Gross Income - Individual Flashcards
(32 cards)
What is the difference between an exclusion and a deduction?
An exclusion is an item that is specifically required by law to not be included with gross income. We do not use exclusions to mathematically compute our gross income. A deduction is an actual adjustment of the gross income.
What are the exclusions, meaning items that are not taxable?
Child support Property settlement payments
Life insurance proceeds
Group Term Life Insurance up to $50K Reimbursement for medical expenses NOT taken as a deduction (it is one or the other)
“Cafeteria plan” benefits
Interest on muni bonds
Pro Rata interest on EE bonds
Scholarships
Leasehold improvements NOT made in lieu of rent (not income to the landlord)
Stock dividends distributed via COMMON shares
Worker’s compensation
Gifts, bequests, inheritances
Damages for being made WHOLE, not punitive, e.g. received personal injury award that was WORK-related
When are dividends paid through a life insurance policy taxable and not taxable?
Whenever life insurance dividends exceed the accumulated paid premiums b/c they are not offsetting the cost of the premium, so it now taxable income. When the dividends are LESS than accumulated paid premiums, not taxable as they are a reduction of the premiums paid into the plan.
How do we compute the amount of pension contributions to exclude from our taxable income? Why do we exclude that portion?
(Cost / Est’d Pmts) x Pmt received = Exclusion amount B/c that portion is actually a return of the cash paid into the pension plan, like a return OF capital.
When should the amount, including interest, redeemed from EE bonds be taxed?
While redeemed EE bond proceeds, including interest, are tax-free, they become taxable if they are not used for higher education expenses and/or exceed the actual education expenses. We compute the pro-rata amount for the taxable portion. EX - Redeemed $6K face plus $4K interest = $10K Actual education expenses = $9K $1K left not used up This means 10% of the interest is taxable since not 100% of the proceeds were used up ($1K / 10K) = 10% x $4K interest = $400 taxable interest
How do we determine which tax year that tips should be assigned to?
Rules are: 1) >$20 in tips = must report 2) Report must be made w/in 10 days of the next month aka Reporting Month Ex - Sally the Stripper made $300 in tips in December 2012. She reported the tips to the strip club in January 2014 as required. Since the reporting month falls in 2014 tax year, her $300 tips are reported in the 2014 tax filing.
When do we include and exclude leasehold improvements as the landlord?
Whenever our tenants make an improvement to our townhouse in lieu of rent, it is reportable income to us. If our tenants made improvements to our townhouse, but did not make it in lieu of rent and continued to pay regular rent, then it is NOT income to us. We have to exclude. We don’t get to deduct the LI either.
When do scholarships become taxable?
Only if they are received as a form of compensation, used for room and board, or in the form of grants for teaching, research, or other activities = still a form of compensation
When do we get to exclude Joe Jr’s scholarships?
when used for tuition, course fees, books, supplies, and equipment AND must not have any condition to give the appearance of compensation
What is the threshold on Group Term Life Insurance paid through work and how does it work?
Employers can pay for GTL insurance up to $50K tax-free to the taxpayer. Anything past $50K is TAXABLE, include the excess in Gross Income. EX - iGov pays $70K in GTL insurance for you. $50K of that $70K is tax-free, the $20K excess is taxable to you.
When do is dividend income taxable?
In the year that the taxpayer actually receives the dividend payment. Ex - Apple, Inc. paid dividends on 12/30/2012 and mailed the dividend payments. We got our dividend payment in our mail on 1/2/2013. We have to pay tax on the dividends in 2013. That is the year we actually received the dividend payments. The payments represent FMV.
Are foreign dividends taxable?
Yes, include foreign dividends in our gross income.
When are stock dividends taxable and not taxable?
Stock dividends distributed through common shares ownership are not taxable. Stock dividends distributed through preferred shares is taxable @ FMV received.
Qualified dividends on Form 1040 are…
Ordinary dividends that qualify for being taxed at a lower long-term capital gains tax rate rather than at higher tax rate for an individual’s ordinary income. All dividends are taxable unless they are stock dividends distributed through common share ownership.
