Unit 4 - Taxable And NT Income PART 1

Question 1

“Exclusion” income

Answer 1

All income is taxable except for specific exclusions.

For example, municipal bonds are non-taxable, but they still need to be reported.

Compensation for physical injuries or lawsuit settlements are not taxable and do not need to be reported on the return

There is a difference between an exclusion and a deduction, as some deductions and credits are phased out at higher gross income levels

Question 2

Gross income includes…

Answer 2

Wages, salaries, commissions, tips, and self-employment income

Non-monetary forms of compensation, like goods, property, services, and taxable fringe benefits

Interest, dividends, capital gains, and stock options

Question 3

Adjusted gross income (AGI)

Answer 3

= gross income minus

Certain specific deductions or adjustments

Examples include IRA contributions, expenses for self-employed, individuals, deductible, student loan, interest, and penalties paid to banks on early withdrawals of savings.

Commonly referred to as above the line

Question 4

How to calculate Taxable income

Answer 4

Start with Gross income

Subtract adjustments to income (“ above the line” deductions)

= adjusted gross income

Subtract the greater of itemized deductions or the standard deduction

= taxable income

X tax rate

= gross tax liability

Subtract credits

= net tax liability or refund receivable (based on the amount of tax , if any)

Question 5

FICA taxes
Earned income vs. unearned income

Answer 5

Earned income is generally subject to Social Security and Medicare taxes, also called FICA taxes.

Investment income and other unearned income are generally not subjective like taxes

Question 6

Constructive receipt of income

Answer 6

The doctrine of constructive receipt requires that cash basis taxpayers be taxed on income when it becomes available

And is not subject to substantial limitations or restrictions

Regardless of whether it is in their physical possession

Income is not considered to have been constructively received if a taxpayer declines to accept an item like a prize or award

Fair market value is used

Question 7

The “claim of right” doctrine

Answer 7

An event that requires a taxpayer to pay back (refund/return) and amount over $3000 which they had included in income in a previous year

They may be eligible for a deduction or a tax credit

IRC section 1341

The repayment is deducted on the same form or schedule on which it was previously included … schedule C, schedule D, schedule a

If the repayment is less than $3000, it cannot be deducted

Question 8

Self-employment income includes these type of businesses

Answer 8

Income from ministers, priest, and rabbis for the performance of services, such as baptisms and marriages

The distributive share of trade or business income allocated by a partnership (k-1)

Question 9

Schedule k-1 from a partnership

Answer 9

Individuals report their distributive share of income from a K-1 on form 1040, schedule E part 2.

The income is considered self-employment income and is subject to self-employment tax

Question 10

FICA tax (payroll tax)

Answer 10

The federal insurance contributions act tax.

Includes two separate taxes :

Social Security tax is 6.2% for the employer and 6.2% for the employee or 12.4%

Medicare is 1.45% for the employee and 1.54% for the employer or 2.9% total

The combined FICA tax rate is 15.3%

Question 11

FICA applies to…

Answer 11

A taxpayers combined earned income, including wages, tips, and 92.35% of net earnings from self-employment.

Social Security tax only applies up to $160,200

There is no yearly maximum for Medicare tax

Question 12

Additional Medicare tax

Answer 12

An additional 0.9% Medicare tax is applied on earned income exceeding the following thresholds

Married filing jointly $250,000

Married filing separately, $125,000

Single, HOH, and QSS $200,000

Question 13

RRTA

Answer 13

Railroad retirement

Question 14

Credit for excess Social Security and RRTA tax withheld

Answer 14

When Social Security tax withheld is more than it should be

Usually occurs when a person changes jobs mid year

Fully refundable on a taxpayer individual return

Schedule 3

Question 15

OASDI

Answer 15

Social Security

Means old age, survivors, and disability insurance

Question 16

Self-employment tax

Answer 16

Self-employed individuals are responsible for paying the entire amount of Social Security and Medicare taxes

Calculated on schedule, SE, self-employment tax

Question 17

Adjustments related to the self-employment tax

Answer 17

These adjustments will reduce overall taxes for a taxpayer with self-employment tax

1. Taxpayers net earnings from self-employment are reduced by 7.65%. Similar to the employers share of Social Security tax, not considered wages to the employee. This reduction removes a corresponding amount from the net earnings before the SE taxes calculated.
2. Taxpayer can deduct the employer equivalent portion of his self-employment tax and determining his adjusted gross income.

