Unit 4: Taxable and Nontaxable Income Flashcards
(138 cards)
1
Q
Taxable Income
A
All income is taxable unless specifically excluded by federal tax law, including wages, salaries, commissions, tips, and taxable fringe benefits.
2
Q
Taxable Income Scenario
A
Sofia earns $60,000 in wages as a teacher and $5,000 in taxable stock options from a side job. She must report $65,000 as taxable income on her tax return.
3
Q
Nontaxable Income
A
Income specifically excluded from taxation, such as municipal bond interest or compensation for physical injuries, regardless of the taxpayer’s income level.
4
Q
Nontaxable Income Scenario
A
Elena receives $10,000 in municipal bond interest and $50,000 as a settlement for a physical injury from a car accident. Neither amount is taxable, but the bond interest must be reported.
5
Q
Municipal Bond Interest
A
Interest from debt securities issued by state, city, or local governments, tax-exempt at the federal level but must be reported on a tax return.
6
Q
Municipal Bond Interest Scenario
A
Carlos earns $12,000 in interest from municipal bonds issued by his city. He reports this on his tax return but does not pay federal tax on it.
7
Q
Compensation for Physical Injuries
A
Payments received for physical injuries or sickness are excluded from gross income and do not need to be reported on a tax return.
8
Q
Compensation for Physical Injuries Scenario
A
After a workplace accident, Maria receives a $100,000 insurance settlement for her broken leg. This amount is nontaxable and not reported on her tax return.
9
Q
Gross Income
A
All forms of taxable compensation, including wages, salaries, commissions, tips, self-employment income, and non-monetary compensation like goods or taxable fringe benefits.
10
Q
Gross Income Scenario
A
Liam earns $50,000 in wages, $2,000 in tips, and receives a $3,000 taxable bonus in property. His gross income is $55,000.
11
Q
Adjusted Gross Income (AGI)
A
Gross income minus specific “above the line” deductions, such as certain IRA contributions, self-employed expenses, or deductible student loan interest.
12
Q
AGI Scenario
A
Emma has $70,000 in gross income and deducts $5,000 for IRA contributions and $2,000 for student loan interest. Her AGI is $63,000.
13
Q
Taxable Income Calculation
A
Calculated by subtracting the greater of itemized or standard deductions from AGI, used to determine gross tax liability before credits.
14
Q
Taxable Income Calculation Scenario
A
Noah’s AGI is $80,000. He takes a $13,000 standard deduction. His taxable income is $67,000, which is multiplied by the tax rate to find his gross tax liability.
15
Q
Earned Income
A
Income received for services performed, such as wages, salaries, tips, professional fees, or self-employment income, subject to FICA taxes.
16
Q
Earned Income Scenario
A
Ava earns $45,000 as a nurse and $3,000 in tips. Her earned income of $48,000 is subject to Social Security and Medicare taxes.
17
Q
Unearned Income
A
Income not received for services, such as interest, dividends, retirement income, taxable alimony, or disability benefits, generally not subject to FICA taxes.
18
Q
Unearned Income Scenario
A
Ethan receives $4,000 in dividends and $10,000 in taxable alimony. This $14,000 of unearned income is not subject to FICA taxes.
19
Q
Constructive Receipt
A
Income is taxed when it becomes available to a cash-basis taxpayer without substantial limitations, even if not physically received.
20
Q
Constructive Receipt Scenario
A
Mia’s client deposits a $1,000 payment into her business account on December 29, 2024. She doesn’t withdraw it until January 2025 but must report it for 2024.
21
Q
Economic Benefit
A
Income is recognized when assets are unconditionally and irrevocably paid into a fund or trust for the taxpayer’s sole benefit.
22
Q
Economic Benefit Scenario
A
Oliver’s employer deposits $5,000 into a trust for his sole benefit in 2024. This is taxable as income in 2024, even if he doesn’t access it.
23
Q
Claim of Right Doctrine
A
If a taxpayer repays over $3,000 of previously reported income, they may claim a tax credit or deduction in the repayment year under IRC Section 1341.
24
Q
Claim of Right Scenario
A
In 2024, Tara reports $20,000 from a sale. In 2025, she repays $15,000 due to a dispute. She can claim a tax credit for the repaid amount on her 2025 return.
