Unit 10: Other Taxable Income
1040, 915, 85, 50, combine, benefits
MAXIMUM TAXABILITY OF SOCIAL SECURITY The taxpayer calculates the taxable portion on a worksheet in the Instructions for Form ___, or Publication ___, Social Security and Equivalent Railroad Retirement Benefits. The taxable portion of Social Security benefits is never more than ___% and, in most cases, is less than ___%. Spouses who file jointly must ___ their incomes and Social Security benefits when figuring the taxable portion of their benefits, even if one spouse did not receive any ___.
strike, jury, estate, gifts
MISCELLANEOUS OTHER INCOME Other types of income that are taxable to the recipient and reported as "other income" include the following (this list is not exhaustive): -___ benefits -___ duty pay (when it is not turned over to the employee's employer and deducted as an adjustment to income) -Fees paid by an ___ to a personal representative/executor -___ or gratuities received by a host or hostess of a party or event where sales are made
not taxable, more than, taxable income, 982
NONTAXABLE CANCELED DEBT There are several circumstances in which canceled debt is ___ ___. Insolvency: A taxpayer is insolvent when his total debts are ___ ___ the FMV of his total assets. If a taxpayer is insolvent when the debt is canceled, the canceled debt is not taxable, but only to the extent of the insolvency (i.e., by how much his debts exceed his assets). For this purpose, the taxpayer's assets include the value of everything he owns, including pensions and retirement accounts. Bankruptcy: Debts discharged through bankruptcy court in a Title 11 bankruptcy case are not considered ___ ___. The taxpayer must attach Form ___, Reduction of Tax Attributes Due to Discharge of Indebtedness, to his federal income tax return to report debt canceled in bankruptcy.
excluded, main, second, rental, vacation
NONTAXABLE HOME MORTGAGE DEBT Home Mortgage Debt: Under the Mortgage Forgiveness Debt Relief Act, mortgage debt on a primary residence that was forgiven was ___ from taxable income. This provision had expired, but was extended retroactively on December 20, 2019, by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. The extension will cover eligible debt cancellations that occurred in 2018 as well as eligible debt cancellations that occur in 2019 and 2020. This exclusion only applies to a ___ home: it does not apply to ___ homes, ___ properties, or ___ homes.
nondeductible, nontaxable, grandfathered, taxable, payer
ALIMONY RECEIVED The Tax Cuts and Jobs Act changes the treatment of alimony starting in 2019, making it ___ to the payor and ___ to the recipient. Divorce and separation agreements entered into before January 1, 2019 will be "___" so there will continue to be an alimony deduction and alimony income for individuals with divorce agreements that were finalized in prior years. However, if a grandfathered agreement is modified and expressly invokes the new treatment, then the alimony receives the new treatment. In contrast, child support is never ___ income to the receiver and not deductible by the ___ because it is viewed as a payment a parent makes simply to support his or her own child.
not, none
AWARDS FOR WRONGFUL INCARCERATION Civil damages, restitution or other monetary awards that the taxpayer received as compensation for a wrongful incarceration are ___ taxable. Example: Ryan was wrongfully convicted of murder and later released after spending almost 15 years in prison. Ryan was awarded $50,000 per year of wrongful imprisonment. ___ of the award is taxable income to Ryan.
gross income, 1099-C, recourse, nonrecourse, FMV, sale
CANCELLATION OF DEBT INCOME Generally, if a taxpayer's debt is canceled or forgiven, the taxpayer must include the debt forgiveness in his ___ ___. If a lender cancels a debt and issues Form ____, the lender will indicate on the form if the borrower was personally liable for repayment of the debt. The tax impact depends on the type of debt and whether the loan is recourse or nonrecourse. A ___ debt holds the borrower personally liable. All other debt is considered nonrecourse. Cancellation of debt may include any indebtedness for which a taxpayer is personally liable, or which attaches to the taxpayer's property, such as an auto loan, credit card debt, mortgage, or home equity loan. Many home mortgages are "___ loans." This means that if the borrower defaults, the lender can seize the home, but cannot seek out the borrower for any further compensation, even if the ___ of the home does not cover the remaining loan balance. If the taxpayer abandons property that secures debt for which the taxpayer is not personally liable (a nonrecourse loan), the abandonment is treated as a ___ or exchange.
