4. Gross Income from Personal & Investment Income

Question 1

Describe the taxation of

“Dividends”

Answer 1

• If the distribution exceeds earnings, it is taxed first, as a return of basis, then, as a capital gain.
• Dividends are considered taxable even if they are immediately re-invested upon receipt.
• Ordinary dividends are taxed at the same rate as ordinary income, while qualified dividends receive preferential tax treatment.

Question 2

Identify the penalties related to IRAs

Answer 2

Question 3

Describe Preferential Treatment of

Long-term Capital Gains or Qualified Dividends

Answer 3

Question 4

Identify the Break Points for

Preferential Treatment of Long-Term Capital Gains

or

Qualified Dividends

Answer 4

Question 5

Identify the

“Non-Qualified Annuity

Exclusion Ratio Formula”

Answer 5

Investment in the Contract ÷ Expected Return

x

Distributions Received (Annually)

=

Exclusion Ratio

• Example:*
• Exclusion Ratio: $150,000 ÷ $450,000 = 33.3%*
• Excluded from Gross Income: 33.3% x $12,500 = $4,167*

Question 6

Identify the

“Tax-Free Equivalent Yield”

Formula

Answer 6

Taxable Yield x (1 - Marginal Tax Rate)

=

Tax-Free Equivalent Yield

Question 7

Identify the

“Taxable Equivalent Yield”

Formula

Answer 7

Tax-Exempt Yield / (1- Marginal Tax Rate)

=

Taxable Equivalent Yield

Question 8

Describe the

“Taxation of Life Insurance Proceeds”

Answer 8

Question 9

How are Roth IRA Distributions Treated for Taxation?

Answer 9

• It is very important to remember that the FIFO treatment applies to distributions so this means that distributions are allocated first to basis (principal) and then earnings, and distributions of basis are always tax-free and penalty-free.
• ​It is important to note that there are three possible tax treatments that apply to the earnings portion of Roth IRA distributions :
  • Tax-free
  • Taxable and subject to 10% penalty
  • Taxable and not subject to the 10% penalty

Question 10

Describe the taxation of

Child Support Payments

&

Property Settlements

Answer 10

• Not deductible by the payor
• Not taxable to the payee

Question 11

What is the view of the IRS for a Property Settlement

Answer 11

• Transferring property between divorcing spouses does not account for an income tax deduction.
• Instead, it is treated as a gift to a spouse for income tax purposes.
• With these transfers, there is no gain or loss recognized and the receiving spouse received a carry-over basis in the property transferred.

Question 12

Describe the

“Taxation Treatment of a Scholarship”

Answer 12

Scholarships are excluded from gross income if:

• The student is a candidate for a degree
• Enrolled at an eligible educational institution
• Proceeds are used for qualified tuition & related expenses
  
  • Tuition
  • Fees
  • Course-related expenses (books, supplies, equipment)

Whether these scholarships are taxable or not, they will usually be reported on Form 1098-T if they are being provided by the college/university.

Question 13

Describe the

“Taxation of Injury and Sickness Awards”

Answer 13