Part 1 - Video 2 Flashcards by D L

What are the types of income covered in EA Tax Training?

Wages and employee compensation
Injury and illness income
Interest
Dividends
Other income

Covers various aspects of taxable and nontaxable income.

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What is the flow of the tax return?

Gross income
Adjustments to income
Adjusted gross income (AGI)
Deductions (Standard or Itemized, QBI)
Taxable income
Income tax
Credits
Other taxes
Total tax
Payments
Amount Due/Overpayment (Refund)

This outlines the process for calculating tax liability.

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What is the difference between taxable and nontaxable income?

Taxable income must always be reported, while nontaxable income usually does not have to be reported, though there are exceptions.

Examples of nontaxable income may include certain gifts or inheritances.

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True or False: Unearned income is subject to Social Security and Medicare tax.

False

Earned income is subject to these taxes, while unearned income is generally not.

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What is the definition of earned income?

Income from working or performing services, such as wages, salaries, tips, professional fees, self-employment income.

This includes various forms of compensation for labor.

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What is investment income?

Interest (Schedule B)
Dividends (Schedule B)
Capital gains (Schedule D)
Rents (Schedule E)
Royalties (Schedule E)

Investment income is reported on specific IRS schedules.

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What is the difference between active and passive income?

Active income: Generated by activities in which you materially participate.
Passive income: Generated by activities in which you do not materially participate, such as rental property.

Losses from passive activities generally cannot be deducted against nonpassive income.

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What are the two accounting methods mentioned?

Cash method: Income recognized when received, expenses when paid.
Accrual method: Income recognized when earned, expenses when incurred.

The cash method is commonly used by individuals and small businesses.

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What is constructive receipt?

Income is constructively received when it is credited to your account or set apart in a way that makes it available to you, regardless of physical possession.

Example: A paycheck prepared but not deposited until the following year is considered received in the year it was prepared.

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What is the significance of a W-2 form?

It indicates that an individual is classified as an employee and must report compensation received.

Employees typically receive a W-2, while independent contractors receive a 1099.

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What is the purpose of Form 1099-NEC?

Used for reporting Non-Employee Compensation for independent contractors, applicable for payments over $600 per year.

This form was reinstated in 2020.

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What type of income is excluded from taxation for clergy members?

Fair market value of housing provided by the church is excluded from income for income tax purposes.

This includes a housing allowance that must be reasonable based on services provided.

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Fill in the blank: Amounts received for dependent care can be excluded, with the maximum exclusion being _______.

$5,000

The exclusion is limited to $2,500 for married filing separately (MFS).

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What are fringe benefits?

Fringe benefits are included in income in the year received unless specifically excluded by law.

Examples of generally excluded benefits include health insurance premiums and educational assistance.

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What is the treatment of military salary for tax purposes?

Taxed like anyone else’s salary and retirement pay is taxed as a pension.

Differential pay is included in income.

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What is the tax treatment for veterans benefits?

Veterans benefits such as education allowances and disability compensation are not considered taxable income.

This includes various forms of assistance and grants.

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What type of grants are available for motor vehicles for veterans?

Grants for motor vehicles for veterans who lost sight or limbs

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What are veterans’ insurance proceeds and dividends?

Veterans’ insurance proceeds and dividends, including endowment policy paid before death

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What is excluded from income under living allowances for volunteers?

Living allowances for housing, utilities, etc. excluded from income

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True or False: Allowances paid to spouse or children while volunteering are always excluded from income.

False

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What programs do not include amounts received from the Retired Senior Volunteer Program (RSVP)?

National Senior Services Corps programs

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What tax counseling program allows volunteers to deduct unreimbursed expenses?

Volunteer Income Tax Assistance (VITA) program

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What is the maximum amount volunteer firefighters can receive without including it in income?

Do not include payments received up to $50 per month

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What should be included in income if you retired on disability?

Include pension received under a plan paid for by your employer

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Under what condition is a military disability pension excluded from income?

Exclude if based on a service-connected disability

What is the exclusion limit for Long-Term Care Insurance Proceeds?

Exclude up to $410 per day

What is the tax status of workers’ compensation payments?

Exclude payments received for an occupational sickness or injury

Fill in the blank: Payments received for compensatory damages for illness or injury are ______.

not taxable

What type of interest is generally taxable income?