professions, income, recognized, death, disability, not taxable
CANCELLATION OF STUDENT LOANS Certain student loans contain a provision that all or part of the debt incurred to attend a qualified educational institution will be canceled if the student later works for a specified period of time in certain ___. The canceled debt does not have to be recognized as ___ on a taxpayer's return. Example: Paula is a medical student completing her residency. In return for forgiveness of her student loans, she agrees to work for four years as a pediatrician in a state program in Minnesota that serves rural and poor communities. The canceled debt does not have to be ___ as income. Discharges of student loans (including private student loans) will not be taxable when the discharge is on account of ___ or permanent ___. It also excludes forgiveness in the event of death even if there is a cosigner on the loan. This new provision covers eligible student loans discharged from January 1, 2018 to December 31, 2025. Example: Peter takes out a student loan of $32,500 and uses it to pay his college tuition and textbooks. He is personally responsible for the loan. Peter later dies in a car accident. The student loan is forgiven by the lender. The forgiven debt is ___ ___ to Peter on his final tax return, and the liability does not transfer to his estate or his heirs.
ordinary income, not, nontaxable
COURT AWARDS Court awards for compensation for lost wages or profits are generally taxable as ___ ___, as are punitive damages. Compensatory damages for personal physical injury or physical sickness are ___ taxable income, whether they are from a settlement or an actual court award. Example: Terrill was injured in a car accident. His legs were broken, and he suffered other serious physical injuries. He received an insurance settlement for his injuries totaling $950,000. This is _____ income because it is payment for a physical injury.
income, not due, taxable, taxable, medical care, taxable
DAMAGES FOR EMOTIONAL DISTRESS Damages received for emotional distress due to "physical injury or sickness" are treated the same way as damages for physical injury or sickness, so they are not included in ___. However, if the plaintiff's emotional distress is ___ ___ to a physical injury (for example, an employment lawsuit in which a taxpayer suffers emotional distress for injury to reputation), the proceeds are ___, except for any damages received for medical care due to that emotional distress. Example: Sheila won a court award for emotional distress caused by unlawful discrimination. The emotional distress resulted in her hospitalization for a nervous breakdown. The court awarded Sheila damages of $100,000, including $20,000 to refund the cost of her medical care for the nervous breakdown. In this case, $80,000 ($100,000 - $20,000) would be considered a ___ court award. The $20,000 of damages for her ___ ___ would not be ___.
not taxable, 32000
EXAMPLE: CALCULATING TAXABLE SOCIAL SECURITY Example: George and Mabel are both over 65. They file jointly, and both received Social Security benefits during the year. At the end of the year, George received a Form SSA-1099 showing net benefits of $7,500. Mabel received a Form SSA-1099 showing net benefits of $3,500. George also received wages of $20,000 and taxable interest income of $500. He did not have any tax-exempt interest. 1. Total Social Security benefits $11,000 2. Enter one-half of Social Security $ 5,500 3. Enter taxable interest and wages $20,500 4. Sum ($5,500 + $20,500) $26,000 George and Mabel's benefits are ___ ___ because the total above is not more than the base amount ($___) for married filing jointly.
11000, itemize, A, deduct
EXAMPLE: GAMBLING WINNINGS Example: Janette had $11,000 of gambling winnings and $23,000 of gambling losses during the year. Her deduction for gambling losses cannot exceed $___, the amount of her gambling winnings. In order to claim the deduction for her losses, Janette must ___ and list her gambling losses on Schedule ___, Form 1040. If Janette does not itemize, she will not be able to ___ any of her gambling losses.
nonrecourse, sale, 170000
EXAMPLE: NONRECOURSE LOAN Example: Linus lost his home to foreclosure because he lost his job and could no longer make his mortgage payments. At the time of the foreclosure, Linus owed a balance of $170,000 to his mortgage lender, and the fair market value of the home was $140,000. The mortgage is a nonrecourse loan. Linus abandons the property, and the bank forecloses on the home. Linus is not personally liable for the debt (since it is a ___ loan). The abandonment is treated as a ___ (for tax purposes) and the "selling price" would be $___, which is the balance of the loan.
