Gross Income

Question 1

All interest is included in Gross Income except:
(non-taxable)

R1-22

Answer 1

• -Bonds/Obligations: state & local, and U.S. possession
• -Series EE (U.S. savings bonds)
  a) used for Educational Expenses
  b) taxpayer or joint ownership
  c) taxpayer is 24+ yrs when issued
  d) acquired after 1989
  
  • phased-out
• -Veterans Administration Insurance

Question 2

Dividends not included in Gross Income
(non-taxable)

R1-24

Answer 2

• -Return of Capital = no E&P
• -Stock Split
• -Stock Dividend
  
  • unless given option for cash/property (tax at FMV)
• -Life Insurance Dividend

Question 3

State & Local Tax Refunds from PY received in CY
included in Gross Income or not?

R1-25

Answer 3

State & Local Income Tax refund received in CY from PY
–Itemized Deduction in PY = taxable
–Standard Deduction in PY = non-taxable
(1040 EZ)

Question 4

Self-Employment Gross income

Expenses nondeductible on Schedule C

R1-28

Answer 4

• -Salary of sole proprietor
• -Federal Income Tax
• -Personal portion of:
  a) Car, travel, vacation expenses
  b) Personal meals & entertainment
  c) interest expense
  d) State & Local tax expense
  e) Health insurance of sole proprietor
• -Bad debt expense if cash basis taxpayer
• -Charitable Contributions

Question 5

IRA distributions
include in Gross Income or not?
(taxable or not)

R1-38

Answer 5

Taxable when withdrawn/distributed

Nondeductible IRAs:

• -Roth IRA = nontaxable
• -Traditional IRA:
  
  • principal amount = nontaxable
  • accumulated earnings = taxable

If withdrawn before age 59.5:
–10% Penalty Tax + Regular Tax
(unless exceptions are met)

Question 6

IRA distribution
Exception to 10% penalty tax for withdrawal before age 59.5

R1-39

Answer 6

H – Homebuyer (1st time) ==> $10,000 max limit
I – Insurance (medical) ==> w/ 12wks of unemp. comp.
M – Medical exp. ==> excess of 10% AGI

D – Disability (total & permanent)
E – Education exp. (higher ed.)
A – and
D – Death

Question 7

Annuities
Include in Gross Income or not?
(taxable or not)

R1-39

Answer 7

*treat like depreciation

Nontaxable = investment/period of payout in months
-excess of this is taxable

Live Longer:
-payments exceeding payout period = taxable

Die before full recovery:
-uncollected portion is Misc. Itemized Deduction not subject to 2% of AGI floor

Question 8

Rental of Vacation Home:
income or not?
(taxable or not)

R1-42

Answer 8

Rented itemized

Rented 15days or more:

• personal use for 14+ days or 10% of rental days
• prorate expenses between rental & personal
• rental expense = deductible to extent of rental income
• no rental loss is allowed

Question 9

PALs can only be offset by PIGs unless:

Passive Activity Loss vs Passive Income Generators

R1-43

Answer 9

1) Mom & Pop Exception:
–must be active & own >10% of rental
–only allowed $25,000 deduction per year
-excess is CF
–Phase-Out if AGI >$100,000:
$25,000 is reduced by 50% of the difference in
rich person’s AGI - $100,000 AGI limit

2) Real Estate Professional:
- - >50% of personal service in real property &
- - >750 hours of service performed

Question 10

Workers Compensation
vs.
Unemployment Compensation

R1-46

Answer 10

Workers Comp. = exclude from Income

Unemployment Comp. = income

Question 11

Nonqualified Employee Stock Option

R1-47

Answer 11

Employee Taxation:

              w/ Readily Ascertainable Value      w/o *Taxed when:          granted                        exercised *Ord. Income:         value-cost                       FMV-cost Basis:     exercise price+ord. inc. exercise price+ord. inc. Future Sale:               CG(L)                             CG(L) Holding period:      exercise date               exercise date *if not exercised:         C(L)                             not taxed

Employer Deduction:
-deducted in same year that employee reports ord. inc.

Question 12

Qualified Employee Stock Option

Requirements for:
Incentive Stock Option (ISO)

R1-48

Answer 12

1 –approved by shareholders
2 –granted within 10yrs of plan
3 –option price is not 10% of Co.
5 –hold stock for 2yrs after grant, 1yr after exercised
6 –remain employee from grant date til 3mo before exercised

Question 13

Qualified Employee Stock Option

Requirements for:
Employee Stock Purchase Plans (ESPP)

R1-49

Answer 13

1 –written & approved by shareholders
2 –not own > 5% of Co.
3 –plan includes all full-time emp. w/ >2yrs employed
4 –option price not 27days after grant date
6 –annual purchase limit = $25,000 of stock
7 –held for >2yrs after granted, 1yr after exercised
8 –remain employee from grant date til 3mo before exercised

Question 14

ISO

R1-48

Answer 14

Employee Taxation:

• -not taxable
• -CG(L) when sold
  
  • ord. inc. (if holding req. not met)
• -buy up to $100,000/yr. excess is nonqualifying option

Employer Taxation:
–no deduction

Question 15

ESSP

R1-49

Answer 15

Employee Taxation:

• -not taxable
• -CG(L) when sold
  
  • ord. inc. (if holding req. not met)
• -

Employer Taxation:
–no deduction