Unit 4: Taxable and Nontaxable Income

Question 1

Formula for Taxable Income

Answer 1

Gross income - certain deductions = Adjusted Gross Income

AGI - standard or Itemized deductions = Taxable income

Question 2

Constructive receipt of income

Answer 2

cash-basis taxpayers are taxed on income when it becomes available and is not subject to substantial limitations or restrictions, regardless of whether it is actually in physical possession

it is not considered constructively received if a taxpayer declines it

Question 3

Claim of Right Doctrine

Answer 3

income received without restriction must be reported in the year received, even if there is a possibility it may have to be repaid in a later year

if a nonbusiness income must be repaid, the repayment is not deductible in the year repaid unless it’s over $3,000

Question 4

Form used to report business income payments

Answer 4

Schedule C, Profit or Loss from Business on Form 1040

Question 5

Form used to report earnings by self-employed Farmers or fishermen

Answer 5

Schedule F, Profit or Loss from Farming

Question 6

FICA (Payroll) Tax for each employee and employer

Answer 6

SS: 6.2% each
Medicare: 1.45% each

Question 7

FICA tax rate for 2019 is ___ up to ____ of combined earned income

Answer 7

15.3%; $132,900

Question 8

Where is self-employment tax calculated?

Answer 8

Schedule SE, Self-Employment Tax

Question 9

What are two adjustments related to the self-employment tax that reduce overall taxes for a taxpayer with self-employment income?

Answer 9

1. net earnings from SE are reduced by 7.65% before SE tax is calculated
2. deduct the employer-equivalent portion of his self-employment tax in determining his adjusted gross income

Question 10

Rules for self employment income

Answer 10

net the profit or loss from each business to determine total earnings from SE

married taxpayers cannot combine income or loss from self-employment

Question 11

When are employers required to issue Forms W-2

Answer 11

by January 31

Question 12

What is Form 8919 used for?

Answer 12

Uncollected SS and Medicare Tax

Question 13

What is Form SS-8?

Answer 13

Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

Question 14

Rules for advanced wages, commissions, or earnings

Answer 14

Recognize in the year actually or constructively received. If later required to be paid back the following year, it is deductible

Question 15

What are supplemental wages?

Answer 15

Compensation paid to an employee in addition to regular pay

Question 16

What is the rule for Garnished Wages?

Answer 16

the full amount of gross wages must be included in taxable wages regardless of how much was taken out

Question 17

What are rules for property or services provided “in lieu” of wages?

Answer 17

recognize the FMV of the property received as taxable income unless it’s restricted;

Question 18

Rules on tip income reporting

Answer 18

An individual who receives $20 or more per month in tips must report the tip income to his employer.

Tips of less than $20 per month are exempt from SS and Medicare taxes, but are still subject to federal income tax

Question 19

rules on noncash tip reporting

Answer 19

they do not have to be reported to the employer but must be reported and included in the TP’s income at their FMV

Question 20

Reporting tips by self-employed individuals

Answer 20

tips must be included in gross receipts on Schedule C

Question 21

Where taxable fringe benefits are reported

Answer 21

reported on the employee’s W-2 and included in taxable income

Question 22

Taxable and nontaxable income on Retirement plans

Answer 22

employer contributions are to qualified retirement plans are not taxable to the employees; Distributions received are taxable income

Question 23

Elective deferral

Answer 23

a retirement plan that allows employees to contribute part of their pretax compensation to the plan

Question 24

Taxation of elective deferral

Answer 24

excluded from taxable compensation for income tax purposes but subject to FICA taxes

Question 25

Cafeteria plans

Answer 25

a cafeteria plan provides employees an opportunity to receive certain benefits on a pretax basis

participants must be permitted to choose from at least one taxable benefit (such as cash) and one qualified (nontaxable) benefit

employee contributions are usually deducted based upon salary reduction agreements therefore considered not constructively received and are treated as taxable wages and not subject to employment taxes

Question 26

What are types of cafeteria plans?

