Unit 10: Other Taxable Income Flashcards
What is a “recovery?”
a return of an amount a taxpayer deducted or took a credit for in an earlier year
What is the rule on recovery in income?
include a recovery in income in the year received, to the extent the deduction or credit reduced taxpayer’s taxes in the earlier year
State and local income tax refunds are reported as taxable income in the year received only if:
- the taxpayer itemized deductions in the prior year in which those taxes were overpaid and
- the amounts paid in the prior year reduced his tax liability in that year
The payer of state and local income tax refunds sends a Form ___ to the taxpayer by ___and sends a copy to the IRS
1099-G, Certain Government Payments; January 31
Refunds of federal income taxes are ___in taxpayer’s income because they are:
not included; never allowed as a deduction
Under the Tax cuts and Jobs Act (TCJA), how is alimony received treated in 2019?
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
What is the rule on child support?
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
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 ___
child support until that obligation is fully paid; alimony
If an alimony payment is subject to reduction based on a contingency relating to a child, the amount subject to reduction is treated as
child support
What are the qualifications for a payment to qualify as alimony?
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
SS income is reported to the taxpayer on ___and are taxable in certain cases, depending upon:
form SSA-1099, Social Security Benefit Statement; income and benefits received for the year
To determine if any percentage of SS benefits is taxable, a taxpayer must
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
Base amounts for calculating taxability of Social Security
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
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.
combine;
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.
- What is the total security benefits?
- what is the sum of benefits and other income?
- Are their benefits taxable or not? explain.
- 11,000
- $5,500 (1/2 of 11,000) + $20,500 = $26,000
- Not taxable because the sum of the benefits and other income is less than their base amount of $32,000
What is “other income?”
items that do not have separately identified lines on Form 1040
Where is Other Income reported?
on Schedule 1, Form 1040
Gambling winnings will be reported to a taxpayer on Form W-2G if he wins:
$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
In 2019 gambling losses are reported on ____ as a miscellaneous itemized deduction, but the deduction is limited to:
Sch.A; the amount of gambling winnings
Generally, If debt is canceled or forgiven, the taxpayer must
include the deb forgiveness in gross income
a recourse debt holds the borrower:
personally liable
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:
ordinary income
if the taxpayer abandons property that secures a debt for which the taxpayer is not personally liable (nonrecourse), the abandonment is treated as a
sale or exchange
if a loan is nonrecourse and the borrower does not retain the asset, the borrower does not have to
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
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:
“other income”; line 8;
- the cancellation of debt income
- 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
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:
a sale; gain or loss;
nondeductible
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?
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
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?
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
A taxpayer is insolvent when:
his total debts are more than the FMV of his total assets
If a taxpayer is insolvent when the debt is canceled, what happens to the canceled debt?
it is nontaxable to the extent of the insolvency
How are debts discharged through bankruptcy court in a title 11 bankruptcy case treated?
non-taxable income
how do you report debt canceled in bankruptcy?
attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to your federal income tax return
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:
taxable income;
loan modification or foreclosure of a taxpayer’s principal residence
What is the Mortgage Forgiveness Debt Relief Act?
mortgage debt on a primary residence that was forgiven was excluded from taxable income
What is a Qualified Principal Residence Indebtedness?
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
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
bankruptcy case or whole the taxpayer was insolvent (up to the amount of the insolvency of the taxpayer right before the debt cancellation)
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:
later works for a specified period of time in certain professions;
not have to be recognized as income
Discharges of student loans will not be taxable when:
This provision covers eligible student loans discharged from :
the discharges is on account of death or permanent disability
January 1, 2018 - Dec. 31, 2025
What is the IRS Revenue Procedure 2020-11?
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.
What is the rule on qualified farm indebtedness?
If a taxpayer incurred the canceled debt in a farming business, it is generally not considered taxable income
What is the rule on canceled debt that is otherwise deductible?
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
What is a hobby?