recourse, income
EXAMPLE: TAXABLE CANCELLED DEBT Example: Larissa bought a new car for $15,000. She made a $2,000 down payment and borrowed the remaining $13,000 from her bank. Larissa is personally liable for the car loan (___ debt). The bank repossessed her car because she stopped making payments. The balance due on the car loan at the time of the repossession was $10,000. The FMV of the car when repossessed was only $9,000. She also has ordinary income from cancellation of debt. That income is $1,000 ($10,000 canceled debt − $9,000 FMV). Larissa must report the canceled debt as ___.
vacation, 982
EXAMPLES: CANCELLED MORTGAGE DEBT Example: Anakin purchased a vacation home for $175,000, with a mortgage of $150,000. Anakin was unable to make the payments and he defaults on the loan. The home later sold in a short sale for $130,000. The lender forgives the remaining mortgage debt. Anakin was not insolvent or in bankruptcy. The forgiven debt is not eligible for the QPRI exclusion because it is a ___ home. Example: Adam's primary residence is subject to a $320,000 recourse mortgage. Adam's mortgage lender forecloses on the home on January 10, 2019. The residence is later sold by the bank for $280,000 on May 1, 2019. Adam has $40,000 of canceled debt income from the discharge of indebtedness. All of the mortgage debt was qualified principal residence indebtedness. Therefore, he can claim the qualified principal residence exclusion by filing Form ___ with his 2019 tax return.
taxable, 1040, not, other income, 1040
EXAMPLES: OTHER INCOME Example: Shirley is 72 years old and retired. She supports herself primarily with her Social Security income. During the year, she receives a jury duty summons. She is chosen for the jury, and she is paid $40 a day for serving ten days on a jury trial. Shirley was also reimbursed by the court for reasonable transportation expenses and parking fees. The $400 she earned for jury duty is ___ and must be reported on her Form ___. The reimbursement for transportation and parking fees is ___ taxable and does not have to be reported on her return. Example: Samuel is the executor of his grandmother's estate. His grandmother died on January 29. Her estate includes several rental properties that must be managed after her death. Samuel is not an attorney or professional executor, but he did agree to manage his grandmother's estate. Samuel pays bills, files the estate's tax returns, manages his late grandmother's rental properties. His grandmother's final will stipulates that the executor should receive 4% of the income generated by the estate, as well as reimbursement for all estate-related business expenses. During the year, Samuel receives $9,500 in executor fees, which he reports as ___ ___ on his Form ___.
W-2G, A, winnings
GAMBLING INCOME Gambling income may include winnings from lotteries, raffles, horse races, and casinos. Gambling winnings will be reported to a taxpayer on Form ___ . A taxpayer must report and pay tax on all gambling winnings, regardless of whether he receives a Form W-2G. Gambling losses are still deductible on Schedule ___ as a miscellaneous itemized deduction, but the deduction is limited to the amount of gambling ___.
exempt, unemployment, would, would not
GOVERNMENT BENEFITS Most government welfare benefits, including food stamps, heating assistance programs, and nonfederal assistance benefits from states or local agencies are ___ from federal taxation. Worker's compensation, which provides wage replacement and medical benefits to injured workers, is not taxable income. In contrast, ___ compensation is taxable. Example: Penny was laid off from her job during the year. She received $300 a week of unemployment compensation for 26 weeks. When she was unable to find another job, she began receiving benefits from her state's WIC program, which provided vouchers for food for her and her toddler. The unemployment compensation ___ be taxable income, but the welfare (WIC) benefits ___ ___ be taxable.
business, profit, 21
HOBBY INCOME A hobby is an activity typically undertaken primarily for pleasure. Even though it may produce income, a hobby is not considered a ___ because it is not carried on to make a ___. Income from a hobby is taxable and reported on Form 1040, Schedule 1, line ___. Hobby income is generally not subject to self-employment tax. Note: The use of hobby expenses offset hobby related income is no longer permitted. The Tax Cuts and Jobs Act repealed most miscellaneous itemized deductions, including the deduction for hobby related expenses. A taxpayer with hobby income is still allowed to deduct cost of goods sold (COGS), if it applies, in order to arrive at taxable income.
cost of goods sold, gross
IRS REGULATIONS IRS Regulation 1.183-1(e) states that a taxpayer may determine gross income from any activity by subtracting the ___ ___ ___ ___ (COGS) from the ___ receipts so long as he consistently does so and follows generally accepted methods of accounting in determining such gross income.