Answer 26

accident, dental, vision, and medical benefits

health-care FSA

adoption and dependent care assistance

Question 27

Flexible Spending Arrangements (FSAs)

Answer 27

a form of cafeteria plan that reimburses employees for expenses incurred for certain qualified benefits

Question 28

2019 limits to employee salary reduction contributions to health-care FSA

Answer 28

$2,700

Question 29

Dependent care assistance plan

Answer 29

used to pay for the care of dependents under 13 years old or for other dependents of the employee if they are not able to take care of themselves

Question 30

Penalty for overcontribution to health-care FSA

Answer 30

income tax + 6% excise tax on excess contributions and related earnings for each tax year the excess contributions remain in the account

Question 31

How to avoid excise tax on excess contributions

Answer 31

remove the year’s excess contributions and related investment earnings before the last day to file federal income taxes for the pertinent tax year

Question 32

What is the amount excluded from taxable income in a qualified adoption assistance program

Answer 32

an employee can exclude amounts paid or reimbursed by an employer up to $14,080 in 2019

Question 33

How much can be excluded under a dependent care assistance program for Single (or if MFS)

Answer 33

an employee can exclude up to $5,000 in 2019 ($2,500 if MFS) of benefits received under a qualified dependent care assistance program each year

Question 34

What are the rules for highly compensated employees (HCEs) and key employees regarding cafeteria plans?

Answer 34

If a cafeteria plan favor HCEs or key employees, the value of benefits may be taxable

Question 35

Who is a Highly Compensated Employee?

Answer 35

Any of the following:

an owner of more than 5% of interest in the business at any time during the year or the preceding year, regardless of compensation

an employee with gross compensation in the previous year in excess of $125,000 for the 2019 tax year

an officer of the company

a family member of one of these employees

Question 36

Family attribution rules

Answer 36

an employee who is a spouse, child, grandparent, or parent of someone who is a 5% (or greater) owner of the business, is automatically considered an “owner”

Question 37

When do HCEs hired in the middle of the year receive HCE status?

Answer 37

they receive the status the following year when they are eligible to collect the entirety of their salary

Question 38

Define “Key Employees”

Answer 38

They are any of the following:

a company officer with annual compensation greater than $180,000 in 2019, or

a more than 5% owner of the company, or

a more than 1% (but not more than 5%) owner of the company with annual compensation of more than $150,000 in 2019

Question 39

A plan is considered to have improperly “favored” HCEs and key employees if:

Answer 39

more than 25% of all benefits are given to those employees

Question 40

How much educational assistance can be excluded per year per employee in 2019? What happens if more is paid?

Answer 40

$5,250; the excess is taxed as wages

Question 41

What are the rules for tuition reduction benefits?

Answer 41

An educational organization can exclude the value of a qualified undergraduate tuition reduction to an employee, spouse, or a dependent child if the employee receives it and uses it at that institution.

Graduate education qualifies only if it’s for a grad student who teaches or researches at that institution

Question 42

An employer may exclude the value of meals and lodging provided to employees if they are provided:

Answer 42

on the employer’s business premises, and the employer’s convenience

Question 43

What are qualified transportation benefits?

Answer 43

transit passes, paid parking, and a ride in a commuter highway vehicle between the employee’s home and workplace.

Question 44

What are the rules for transportation fringe benefits?

Answer 44

They are non-taxable to the employee;

Question 45

What is the 2019 threshold amount for transportation benefits? What happens to the excess?

Answer 45

$265 per month; the excess is included in taxable income as wages

Question 46

Up to how much life insurance coverage may be provided as a nontaxable benefit?

Answer 46

$50,000

Question 47

What is the rule on work-related moving expense reimbursements?

Answer 47

They are no longer deductible except for certain members of the armed forces therefore any reimbursements or paid by the employer is taxable as wages

Question 48

What are no additional-cost services? Give examples?

