Unit 4 - Taxable And NT Income PART 2

Question 1

Above the line deductions

Answer 1

The following expenses are deducted “above the line” (regardless if you use itemized or standard deductions)

1. Alimony payments
2. Business use of your car
3. Business use of your phone
4. Money put in an IRA
5. Money put in HSA
6. Penalties on early withdrawals from savings
7. Student loan interest
8. Teacher expenses
9. Self employment expenses
10. Work related education expenses ( for some military, government, self-employed, or disabled)
11. Moving expenses (military service members)

Question 2

List of itemized deductions

Answer 2

The following can be deduced if you itemize (not the standard deduction)

1. Bad debts
2. Canceled debt on home
3. Capital losses
4. Donations to charity
5. Gains from sale of your home
6. Gambling losses
7. Home mortgage interest
8. Income taxes
9. Sales tax
10. Real estate taxes
11. Personal property tax (vehicle)
12. Losses from disasters and theft
13. Medical and dental expenses over 7.5% of your AGI
14. Miscellaneous itemized deductions
15. Opportunity zone investment

Question 3

Adoption assistance in a cafeteria plan

Answer 3

Paid for entirely with pretax salary reductions

An employee can exclude amounts paid or reimbursed by an employer under a qualified adoption assistance program

Up to a maximum of $15,930

Question 4

HCE

Answer 4

Highly compensated employees

A company officer (President, vice, president, treasurer)

A 5% or greater shareholder in the current or prior year

And employee paid $150,000 or more

A spouse or close family member of one of the persons described above regardless of salary level

Question 5

Family attribution

Answer 5

An employee can be determined to be an HCE merely by familial relationship

Rules will treat the relative of the owner as having the same ownership percentage

Question 6

HCE status when hired in the middle of the year

Answer 6

Will not receive HCE status until the start of the following year, when they are eligible to collect the entirety of their salary

Question 7

Key employees

Answer 7

A company officer having annual pay more than $215,000, the officer does not have to be an owner of the company

A 5% owner of the business

A one percent owner of the business whose annual pay is more than $150,000

Question 8

Benefit plans that favor HCE and key employees

Answer 8

A planet has improperly favored HCE and key employees if more than 25% of all the benefits are given to those employees

If this happens, then the plans can lose their tax status, and the HC and employees will need to pay taxes on the previous non-taxable income

Question 9

Education assistance & student loans

Answer 9

An employee fringe benefit

Assistance can be offered for the cost of tuition, fees, books, supplies, and equipment.

Undergraduate or graduate level courses and do not have to be work related

Up to $5250 is nontaxable

Does not include lodging, meals, and transportation

Question 10

Tuition reduction benefits

Answer 10

A college or other educational institution can exclude the value of a qualified, undergraduate, tuition reduction to an employee, his spouse or a dependent child

Teacher Assistance – the tuition reduction is not taxable

Question 11

Employer provided meals and lodging

Answer 11

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

Provided on the employers business premises

Provided for the employers convenience

Lodging must be required as a condition of employment, and can be provided for the taxpayer, spouse, and dependence

Meals to restaurant employees count as non-taxable

Question 12

Transportation fringe benefits

Answer 12

Transit passes, parking paid, or commuter passes bus passes

Non-taxable for employees up to a certain amount $300

Employers can no longer deduct these expenses

The use of a company car for commuting purposes or other personal use is generally a taxable benefit

qualified “ nonpersonal use “ Exceptions…

Police or fire vehicles
School buses
Ambulances

Exempt from fringe benefit reporting as long as the employer requires their use for the employees to do their job

Question 13

Fringe benefits – cell phones

Answer 13

Employer provided cell phones can be excluded from an employees income

Must have valid business related reasons, such as being on call or to communicate with clients while away from the office

Question 14

Group term life insurance coverage

Answer 14

Up to $50,000 of life insurance coverage can be provided as a non-taxable benefit

Anything above $50,000 is taxable

Taxable amount would show on the W-2 inbox 12 “ code C”

Question 15

Fringe benefits – work related moving expense reimbursements

Answer 15

Only non-taxable for certain members of the armed forces

For all others, moving expenses that are reimbursed or paid for by an employer must be included in the employees taxable income as wages

Question 16

Fringe benefits – no additional cost services

Answer 16

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

These are nontaxable

Unused airline tickets
Open hotel rooms
Cup of coffee
Car wash

Question 17

Fringe benefits – gyms

Answer 17

Employees provided with free or low cost use of a health club on the employers premises, is non-taxable

The gym must be used primarily by employees, their spouses, and their children

If the fitness program is an offsite location, it is taxable

Question 18

Fringe benefits – employee achievement, awards

Answer 18

Non-taxable awards given for length of service or safety, achievement, and limited to the following

$400 for awards that are not qualified plan awards

$1600 for qualified plan awards a qualified plan award is one that does not discriminate in favor of higher compensated employees and that is established under a written plan

The following employee awards are taxable

Cash, gift cards, lodging, stock, bonds, or tickets to sporting events

Question 19

Fringe benefits - De Minimus (minimal) benefits

Answer 19

This is a property or service. An employer provides that has so little value that accounting for it would be impractical.