Any interest you receive or that is credited to your account and can be withdrawn

What types of interest are not federally taxable?

* Interest on municipal bonds * Dividends received from a mutual fund that holds muni bonds * Interest on VA dividends left on deposit with the VA * Interest inside IRAs, both regular and Roth

What is the tax treatment for interest on US bonds/obligations?

Interest is taxable for federal income tax, but not for state and local income tax

True or False: Life insurance proceeds are generally taxable.

False

What is Original Issue Discount (OID)?

When a debt instrument is issued at one price, and the redemption price is higher

What is the reporting requirement for interest income?

Report on line 2b of 1040 or 1040-SR

What type of dividends are taxed at ordinary income tax rates?

Ordinary dividends

What qualifies a dividend as a qualified dividend?

Must be paid by a US corporation or a qualified foreign corp and meet holding period requirements

Fill in the blank: Preferred stock dividends must be held for more than ______ days during the 181-day period.

What is the tax treatment for stock dividends?

Generally not taxable unless you have the choice to receive stock or cash

What is a constructive dividend?

A distribution from a corporation to a shareholder that is not intended to be a dividend, but is considered to be a dividend

What is a stock dividend?

A distribution of stock or stock options instead of cash, generally not taxable except in certain scenarios ## Footnote Exceptions include having the choice to receive stock or cash, some preferred stock distributions, and other specific situations.

Define constructive dividends.

A distribution from a corporation to a shareholder that is not intended as a dividend but is treated as one for tax purposes ## Footnote Examples include paying personal expenses with a business check, using corporate property for personal purposes, and excessive compensation.

How is business income reported for a sole proprietorship?

Reported on Schedule C.

How is income from self-employed farming reported?

Reported on Schedule F.

How is income from rental real estate reported?

Reported on Schedule E.

What is the tax treatment of partnerships and S corporations?

They are generally not taxable entities; income and deductions pass through to partners/shareholders based on ownership percentage.

What documentation do partners/shareholders receive to report their share of income?

A K-1 showing the amounts to report.

What is the tax obligation of a beneficiary of a trust?

They must include their share of the trust's income in taxable income, even if not received.

What is royalty income?

Income typically from oil, gas, mineral properties, copyrights, or patents.

How is rental income from personal property reported if not a business?

Reported on Schedule 1 as Other Income.

What is bartering?

An exchange of property or services where the value received must be included in income.

If a debt is canceled, what is the general tax implication?

You must include the canceled amount in your income.

Name exceptions where canceled debts are not included in income.

Student loans, debts discharged in bankruptcy, qualified farm debt, qualified real property business debt, and cancellation intended as a gift.

Are life insurance proceeds generally taxable?

No, unless received in installments where some may be interest, which is taxable.

What is a recovery in tax terms?

A return of an amount deducted or credited in an earlier year.

What is the tax treatment of unemployment benefits?

Taxable income, reported on a 1099-G.

Are government payments for need taxable?

No, they are not included in income unless compensation for services performed.

What is the tax treatment of hobby income?

Must be reported as income on Schedule 1, with deductions limited to cost of goods sold.

What is the tax treatment of alimony for divorces after 2018?

Not included in income and not deductible by the payer.

Are court awards for physical injury taxable?

Generally not taxable if compensating for physical injury or sickness.

What must be included in income regarding gambling winnings?

All winnings must be included; losses can only be deducted if itemizing deductions.

What is the tax status of scholarships for tuition and fees?

Not taxable.

What types of income are included in taxable income?

* Alaska Permanent Fund dividend * Bribes * Jury duty pay * Income from illegal activities * Prizes and awards

What payments are not included in income?

* Campaign contributions * Gifts and inheritances * Child support payments * Utility rebates

What is a net operating loss (NOL)?

When losses exceed income for the year from business, rental property, and other specified deductions.

What can NOLs generated after 2020 not do?

They can no longer be carried back to previous years, except for certain farmers and insurance companies.

In what manner can NOLs be used going forward?

They can be carried forward indefinitely but only offset 80% of taxable income.

What is the impact of a NOL carryforward on taxable income?

It reduces taxable income by a maximum of 80% of the current year's income.

Part 1 - Video 2 Flashcards

(67 cards)