Unit 4: Taxable and Nontaxable Income Flashcards
Formula for Taxable Income
Gross income - certain deductions = Adjusted Gross Income
AGI - standard or Itemized deductions = Taxable income
Constructive receipt of income
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
Claim of Right Doctrine
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
Form used to report business income payments
Schedule C, Profit or Loss from Business on Form 1040
Form used to report earnings by self-employed Farmers or fishermen
Schedule F, Profit or Loss from Farming
FICA (Payroll) Tax for each employee and employer
SS: 6.2% each
Medicare: 1.45% each
FICA tax rate for 2019 is ___ up to ____ of combined earned income
15.3%; $132,900
Where is self-employment tax calculated?
Schedule SE, Self-Employment Tax
What are two adjustments related to the self-employment tax that reduce overall taxes for a taxpayer with self-employment income?
- net earnings from SE are reduced by 7.65% before SE tax is calculated
- deduct the employer-equivalent portion of his self-employment tax in determining his adjusted gross income
Rules for self employment income
net the profit or loss from each business to determine total earnings from SE
married taxpayers cannot combine income or loss from self-employment
When are employers required to issue Forms W-2
by January 31
What is Form 8919 used for?
Uncollected SS and Medicare Tax
What is Form SS-8?
Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Rules for advanced wages, commissions, or earnings
Recognize in the year actually or constructively received. If later required to be paid back the following year, it is deductible
What are supplemental wages?
Compensation paid to an employee in addition to regular pay
What is the rule for Garnished Wages?
the full amount of gross wages must be included in taxable wages regardless of how much was taken out
What are rules for property or services provided “in lieu” of wages?
recognize the FMV of the property received as taxable income unless it’s restricted;
Rules on tip income reporting
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
rules on noncash tip reporting
they do not have to be reported to the employer but must be reported and included in the TP’s income at their FMV
Reporting tips by self-employed individuals
tips must be included in gross receipts on Schedule C
Where taxable fringe benefits are reported
reported on the employee’s W-2 and included in taxable income
Taxable and nontaxable income on Retirement plans
employer contributions are to qualified retirement plans are not taxable to the employees; Distributions received are taxable income
Elective deferral
a retirement plan that allows employees to contribute part of their pretax compensation to the plan
Taxation of elective deferral
excluded from taxable compensation for income tax purposes but subject to FICA taxes
Cafeteria plans
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
What are types of cafeteria plans?
accident, dental, vision, and medical benefits
health-care FSA
adoption and dependent care assistance
Flexible Spending Arrangements (FSAs)
a form of cafeteria plan that reimburses employees for expenses incurred for certain qualified benefits
2019 limits to employee salary reduction contributions to health-care FSA
$2,700
Dependent care assistance plan
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
Penalty for overcontribution to health-care FSA
income tax + 6% excise tax on excess contributions and related earnings for each tax year the excess contributions remain in the account
How to avoid excise tax on excess contributions
remove the year’s excess contributions and related investment earnings before the last day to file federal income taxes for the pertinent tax year
What is the amount excluded from taxable income in a qualified adoption assistance program
an employee can exclude amounts paid or reimbursed by an employer up to $14,080 in 2019
How much can be excluded under a dependent care assistance program for Single (or if MFS)
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
What are the rules for highly compensated employees (HCEs) and key employees regarding cafeteria plans?
If a cafeteria plan favor HCEs or key employees, the value of benefits may be taxable
Who is a Highly Compensated Employee?
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
Family attribution rules
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”
When do HCEs hired in the middle of the year receive HCE status?
they receive the status the following year when they are eligible to collect the entirety of their salary
Define “Key Employees”
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
A plan is considered to have improperly “favored” HCEs and key employees if:
more than 25% of all benefits are given to those employees
How much educational assistance can be excluded per year per employee in 2019? What happens if more is paid?
$5,250; the excess is taxed as wages
What are the rules for tuition reduction benefits?
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
An employer may exclude the value of meals and lodging provided to employees if they are provided:
on the employer’s business premises, and the employer’s convenience
What are qualified transportation benefits?
transit passes, paid parking, and a ride in a commuter highway vehicle between the employee’s home and workplace.
What are the rules for transportation fringe benefits?
They are non-taxable to the employee;
What is the 2019 threshold amount for transportation benefits? What happens to the excess?
$265 per month; the excess is included in taxable income as wages
Up to how much life insurance coverage may be provided as a nontaxable benefit?
$50,000
What is the rule on work-related moving expense reimbursements?
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
What are no additional-cost services? Give examples?
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
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?
$400 for non qualified plan awards
$1,600 for qualified plan awards
What is a qualified plan award?
an award that does not discriminate in favor of highly compensated employees and that is established under a written plan
What are de minimis benefits?
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
How much employee discounts can be excluded from wages?
For services, 20% discount of the price charged to nonemployee customers
For merchandise, the gross profit % x price nonemployee customers pay
Reimbursements of employee-business expenses are not taxable income if employees meet all of the following:
have incurred the expenses while performing as employees
adequately account for travel, meals, and lodging
provide evidence such as receipts
return any excess reimbursements
Qualifying expenses for travel are excludable from income if they are:
incurred for temporary travel on business
A clergy member’s salary is reported on:
Form W-2
Offerings and fees received by clergy members for performing marriages, baptisms, and funerals must be reported as:
self-employment income on Schedule C
A clergy member who receives a housing allowance may exclude the allowance from ___ and the exclusion for housing is limited to the lesser of:
gross income;
Fair market rental value (including utilities), or the actual cost to provide the home
Items included in income for purposes of determining a clergy member’s self-employment tax:
salary, other fees, and housing allowances
How can a clergy member claim exemption from SE tax?
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
If a clergy member is a member of a religious order that has taken a vow of property, he is ____
exempt from paying SE tax on earnings for qualified services
What items are not allowed by the church to withhold from a clergy member’s wages? Why?
SS and Medicare taxes; they are treated as self-employed for the purposes of these taxes
What are special rules for combat pay?
they are not taxable income
What are special rules for hazardous pay for enlisted personnel? officers?
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
What are rules for Veterans benefits paid by the Department of Veteran Affairs?
they are not taxable to the veteran or his family
What is workers comp and what are the rules for receiving workers comp?
they are a type of benefit that pays workers injured on the job; they are exempt from tax
As a general rule, LT disability payments from insurance policy are excluded from income if:
the taxpayer pays the premiums for the policy
Disability retirement benefits are
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
What are Veteran’s Disability Benefits?
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
Interest income received as a result of life insurance proceeds is usually
taxable
If a taxpayer surrenders a life insurance policy for cash, he must:
generally include in income any proceeds that are more than the cost of the policy
Rules for a life insurance proceeds received in installments (annuitites)
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
