Unit 10: Other Taxable Income

Question 1

What is a “recovery?”

Answer 1

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

Question 2

What is the rule on recovery in income?

Answer 2

include a recovery in income in the year received, to the extent the deduction or credit reduced taxpayer’s taxes in the earlier year

Question 3

State and local income tax refunds are reported as taxable income in the year received only if:

Answer 3

1. the taxpayer itemized deductions in the prior year in which those taxes were overpaid and
2. the amounts paid in the prior year reduced his tax liability in that year

Question 4

The payer of state and local income tax refunds sends a Form ___ to the taxpayer by ___and sends a copy to the IRS

Answer 4

1099-G, Certain Government Payments; January 31

Question 5

Refunds of federal income taxes are ___in taxpayer’s income because they are:

Answer 5

not included; never allowed as a deduction

Question 6

Under the Tax cuts and Jobs Act (TCJA), how is alimony received treated in 2019?

Answer 6

alimony is nondeductible to the payer and nontaxable income to the recipient

divorce and separation agreements entered before Jan. 1, 2019 will be grandfathered unless modified to a new treatment

Question 7

What is the rule on child support?

Answer 7

it is not taxable income to the receiver and not deductible by the payer because it is viewed as a payment a parent makes simply to support his or her own child

Question 8

If a divorce agreement specifies payments of both alimony and child support and only partial payments are made by the payer, the partial payments are considered ____. Any additional amounts paid are then treated as ___

Answer 8

child support until that obligation is fully paid; alimony

Question 9

If an alimony payment is subject to reduction based on a contingency relating to a child, the amount subject to reduction is treated as

Answer 9

child support

Question 10

What are the qualifications for a payment to qualify as alimony?

Answer 10

the divroce agreement may not include a clause indicating that the payment is something else

if the spouses are legally separated, they cannot live together when the alimony payments are made, or the IRS will not consider the payments to be alimony

the payer must have no liability to make any payment after the death of the former spouse

Question 11

SS income is reported to the taxpayer on ___and are taxable in certain cases, depending upon:

Answer 11

form SSA-1099, Social Security Benefit Statement; income and benefits received for the year

Question 12

To determine if any percentage of SS benefits is taxable, a taxpayer must

Answer 12

compare the base threshold amount for his filing status with the total of:

one half of his benefits plus

all of the taxpayer’s other income, including tax-exempt interest

If the sum is more than the base amount for his filing status, a percentage of SS is taxable

Question 13

Base amounts for calculating taxability of Social Security

Answer 13

MFJ: $32,000

Single, HOH, QW, or MFS (and lived apart from spouse all year): $25,000

MFS (if lived with spouse any time during the year): $0

Question 14

Spouses who file jointly must ___incomes and SS benefits when figuring the taxable portion of their benefits, even if one spouse did not receive any benefits.

Answer 14

combine;

Question 15

George and Mabel are both over 65, their base amount is $32,000. They received total SS benefits of $11,000. George received wages o $20,000 and taxable interest income of $500.

1. What is the total security benefits?
2. what is the sum of benefits and other income?
3. Are their benefits taxable or not? explain.

Answer 15

1. 11,000
2. $5,500 (1/2 of 11,000) + $20,500 = $26,000
3. Not taxable because the sum of the benefits and other income is less than their base amount of $32,000

Question 16

What is “other income?”

Answer 16

items that do not have separately identified lines on Form 1040

Question 17

Where is Other Income reported?

Answer 17

on Schedule 1, Form 1040

Question 18

Gambling winnings will be reported to a taxpayer on Form W-2G if he wins:

Answer 18

$600 or more from regular gambling

$1,200 or more from bingo or slot machines

$1,500 or more on keno

any amounts subject to federal income tax withholding

Question 19

In 2019 gambling losses are reported on ____ as a miscellaneous itemized deduction, but the deduction is limited to:

Answer 19

Sch.A; the amount of gambling winnings

Question 20

Generally, If debt is canceled or forgiven, the taxpayer must

Answer 20

include the deb forgiveness in gross income

Question 21

a recourse debt holds the borrower:

Answer 21

personally liable

Question 22

If a lender forecloses on property subject to a recourse debt and cancels the portion of the debt in excess of the FMV of the property, the canceled portion is treated as:

Answer 22

ordinary income

Question 23

if the taxpayer abandons property that secures a debt for which the taxpayer is not personally liable (nonrecourse), the abandonment is treated as a

Answer 23

sale or exchange

Question 24

if a loan is nonrecourse and the borrower does not retain the asset, the borrower does not have to

Answer 24

recognize the cancellation of debt as income but there is a deemed sales price based on the amount of the non-recourse loan at the time of the abandonment, foreclosure, or short sale

Question 25

If the original debt is a nonbusiness debt, the canceled debt amount is reported as ___on ___ of Schedule 1.

