gross income inclusions - mid-state technical...
TRANSCRIPT
Chapter 3
Gross Income Inclusions
CCH Essentials of Federal Income Taxation
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Problems in Recognizing Gross Income
• Recognizing potential income items
• Identifying those income items specifically
excluded by law
Taxpayers face two problems:
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Compensation• Fees
• Bonuses
• Commissions
• Salaries
• Wages
• Property
• Honorariums for making a speech
• So-called gifts received for helping other taxpayers
• Employee fringe benefits
• Military service pay
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Fair Market Value
FMV is the price that a willing buyer wants
to pay and a willing seller wants to accept.
FMV assumes that neither buyer nor seller
must buy or sell. FMV also assumes that
buyer and seller have reasonable knowledge
of all necessary facts. Finally, in the absence
of an actual sale or exchange, FMV can be
determined by expert appraisal or other
supporting evidence.
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Tips
Employees must file tip reports (form
4070) with their employers by the tenth
of the month following the month in
which they receive tips. When
employees fail to turn in tip reports, they
include their tips in gross income in the
year of receipt.
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Tips
An employee who gets less than $20.00
in monthly tips while working for one
employer need not tell the employer
about the tips. However, the employee
must report the tips as compensation
on either Form 1040EZ, Form 1040A,
or Form 1040.
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Tips
When employees of certain large
restaurants and cocktail lounges report
less than 8% of gross sales in tips to
their employers, the employers must
report the difference as additional
income on the employee’s Form W-2.
These are called ―allocated tips.‖
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Divorce and Separation Agreements
• Division of property acquired during the
marriage (property settlement)
• Spousal support (alimony)
• Support of the children (child support)
When a married couple gets a divorce or
becomes legally separated, three money
issues arise:
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Dividend Income
• Ordinary dividends
• Nominee dividends
• Dividend Reinvestment Plans (DRIPs)
• Return-of-Capital distributions
• Distributions of mutual funds
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REPORTING
DIVIDEND INCOME
• 1099 DIV
• Cannot use 1040EZ
• if Dividends > $1500
– 1040A uses Schedule 1
– 1040 uses Schedule B
• Qualified Dividends get special tax rate of
5 or 15%
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Farm Income or Loss
• Taxpayers report net income (or loss) from
farming on Form 1040
• Details of income and expenses are reported
on Schedule F
• Special income and expense rules apply to
farming
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Interest Income
• Interest as dividends
• Savings accounts and certificates
• Merchandise premiums
• Interest on insurance dividends
• U.S. savings bonds
• U.S. Treasury bills, notes, and bonds
• Accrued interest
• Original Issue Discount
(OID) bonds
• Market Discount (MD)
bonds
• Bond premiums on
taxable bonds
• Imputed interest
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Tax-exempt Interest
• Interest from several sources may be tax-
exempt if qualified by the tax code
• Common sources:
– State and city municipal bonds
– Certain bonds used for educational costs
– Interest on educational IRA
– Interest and earnings on Roth IRA
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REPORTING
INTEREST INCOME
• 1099-INT—see p. 3-18
• 1040EZ if taxable interest of $1500 or less
• 1040A uses Schedule 1, with taxable
interest over $1500
• 1040 uses Schedule B with taxable interest
over $1500
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U.S. Savings Bonds• Interest is usually deferred until the maturity date
• Interest may be amortized if the taxpayer wishes
• Usually Series EE as purchase– Purchased at a fraction of face value
– Interest is received when bond is redeemed
• Series HH is from an exchange
• Series I bonds purchased at face value– Interest accrues and received when redeemed
• T-bills—Treasury bills, notes, bonds are different– These pay interest every 6 months
– May include original issue discount
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ORIGINAL ISSUE DISCOUNT
• Occurs when Bonds are issued (purchased)
at less than their face value
• Discount = Maturity Value – Issue Price
• Discount represents income
• Amortize this Discount over the remaining
life of the bond, and report it as interest
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IMPUTED INTEREST
• A minimum required amount of interest
• When loans are made without interest, or
made at a low interest rate
• Lender must recognize interest equal to the
imputed amount
• May apply to gift loans, with exceptions
• See page 3-19
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KIDDIE TAX
• Children under age 18
• Net Unearned Income greater than $1,700
• First $850 is tax free usually
• Next $850 taxed at child’s rate (usually 10%)
• Excess NUI over $1,700 is taxed at the parents’
marginal rate (highest bracket)
• Report on form 8615
• See example p. 3-26
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Net Unearned Income (NUI)
Total unearned income
Less: $800
Less: The greater of
(1) $800 of the standard deduction or
(2) Itemized deductions directly related to
the production of the unearned income
Equals: Net Unearned Income
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IRAs
• Traditional IRA—above the line deduction
– Contributions made tax-free
– At retirement, withdrawals are taxable
– Significant penalties for early withdrawals
• ROTH IRA—non-deductible
– Contributions made with after-tax earnings
– No tax on withdrawals or earnings
– May be withdrawn without penalty for a number of reasons
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Nontaxable IRA Distribution Formula
Total nondeductible contributionsDistribution = Nontaxable
Total value of IRA Distribution(including contributions and earnings)
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Pensions & Annuities
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• Usually contain some taxable and
nontaxable portions
• Nontaxable part comes from money the
taxpayer put into the fund after tax
• Taxable part comes from contributions paid
or growth which was never taxed
• Payer of the fund will report this on 1099R
• See p. 29—31 for details
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SOCIAL SECURITY
BENEFITS
• Taxable when other income plus S.S.
benefits are over• $25,000 for a Single taxapayer
• $32,000 for Married—Joint
• Two-tiered system taxes 50% or up to 85%
of the S.S. benefits
• See worksheet
Calculating Social Security Benefits
Jane is single and files form 1040A for
2007. She received the following
income:
Fully taxable pension $18,600
Wages from part-time job 9,400
Taxable interest income 990
Social Security benefits 5,890
HOW MUCH OF THE SOCIAL SECURITY IS TAXABLE?
Calculating Social Security
Benefits
Joe and Betty file a joint return for 2007. They received the
following income in 2004:
Fully taxable pension--Betty $38,000
Taxable interest income 2,500
Social Security benefits--Joe 10,000
HOW MUCH OF THE SOCIAL SECURITY IS TAXABLE?
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OTHER TAXABLE INCOME
• Rents and Royalties
• Unemployment Compensation
• State and Local Tax Refunds
• Illegal Income
• Awards, prizes, gambling winnings
– Gambling expenses may be deducted but only
if the taxpayer itemizes deductions
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Tax Benefit RuleTaxpayers may have reportable income when they get
back (recover) amounts deducted in a prior year.
For a recovery to be taxable, taxable income for the
prior deduction year must equal or exceed zero, and
the taxpayer must have itemized deductions.
This often effects taxpayers who itemize and receive
a state tax refund the following year
See p. 3-33
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