Unit 4 - Taxable And NT Income PART 2 Flashcards
Above the line deductions
The following expenses are deducted “above the line” (regardless if you use itemized or standard deductions)
- Alimony payments
- Business use of your car
- Business use of your phone
- Money put in an IRA
- Money put in HSA
- Penalties on early withdrawals from savings
- Student loan interest
- Teacher expenses
- Self employment expenses
- Work related education expenses ( for some military, government, self-employed, or disabled)
- Moving expenses (military service members)
List of itemized deductions
The following can be deduced if you itemize (not the standard deduction)
- Bad debts
- Canceled debt on home
- Capital losses
- Donations to charity
- Gains from sale of your home
- Gambling losses
- Home mortgage interest
- Income taxes
- Sales tax
- Real estate taxes
- Personal property tax (vehicle)
- Losses from disasters and theft
- Medical and dental expenses over 7.5% of your AGI
- Miscellaneous itemized deductions
- Opportunity zone investment
Adoption assistance in a cafeteria plan
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
HCE
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
Family attribution
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
HCE status when hired in the middle of the year
Will not receive HCE status until the start of the following year, when they are eligible to collect the entirety of their salary
Key employees
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
Benefit plans that favor HCE and key employees
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
Education assistance & student loans
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
Tuition reduction benefits
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
Employer provided meals and lodging
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
Transportation fringe benefits
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
Fringe benefits – cell phones
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
Group term life insurance coverage
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”
Fringe benefits – work related moving expense reimbursements
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
Fringe benefits – no additional cost services
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
Fringe benefits – gyms
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
Fringe benefits – employee achievement, awards
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
Fringe benefits - De Minimus (minimal) benefits
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
Fringe Benefits – employee discounts
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
Accountable plan, reimbursement of employee business expenses
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.
Taxation of clergy members
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
Housing allowance for clergy
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
Clergy member – exemption from self-employment tax
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
Combat pay
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
Veteran benefits
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
Medicare waiver payments
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
Medicare waiver payments – choosing to include them in your income
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
Worker’s Compensation
Always exempt from tax, and do not need to be reported on a tax return
Disability retirement, benefits
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
Disability insurance benefits
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
Veterans disability benefits
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
Life insurance payments
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
