Transcript Module 4 - TaxPoint 2001

Module 25
Gross Income &
Exclusions
Menu Topics
1. Introduction
2. Inclusions in gross income (GI)
Earned income
Investment income
Conduit entities
Other income
3. Exclusions from gross income
4. Deductions for adjusted gross income (AGI)
Introduction
Key Learning Objectives
 Shifting focus to individuals
 Deriving the tax model for individuals
Shifting Focus to Individuals
 Some
personal items are deductible
 For/from adjusted gross income (AGI)
 Several tax rate schedules
Individual Income Tax Model
Adjusted Gross Income
Gross income
Less: deductions for AGI
Adjusted gross income
Individual Income Tax Model
Taxable Income
Adjusted gross income (AGI)
Less: deductions from AGI
Standard or itemized deduction
Personal and dependency exemptions
Taxable income
Individual Income Tax Model
Tax Liability
 Tax
liability
Based
 Plus:
on taxable income and filing status
other taxes
 Less: credits and payments
 Balance due or refund
Inclusions in Gross Income:
Earned Income
Key Learning Objectives
 Earned and taxed in same tax period
Wages
 Earned
and other compensation
and taxed in different tax
periods
Pension
and retirement payments
Social security benefits
Compensation for Services
Generally Includes
 Cash
and FMV of property
 Bonuses and most awards
 Tips-extra penalties here
 Sick pay
 Severance pay
Compensation for Services
Generally Includes
 Personal
use of property, i.e. autos
 Personal expenses paid
for
self or family
 Moving

expenses paid by employer
if not "Qualified"
 Unemployment
benefits
 Excess fringe benefits
Compensation for Services
Deferred Income
 Pension
& retirement
 Pretax dollars
 After tax dollars
See
annuity formula in next section
Social Security Benefits
 Include
in income
Up to 50% OR
Up to 85%
 Inclusion depends on "tax base"
Social Security Benefits
Tax Base
 "Tax
base" includes
Tax exempt interest
1/2 of Social Security
Social Security Benefits
 Include
up to 50% if “tax base”
>$25,000 if filing single
>$32,000 if married, filing joint
 Include up to 85% if “tax base”
>$34,000 if filing single
>$44,000 if married, filing joint
Inclusions in Gross Income:
Investment Income
Key Learning Objectives
 Interest income
 Dividend income
 Annuities
 Capital gains and losses
Interest
Income As Earned
 Income
as earned if bank, etc
 Original Issue Discount--OID
If
not paid at least once a year, accrue
 §7872-imputed
If
interest
not charged by lender
Related party loan
Some exceptions
Interest
State & Municipal Bonds
 Tax
exempt at federal level
 Tax exempt in state of issue
Interest: Obligations
of U.S. Government
 Fully
taxable at federal level
 Tax exempt at state level
 Series E/EE Bonds
 May
defer interest until redemption
 Must treat all bonds the same way
 Educational Assistance
 May
Bonds
get exclusion; many rules
Dividends
 With
E & P--ordinary income
 Without E & P
Return
of capital, then
Capital gains
 Capital
gains distributions
Mutual
funds
Stock Dividends
 Stock

dividends
Generally non-taxable
 Unless

Choice of $ or stock
 Dividend

reinvestment plan
Different type of stock
Annuities

Recover cost through an exclusion ratio
 Investment in contract
÷
 Known
or expected return
Known return--term of annuity
 Expected return if life time payments

 Annual
payment times multiple
 Multiple based on life expectancy
Capital Gains and Losses
 See
Module 20 for full details
 Net capital gains taxed at
no
more than 20% or 28%
10% if held > 18 months and taxpayer’s
highest MTR is 15%
 Net
capital loss deduction limited to
$3,000 per year
Inclusions in Gross Income:
Conduit Entities
Key Learning Objectives
 Classifying the results of



Partnerships
S corporation
Trusts & estates
Income from Conduit Entities
Reported on Schedule E, Page 2
 Regardless
of timing of distributions
Sole proprietors
Partners
S corporation shareholders
 Report their % of the entity's income as
earned
Income from Conduit Entities
Reported on Schedule E, Page 2
 Report
only income distributed
Beneficiaries of
Trusts
Estates
Inclusions in Gross Income:
Other Income
Key Learning Objectives
 Legal settlements
Alimony
 Awards,
prizes, and gambling
 Imputed investment income
See
interest income
Alimony
Income to payee
 Deductible for AGI by payer
 Payments and receipts reported on 1040,
page 1

Alimony
 Payer
excludes
 Payee includes
Alimony

Requirements
 Payments in cash


Parties must live apart
Payments must cease upon death
Alimony
Distinguish from child support
 If both, child support deemed paid first
 Property settlements non-taxable
 Recapture of front-loaded alimony

