Tax Course Ch. 7: Other Income & Adjustments

Where the taxable disability benefit is reported on the tax return depends upon the taxpayer's age when the benefit is received

-Until the taxpayer reaches minimum retirement age, the disability pension payments are reported as wage income (and are considered earned income) on Form 1040, line 1. -Beginning on the day after the taxpayer reaches minimum retirement age, the disability pension payments are reported as pension income on Form 1040, lines 4a and 4b

Where the taxable disability benefit is reported on the tax return depends upon the taxpayer's age when the benefit is received:

-Until the taxpayer reaches minimum retirement age, the disability pension payments are reported as wage income (and are considered earned income) on Form 1040, line 1. -Beginning on the day after the taxpayer reaches minimum retirement age, the disability pension payments are reported as pension income on Form 1040, lines 4a and 4b.

The cost of room and board qualifies only to the extent that it is not more than the greater of the following:

1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance for a particular academic period and living arrangement of the student. 2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Requirements to adjusting alimony as an income

1. The payment is made in cash or a cash equivalent (check, payroll deduction, etc.) 2. The payment is received by, or on behalf of, a spouse under a divorce or separation instrument executed before January 1, 2019; 3. The instrument does not state that the payment is not alimony, included in the recipient spouse's income and deductible by the payor spouse 4. If the spouses are divorced or legally separated, they cannot be members of the same household when the payment is made 5. The instrument must state that liability for payments ceases upon the death of the recipient spouse, or, if the instrument is silent on the issue, the payments must cease upon the death of the recipient spouse under state law.

Alimony Recapture

1st Year + 2nd Year - ($37,500 + 2 x 3rd Year)

fully taxable or partially taxable

Any amount of scholarship or fellowship funds exceeding the degree candidate's amount of current-year qualified educational expenses is taxable income.

where are scholarships & fellowships reported

As discussed earlier, a taxpayer's scholarship or fellowship is reported on Form 1098-T, box 5

Disability Benefits

As mentioned earlier, until the taxpayer reaches minimum retirement age, taxable disability pension payments, reported on Form 1099-R, box 2a, Taxable Amount, are entered as wage income on Form 1040, line 1

fellowship

Financial aid grants awarded to students for the purpose of attending a college or performing research.

scholarship

Financial aid grants awarded to students for the purpose of attending a college or performing research.

Moving Expenses

Form 3903 - transportation - household goods - traveling (U HAUL) - housing - temporary storage (U HAUL)

Student Loan Interest Deduction formula

Married Filing Jointly; Interest Paid x (modified AGI - $135,000) / $30,000 All other filing statuses; Interest Paid x (modified AGI - $65,000) / $15,000 *All are limited to $2,500

Unemployment Compensation

Unemployment compensation is reported to the taxpayer on Form 1099-G, Certain Government Payments, box 1. Unemployment compensation is fully taxable and is entered on Schedule 1 (Form 1040), line 19 *A taxpayer who receives unemployment compensation may request that the payer withhold 10% of the benefits from each check to go toward their federal income tax liability. This may be done by filing Form W-4V, Voluntary Withholding Request *The payer will report the income tax withheld on Form 1099-G, box 4

Health Savings Account (HSA)

a tax-free savings account—funded by employees, employer, or both—to spend on routine medical costs. Usually combined with a high-deductible policy to pay for catastrophic care

Form 1040 adjustments

adjustments reduce their gross income, resulting in their adjusted gross income (AGI). Before a taxpayer deducts any of these adjustments from their gross income, they would first need to qualify to claim the adjustment.