The taxpayer must generally report two transactions:

Answer 25

“other income”; line 8;

1. the cancellation of debt income
2. gain or loss on the sale or repossession, generally equal to the difference between the FMV of the property at the time of the foreclosure and the taxpayer’s adjusted basis in the property

Question 26

If a personal asset such as a vehicle is repossessed, the repossession is treated as a ___ for tax purposes, and a ___ must be computed. A loss related to a personal asset would be:

Answer 26

a sale; gain or loss;

nondeductible

Question 27

Your boat was repossessed and you owed a balance of $170,000 to the lender with the FMV at $140,000. How is the repossession treated? What is the “selling price” ? What must you recognize?

Answer 27

possession is treated as a sale with the “selling price” of $140,000

you must recognize 170,000 - 140,000 = $30,000 of debt forgiveness income

Question 28

You bought a car for $15,000 using a downpayment of $2,000 and borrowed money of $13,000. The car was repossessed and the remaining balance on the loan is $10,000 while the FMV is $9,000. How is the repossession treated?

Answer 28

Since a repossession is treated as a sale, the “selling price” is the FMV of $9,000. The “loss” on the sale is the adjusted basis of $15,000 less FMV of $9,000 = $6,000 which is nondeductible.

The amount of debt forgiven is $10,000 - 9,000 = $1,000 must be reported as income

Question 29

A taxpayer is insolvent when:

Answer 29

his total debts are more than the FMV of his total assets

Question 30

If a taxpayer is insolvent when the debt is canceled, what happens to the canceled debt?

Answer 30

it is nontaxable to the extent of the insolvency

Question 31

How are debts discharged through bankruptcy court in a title 11 bankruptcy case treated?

Answer 31

non-taxable income

Question 32

how do you report debt canceled in bankruptcy?

Answer 32

attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to your federal income tax return

Question 33

Normally, when a bank forecloses on a home and sells it for less than the borrower’s outstanding mortgage, the bank forgives the unpaid mortgage debt, and the canceled debt is ___to the homeowner.

However, a taxpayer may exclude income realized as a result of:

Answer 33

taxable income;

loan modification or foreclosure of a taxpayer’s principal residence

Question 34

What is the Mortgage Forgiveness Debt Relief Act?

Answer 34

mortgage debt on a primary residence that was forgiven was excluded from taxable income

Question 35

What is a Qualified Principal Residence Indebtedness?

Answer 35

it is a mortgage secured by a taxpayer’s principal residence that was taken out to buy, build, or substantially improve that residence and may also include debt from refinancing.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure may qualify for exclusion from taxable income.

The exclusions applies to a main home

It cannot be more than the cost of the home (plus improvements) and the maximum amount that can be treated as QPRI is $2m ($1m for MFS)

the amount of debt forgiven must be reported by completing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness

Question 36

If the canceled debt does not qualify under the qualified principal residence indebtedness exclusion, canceled mortgage debt does not have to be included in taxable income if the debt was canceled in a

Answer 36

bankruptcy case or whole the taxpayer was insolvent (up to the amount of the insolvency of the taxpayer right before the debt cancellation)

Question 37

Certain student loans contain a provision that all or part of the debt incurred to attend a qualified educational institution will be canceled if the student:

The canceled debt does:

Answer 37

later works for a specified period of time in certain professions;

not have to be recognized as income

Question 38

Discharges of student loans will not be taxable when:

This provision covers eligible student loans discharged from :

Answer 38

the discharges is on account of death or permanent disability

January 1, 2018 - Dec. 31, 2025

Question 39

What is the IRS Revenue Procedure 2020-11?

Answer 39

It establishes a safe harbor extending relief to taxpayers who took out a loan to finance attendance at a nonprofit or for-profit school that closed because of certain illegal business practices.

The debt canceled is not taxable and does not have to be reported on tax returns.

Question 40

What is the rule on qualified farm indebtedness?

Answer 40

If a taxpayer incurred the canceled debt in a farming business, it is generally not considered taxable income

Question 41

What is the rule on canceled debt that is otherwise deductible?

Answer 41

If a taxpayer uses the cash method of accounting, he should not recognize canceled debt as income if payment of the debt would have otherwise been a deductible expense

Question 42

What is a hobby?