25
Repayment Deduction (≤ $3,000)
Repayments of $3,000 or less are deducted on the same form/schedule as the original income, but IRC Section 1341 does not apply.
26
Repayment Deduction (≤ $3,000) Scenario
Leo repays $2,000 of overpaid wages in 2024, originally reported on his W-2. He deducts it on Schedule A, as it’s under $3,000.
27
Self-Employment Income
Income earned by working for oneself, reported on Schedule C or F, subject to self-employment tax if $400 or more.
28
Self-Employment Income Scenario
Zoe earns $10,000 as a freelance graphic designer. She reports this on Schedule C and pays self-employment tax since it exceeds $400.
29
Form 1099-NEC
Issued to independent contractors for nonemployee compensation of $600 or more, reported on Schedule C.
30
Form 1099-NEC Scenario
Diego receives a Form 1099-NEC showing $8,000 for consulting work. He reports this as self-employment income on Schedule C.
31
FICA Tax
Comprises Social Security (6.2% each for employer/employee) and Medicare (1.45% each) taxes, totaling 15.3% on earned income up to $168,600 in 2024.
32
FICA Tax Scenario
Chloe earns $50,000 in wages. Her FICA tax is $3,100 (Social Security) + $725 (Medicare) = $3,825, matched by her employer.
33
Additional Medicare Surtax
A 0.9% tax on wages and self-employment income above certain thresholds for high-income individuals.
34
Additional Medicare Surtax Scenario
Mason earns $250,000 in wages. He pays the standard 1.45% Medicare tax plus a 0.9% surtax on income above the threshold.
35
Credit for Excess Social Security
A refundable credit for over-withheld Social Security tax when total wages from multiple employers exceed the 2024 cap of $168,600.
36
Credit for Excess Social Security Scenario
Lila earns $100,000 from one job and $80,000 from another. Excess Social Security withheld is credited on her 2024 Schedule 3.
37
Self-Employment Tax (SE Tax)
Social Security and Medicare taxes paid by self-employed individuals on net earnings, calculated on Schedule SE.
Self employment tax also taxes income along with FICA.
38
Self-Employment Tax Scenario
Owen has $60,000 in net self-employment income. He calculates his SE tax on Schedule SE, paying 15.3% on 92.35% of his earnings.
39
SE Tax Adjustments
Net earnings are reduced by 7.65% before calculating SE tax, and the employer-equivalent portion is deductible from AGI.
40
SE Tax Adjustments Scenario
Priya’s net self-employment income is $40,000. She reduces it by 7.65% ($3,060) for SE tax and deducts half the SE tax from her AGI.
41
Employee Compensation
Wages, salaries, bonuses, tips, and commissions received by employees, taxable and subject to payroll taxes.
42
Employee Compensation Scenario
Raj earns $70,000 in salary and a $5,000 bonus. Both are reported on his W-2 and subject to income and payroll taxes.
43
Independent Contractor
A worker where the payor controls only the result of the work, not how it’s done, responsible for their own taxes.
44
Independent Contractor Scenario
Tara, a freelance writer, is paid $15,000 for a project. She receives a 1099-NEC and reports it as self-employment income.
45
Worker Misclassification
When a worker is incorrectly classified as an independent contractor instead of an employee, they can file Form SS-8 for IRS review.
46
Worker Misclassification Scenario
Sam, classified as a contractor, works under full employer control. He files Form SS-8, and the IRS determines he’s an employee, requiring Form 8919.
47
Advance Wages
Wages, commissions, or earnings paid before services are performed, taxable in the year received.
48
Advance Wages Scenario
Bella receives a $2,000 salary advance in December 2024. She reports it as taxable income on her 2024 tax return.
49
Supplemental Wages
Compensation beyond regular pay, such as bonuses, commissions, vacation pay, sick pay, or taxable prizes, subject to withholding.
50
Supplemental Wages Scenario
Kai receives a $1,000 bonus and $500 in sick pay. Both are included on his W-2 as taxable supplemental wages.
51
Garnished Wages
Wages withheld for debts like child support or taxes, but the full gross wages remain taxable to the employee.