punitive, always, other income, would not, taxable
OTHER CIVIL DAMAGES ___ damages are ___ taxable income, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness. Punitive damages are legal damages assessed in order to "punish" the defendant for outrageous or malicious conduct. Punitive damages should be reported as "___ ___" (Form 1040). Example: Morgana purchases a new car; a sporty sedan called the "Flinto." She enjoys the vehicle and drives it to and from work every day. After about six months of ownership, she has a small fender bender on a residential street. During the accident, her car's gas tank mysteriously explodes. Morgana manages to escape the burning vehicle, but she experiences third-degree burns on her right arm and leg from the blast. Morgana later discovers that the "Flinto" has a serious design flaw, and the manufacture of the car knew about it, but refused to issue a recall. She decides to sue the manufacturer of the car in a civil action. The case goes to trial, and the jury awards Morgana $2 million in compensatory damages for her injuries, but also an additional $15 million in punitive damages, which was designed to punish the manufacturer for its conduct. The $2 million in compensatory damages ___ ___ be taxable to Morgana, as it was payment for her physical injuries. The $15 million in putative damages would be ___ as "other income" on Schedule 1 of her Form 1040.
taxable, deductible, business expense
OTHER QUALIFIED INDEBTEDNESS Qualified Farm Indebtedness: If a taxpayer incurred the canceled debt in a farming business, it is generally not considered ___ income. Canceled Debt that is Otherwise Deductible: If a taxpayer uses the cash method of accounting, he should not recognize canceled debt income if payment of the debt would have otherwise been a ___ expense. Example: Raima is a self-employed interior designer. A CPA firm agrees to file her business tax return and bill her at a later date. Raima receives $2,200 of tax preparation and bookkeeping services for her business on credit. Later, Raima loses a major design account and has trouble paying her debts, so her CPA forgives the amount she owes. Raima does not include the canceled debt in her gross income because payment of the debt would have been deductible as a ___ ___ had it been paid.
SSA-1099, one-half, other, none, taxable, 32000, 25000, 0
SOCIAL SECURITY INCOME Social Security income is reported to the taxpayer on Form ___, Social Security Benefit Statement, and these benefits are taxable in certain cases, depending upon a taxpayer's income and the amount of benefits received for the year. To determine if any percentage of his Social Security benefits is taxable, a taxpayer must compare the base threshold amount for his filing status with the total of: • ___-___ of his benefits, plus • All of the taxpayer's ___ income, including tax-exempt interest. If the sum is less than the base amount for his filing status, ___ of the Social Security is ___. If the sum is more than the base amount for his filing status, a percentage of the Social Security is taxable. Base Amounts for Calculating Taxability of Social Security -MFJ: $___ -Single, HOH, QW, or MFS (and lived apart from his/her spouse all year): $___ -MFS (if lived with spouse at any time during the year): $___
recovery, credit, A, income, reduced, itemized, 1099-G, not included
TAXABLE RECOVERIES A ___ is a return of an amount a taxpayer deducted or took a ___ for in an earlier year. The most common recoveries are refunds, reimbursements, and rebates of deductions itemized on Schedule ___. A taxpayer must include a recovery in ___ in the year he receives it, to the extent the deduction or credit ___ his tax in the earlier year. State and local income tax refunds are reported as taxable income in the year received only if the taxpayer ___ deductions in the prior year in which those taxes were overpaid. The payer should send Form ___, Certain Government Payments, to the taxpayer by January 31, and also send a copy to the IRS. Refunds of federal income taxes are ___ ___ in a taxpayer's income because they are never allowed as a deduction.
engaged, profit, three, five, equine
THREE OF THE LAST FIVE YEARS "SAFE HARBOR" IRC § 183(d) is a safe harbor for the taxpayer. It allows a presumption that the taxpayer is "___ in for ___" if in 3 of 5 consecutive years (2 of 7 in the case of breeding, training, showing or racing of horses). On other words, the IRS presumes that an activity is "a business" rather than a "hobby" if it makes a profit during at least ___ of the last ___ tax years, including the current year. This rule changes to two out of the last seven years for ___-related activities, for example, racing, breeding, and training horses.
