Gross Income Inclusions - Mid-State Technical Collegeinstructor.mstc.edu/instructor/jkruziki/Tax/PowerPoint/Chapter 03 students.pdf · CCH Essentials of Federal Income Taxation 5

Chapter 3

Gross Income Inclusions

CCH Essentials of Federal Income Taxation

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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

Chapter 3

Documents

Gross Income Inclusions - Mid-State Technical Collegeinstructor.mstc.edu/instructor/jkruziki/Tax/PowerPoint/Chapter 03 students.pdf · CCH Essentials of Federal Income Taxation 5