Vickie - Chapter 1: Individual Tax - Income Flashcards
What is included in an individual’s GROSS income?
Wages Interest Dividends State & Local Tax Refunds Alimony received Business Inc (S/E - Schedule C) Capital Gain/Loss IRA Income Pension & Annuity Rental Income/Loss K-1 Income/Loss UE Compensation S/S Benefits Other Income (prizes, awards, scholarships)
What are the adjustments to arrive at AGI in individual taxation?
Educator expenses IRA contribution Student Loan Interest Expense Tuition and Fee Deduction Health Savings Account Moving Expenses S/E: - 1/2 S/E FICA tax - S/E Health Insurance - S/E Retirement Contribution (Keogh) Early withdrawal penalty of savings (Interest penalty) Alimony payments
What are the deductions from AGI?
Med expenses (in excess of 10% AGI)
Taxes - state, local foreign (income/sales & property)
Interest expense (home & investment interest expense)
Charity (up to 50% AGI)
Casualty (in excess of 10% AGI)
Misc (in excess of 2% AGI)
Other Misc (no 2% AGI limitation)
How is the total exemption amount calculated?
$4000 (2015) * T/P, Spouse, Dependents (Each person gets $4000)
What is included in WAGES of gross income?
Cash FMV Property Guaranteed Payments Cancellation of Debt Fringe Benefits - Partially Taxable & Nontaxable
What are the FRINGE BENEFITS in WAGES of gross income?
Partially taxable: LIFE INSURANCE PREMIUM paid by employer covering employees. Exclude from income up to $50K.
Nontaxable:
- LIFE INSURANCE PROCEEDS. However, the INTEREST INCOME (proceeds over principal amount) ARE taxable.
- Accident, Medical, health insurance: premium payments exclude from income if paid by EMPLOYER.
- Meals & Lodging: exclude from income if for benefit of EMPLOYER & condition of EMPLOYMENT
- Employee educational expenses: exclude up to $5,250 if paid by EMPLOYER. BS & MBA ok.
- Pension plan / 401K: payments made by EMPLOYER (nontaxable), employee receives benefits (taxable)
- Flexible spending arrangement: a part of salary deposited pretax into arrangement NONTAXABLE.
What is included as part of INTEREST INCOME in GROSS income for individuals?
Taxable interest income
- Premiums for opening savings account @ FMV (FMV = taxable)
- INTEREST paid by state and fed tax refunds (but refund NOT taxable)
What is NONTAXABLE interest income? (And therefore not included in gross income for individuals)
- Interest income on state, local, and municipal bond obligations
- mutual fund dividends
- US possession bond interest
- Interest from EE (SOMETIMES nontaxable if used for higher education)
How is unearned child income taxable amount computed?
Depends on child’s standard deduction.
For ex: SD = $950.
Take child’s unearned income = $2000
$2000 - $950 = $1050.
The NEXT $950 is taxed at child’s rate. ($950 x Child’s tax rate)
Any EXCESS ($100 = 1050 - 950) is taxed at parent’s rate. ($100 x Parent’s rate)
What is included and NOT included as a part of dividend income for GROSS income in individuals?
Taxable - Cash, FMV Property (taxed at 0 - 20%), CG distribution.
Nontaxable - stock split, stock dividend, life insurance dividends, return of capital)
What is taxable for state and local tax refunds?
Taxable refund only if ITEMIZED in prior year.
Nontaxable refund is if STANDARD DEDUCTION (1040EZ) (because itemized means they took state and local tax deductions last year). However, the interest income portion from the refund IS taxable.
What is taxable for divorce payments as a part of GROSS INCOME?
Alimony received - Taxable
Child support - nontaxable, first priority
Property settlements - nontaxable
For self employment income (schedule C), how many taxes are there?
The net income is taxed twice - 1) Income Tax and 2) S/E tax
The S/E tax is NOT deductible on schedule C. It is an adjustment to AGI.
What are allowable deductions on Schedule C, S/E?