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
The IRS presumes that an activity is “carried on for a profit” if it makes a profit during at least:
three of the last five tax years, including the current year
Uses of hobby-expenses under the TCJA
no longer permitted as itemized deductions
A taxpayer with hobby income is still allowed to deduct ___, if it applies, in order to arrive at taxable income
COGS
Court awards for compensation for lost wages or profits are generally taxable as
ordinary income
Compensatory damages for personal physical injury or physical sickness are
not taxable income
Damages received for emotional distress due to “physical injury or sickness” are
treated the same way as damages for physical injury or sickness
If the plaintiff’s emotional distress is not due to physical injury, the proceeds are ___, except for:
taxable; damages received for medical care that are directly related to that emotional distress
What are punitive damages?
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)
Civil damages, restitution, or other monetary awards that the taxpayer received as compensation for wrongful incarceration are
not taxable
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
subject to nondisclosure agreement
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:
taxable; “other income”; FMV
rejecting the prize or directly transfer the prize to a charity or other nonprofit organization
Tax free education assistance includes:
scholarships, Pell Grants, and employer-provided educational assistance
What is a Scholarship?
an amount paid to an undergraduate or graduate student to pursue a college degree
What is a fellowship?
an amount paid to an individual to pursue research
A scholarship or fellowship is excluded from income only if:
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
Qualified educational expenses include:
tuition, required fees, and course- related expenses such as books
What is a Pell Grant?
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
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 ___
nontaxable; taxable income
Veterans’ benefits for education are tax-free if:
administered by the Department of Veteran’s Affairs
What is a Qualified Tuition Program also known as Section 529 Plans?
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.
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.
gifts; $15,000
Why are 529 plans commonly used for estate planning purposes?
the amounts contributed to a 529 are removed from the calculation of a donor’s gross estate
What makes the 529 plan different from the Coverdell ESA?
it does not impose age or income limits
Distributions from a 529 plan are reported to the taxpayer on Form?
1099-Q
The beneficiary generally does not have to include in taxable income any earnings distributed from a 529 plan if:
the total distribution is less than or equal to a student’s qualified education expenses (after reduction of tax-free education assistance received)
The definition of “qualified higher education expenses” for distributions from 529 accounts also includes:
purchases of computer equipment and technology
A 529 plan “Qualified Expenses” include:
tuition, books, fees, computer equipment, and software, and room and board for any time the beneficiary is enrolled in school.
Who can you designate as a beneficiary under a 529 Plan?
anyone, yourself included
What is the modification added to Section 529 plans under TCJA?
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.
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 ___
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
What happens if total distribution under a 529 plan is greater than a student’s adjusted qualified expenses?
The portion of the earnings is taxable with an excise tax of 10%
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?
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
Any amount distributed from a 529 plan is not taxable if:
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
What is a Coverdell Education Savings Account (ESA)?
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
What makes a Coverdell ESA more flexible than a 529 plan in terms of investing?
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.
In order to contribute fully to an ESA, the contributor’s MAGI must be:
below $190,000 - $220,000 for joint filers or $95,000 - $110,000 for single
All contributions to an ESA must be in ___ and made by ___
cash; due date of the contributor’s tax return (not including extensions)
What are the age limits on a Coverdell?
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.
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:
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
Contributions to a Coverdell ESA are not ___ but amounts deposited in the account grow ___ until they are later distributed
tax-deductible; tax-free
What are the rules regarding accounts established for a beneficiary?
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
What happens if the contributions exceed $2,000 for a single beneficiary to all coverdell accounts?
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.
The penalty for excess ESA contributions is imposed on the ___ of the account. The excise tax must be reported on ___, using IRS Form ___
beneficiary; child’s income tax return; 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
What is the penalty tax on coverdell distributions not used for qualifying educational expenses?
10%
The beneficiary of a Coverdell account can receive distributions to pay qualified education expenses that are tax-free if:
the amount of the distributions does not exceed the adjusted qualified education expenses.
If a coverdell distribution exceeds the beneficiary’s qualified education expenses, a portion of of the earnings is ___ and reported as ___ on:
taxable; “other income”; line 8 of Schedule 1 of Form 1040
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?
True
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:
allocated between the distributions from each account
American Opportunity or Lifetime Learning Credit for that year
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?
$400 of jury duty pay is reported on 1040 while the reimbursements aren’t taxable, therefore not reported.
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?
$115 is reported as income at FMV
You were paid fees to be an executor of an estate. Should you report this as income? Why/Why not?
Yes as “other income” on Schedule 1, Line 8 of Form 1040