Question 18

Self-employment tax for more than one business

Answer 18

Taxpayer must net the profit or loss from each business to determine the total earning subject to SE tax

Marriage taxpayers cannot combine their income or loss from self-employment to determine their individual earnings subject to SE tax

Question 19

Employee vs independent contractor

Misclassification

Answer 19

If a worker receives a form 1099 – NEC but believes they are an employee, they can file form SS – eight, determination of worker status for purposes of federal, employment, taxes, and income tax withholding with the IRS

If a determination is made that they are an employee, they will file form 8919, uncollected, Social Security, and Medicare tax on wages, with their tax return

Wages from form 8919 also are reported on the form 1040 on line 1g

Question 20

Advance wages

Answer 20

If an employee request an advance on wages, it would be considered constructively received THEN

Even though he will not actually earn the money until later

Question 21

Supplemental wages

Answer 21

Compensation paid to an employee in addition to their regular pay

Listed on the employees form W-2 and our taxable

Examples …

Vacation and pay

Bonuses, commissions, prizes

Severance pay, backpay, holiday pay

Payment for nondeductible moving expenses

Question 22

Garnished wages

Answer 22

Ex child support

Full amount of gross wages must be included in taxable wages at your end (before the garnished wages)

Question 23

Property or services in Lou of wages

Answer 23

Wages paid in any other form, other than cash are measured by their fair market value

However, if an employee receives stock or other property that is restricted, the property is not included in income until it is available to the employee without restriction.

Student teachers that receive tuition reduction and or free on campus housing in Lou of wages would need to report it as taxable wages

Question 24

Tip income

Answer 24

Tips received our taxable income

Individuals who receive $20 or more per month and tips must report the tip income to their employer

Tips less than $20 are exempt from Social Security and Medicare taxes, but are still subject to federal income tax

More than one job - the $20 tip reporting threshold applies on a purge job basis, not on an overall basis

Question 25

Reporting tip income

Answer 25

An employee who does not report all their tips to their employer generally must report the tips and related Social Security and Medicare taxes on form 1040

Form 4137, Social Security and Medicare tax on unreported tip income, is used to compute the additional tax

Taxpayers who are self-employed and receive tips must include their tip income and gross receipts on schedule C

Question 26

Non-cash tips

Answer 26

Do not have to be reported to the employer, but they must be reported and included in the taxpayers gross income at their fair market value

Example – concert tickets

Question 27

Fringe benefits for employees

Answer 27

Any additional cash, property, or service given to employees on top of their regular taxable wages

Usually offered as part of a compensation package

Common examples being health insurance, retirement, plans, and parking passes

Most fringe benefits are not subject to taxes, but there are some exceptions

Question 28

Taxable fringe benefits for employees

Answer 28

Concert and athletic event tickets

Offsite athletic facilities and health club memberships

The value of employer provided life insurance over $50,000

Any cash benefit in the form of a credit card or gift card?

Transportation benefits, exceeding the monthly max of $300 per month

Employer provided vehicles if they are used for personal purposes

Question 29

Non-taxable fringe benefits for employees

Answer 29

Accident or health plan coverage

Retirement plans

Cafeteria plans

Flexible, spending arrangements (FSAs)

Question 30

Retirement plans

Answer 30

Employer contributions to qualified retirement plans are not taxable to the employees when they are made

When employee receives distributions from a retirement plan, the amounts received our taxable income

Elective deferrals are excluded from taxable compensation for income tax purposes, but is subject to Social Security and Medicare taxes

Question 31

Cafeteria plans

Answer 31

Employees receive certain benefits before taxes are taken out

Examples of qualified benefits are

accidental, dental, vision, and medical insurance

flexible spending accounts

Adoption assistance

Dependent care assistance

Employee contributions are typically deducted through salary, reduction agreements, and they do not count as taxable income

Question 32

Flexible, spending arrangements (FSAs)

Answer 32

An FSA is a form of cafeteria plan benefit that reimburses employees for expenses incurred for certain qualified, benefits, such as healthcare and daycare expenses

Question 33

HCFSA

Answer 33

Healthcare flexible, spending arrangement

Capped at $3050

Both employer and employee may contribute to the healthcare FSA, but contributions from all sources must not exceed the annual maximum

Typically subject to an annual use it or lose it rule with a short 2 1/2 month grace period after year end to claim subsequent year qualifying expenses

Normally healthcare FSA funds that are not spent or forfeited back to the employer

Employee plans can also offer a carryover option with the maximum amount that can be carried forward being 20% of the maximum available salary reduction equals $610

Question 34

DCFSA

Answer 34

Dependent care, flexible spending arrangement or dependent care assistance plan

For unmarried taxpayers and married filing jointly, the annual limit is $5000

For married couples filing separately, the limit is $2500

Funds are used to pay for eligible daycare services, before or after school programs, and adult daycare for disabled dependence

The accounts may only reimburse up to the amount the account is funded .