© Copyright 2003-2012 by M. Ray Gregg. All rights reserved. 1

© Copyright 2003-2012 by M. Ray Gregg. All rights reserved.

1

Federal Income Tax

Chapter 3


3

Gross Income- FOR= AGI- FROM= Taxable Income


4

Gross Income• Chapters 3 and 4• Inclusions and Exclusions• General Concepts


5

Wherewithal To Pay• Define• See Problem 3-4• Problem 3-6

– Why?– Problems?


6

Wherewithal To Pay• Problem 3-15

– Accounting?– Tax?

• Problem 3-42


7

Problem 3 - 42


8

Problem 3 - 42

Item Total Include ExcludeCancellation Fee 1,000 1,000First Month's Rent 800 800Last Month's Rent 800 800Security Deposit 500 500Club Rental 17,000 17,000Swimming Pool 15,000 15,000

35,100 19,600 15,500


9

Problem 3 - 42


35,100 19,600 15,500


10

Constructive Receipt

• Define in Problem 3-12• Examples• Problem 3-35

– Pick 2 of 5


11

Examples of Income

• Problem 3-44


12

Problem 3 - 44


13

Problem 3 - 44


35,100 19,600 15,500


14

Problem 3 - 44

Item Total Include ExcludeInherit City of Atl 10,000 10,000Interest City of Atl 500 500Gain on City of Atl 200 200Interest Svg Bonds 800 800Interest Quebec 300 300

11,800 1,300 10,500

SS


15

Examples of Income

• Problem 3-44• Problem 3-45

– Long way– Short cut


16

Problem 45 a.

Determine “multiple” from table:

58 yr old = 25.9

$500 x 12 mo x 25.9 yrs = $155,400

Less: Cost (excluded) 40,000

Amount to INCLUDE $115,400


17

Problem 45 a.Total $155,400 100%

Exclude 40,000 25.7%

Include $115,400 74.3%

THEN

$500 x 12 mo x 25.7% = $1,542

will be excluded


18

Problem 45 b.

After age 84?

100% would be INCLUDED

Ch 4


19

Social Security Benefits

1984

excludedup to 50% included

1993

up to 85% included


20


NoneBase 1

SomeBase 2

More


21


No SS benefits included in GIBase 1

Lesser of:• ½ SS benefits• ½ (PI – Base 1)

Base 2

Lesser of:• 85% of SS benefits• 85% (PI – Base 2) + lesser of• Maximum• ½ SS


22




Base 2



23


S = $25,000; MFJ = $32,000Base 1

Base 2 S = $34,000; MFJ = $44,000


24

Provisional IncomeAGI (without SS)

+ Tax Exempt Interest

+ Excluded Foreign Income

+ ½ SS Benefits

= Provisional Income


25

text page 3-32


26


• Problem 3-47


27

Salary 31,000 AGI (without SS) 31,000Tax Exempt Interest

Social Security ??? Excl Foreign IncomeA G I 31,000 1/2 Soc Sec Benefits 2,500

Provisional Income 33,500

Lesser of:1/2 of SS Benefits: 2,500

or1/2 of (PI - Base 1):PI 33,500Base 1 32,000Excess 1,500

x 1/2 750

Problem 47 (a)


28

Salary 31,000 AGI (without SS) 31,000Tax Exempt InterestExcl Foreign Income

A G I 31,000 1/2 Soc Sec Benefits 2,500




x 1/2 750

Problem 47 (a)


29


S = $25,000; MFJ = $32,000Base 1

Base 2 S = $34,000; MFJ = $44,000


30




Base 2



31






x 1/2 750

Problem 47 (a)


32






x 1/2 750

Problem 47 (a)


33






x 1/2 750

Problem 47 (a)

$750


34


Social Security 750 Excl Foreign IncomeA G I 31,750 1/2 Soc Sec Benefits 2,500




x 1/2 750

Problem 47 (a)

$750


35






x 1/2 7750

Problem 47 (b)


36






x 1/2 7750

Problem 47 (b)


37


S = $25,000; MFJ = $32,000Base 1

Base 2 S = $34,000; MFJ = $44,000


38




Base 2



39

Lesser of:85% of SS Benefits: 4,250

or85% of (PI - Base 2):PI 47,500Base 2 44,000Excess 3,500 6,000

85% of excess 2,975 + = 5,475

2,500

Problem 47 (b)Salary 45,000 AGI (without SS) 45,000

Tax Exempt InterestSocial Security ??? Excl Foreign IncomeA G I 45,000 1/2 Soc Sec Benefits 2,500



40



85% of excess 2,975 + = 5,475

2,500





41



85% of excess 2,975 + = 5,475

2,500





42



85% of excess 2,975 + = 5,475

2,500




$4,250


43




44


S = $25,000; MFJ = $32,000Base 1

Base 2 S = $34,000; MFJ = $44,000


45




Base 2



46



– check figuresa. = $1,500

b. = $1,500

c. = $2,550

• Problem 3-48– Decision


47




Base 2


Q45


48

Chapter 4

• Meals and lodging?– Problem 4-16

• Premiums by employer?– Problem 4-13

“Benefits” included?


49

Problem 4 - 13

Insurance premiumspaid by ER

a. b. c. Benefits received

included?


50

Problem 4 - 13


a. May ER deduct?

b. c. Benefits received

included?


51

Problem 4 - 13


a. May ER deduct?

b. Must EE include?

c. Benefits received

included?


52

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?


53

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical

Disability

Life


54

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes

Disability

Life


55

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No

Disability

Life


56

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No No

Disability

Life


57

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No No

Disability Yes

Life


58

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No No

Disability Yes No

Life


59

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No No

Disability Yes No Yes

Life


60

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No No


Life Yes*


61

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No No


Life Yes* No*


62

Group Term InsuranceP

rem

ium

s P

aid

by

ER

$50,000 of coverage

NOT included

excess prem INCLUDED


63

Problem 4 - 13


a. May ER deduct?

b. Must EE include?


included?

Medical Yes No No


Life Yes* No* No


64

Chapter 4




• Group term?– Problem 4-14 (not key employees)


65

Group Term InsuranceP

rem

ium

s P

aid

by

ER

$50,000 of coverage

NOT included

excess prem INCLUDED


66

Chapter 4




• Group term?– Problem 4-14 (not key employees)– Problem 4-44 (by “inspection” only)


67

Life Insurance

• Proceeds at death– Problem 4-35

• Include $4,000 ($20,000 - $16,000)• None included• Include $2,500 [$15,000 – ($50,000/4 = $12,500)]

– Problem 4-45• None – all excluded• $9,000 included [$14,000 – ($100,000/20=$5,000)]


68

Life Insurance

• Any exceptions?– Problem 4-36

• Include $5,000 ($20,000 - $6,000 - $9,000)• No (because she would have his “rights”)

• “Dividends”– Problem 4-38


69

What are “dividends”on life insurance?

• Are life insurance premiums deductible?– NO

• Are “refunds” of premiums includable?– NO


70

Problem 4 - 38• $8,000 premiums deductible?

– NO• $6,000 dividends received included?

– NO• Interest on accumulated dividends?

– Included• b. Div = $9,000?

– Then $1,000 included.


71

Include or Exclude?

• Death Benefits– Problem 4-48

• For past services – deductible• Includable as GI

• Gifts– Problem 4-34

• Prizes– Problem 4-39

Pensions

Documents

© Copyright 2003-2012 by M. Ray Gregg. All rights reserved. 1