Unit 2 Flashcards
Inclusions
Debt forgiven when not bankrupt
Income or losses passed through from S corporations, partnerships, trusts, and LLCs (reported on Schedule E)
Income from sole proprietorships (reported on Schedule C)
Alimony received that meets certain qualifications
Winnings from gambling (but not losses)
Compensation for non-physical personal harm
Punitive damages
Court awards and damages that replace lost income
Recapture of certain gains from selling property
Distributions from retirement accounts like IRAs, SEPs, SIMPLEs, and other qualified plans
Social security benefits that are taxable
Imputed income (income attributed to you even if you didn’t directly receive it)
Exclusions
Money received from life insurance policies
Life insurance payouts for terminally ill individuals
Gifts you receive
Inherited money or property
Interest earned from municipal bonds
Child support payments
Certain life insurance dividends and similar items that are a return of your original investment
Money taken out from 529 savings plans to pay for education expenses
Employer-provided group life insurance coverage up to $50,000
Educational assistance from your employer up to $5,250
Exclusions from taxes on the sale of your home under certain conditions (§121 exclusions)
Disability income for the portion of premiums paid by the employee
Workers’ compensation benefits
Imputed Income
-To avoid imputing interest (meaning, to treat a transaction as if it involved interest even if it doesn’t explicitly state it), the stated interest rate must be at least as high as 100% of the Applicable Federal Rate (AFR).
-For sale-leaseback arrangements, the stated interest rate must be 110% of the AFR.
-The AFR is set monthly by the federal government based on the interest rate it pays on borrowed money.
-The AFR varies depending on the length of the loan: short-term (up to 3 years), mid-term (over 3 years but not more than 9 years), and long-term (over 9 years).
The key transactions that are exempt from the imputed interest rules
-Debt covered by original issue discount rules.
-Individual loans totaling $10,000 or less (unless used to buy income-generating property).
-Sales of property for $3,000 or less.
-Sales where all payments are due within six months.
Most Common Situations Where Imputed Interest Applies
-gifts, shareholder loans, and certain other types of loans.
-Gift loans: loans given due to love, affection, or generosity.
-Corporate shareholder loans: loans from a corporation to its shareholder(s).
-Compensation-related loans: loans from an employer to an employee.
Exceptions to Imputed Interest
-No interest is assumed on gift loans between individuals if they’re $10,000 or less, except if the money is used to buy something that generates income.
-No interest is assumed on corporate or compensation-related loans if they’re $10,000 or less.
-For loans between individuals ranging from $10,001 to $100,000, the interest assumed is either the borrower’s investment income or the amount calculated using the AFR, whichever is lower. If the investment income is $1,000 or less, no interest is assumed.
Imputed Interest For loans between individuals that range between $10,001 and $100,000 inclusive
Assume applicable federal rate of 7%
$10,000 ,No Investment Income, Lender imputes $0. The loan was for $10,000 or less.
$100,000,$1,000,Lender imputes $0. The net investment income was $1,000 or less.
$100,000, $1,800, Lender imputes $1,800 since this would be less than the AFR amount.
$100,000,$7,300,Lender imputes the AFR amount of $7,000 since it is less than net investment income.
$101,000, Non-applicable, Lender imputes $7,070 (the AFR amount) and the net investment income does not matter.
