alimony
QDRO
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
Payments to a third-party – considered alimony
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
Government benefits – welfare benefits, including food, stamps, heating assistance, programs, and poverty assistance
Are exempt from federal taxation
Government benefits – Worker’s Compensation
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
Government benefits – unemployment compensation
Is taxable income – reported on schedule 1
Social Security income – what is it?
What form?
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
SSI
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
How are Social Security benefits taxed?
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%
Social Security benefits – what are the base amounts for calculating taxability
Married filing jointly – $32,000
MFS (if lived together during year) - $0
Single, HOH, QSS, or MFS (live part whole year) – $25,000
Gambling income – what does it include and how is it reported to a taxpayer
How is income and losses reported?
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
Professional gamblers – generating a net operating loss
Regardless, if gambling profit and loss is for personal or professional
Losses can only offset winnings
They cannot generate a loss on schedule C
Gambling winnings – recordkeeping
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
1099 – C
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
Recourse debt vs non-recourse
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
Canceled debt – intended as a gift
There is no taxable income
Example – owes parents money, but they choose to forgive the dead
Where is the cancellation of debt amount reported?
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
Calculating debt forgiveness income for recourse loan
Equals the outstanding debt minus the FMV at time of repossession or foreclosure
Treated as a sale for tax purposes
Any loss is nondeductible
Exclusions to cancel debt income – including recourse loans
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
HELOC
Home equity loan
Non-taxable canceled debt – insolvency
How is it calculated and determined if canceled debt is taxable or non-taxable
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
QPRI
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
Canceled mortgage debt – how to qualify to exclude it from income
- Qualified principal residence indebtedness exclusion QPRI.
- Bankruptcy.
- Insolvency.
Cancellation of student loans
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
Qualified farm indebtedness
Is canceled debt taxable or non-taxable
If debt is incurred in a farming business – it generally not considered taxable income
Canceled debt that is otherwise deductible
Taxable or not taxable
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
Hobby income
How is it calculated?
Where is it reported and how is it taxed?
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
Hobby income versus self-employment income for profit
How to tell the difference
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
Taxation of court awards and damages
What types are taxable and which ones are non-taxable
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
Sexual harassment or sexual abuse settlements with a nondisclosure agreement - deducting expenses
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
Prizes and awards
What’s taxable and where is it reported
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
Tax-free education assistance
What’s included?
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
Scholarships, Pell grants, and fellowships are tax-free only if…
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
Veterans educational benefits – what’s taxable?
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
Qualified tuition programs – what are they?
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
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?
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
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?
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
Miscellaneous other income reported on schedule 1…
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