Answer 42

it is undertaken primarily for pleasure. Even if it produces income, it is not considered as a business because it is not carried on as a profit. It is taxable and reported on Form 1040, Schedule 1, line 21. It is not subject to self-employment tax

Question 43

The IRS presumes that an activity is “carried on for a profit” if it makes a profit during at least:

Answer 43

three of the last five tax years, including the current year

Question 44

Uses of hobby-expenses under the TCJA

Answer 44

no longer permitted as itemized deductions

Question 45

A taxpayer with hobby income is still allowed to deduct ___, if it applies, in order to arrive at taxable income

Answer 45

COGS

Question 46

Court awards for compensation for lost wages or profits are generally taxable as

Answer 46

ordinary income

Question 47

Compensatory damages for personal physical injury or physical sickness are

Answer 47

not taxable income

Question 48

Damages received for emotional distress due to “physical injury or sickness” are

Answer 48

treated the same way as damages for physical injury or sickness

Question 49

If the plaintiff’s emotional distress is not due to physical injury, the proceeds are ___, except for:

Answer 49

taxable; damages received for medical care that are directly related to that emotional distress

Question 50

What are punitive damages?

Answer 50

legal damages assessed in order to “punish” the defendant for outrageous or malicious conduct

They are always taxable income and reported as “other income” on line 8 of Schedule 1 (Form 1040)

Question 51

Civil damages, restitution, or other monetary awards that the taxpayer received as compensation for wrongful incarceration are

Answer 51

not taxable

Question 52

Under the TCJA, no tax deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if the payments are

Answer 52

subject to nondisclosure agreement

Question 53

Prizes and awards are ___ and reported as ___. If the prize is in the form of property, the ___is treated as the taxable amount.

The winner may avoid taxation of the award by:

Answer 53

taxable; “other income”; FMV

rejecting the prize or directly transfer the prize to a charity or other nonprofit organization

Question 54

Tax free education assistance includes:

Answer 54

scholarships, Pell Grants, and employer-provided educational assistance

Question 55

What is a Scholarship?

Answer 55

an amount paid to an undergraduate or graduate student to pursue a college degree

Question 56

What is a fellowship?

Answer 56

an amount paid to an individual to pursue research

Question 57

A scholarship or fellowship is excluded from income only if:

Answer 57

the TP is a degree candidate at an eligible educational institution

the amount 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 services

Question 58

Qualified educational expenses include:

Answer 58

tuition, required fees, and course- related expenses such as books

Question 59

What is a Pell Grant?

Answer 59

a need-based grant that is treated as a scholarship for tax purposes; it is tax free to the extent it is used for qualified educational expenses

Question 60

Cadets and midshipment in the service academy receive free tuition and room and board, which is ___. However, they also receive government pay while at the military academy; these amounts are ___

Answer 60

nontaxable; taxable income

Question 61

Veterans’ benefits for education are tax-free if:

Answer 61

administered by the Department of Veteran’s Affairs

Question 62

What is a Qualified Tuition Program also known as Section 529 Plans?

Answer 62

They are plans that allow you to prepay a student’s qualified educational expenses at an eligible educational institution or contribute to an account that will be used to pay for future expenses.

The amounts contributed to such a plan are not deductible for federal tax purposes, but the earnings grow tax-free.

Question 63

Contributions to a Section 529 are treated as ___ for tax purposes, which means that a donor can contribute up to ___ in 2019, per beneficiary, without incurring any gift tax.

Answer 63

gifts; $15,000

Question 64

Why are 529 plans commonly used for estate planning purposes?

Answer 64

the amounts contributed to a 529 are removed from the calculation of a donor’s gross estate

Question 65

What makes the 529 plan different from the Coverdell ESA?

Answer 65

it does not impose age or income limits

Question 66

Distributions from a 529 plan are reported to the taxpayer on Form?

Answer 66

1099-Q

Question 67

The beneficiary generally does not have to include in taxable income any earnings distributed from a 529 plan if:

Answer 67

the total distribution is less than or equal to a student’s qualified education expenses (after reduction of tax-free education assistance received)

Question 68

The definition of “qualified higher education expenses” for distributions from 529 accounts also includes:

Answer 68

purchases of computer equipment and technology

Question 69

A 529 plan “Qualified Expenses” include:

Answer 69

tuition, books, fees, computer equipment, and software, and room and board for any time the beneficiary is enrolled in school.

Question 70

Who can you designate as a beneficiary under a 529 Plan?

Answer 70

anyone, yourself included

Question 71

What is the modification added to Section 529 plans under TCJA?

Answer 71

distributions are allowed (not exceeding $10,000 per year) for tuition expenses incurred in connection with enrollment or attendance at any public, private, or religious elementary or secondary school.

Question 72

Starting in 2019, the SECURE Act expanded Section 529 plans further to permit tax-free distributions to pay for fees, books, supplies and equipment required for a ___

Answer 72

qualifying apprenticeship program or to pay the principal or interest (up to $10,000) on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary

Question 73

What happens if total distribution under a 529 plan is greater than a student’s adjusted qualified expenses?