Answer 48

services provided to employee that do not impose any substantial cost to the employer because the employer already offers those services in the ordinary course of business

examples: unused airline seat tickets for employees or open hotel rooms

Question 49

How much tax-free amount is allowed to be excluded from an employee’s taxable wages for the value of awards given for length of service awards or safety achievements?

Answer 49

$400 for non qualified plan awards

$1,600 for qualified plan awards

Question 50

What is a qualified plan award?

Answer 50

an award that does not discriminate in favor of highly compensated employees and that is established under a written plan

Question 51

What are de minimis benefits?

Answer 51

property or service an employer provides that has so little value that accounting for it would be impractical.
this excludes cash and gift cards unless they are for occasional money or transportation fare and the benefit must be provided so that an employee can work an unusual, extended schedule to be non-taxable

Question 52

How much employee discounts can be excluded from wages?

Answer 52

For services, 20% discount of the price charged to nonemployee customers

For merchandise, the gross profit % x price nonemployee customers pay

Question 53

Reimbursements of employee-business expenses are not taxable income if employees meet all of the following:

Answer 53

have incurred the expenses while performing as employees

adequately account for travel, meals, and lodging

provide evidence such as receipts

return any excess reimbursements

Question 54

Qualifying expenses for travel are excludable from income if they are:

Answer 54

incurred for temporary travel on business

Question 55

A clergy member’s salary is reported on:

Answer 55

Form W-2

Question 56

Offerings and fees received by clergy members for performing marriages, baptisms, and funerals must be reported as:

Answer 56

self-employment income on Schedule C

Question 57

A clergy member who receives a housing allowance may exclude the allowance from ___ and the exclusion for housing is limited to the lesser of:

Answer 57

gross income;

Fair market rental value (including utilities), or the actual cost to provide the home

Question 58

Items included in income for purposes of determining a clergy member’s self-employment tax:

Answer 58

salary, other fees, and housing allowances

Question 59

How can a clergy member claim exemption from SE tax?

Answer 59

He must file IRS form 4029, Application for Exemption from SS and Medicare Taxes and Waiver of benefits

The sect or religious order must also complete part of the form

Question 60

If a clergy member is a member of a religious order that has taken a vow of property, he is ____

Answer 60

exempt from paying SE tax on earnings for qualified services

Question 61

What items are not allowed by the church to withhold from a clergy member’s wages? Why?

Answer 61

SS and Medicare taxes; they are treated as self-employed for the purposes of these taxes

Question 62

What are special rules for combat pay?

Answer 62

they are not taxable income

Question 63

What are special rules for hazardous pay for enlisted personnel? officers?

Answer 63

enlisted personnel serving a in a combat zone for any part of a month may exclude their pay from tax

for officers, pay is excluded up to a certain amount depending on the branch of service

Question 64

What are rules for Veterans benefits paid by the Department of Veteran Affairs?

Answer 64

they are not taxable to the veteran or his family

Question 65

What is workers comp and what are the rules for receiving workers comp?

Answer 65

they are a type of benefit that pays workers injured on the job; they are exempt from tax

Question 66

As a general rule, LT disability payments from insurance policy are excluded from income if:

Answer 66

the taxpayer pays the premiums for the policy

Question 67

Disability retirement benefits are

Answer 67

taxable as wages if you retire on disability before reaching the minimum retirement age. Once you reach retirement age, the payments become taxable as pension income

Question 68

What are Veteran’s Disability Benefits?

Answer 68

tax-exempt benefits to a veteran for disabilities linked to their military service ; they are exaempt from taxation if the vet wast terminated through separation or discharged under honorable conditions

Question 69

Interest income received as a result of life insurance proceeds is usually

Answer 69

taxable

Question 70

If a taxpayer surrenders a life insurance policy for cash, he must:

Answer 70

generally include in income any proceeds that are more than the cost of the policy

Question 71

Rules for a life insurance proceeds received in installments (annuitites)

Answer 71

Exclude part of each installment from income. To do so, divide the amount held by the insurance company by the number of installments to be paid. Anything over this excluded amount is taxable interest income