Module 4 - TaxPoint 2001
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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