Examples include the following

Use of a company copy machine

Holiday gifts with a low fair market value

Flowers, fruit, books or similar property provided under special circumstances, such as a birthday

Beverages and snacks

Cash is not excludable as de minimus unless for occasional meal money or transportation fair - so the employee can work in unusual, extended schedule

Question 20

Fringe Benefits – employee discounts

Answer 20

Employees can exclude the value of employee discounts from wages up to the following limits

For services, a 20% discount of the price charge to non-employee customers

For merchandise, the companies, gross profit percentage by the price non-employee customers pay

Question 21

Accountable plan, reimbursement of employee business expenses

Answer 21

When a company reimburses its workers for specific business related cost such as work (cpe), travel and meals the reimbursements are not considered taxable income if they meet all the following requirements

Have incurred the expenses while performing their duties as employees

Provide proper documentation for travel, meals, and lodging expenses

Supply evidence of their employee business expenditures, such as receipts or records

Return any surplus reimbursements within a reasonable timeframe

Employers are not obligated to establish an accountable plan for reimbursing business expenses

Under an accountable plan a company may give cash advances to employees within reason

Qualifying expenses for travel are excludable if it is for temporary travel less than one year

Covers…

Airfare, mileage, reimbursement, taxi, fares, hotels, meals, dry, cleaning, laundry, etc.

Question 22

Taxation of clergy members

Answer 22

Clergy members are individuals who are ordained, commissioned, or licensed by a religious body or church denomination

Salary is reported on form W – two and his taxable

Services in the exercise of the ministry, do not have Social Security or Medicare taxes withheld

But offerings and fees received for performing marriages, baptisms, and funerals must be reported as self-employment income on schedule C

Question 23

Housing allowance for clergy

Answer 23

A clergy member can receive a housing allowance that is non-taxable

Only taxpayers who are serving as clergy are eligible for a housing allowance

The exclusion is limited to the lesser of the following amounts

The amount officially designated as a housing allowance

The amount actually used to provide or rent a home

The fair market rental value of the home, including utilities, property taxes insurance

The housing allowance cannot exceed reasonable pay, and must be used for housing in the year. It is received.

Housing allowances are included in determining self-employment tax – you still have to pay Social Security and Medicare tax on the allowance amount

Question 24

Clergy member – exemption from self-employment tax

Answer 24

Claiming to be Conscientiously opposed to public insurance because of religious principles

A clergy member or a minister can claim an exemption from self-employment tax using IRS form 4029

Application for exemption from Social Security and Medicare taxes and waiver of benefits

The exemption is irrevocable

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

It does not apply to federal income tax, only self-employment tax

If approved, the clergy does not pay Social Security or Medicare taxes and will not receive credit toward those benefits in retirement

If clergy member is a member of a religious order that has taken a vow of poverty, he is exempt from paying self-employment tax on his earnings for qualified services

Question 25

Combat pay

Answer 25

Combat pay is not considered taxable income

Hazardous duty pay is also excludable for military personnel

Enlisted personnel who serve in a combat zone for any part of a month may exclude their pay from tax (for entire month)

Officers – the pay is excluded up to a certain amount, depending on the branch of service

Question 26

Veteran benefits

Answer 26

Benefits paid by the department of veteran affairs to a veteran or his family member are not taxable if they are for…

Education – the G.I. bill

Training

Disability compensation

Work therapy

Dependent care assistance

Other benefits or pension payments because of disability

Question 27

Medicare waiver payments

Answer 27

Also called – difficulty of care payments

Can be excluded from taxpayers, gross income

For in-home care services provided to a disabled individual who resides in the same home

They don’t need to be related to you

Qualified Medicare waiver payments may be excluded from income only when the care provider and the care recipient reside in the same home

Could still receive a form – two or a form 1099 for the income, but it is non-taxable

Question 28

Medicare waiver payments – choosing to include them in your income

Answer 28

Taxpayers who receive these payments may choose to include them in their income for purposes of the

Earned income tax, credit EITC or

the additional child tax credit ACT

Under the SECURE act, taxpayers can use this income to fund an IRA, but they are treated as nondeductible contributions

Question 29

Worker’s Compensation

Answer 29

Always exempt from tax, and do not need to be reported on a tax return

Question 30

Disability retirement, benefits

Answer 30

If a taxpayer retires on disability before reaching the minimum retirement age – the disability retirement benefits are tax taxable as wages

Once the taxpayer reaches retirement age, usually 62, the payments are taxable as pension income

Question 31

Disability insurance benefits

Answer 31

If premiums are paid by the employee – the disability payments are excluded from income (unless it’s paid with pretax dollars)

If an employer pays the insurance premiums – the employee must report the payments as taxable income

If both an employee and the employer have paid premiums for a disability policy, only the employers portion would be reported as taxable income

Question 32

Veterans disability benefits

Answer 32

Also called VA disability compensation

Specifically paid to veterans for disabilities that are service connected

Exempt from taxation, if the veteran was terminated through separation or discharged under honorable conditions

The VA typically does not issue form W – two, form 1099 – R, or any other tax related document for VA disability benefits

Question 33

Life insurance payments

Answer 33

Not taxable to a beneficiary if the payment was the result of the death of the insured

Interest income received on life insurance proceeds is usually taxable

If surrender a life insurance policy for cash, must include an income any proceeds that are more than the cost of the policy

Except for when a terminally, ill person receives a viatical settlement – the funds are tax free

If receiving life insurance proceeds in installments (annuity) rather than a lump sum, part may include interest income – that is taxable