4-1 ac 256 unit 4 seminar presented by mike lubell, dba, cpa ©2011 pearson education, inc....
TRANSCRIPT
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AC 256 Unit 4 SeminarAC 256 Unit 4 Seminar
Presented By Mike Lubell, DBA, CPA
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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GROSS INCOME: GROSS INCOME: EXCLUSIONSEXCLUSIONS
Items that are not incomeMajor statutory exclusionsTax planning considerationsCompliance and procedural
considerations
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Items that Are Not Items that Are Not IncomeIncome
Unrealized incomeSelf-help incomeRental value of personal-use
propertySelling price of property
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Unrealized Income
Example:Land valued at $20,000 beginning
of year appreciates to $45,000 at end of yearThe $25,000 increase in value is
unrealized income and not taxable
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Self-Help Income
The amount saved is not subject to taxCleaning your own carpetRepairing your car
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Selling Price of Property
Only gain on sale of property is taxable
Selling price – Basis in property= Gain on sale of property
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Major Statutory Major Statutory ExclusionsExclusions
(1 of 2)(1 of 2)
Gifts and inheritancesLife insurance proceedsAdoption expensesAwards for meritorious achievementScholarships and fellowshipsDistributions from qualified tuition
programs
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Major Statutory Major Statutory ExclusionsExclusions
(2 of 2)(2 of 2)
Payments for injury and sicknessEmployee fringe benefitsForeign-earned income exclusionIncome from the discharge of a debtExclusion for gain from small
business stockOther exclusions
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Life Insurance Proceeds
Paid by reason of deathGenerally non-taxable
Policy surrendered not for deathExcess of proceeds over the premiums
paid taxable to recipientDividends on life insurance and
endowment policies non-taxableConsidered return of premiums paid
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Adoption Expenses
Adoption creditTax credits or an exclusion for
amounts paid pursuant to an adoption assistance plan created by an employer
Employee may exclude up to $12,170Phased out between $182,520 and
$222,520
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Awards for Meritorious Achievement
Awards for religious, charitable, scientific, etc. are not taxable if ALL criteria are met:Did not enter contestIs not required to perform substantial
future servicesDesignates a qualified charitable
organization to receive the payment
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Scholarships and Fellowships
Scholarships excluded for degree candidates used for qualified tuition and related expensesRequired for courses of instruction at
an educational institutionTuition, fees, books, supplies, equipment
Not room and board
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Distributions from QualifiedTuition Programs: §529
Plans (1 of 2)
Earnings while in a §529 plan are not taxable
Earnings distributed excluded from income if used by beneficiary for qualified tuition and related expensesTuition, fees, books, supplies,
equipment, AND Room and board if ≥ half-time student
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Distributions from Qualified
Tuition Programs: §529 Plans (2 of 2)
Distributions not used for qualified tuition expensesIncluded in beneficiary’s income, ANDSubject to a 10% penalty
Beneficiary must be “family” member
Beneficiary may be changed w/o tax consequences
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Payments for Injury and Sickness
Injury includes both physical and mental
Disability income policy is non-taxable if purchased by taxpayerTaxable if purchased by employer
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Employee Fringe Benefits(1 of 2)
In generalEmployer-paid insurance§132 fringe benefitsEmployer awardsMeals and lodgingMeals and entertainmentEmployee death benefits
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Employee Fringe Benefits(2 of 2)
Dependent careEducational assistanceCafeteria plans
Flexible spending plansInterest-free loans
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Employee Fringe Benefits in General
Compensation generally taxableLaw encourages certain types of
fringe benefits by Making them nontaxable to the
employee, ANDDeductible by the employer
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Employer-Paid Insurance
Premiums on health, accident, disability and qualifying group term insurance
Most employee life insurance premiums
Benefits from non-discriminatory self-insured plans
See Topic Review 1
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§132 Fringe Benefits
No additional cost benefitsEmployee discountsWorking condition benefitsDe minimis benefitsTransportation fringesAthletic facilitiesSee Topic Review 2
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Employee Awards
Employee achievement awards and qualified plan awardsMust be tangible personal propertyLimited to average of $400/employee
Max award $1,600Includes safety or length of serviceMust not discriminate in favor of
highly paid employees
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Meals and Lodging
Provided on employer’s premises
For the convenience of employer
Lodging must be a condition of employment to be nontaxable
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Meals and Entertainment
50% of meal or cost of entertaining customers is deductibleIncludes cost of employee’s meal or
entertainmentEmployer gets deduction if employer
pays or reimburses employeeEmployee does NOT recognize income
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Employee Death Benefits
§101(b) provides exclusion up to $5,000
Amounts over $5,000 may be nontaxable gifts depending on facts and circumstances, including employer’s intentionGift is NOT deductible by employer
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Dependent Care
Employer-financed programsEmployee may exclude up to
$5,000 of assistance each yearCannot discriminate in favor or
highly compensated employees
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Educational Assistance
Employers pay employee educational costs
Employee may exclude up to $5,250 per year for tuition, fees, books, supplies, and equipment
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Cafeteria Plans
Also called flexible spending accountsEmployee has option of receiving
any combination of benefits up to a certain amount, including cash
Only receipt of cash is taxable
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Interest-Free Loans
Interest must generally be imputed on interest-free loansImputed interest generally
deductible by employer and taxable to employee
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Foreign-Earned Income Exclusion
(1 of 3)
U.S. citizens subject to U.S. income tax on worldwide incomeSubject to double taxation if foreign income taxed by foreign country
Foreign tax credit (FTC) mitigates double taxation
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Foreign-Earned Income Exclusion
(2 of 3)
Foreign earned income exclusion alternative to FTCMay exclude up to $91,500 of foreign earned income
Add’l exclusion for foreign housing costsForeign housing costs in excess of $14,640Max housing exclusion is $12,810
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Foreign-Earned Income Exclusion
(3 of 3)
To qualify for foreign earned income exclusionMust be bonafide resident of foreign
country(ies) for entire taxable year, OR Be physically present in foreign country
for 330 days during a 12 month periodIf 12-month period spans two tax years,
exclusion pro rated based on [# days/365]
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Income from the Discharge of a Debt (1 of 2)
Generally, taxpayer may have to include amount of debt forgiveness in gross incomeExceptions: nontaxable situations
Discharge occurs in bankruptcyDischarge occurs when taxpayer is
insolvent
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Income from the Discharge of a Debt (2 of 2)
Student loansDischarge excluded from gross
income if discharge contingent on the performing certain public services
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Exclusion for Gain from Small Business Stock
50% of gain may be excluded from gross income if held > five years
Maximum tax rate on taxable amount is 28%Effective tax rate of 14%
Eligible amount limited to greater of $10M or 10x adjusted basis in stock
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Other Exclusions(1 of 2)
Gain from sale of personal residenceAnnuities paid to survivors of public
safety officersCertain military-related paymentsHousing allowance for ministersCampus housingFoster care payments
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Other Exclusions(2 of 2)
Rural letter carrier’s allowanceRoth IRA distributionsEducation IRA distributionsPersonal foreign currency gainsSee Table 2
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Tax Planning Tax Planning ConsiderationsConsiderations
Employee fringe benefitsCafeteria plans can help provide
valuable benefits to employees or cash if they don’t need the benefits offered
Self-help income and use of personally owned property
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Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations
Fringe benefits and Form W-2Nontaxable benefit may be excluded
from employees’ W-2Penalties related to wages
For failure to report – $50 per failureFor failure to withhold – 100%
Penalty can be imposed on employer and other people, such as officers or accountants
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