- Salaries to OTHERS
- COGS
- Deprecation of BUSINESS assets
- M&E + unreimbursed employee expenses: 50% deductible
- Interest expense only when incurred AND paid (cash basis)
- State & local taxes paid
- Bad debt actually written off for ACCRUAL BASIS T/P only (allowance method disallowed)
What are NONdeductible expenses on Schedule C?
Personal expenses
Federal taxes paid
Salaries paid to sole proprietor
Ex: if there is a home where 10% used for business, then 10% of the personal expenses are DEDUCTED on schedule C, since it is a part of business expense, and 90% on schedule A (itemized deductions) if applicable.
What are the uniform capitalization rules?
Apply to all business enterprises, including sole proprietorships, partnerships, and corporations.
Capitalized as inventory: DM, DL, factory OH
Period expense: SG&A, R&D
Don’t apply to inventory acquired for resale if taxpayer’s average gross receipts for preceding 3 years do NOT exceed $10M annually.
Inventory acquired for resale = tangible personal property or real property.
How should income from long term contracts be recognized in GROSS income for individuals?
Use % completion method.
How should capital gain or loss of property be recognized for income purposes?
Amount realized from sale
Where does IRA income come from?
The taxable income from IRA income is from distributions or withdrawals from IRA. However, the taxable income amount depends on what type of IRA account it is.
1) Traditional deductible IRA
- Withdrawal / distribution amount is taxable at marginal tax rate (not effective tax rate)
- Early withdrawal means withdrawal amount taxable at marginal rate, and withdrawal amount taxable at 10% (the penalty rate).
2) Traditional nondeductible IRA
- TAXABLE AMOUNT: Withdrawal / distribution amount is taxable only on accumulated earnings.
- NONTAXABLE AMOUNT: Principal / contribution amount.
ex: distribution amount = $6K
Total investment (principal) = $10K
Value of account @ date of distribution = $15K
Accumulated earnings = $15K - $10K = $5K
1) Taxable amount (accumulated earnings portion)
= 5K/15K * 6K = $2K
2) Nontaxable amount (contribution/principal)
= 10K/15K * 6K = $4K
3) Roth IRA
- NONTAXABLE: both contribution (principal) & accumulated earnings
- can withdraw without penalty
What are the exceptions to the 10% penalty for premature distribution from IRA?
if distribution is used on: HIM DEAD
H: 1st time buying home ($10K max) I: insurance: med M: med expense > 10% AGI D: disability E: education a: and D: Death
How are annuities included in GROSS Income for individuals?
Treat like depreciation.
Partially taxable & nontaxable.
When annuitant arrives at life expectancy, ALL TAXABLE.
What is Schedule E used for?
to compute passive activity income or loss.
for:
- rental real estate
- royalties
- partnerships & LLC (from k-1)
- S Corp (from k-1)
- trusts & estates (from k-1)
What is included in rental income on schedule E?
prepaid rent
NONrefundable deposits
rental cancellation pmt
improvements to home @ FMV
If less than 15 days rental home, NOT rental income.
if more than 15 days, yes passive income. pro-rate the expenses. loss is disallowed.
What is Passive activity?
passive activity is any activity t/p not materially participated in.
generally all rental activity is passive activity.
what is PAL?
PAL may NOT deduct against other forms of income. can only deduct against current year passive activity INCOME.
remaining net loss suspended and carried forward infinitely.
what is the mom & pop exception?
this is the exception to PAL.
requirements:
1) if own > 10% rental activity
2) mAGI
What happens when passive activity is disposed of?
The carryover PAL and current year PAL will be FULLY deductible in the year property is disposed of.
Is UE compensation included in gross income?
Yes ; worker’s compensation is not, however.
How much of SS benefits is taxable?
Up to 85% of SS benefits. excess not included on gross income
What are taxable miscellaneous items for gross income?
prizes and awards @ FMV unless (without consent to win, and gives to government/organization after)
gambling wins (offset by losses)
punitive damages
How are scholarships / grants included on gross income?
Only include portion that goes to room & board, and services. this is TAXABLE.
nontaxable - tuition, fees, books.
What are nontaxable items NOT included on income?
life insurance proceeds (interest income IS taxable)
gifts and inheritances (income generated from property IS taxable however)
medicare benefits
workers comp
personal injury
premium on accident insurance