Alimony
 Only




alimony if
Written divorce decree
Decree does not preclude alimony
Individuals are not living together
Not child support
Alimony
 Payments



must be
Paid in cash
Periodic and
Terminate with death of payee
Alimony vs. Child Support (CS)
 CS
has no tax effect to payer or payee
 Must pay CS before alimony is
Included/excluded
 IRS
can keep tax refunds for CS for
custodial parent
Alimony vs. Property Settlement
 Division
of property at divorce
 Income not recognized by either party
Awards, Prizes, and Gambling
 FMV
included in income, except
 Non-cash meritorious achievement for
Safety
 Length of service

 Reported

on 1040
Page 1, other income
Sale of Principal Residence
Key Learning Objectives
 $250,000 of gain excluded
$500,000
 No
if MFJ
replacement required
 Two year requirements
use and time between exclusions
Exclusions from Gross Income
Key Learning Objectives
 Employment activities
 Investment activities
 Other activities
 Interest on qualified college loans
Employment Payments Excluded
 Some
fringe benefits excluded
 Life insurance
1st
$50,000 of group term
 Accident/health
insurance premiums
 No additional cost services
 Note: Death benefits included after
1996
Employment Payments Excluded
Meals/Lodging
 For
employer's convenience
 On premises
 Necessary to job
 Lodging must be required/not optional
Employment Payments Excluded
Cafeteria Plans
 Allocate
specific dollars to choice of
non-taxable fringes
 Amounts not spent are forfeited
Employment Payments Excluded
 Employee


 De
Discounts
Not in excess of gross profit %
Maximum of 20% discount on services
Minims fringes
Employment Payments Excluded
Qualified Moving Expenses
 See
discussion under exclusions
from AGI
 If employer pays for these expenses
both the income and the deduction are
excluded from the tax calculation
Employment Payments Excluded
Working Condition Fringes
 Provided/paid
for by employer
 Would be deductible to employee
 But also includes
Parking
Athletic facility on premises
Employment Payments Excluded
Qualified Transportation Fringes
Must be paid for by employer
 Cannot exceed specific amounts
Indexed for inflation
Transportation in commuter highway
vehicle--to/from work
Transit pass
Parking place

Employment Payments Excluded
 In
general, benefits must not
Discriminate in favor of owners or
highly paid
 Exception for working condition
fringe benefits
Investment Payments Excluded
 Interest
on state and local bonds
 Most gain on sale of principle
residence
Other Payments Excluded
 Life
insurance proceeds
Not
obtained for consideration
 Gifts
 Inheritances
 Welfare
payments
Other Payments Excluded
Scholarships/Fellowships
 Excluded
ONLY if
Degree
student
No services provided
 Exclude
only am't spent on
Tuition,
fees, books, etc.
Excluded Compensation for
Injury/Sickness/Damages
Workman's compensation--exclude all
 If Em's pays premiums exclude
All disability payments
 If employer pays premiums exclude
Only payments for permanent loss of
bodily function

Excluded Compensation for
Injury/Sickness/Damages
 Physical
injury awards--exclude only
compensatory--non punitive
exclude
all if “wrongful death”
personal injury--Include all
Damage to character
Alienation of affection
Loss of custody of minor child
 Other
Include Payments that
Compensate for Lost Earnings
 Patent/copyright
infringement
 Breach of business contract
 Other interference w/business
Deductions for AGI
Key Learning Objectives
 In
general
 Moving expenses
 Penalty on early withdrawals of
savings
 Alimony payments
Deductions for AGI
In General (1)
 Trade
Sch.
or business expenses
C
 Employee
Form
 Losses
Sch.
business expenses
2106
from property transactions
D or Form 4797
1040, lines 13-14
Deductions for AGI
In General (2)
 Rental
Sch.
and royalty expenses
E
 Adjustments
Form
to income items
1040, lines 23-30
Moving Expenses
 For
family and personal belongings
 Move to take job or start business
 Taxpayer must actually work in the
new area for specified amount of time
Amount
of time is a function of whether
employed or self-employed
Need not have job before moving as long as
work is obtained
Moving Expenses
Distance Test
 Compare
distance from
Old house to new job
Old house to old job
 If new commute from old house
exceeds old commute by 50 miles
 Can deduct costs of move
Moving Expenses
Deductions For AGI
 Direct
costs
 Move household goods
 30 days storage, if needed
 Move members of household
Moving Expenses
Move Members of Household
 100%
of lodging
 Meals are NOT deductible
 If auto
10¢/mile or
Out of pocket for oil and gas only
 100% of cost airline tickets