The Tax Cuts and Jobs Act (TCJA)

alimony payments are no longer income

non degree candidate

automatically taxable

Early withdrawal penalties go in which box?

early withdrawal penalties may be reported in box 2 of Form 1099-INT, Interest Income, or box 3 of Form 1099-OID, Original Issue Discount.

true or false? MOVING EXPENSES can be adjusted & reported on Form 2106 (Unreimbursed Employee Expenses?

false

eligible student

is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

is room & board a qualified educational expense?

no

alimony

payments made regularly to an ex-spouse after divorce *Alimony does not include payments made for child support or for any voluntary payments made outside of an agreement or court decree of divorce or separation

Military Tax payer expenses are...

reported in Form 3903 then deducted on schedule 1 (Form 1040) line 26

IRA deduction

subject to an adjustment of $5,500 OR $6,500 for taxpayers 50 & older *Schedule 1 (1040) Line 32

Unemployment Compensation

taxable

Gambling winnings

taxable *James Kennedy took a chance one day and bought a $1 scratch-off. It was his lucky day, because he won $100,000! The IRS requires a mandatory 24% withholding on winnings that exceed $5,000. James received a check for $76,000 and has $24,000 of withholding to report. James's Form W-2G is shown below

Alaska Permanent Fund

taxable but not treated as a dividend on form 1099. Must report on Schedule 1

Student Loan Interest Deduction

$2,500 for every qualified student Schedule 1 (1040) Line 33

Educator expenses

- A taxpayer who is an eligible educator in 2018 may deduct up to $250 of qualified educator expenses paid in 2018; this is done on Schedule 1 (Form 1040), line 23. If the taxpayer and their spouse are filing a joint return, and both individuals are eligible educators, their maximum deduction is $500 ($250 per eligible educator) - An eligible educator is someone who worked at least 900 hours during the school year as a teacher, instructor, teacher's aide, counselor, principal, or administrator in an elementary or secondary school (kindergarten through 12th grade)

Types of Self Employment Adjustments

- Deductible Apart of Self Employment tax - Self Employment SEP, Simple & Qualified Plans - Self Employed Health Insurance Deductible

types of tax free funds

- Employer-provided educational assistance. - Tax-free distribution of earnings from a Coverdell Education Savings Account (ESA). - Tax-free distribution of earnings from a qualified tuition program (QTP). - U.S. Savings Bond interest excluded from income because it is used to pay qualified education expenses. - Tax-free part of scholarships and fellowships. - Veterans' educational assistance. - Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

A qualified student loan is a loan taken out by the taxpayer solely to pay qualified education expenses that were:

- For the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the taxpayer took out the loan. - Paid or incurred within a reasonable period of time before or after the taxpayer took out the loan. - For education provided during an academic period for an eligible student.

Student Loan Interest Deduction qualifications

- Uses any filing status except married filing separately. - Cannot be claimed as a dependent on another taxpayer's return - Must be legally obligated to pay interest on a qualified student loan. - Paid interest on a qualified student loan.

Qualified Education Expenses

- books - equipment - CPU software - classroom supplies - instructional material *homeschooling NOT included *gifts NOT included

schedule 1 line 11 (Other Income)

- prizes / awards - jury duty - cancelled debts - rental of personal property - taxable distributions from a health savings account - credit card insurance - hobby income - medical trial income

Qualified Education Expenses for student loans are...

- tuition fees - room & board - books, supplies, equipment - other necessary expenses (transportation)

is alimony apart of additional income?

- yes this is reported on Schedule 1 (Form 1040) line 11 (taker) - Taxpayers who make taxable alimony payments during the year may be eligible to deduct these payments as an adjustment to income on Schedule 1 (Form 1040), line 31a. (maker)

non-taxable income

-Most gifts (bequests) and inheritances -Certain foster care payments -Child support payments -Disaster relief grants -Federal Income tax refunds -Life insurance proceeds -Medical / Health insurance proceeds -Rebates -Welfare benefits -Worker's Compensation

Qualified Expenses must be reduced:

-Reimbursements received that were not included in box 1 of the educator's Form W-2. -Excludible U.S. Series EE and I Savings Bond interest from Form 8815. -Nontaxable distribution from Coverdell Education Savings Account earnings. -Nontaxable qualified tuition program earnings or distributions

Flexible Spending Account (FSA)

A salary reduction cafeteria plan that uses employee funds to provide various types of health care benefits. not reported on Form 1040

qualified tuition program

A savings program sponsored by a state or private educational institution in which individuals can invest to pay future college expenses

is a scholarship or fellowship fully taxable?

