INDIVIDUAL - INCOME EXCLUSIONS FROM GROSS INCOME

Question 1

What is the common name for tax-exempt governmental obligations.

Answer 1

Municipal Bonds, which are state and local government securities.

Federal securities are NOT included.

Question 2

The interest made through Private Activity Bonds, just as Municipal Bonds, is tax-exempt. True or False?

Answer 2

False.

Private Activity Bonds, which are commonly used to finance, sports facilities, airports, for profit hospitals, and industrial parks, are not tax-exempt, since the interest from these investments is NOT excluded from income.

Question 3

What guarantees scholarships and fellowships not be included in taxable income?

Answer 3

Scholarships and fellowships are not included if used to pay tuition, fees, books, supplies and equipment.

They are taxable income when used for room & board.

Question 4

Scholarships used to pay for room and board do not qualify for income exclusions. True or False?

Answer 4

True.

Scholarships are excluded for income only if used to pay tuition, fees, books, supplies and equipment.

Question 5

Are grants included as income?

Answer 5

Yes.

Grants that are used as payment to students for teaching, research or other services are included in taxable income.

Question 6

When is Worker’s Comp taxable?

Answer 6

Never.

1. Workers’ compensation and disability payments are not taxable.
2. Amounts received for personal injury are not included in income.
3. Money received from accident and health insurance claims are not taxable.

Question 7

The sale of a principle residence is always taxable. True or False?

Answer 7

False.

Details TBD:

Question 8

Life insurance proceeds are never taxable. True or False?

Answer 8

False.

Life insurance proceeds are not taxable so long as the beneficiary of the insurance policy and the heir of the estate are the same person.

But it should be noted that if the recipient chooses installments over time rather than a lump sum payment, the interest that is earned on the unpaid amount is taxable.

Question 9

Dividends from an Insurance Policy are not taxable, except in what instance?

Answer 9

Dividends received from the insurance policy are not taxable to the extent that they are a return on the premium (less than the amount of premiums paid).

Question 10

Annuities are excluded from gross income to the extent that they are a return of capital. True or False?

Answer 10

True.

The return of capital portion is calculated using the cost of the annuity divided by the total expected payments over the lifetime of the taxpayer based upon a taxpayer’s assumed life expectancy at the time when the annuity contract is agreed.

Question 11

Prizes and awards are always taxable. True or False?

Answer 11

False.

Prizes and awards are excluded from taxable income if:

1. The prize is received for religious, charitable, scientific, educational, artistic, literary or civic achievement and:
2. The recipient is selected without any action on his/her part to enter the contest,
3. The recipient is not required to render future services as a condition of receiving the prize, and
4. The payer transfers the prize or award to a governmental unit or charitable organization upon the recipient’s request.

Question 12

When are Social Security benefits included in taxable income?

Answer 12

Social Security benefits are partially taxable for some high income taxpayers. The portion of the SS benefits included as taxable income range from 50-85% based on the taxpayers income situation in relation to their Provisional Income total.

Note: Provisional income is an IRS threshold above which social security income is taxable.

Question 13

Child support payments made as part of a divorce settlement are not included in the taxable income of the recipient, but they are deductible by the payor. True or False?

Answer 13

False.

Child support payments made as part of a divorce settlement are not included in the taxable income of the recipient and are NOT deductible by the payor.

Question 14

What are series EE Saving Bonds?

Answer 14

Series EE Saving Bonds are bonds that are redeemed to finance qualified higher education expenses.

Question 15

The parameters that make Adoption Assistance not taxable?

Answer 15

Adoption assistance that was received by a parent under an adoption assistance agreement with a state under the Adoption Assistance and Child Welfare Act of 1980 is not taxable.

Question 16

Survivor Annuity Benefit is tax exempt when:

Answer 16

The survivor annuity benefit that was distributed as the result of the death of a public safety officer while on duty is tax-exempt to the officer’s spouse, ex-spouse or child.

Question 17

All Employee benefits are tax-exempt. True or False?

Answer 17

False.

Question 18

9 Employee Benefits that are excluded from income (not exhaustive):

Answer 18

1. Group life insurance premiums paid by the employer for insurance up to $50,000.
2. Premiums paid by the employer for accident and health plans if they cover the loss of earnings, medical care expenses or permanent injury or loss of body function.
3. Meals or lodging provided on the employer’s premises.
4. A fringe benefit is excluded if it is: no additional cost, a qualified employee discount, a working condition fringe benefit (such as a company car for business) or a de minimis (minimal in value) fringe benefit.
5. Dependent care services up to $5,000 per year ($2,500 for married individuals filing separately).
6. Educational assistance programs up to $5,250 per year.
7. Workers’ Compensation.
8. Qualified adoption expenses paid by the employer up to $13,570 (per eligible child).
9. Retirement benefits are excluded from income in the year that they are earned.

Parking fringe benefit.

Question 19

Joanna has the following income during the tax year. Calculate the amount Adrian can exclude from gross income:

$43,000 wages paid by her employer
$5,000 in child support
$8,000 of credit card liability forgiven in bankruptcy
$10,000 cash received as a gift from Lisa’s mom
$3,400 for services provided as a voice instructor; reported on 1099-MISC

Answer 19

Answer: $23,000

Of the items listed, debt forgiven in bankruptcy ($8,000), child support ($5,000) and the cash gift ($10,000) are excluded from gross income.

$8,000 + $5,000 + $10,000 = $23,000

Income earned as wages ($43,000) and for services provided a voice instructor ($3,400), are included in gross income.

Question 20

Discharge of Qualified Principal Residence Indebtedness

Answer 20

Letts the taxpayer off the hook for money borrowed on a main home, that is unpaid.

It’s forgiven by the bank, typically.

(Confirm this answer)

Question 21

Principal Residence Indebtedness

Answer 21

Incurred to buy, build or substantially improve a principal residence.

Applies to discharges made after 2006 and before 2021.

This can include an equity loan.

(Confirm this answer)

Question 22

How is Social Security tax calculated from your income?

Answer 22

To calculate Social Security tax withholding on 401(k) contributions, your employer first determines your gross wages for the pay period. Gross wages are your earnings before deductions. Your employer subtracts Social Security tax from your gross wages and then deducts your 401(k) contribution.

Question 23

What is the maximum exclusion allowed for qualified plan awards?

Answer 23

$1,600 total.

Note: It is $400 for non-qualified plan awards

If you have $1600 in qualified and $400 in non-qualified, you can only exclude $1600 total, and not the combination of the two!