EE bonds must be owned by
the buyer (the redeemer) or joint owner with the spouse.
Items that are includible in Gross Income
Compensation received - wages, salaries, bonuses, commissions, fees, and tips, and property received @ FMV Non-deductible reimbursements
Distributive share of Partnership or S-Corp income
Gain from sale or exchange of property - installment basis (Schedule D)
Rents & royalties = passive income
Dividends (not from life insurance proceeds unless exceeds the premiums paid)
Interest on savings, CD’s, US Federal bonds, t-bills,
Interest on tax refunds Interest on loans made, imputed or prepaid @ prorated amount
Alimony
Alimony recaptured (if you tried to screw over your ex)
Up to 85% of Social Security benefits if you’re in upper bracket Income in respect of decedent Unemployment compensation
Sale of stocks acquired either as compensation (Incentive Stock Option) or as your own investment
Foster child payments used for your own needs
Punitive damages received, e.g. personal injury award for something not work-related
Gambling winnings
Tax benefits incurred by taking itemized deduction on last year’s tax return
How are alimony payments applied when they are less than full?
Apply 100% of the payments to the children as child support. Whatever is left over counts as alimony and include it in your gross b/c it is taxable. Will have to sue the bastard for remainder of alimony, but still got to pay taxes on any alimony not used as child support.
Does alimony count as child support? What about property settlement payments like paying the mortgage to your ex?
No, alimony is separate from child support and property settlement payments (e.g. mortgage on the house). Only when alimony is not paid in full is when we apply these alimony payments as child support and the remainder, if any, counts as alimony and is taxable. Property settlement payments such as paying the mortgage on the home that existed during the marriage do not count as alimony. They are not tax-deductible for the payer and not includible in recipient’s gross income. This is where angry ex’s try to pass off property settlement payments as alimony payments in order to take the deduction and this is why we have the alimony recapture mechanism in place.
What is the tax treatment for child support?
It is not taxable to the recipient and is not deductible by the payer. We exclude child support from gross income of the recipient.
Alimony Recapture and its tax impact
Applies to situations where the payer tries to screw the ex by over-paying alimony (front-loading) in x1 then less in x2 and x3 (3 years) in order to jack up the ex’s tax liability in year 1. The alimony recapture is a mechanism for “recapturing” what the alimony should have been due to the ex and adjust the tax burden accordingly to recapture a credit for being forced to overpay on tax (inflated gross income due to the overpaid alimony). x2 Excess over x3 ($15,000) = x2 recapture amt x1 alimony (avg alimony rec’d in x2 & x3 altogether LESS x2 recapture amt) ($15,000) =x1 recapture amt x2 recapture + x1 recapture = TOTAL recapture
How can taxpayers reduce their taxable interest on US bonds?
Taxpayers can elect to amortize the bond premium on the US bonds and offset the amortization against the taxable interest amount to REDUCE the taxable interest before including in the gross income. Less taxable interest = less gross income to tax. Available for U.S. federal bonds bought after 1987, e.g. HH bonds
What is “tax benefit” on the 1040 and when does it have to be reported for taxation?
Tax benefit is where you got a refund on last year’s tax return because you used the itemized deduction. You can also get a refund by using the standard deduction. However, IRC says tax benefits obtained by using the ITEMIZED deduction are taxable in the following year’s 1040. Itemized deduction & refund on last year’s = taxable Standard deduction & refund on last year’s = not taxable
Can alimony also be payment for the ex’s college tuition?
Yes, alimony can be paid in cash or its equivalent. The goal of alimony is to help the ex get back on his/her feet financially.
What do we need to worry about Incentive Stock Options (ISO)?
When the shares obtained through the ISO are sold, the gains on these shares are taxable. We don’t care when the company granted the ISO. We care about whether the taxpayer actually exercised the ISO and got shares then sold these shares b/c we want to tax on these gains made on the sale.