52
Garnished Wages Scenario
Leo’s $3,000 monthly wages are garnished by $500 for child support. He reports the full $3,000 as taxable income on his W-2.
53
Property in Lieu of Wages
Property received for services is taxable at its fair market value when received, unless restricted.
54
Property in Lieu of Wages Scenario
Mia receives $10,000 in stock for consulting work. She reports the fair market value as taxable income when the stock is unrestricted.
55
Restricted Property
Property received with restrictions (e.g., cannot sell) is taxable only when restrictions lapse.
56
Restricted Property Scenario
Noah receives restricted stock worth $8,000, unsellable for 3 years. He reports it as income when the restrictions lift in 2027.
57
Tuition Reduction as Wages
Tuition reduction for services (e.g., teaching) is taxable as wages, while non-service-related reductions may be nontaxable.
58
Tuition Reduction as Wages Scenario
Ava, a teaching assistant, gets a $5,000 tuition reduction for her work. It’s reported as taxable wages on her W-2.
59
Tip Income
Tips received for services are taxable income, reportable to the employer if $20 or more per month per job.
60
Tip Income Scenario
Sam, a waiter, earns $2,000 in tips monthly. He reports this to his employer, and it’s included on his W-2 as taxable income.
61
Non-Cash Tips
Tips in non-cash form (e.g., tickets) are taxable at fair market value but exempt from FICA taxes.
62
Non-Cash Tips Scenario
Lila receives concert tickets worth $200 as a tip. She reports $200 as taxable income but not for Social Security or Medicare taxes.
63
Taxable Fringe Benefits
Additional cash, property, or services (e.g., off-site gym memberships, personal use of company vehicles) included in taxable income.
64
Taxable Fringe Benefits Scenario
Emma uses a company car for personal trips, valued at $1,500. This is reported as taxable income on her W-2.
65
Nontaxable Fringe Benefits
Benefits excluded from income, such as health insurance, employer retirement contributions, or qualified transportation benefits.
66
Nontaxable Fringe Benefits Scenario
Carlos receives $5,000 in employer-paid health insurance. This is excluded from his taxable income.
67
Retirement Plan Contributions
Employer contributions to qualified retirement plans are nontaxable until distributed; employee elective deferrals are pre-tax but subject to FICA.
68
Retirement Plan Contributions Scenario
Zoe’s employer contributes $3,000 to her 401(k). It’s nontaxable until she withdraws it, but her $2,000 deferral is subject to FICA.
69
Cafeteria Plan
A plan allowing employees to choose between taxable (e.g., cash) and nontaxable benefits (e.g., health insurance) with pre-tax contributions.
70
Cafeteria Plan Scenario
Liam opts for health insurance over cash in his employer’s cafeteria plan. His contributions are pre-tax, reducing his taxable income.
71
Healthcare FSA
A cafeteria plan benefit reimbursing medical expenses up to $3,200 in 2024, subject to a “use-it-or-lose-it” rule with a grace period or carryover.
72
Healthcare FSA Scenario
Mia contributes $3,200 to her Healthcare FSA and spends $2,800. She must use the $400 balance by March 15, 2025, or lose it.
73
Dependent Care FSA
A cafeteria plan benefit reimbursing dependent care expenses, up to $5,000 for joint filers or $2,500 for separate filers in 2024.
74
Dependent Care FSA Scenario
Ethan contributes $5,000 to his DCFSA for daycare. He’s reimbursed $5,000, reducing his taxable income.
75
Adoption Assistance
Up to $16,810 in 2024 of employer-paid adoption expenses via a cafeteria plan, excludable from income with pre-tax contributions.
76
Adoption Assistance Scenario
Sophia’s employer reimburses $10,000 for adoption costs through a cafeteria plan. This is excluded from her taxable income.
77
Highly Compensated Employee (HCE)
An employee who is a company officer, 5%+ shareholder, earns $150,000+ (2023), or is a spouse/dependent of such, per 2024 rules.
78
HCE Scenario
Ava, a company president earning $200,000, is an HCE. Her benefits in a cafeteria plan are scrutinized for nondiscrimination.
79
Key Employee
An employee who is a company officer with pay over $220,000, a 5% owner, or a 1% owner with pay over $150,000 in 2024.