A scholarship or fellowship may be fully or partially taxable to the degree candidate if they are used for room and board. This does not require that the funds be used for qualified educational expenses. A scholarship or fellowship is also fully taxable to the degree candidate if it represents payment for teaching, research, or other services required as a condition for receiving the scholarship or fellowship.

Self Employment SEP, Simple & Qualified Plans

A taxpayer who is self-employed or a partner in a partnership and made SEP, SIMPLE, or other qualified retirement plan contributions for themselves during the year may be able to deduct these contributions

Self Employed Health Insurance Deductible

A taxpayer who is self-employed, a partner in a partnership, or a shareholder in an S corporation may be eligible to deduct the cost of health insurance for themselves, their spouse, or their dependents. To claim this deduction, the taxpayer must meet specific requirements, which are discussed in the Form 1040 instructions

form 8863

Education Credits

Form 2106

Employee Business Expenses - Armed Forces (100+ miles at home) - Officials paid on a fee basis - Performing Artists

non degree candidate

If the student is a non-degree candidate or is not attending an eligible educational institution, then the scholarship and fellowship funds are fully taxable to the student

Deductible Apart of Self Employment tax

If the taxpayer is self-employed and owes self-employment tax, the taxpayer is allowed to deduct one-half of their self-employment tax calculated on Schedule SE.

Disability income

Payments received from a disability insurance policy for which the taxpayer paid the premiums are not earned income for EITC purposes. It does not matter whether they have reached minimum retirement age or not. However, if their policy is through their employer, their Form W-2 may show the amount in box 12 with code "J.

form 8962

Premium Tax Credit

social security disability income

Social security income, regardless of the age of the recipient, is never reported as wage income, nor is it ever considered earned income. Social security disability income is reported on the tax return as social security benefits received by the taxpayer, and it is subject to the same rules regarding taxability as other social security benefits. Social security disability income is reported to the recipient on Form SSA-1099, not Form 1099-R

degree candidate

Someone seeking to complete a degree program and earn a college diploma. scholarship / fellowship is fully taxable

Form 1098E

Student Loan Interest Statement

Alaska Permanent Fund

The Alaska Permanent Fund dividend is a dividend paid to Alaska residents from Alaska's mineral income fund. It is paid to those who have lived within the state for a full calendar year, starting January 1 and ending December 31, and who plan to remain an Alaskan resident indefinitely. Each year, the dividend payment varies widely.

Form 1040 adjustments cont.

The adjustments to income are entered on Schedule 1 (Form 1040) and subtotaled. The total on line 36 is then subtracted from Form 1040, line 6, and entered on Form 1040, line 7.

Gambling winnings

The gross amount of a taxpayer's gambling winnings is taxable. This includes amounts won from lotteries, casinos, races, raffles, etc. Depending on the amount of gambling winnings, the taxpayer may receive a Form W-2G, Certain Gambling Winnings, from the payer. All winnings are taxable, whether or not the winner received a Form W-2G. Gambling winnings are reported on Schedule 1 (Form 1040), line 21. Withholding of income tax from certain gambling winnings is usually required. If a taxpayer had tax withheld from their winnings, they will receive a Form W-2G showing the amount of tax withheld.

Long Term Disability Income

The taxability of long-term disability benefits depends on who paid the disability policy premiums, and whether the disability premiums were paid with pre- or after-tax dollars. If a taxpayer retires on disability and the taxpayer paid the premiums with after-tax dollars, then the taxpayer's disability benefits received are tax-free. If a taxpayer retires on disability and the employer or taxpayer paid the policy with pre-tax dollars, the taxpayer must include any disability benefits received in income