1. Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
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19. 2009 Cengage Learning Example Din has saved $750,000 in his retirement account and uses it to purchase an annuity. His annuity equals $4,800/month and the IRS tables show he is expected to live 19 years. How much is excludable each year of retirement? Assume that Din is required to use the general rule.
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38. 2009 Cengage Learning If (MAGI + (50%)(SS benefits)) exceeds base amount as follows: Base Amount Filing Status $32,000 MFJ $ 0 MFS $25,000 All others … then, the taxable amount is calculated by completing the Simplified Taxable Social Security Worksheet
Gross income is the initial point of tax computation. Gross income is composed of the following items: Compensation for services, including fees, commissions, fringe benefits, and similar items Gross income derived from business Gains derived from dealings in property Interest Rents Royalties Dividends Alimony and separate maintenance payments Annuities Income from life insurance and endowment contracts Pensions Income from discharge of indebtedness Distributive share of partnership gross income Income in respect of a decedent Income from an interest in an estate or trust The general rule is that anything a taxpayer received must be included in gross income unless specifically excluded. Noncash items should be reported at a fair market value.
Interest and dividend income is part of gross income. If a taxpayer earns $1,500 or more in interest and dividends, the taxpayer must file a Schedule B with their return. Interest and dividends from cooperative banks, credit unions, domestic building and loan associations, domestic savings and loan associations, federal savings and loan associations and mutual savings banks are included. Savings bonds come in three different forms, Series EE, Series HH and Series I. Series EE bonds are issued at a discount. In other words, the bond sells for one value and is cashed in at a higher value. Series HH bonds are bonds that have interest paid semi-annually. Series I bonds do not pay interest until maturity, but earnings are adjusted for inflation on a semi-annual basis. Cash basis taxpayers report the increase in redemption value on a Series EE or Series I bond using one of the following methods: The interest may be reported in the year the bonds are cashed or in the year they mature, which ever is earlier, or The taxpayer may elect to report the increase in redemption value each year.
Alimony payments are deductible by the individual making the payments and taxable income to the person receiving the payments. The term "alimony," for income tax purposes, includes separate or periodic maintenance payments made to a spouse or former spouse. Payments must meet certain requirements to be considered alimony. Rules for divorces prior to 1985 were different than they are now so consult the tax rules for that time period if reference to those particular rules is needed. To qualify as alimony, payments must: … be in cash and be received by spouse. … be made under decree of divorce/separation or associated written agreement … cease upon the death of the spouse … not be designated as anything other than alimony in the written agreement … not be made to members of the same household … not be child support payments Alimony payments should not change based on age of children or other such circumstances. Such payments are not alimony. Alimony paid by high-income spouse to low-income spouse will result in tax savings to high-income spouse. Payments made for child support are neither deductible by the taxpayer making them nor are they income to the recipient. They may be an important factor in determining which spouse is entitled to claim the dependency exemption for the child. Child support payments must be up to date before any amount paid may be treated as alimony.
(c)(1)Definition of "employee achievement award" An employee achievement award is an item of tangible personal property given to an employee for a length of service or safety achievement, but only if awarded as part of a meaningful presentation. The award cannot be compensation for services or even be presented under conditions and circumstances that create a significant likelihood that the payment is disguised compensation. Since only awards of tangible personal property are qualify under this definition, awards of cash, gift certificates, intangible property, tickets to theater and sporting events, vacations, and real property must be included in the employee's gross income. PRACTICE TIP: In order to prevent the IRS from claiming that the award is a form of disguised compensation taxable to the employee, the award should not be made when annual salary adjustments take place, as a substitute for a prior program of awarding cash bonuses, or in a manner that discriminates in favor of highly compensated employees. Furthermore, if the cost of the award to the employer is disproportionate to its fair market value (e.g., the award is made in the form of a television set that cost the employer $350, but has a fair market value of $900) the IRS may claim that the award is disguised compensation
(c)(1)Definition of "employee achievement award" An employee achievement award is an item of tangible personal property given to an employee for a length of service or safety achievement, but only if awarded as part of a meaningful presentation. The award cannot be compensation for services or even be presented under conditions and circumstances that create a significant likelihood that the payment is disguised compensation. Since only awards of tangible personal property are qualify under this definition, awards of cash, gift certificates, intangible property, tickets to theater and sporting events, vacations, and real property must be included in the employee's gross income. PRACTICE TIP: In order to prevent the IRS from claiming that the award is a form of disguised compensation taxable to the employee, the award should not be made when annual salary adjustments take place, as a substitute for a prior program of awarding cash bonuses, or in a manner that discriminates in favor of highly compensated employees. Furthermore, if the cost of the award to the employer is disproportionate to its fair market value (e.g., the award is made in the form of a television set that cost the employer $350, but has a fair market value of $900) the IRS may claim that the award is disguised compensation
An annuity is a series of payments under a contract that are made regularly for more than one full year. In general, annuity payments must be included in gross income as ordinary income. However, under Code Section 72 , taxpayers can exclude from income amounts that are considered to represent a return of premiums or other consideration paid for the annuity contract
Amounts received as an annuity from qualified employee plans under Code Section 401(a), employee annuities under Code Section 403(a), and annuity contracts under Code Section 403(b), must generally use a simplified method to compute the taxable and tax-free portion of the distributions. However, the simplified method does not apply if the annuitant is over age 75 and there are five or more years of guaranteed payments under the annuity. Instead, the regular annuity rules apply.