80
Key Employee Scenario
Raj, a vice-president earning $230,000, is a key employee despite no ownership, due to his salary and position.
81
Nondiscrimination Testing
IRS rules ensuring benefit plans don’t favor HCEs or key employees; failure results in taxable benefits for those employees.
82
Nondiscrimination Testing Scenario
A company’s 401(k) plan favors HCEs. After failing IRS testing, HCEs must report their benefits as taxable income.
83
Educational Assistance
Up to $5,250 in 2024 of employer-paid tuition or student loan costs, excludable from income, unless job-related.
84
Educational Assistance Scenario
Noah’s employer pays $4,000 for his MBA tuition. This is excluded from his taxable income under the $5,250 limit.
85
Tuition Reduction Benefits
Qualified tuition reductions at eligible institutions for employees or dependents, excludable if for undergraduate or specific graduate work.
86
Tuition Reduction Benefits Scenario
Lila, a professor, gets a tuition waiver for her daughter’s undergraduate studies. It’s nontaxable as a qualified tuition reduction.
87
Employer-Provided Meals and Lodging
Meals and lodging provided on business premises for the employer’s convenience, excludable if lodging is a condition of employment.
88
Meals and Lodging Scenario
Sam lives in employer-provided housing at a remote construction site. The lodging and meals are nontaxable for the employer’s convenience.
89
Transportation Fringe Benefits
Transit passes or parking up to $315/month in 2024, excludable from income; excess is taxable.
90
Transportation Fringe Benefits Scenario
Emma’s employer pays $400/month for parking. $315 is nontaxable, but $85 is included in her taxable wages.
91
Qualified Nonpersonal Use Vehicles
Vehicles like school buses or police cars, where personal use is nontaxable as a working condition benefit.
92
Qualified Nonpersonal Use Vehicles Scenario
Ava drives a school bus and uses it to get lunch. This personal use is nontaxable as the bus is a qualified vehicle.
93
Cell Phone Benefits
Employer-provided cell phones for business use are nontaxable if provided for valid business reasons.
94
Cell Phone Benefits Scenario
Raj’s employer provides a phone for client calls. Its value is excluded from his income as a business-related benefit.
95
Group-Term Life Insurance
Up to $50,000 of coverage is nontaxable; excess coverage is taxable and reported on Form W-2.
96
Group-Term Life Insurance Scenario
Mia’s employer provides $75,000 in life insurance. The cost of $25,000 is taxable and reported on her W-2.
97
Work-Related Moving Expenses
Reimbursed moving expenses are taxable as wages for most taxpayers, except certain armed forces members.
98
Work-Related Moving Expenses Scenario
Liam’s employer reimburses $5,000 for a job-related move. This is included as taxable wages on his W-2.
99
No-Additional-Cost Services
Services like unused airline seats for employees, nontaxable if they incur no significant cost to the employer.
100
No-Additional-Cost Services Scenario
Zoe, an airline employee, flies free on a standby seat. This is nontaxable as a no-additional-cost service.
101
Employee Achievement Awards
Awards for length-of-service or safety, excludable up to $400 (non-qualified) or $1,600 (qualified plan awards).
102
Employee Achievement Awards Scenario
Ethan receives a $500 qualified service award watch. It’s nontaxable as it’s under the $1,600 limit for qualified awards.
103
De Minimis Benefits
Benefits of minimal value (e.g., snacks, occasional copier use) that are nontaxable due to impractical accounting.
104
De Minimis Benefits Scenario
Sophia’s employer provides coffee and donuts weekly. These are nontaxable de minimis benefits.
105
Employee Discounts
Discounts on services (up to 20%) or merchandise (gross profit percentage) are nontaxable up to specified limits.
106
Employee Discounts Scenario
Carlos, a retail employee, gets a 20% discount on a $100 shirt. The $20 discount is nontaxable.
107
Accountable Plan
A plan reimbursing business expenses (e.g., travel, meals) that are nontaxable if documented and excess is returned.
108
Accountable Plan Scenario
Ava is reimbursed $1,000 for business travel with receipts and returns $200 unused. The $800 is nontaxable.
109
Clergy Salary
Salaries of ordained clergy are taxable on Form W-2, but Social Security and Medicare taxes are not withheld.