Answer 73

The portion of the earnings is taxable with an excise tax of 10%

Question 74

You have qualified education expenses worth $10,000. You received 529 distributions of $7,500 and a tax free scholarship of $4,000.

How much is your adjusted qualified education expense and are any of your 529 distributions reported?

Answer 74

Adjusted qualified education expenses: $6,000 ($10,000 - $4,000 scholarship)

Since $6,000 < $7,500, part of your distributions are taxable and reported as “Other Income” on Line 8 of Schedule 1, Form 1040

Question 75

Any amount distributed from a 529 plan is not taxable if:

Answer 75

if rolled over to another 529 plan for the use of the same beneficiary or for a member of the beneficiary’s family and the amount must be rolled over to another educational account within 60 days after the distribution

Question 76

What is a Coverdell Education Savings Account (ESA)?

Answer 76

they are structured as a trust or custodial account set up to pay qualified elementary, secondary, or higher education expenses for a designated beneficiary.

the funds are withdrawn tax-free when used for educational purposes

Question 77

What makes a Coverdell ESA more flexible than a 529 plan in terms of investing?

Answer 77

Investments are self-directed which means there are a variety of investment options available, whereas a 529 plan is limited to the state’s selected investment options.

Question 78

In order to contribute fully to an ESA, the contributor’s MAGI must be:

Answer 78

below $190,000 - $220,000 for joint filers or $95,000 - $110,000 for single

Question 79

All contributions to an ESA must be in ___ and made by ___

Answer 79

cash; due date of the contributor’s tax return (not including extensions)

Question 80

What are the age limits on a Coverdell?

Answer 80

contributions to a coverdell must be made before the beneficiary reaches age 18 and the use of account must be made by age 30 unless the beneficiary is special needs.

Question 81

If there is a balance in the ESA when the beneficiary reaches age 30, it must be distributed within ___; The beneficiary can also choose to:

Answer 81

30 days of turning 30 (or within 30 days after the death, if before age 30 of the beneficiary); transfer the ESA to another beneficiary (such as a younger sibling or another family member) to avoid the tax

Question 82

Contributions to a Coverdell ESA are not ___ but amounts deposited in the account grow ___ until they are later distributed

Answer 82

tax-deductible; tax-free

Question 83

What are the rules regarding accounts established for a beneficiary?

Answer 83

there is no limit to the number of accounts established for a beneficiary.

the total contribution to all accounts on behalf of a beneficiary cannot exceed $2,000 per year

Question 84

What happens if the contributions exceed $2,000 for a single beneficiary to all coverdell accounts?

Answer 84

There will be a 6% excise tax if the excess contributions and earnings are not withdrawn from the child’s accounts before June 1 of the following tax year . This tax applies each year the excess remains in the account. Any earnings withdrawn as part of a corrective distribution are taxable in the year of the excess contribution.

Question 85

The penalty for excess ESA contributions is imposed on the ___ of the account. The excise tax must be reported on ___, using IRS Form ___

Answer 85

beneficiary; child’s income tax return; 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

Question 86

What is the penalty tax on coverdell distributions not used for qualifying educational expenses?

Answer 86

10%

Question 87

The beneficiary of a Coverdell account can receive distributions to pay qualified education expenses that are tax-free if:

Answer 87

the amount of the distributions does not exceed the adjusted qualified education expenses.

Question 88

If a coverdell distribution exceeds the beneficiary’s qualified education expenses, a portion of of the earnings is ___ and reported as ___ on:

Answer 88

taxable; “other income”; line 8 of Schedule 1 of Form 1040

Question 89

There is no law that prevents a taxpayer from contributing to both a Coverdell and a 529 plan for the same beneficiary. True or False?

Answer 89

True

Question 90

If a beneficiary receives distributions from both a 529 plan and a Coverdell ESA in the same year, and the total distributions exceed the beneficiary’s adjusted qualified education expenses for that year, the expenses must be:

The total education expenses must also be reduced by any amounts used in claiming:

Answer 90

allocated between the distributions from each account

American Opportunity or Lifetime Learning Credit for that year

Question 91

You received jury duty pay for $400 and was also reimbursed for transportation and parking fees for $60. How should you report these as income?

Answer 91

$400 of jury duty pay is reported on 1040 while the reimbursements aren’t taxable, therefore not reported.

Question 92

You host a party for friends which includes a live demo by a Pampered Chef consultant. Your friends ended up buying $2,000 worth of Pampered Chef products and you received a gift of $115 of products for hosting the party. How should you report this?

Answer 92

$115 is reported as income at FMV

Question 93

You were paid fees to be an executor of an estate. Should you report this as income? Why/Why not?

Answer 93

Yes as “other income” on Schedule 1, Line 8 of Form 1040