110
Clergy Salary Scenario
Pastor Emma earns $40,000 in salary, reported on her W-2. It’s taxable, but no FICA taxes are withheld.
111
Clergy Housing Allowance
Excludable from income tax up to the lesser of designated amount, actual housing costs, or fair market rental value, but subject to SE tax.
112
Clergy Housing Allowance Scenario
Reverend Noah gets a $10,000 housing allowance, spends $9,000 on rent. He excludes $9,000 from income tax but pays SE tax.
113
Clergy SE Tax Exemption
Clergy may apply for exemption from SE tax via Form 4029 if opposed to public insurance on religious grounds, forfeiting benefits.
114
Clergy SE Tax Exemption Scenario
Pastor Lila files Form 4029 for SE tax exemption due to religious beliefs. She pays no SE tax but loses Social Security benefits.
115
Vow of Poverty
Clergy with a vow of poverty are exempt from SE tax on earnings for qualified services, as income belongs to the religious order.
116
Vow of Poverty Scenario
Sister Mia’s earnings go to her religious order under a vow of poverty. They’re tax-free and exempt from SE tax.
117
Combat Pay
Military pay for service in a combat zone, excludable from income for enlisted personnel or up to a limit for officers.
118
Combat Pay Scenario
Sgt. Ethan serves in a combat zone for 6 months, earning $30,000. All is nontaxable as combat pay.
119
Veterans Benefits
Payments for education, disability, or dependent care from the VA are nontaxable if service-related.
120
Veterans Benefits Scenario
Veteran Sophia gets $2,000 for education via the GI Bill. It’s nontaxable and not reported on her tax return.
121
Medicare/Medicaid Waiver Payments
“Difficulty-of-care” payments for in-home care of a disabled person, excludable if caregiver and recipient live together.
122
Medicare/Medicaid Waiver Payments Scenario
Ava cares for her disabled son at home, receiving $6,000 in waiver payments. These are nontaxable as they live together.
123
EITC/ACTC Election for Waiver Payments
Caregivers may include waiver payments in earned income for EITC or ACTC, choosing to include all or none.
124
EITC/ACTC Election Scenario
Mia includes her $5,000 Medicaid waiver payments in earned income to boost her EITC, increasing her tax refund.
125
Worker’s Compensation
Payments for work-related injuries, always nontaxable and not reported on a tax return.
126
Worker’s Compensation Scenario
Raj, injured on a factory job, receives $10,000 in worker’s compensation. It’s nontaxable and not reported.
127
Disability Retirement Benefits
Taxable as wages until minimum retirement age (usually 62), then taxable as pension income.
128
Disability Retirement Benefits Scenario
Lila, 55, receives $20,000 in FERS disability benefits. It’s taxable as wages until she reaches 62, then as pension income.
129
Disability Insurance Benefits
Nontaxable if the employee pays premiums with post-tax dollars; taxable if employer-paid or pre-tax contributions.
130
Disability Insurance Benefits Scenario
Ethan receives $12,000 in disability benefits; his employer paid 70% of premiums. $8,400 (70%) is taxable.
131
Veterans Disability Benefits
Payments for service-connected disabilities, nontaxable if discharged honorably, not reported on a tax return.
132
Veterans Disability Benefits Scenario
Veteran Noah receives $15,000 for a service-connected injury. It’s nontaxable and not reported.
133
Life Insurance Proceeds
Generally nontaxable to beneficiaries, except for interest income or proceeds exceeding policy cost.
134
Life Insurance Proceeds Scenario
Ava receives $100,000 as a life insurance beneficiary. It’s nontaxable, but $2,000 interest earned is taxable.
135
Viatical Settlement
Tax-free proceeds from selling a life insurance policy if the policyholder is terminally ill (life expectancy ≤ 24 months).
136
Viatical Settlement Scenario
Terminally ill Sam sells his life insurance policy for $50,000. The proceeds are nontaxable as a viatical settlement.
137
Life Insurance Installments
Part of each installment is nontaxable (based on lump sum divided by number of payments); excess is taxable interest.
138
Life Insurance Installments Scenario
Mia receives $1,200 monthly for 100 months from a $100,000 policy. $1,000/month is nontaxable; $200 is taxable interest.
