Wages and Salaries
There is a penalty for not reporting tips to an employer as required. The penalty is:
Equal to 50% of the social security and Medicare tax due on those tips.
If you did not report tips to your employer as required, you may be charged a penalty equal to 50% of the social security and Medicare tax due on those tips.
Emilio is a U.S. citizen and is employed by the Italian Embassy in Washington DC. Which of the following statements is true?
Emilio has to pay self-employment taxes on his earnings.
While FICA and SECA both pertain to social security and medicare payments, FICA is administered on employer/employee relationships and SECA applies to self-employed taxpayers.
Employees of an international organization or a foreign government in the United States are exempt from Social Security and Medicare employee taxes.
For U.S. citizens the income paid for services rendered to an international organization is reportable as self-employment income on their U.S. federal income tax returns, and is subject to self-employment tax to the extent such services are performed within the United States.
The following statements about dividends received from a dividend reinvestment plan are correct EXCEPT:
Reinvested dividends are not taxable if not removed from the plan.
Dividends are taxable as income when received. The fact that they are re-invested does not matter. The question contains the word EXCEPT, which is intended to trick you. All are correct EXCEPT implies that the answer is the only one that is FALSE. Don't fall for this trick.
A 62-year-old, married taxpayer files Married Filing Separately, and lives apart from the spouse for an entire taxable year. What is the taxpayer’s beginning base amount for computing taxable Social Security benefits?
$25,000
The base amount for a taxpayer who is married filing separately and lives apart from a spouse the entire tax year is $25,000.
§ 86(c)(1); IRS Publication 915
Paula received money from several sources during the year. She reports as income on her tax return all of the following EXCEPT:
$1,200 of payments from her mother directly to Paula's landlord for part of Paula's rent.
If a person pays rent for a taxpayer, and that person does not have a business relationship with the taxpayer, the amount of rent is considered a gift and is not reported as income.
Money received from a bank upon opening an account is taxable interest income and the bank will report it on form 1099-INT. Reportable income also includes tips and a reduction of rent in exchange for services provided.
Generally, a taxpayer must report to his or her employer tips received in excess of _________?
$20 per month
If the taxpayer received cash and charge tips of $20 or more in a calendar month, he or she must report the amount received to the employer. IRS Form 4137.
Mark is a minister of a tax-exempt church. He performs weddings and baptisms and is often paid by personal check or given tips after the ceremonies by the members of his congregation. Which of the following statements is true?
Mark needs to report all fees and tips received for religious ceremonies.
Members of the clergy must include in income any salary and fees received for masses, marriages, baptisms, funerals, etc.
A distribution of stock, or rights to acquire stock in the distributing corporation, is not included in the recipient's gross income unless:
All of the above
Distributions by a corporation of its own stock or stock rights (also known as stock options) are generally not taxable, and a holder of such options need not report them on a return. Distributions of stock dividends and stock rights are taxable if any of the following apply:
Ben is single and retired in September 20X1. He received taxable pension payments of $10,000 and Social Security benefits of $5,000 during the year. He also received $2,000 of unemployment payments during January and February of 20X1. Ben has no other income or deductions. What is his adjusted gross income (AGI) for 20X1?
$12,000
One-half of the Social Security benefits plus all other income is below the base amount of $25,000 for single filing status. Therefore, none of his Social Security is taxable. His AGI is $12,000 ($10,000 taxable pension + $2,000 of unemployment).
Dr. Al-Matine practices medicine in the City of Walzone. This year she performed medical services on a local carpenter and charged him the normal fee of $3,000. He could not pay the entire amount so they agreed that he would pay her cash of $200 and also build her a new bookcase. The bookcase cost the carpenter $700 but had a fair value of $1,100. Dr. Al-Matine uses the cash basis to report income and expenses. When Dr. Al-Matine files her income taxes for the year, what amount should be included for the work done on the carpenter?
$1,300
Under normal situations, revenue reported for tax purposes is equal to the value of the items actually received. Here, the doctor received cash of $200 and a bookcase valued at $1,100 for a total earned income of $1,300.
Billy works as a bagger at a local grocery. Occasionally, he helps customers to their cars. He receives tips of $15 per month. What amount of tip income does Billy need to report to his employer for the year?
$0
Tips of less than $20 per month do not need to be reported to an employer. All tips received must be included in income on the taxpayer's income tax return.
Rev. William Wilson is a full-time minister. The church allows him to use a parsonage that has an annual fair rental value of $24,000. The church pays him an annual salary of $67,000, of which $7,500 is designated for utility costs. His actual utility costs during the year were $7,000. What is his income for income tax purposes?
$60,000.
For income tax purposes, Rev. Wilson excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 for utility costs). The portion of salary not designated for utility costs is $59,500. Out of the $7,500 for utility costs he only spends $7,000, and must include the $500 difference in income. For income tax purposes, he reports $60,000 ($59,500 salary plus $500 of unused utility allowance). His income for SE tax purposes is $91,000 ($67,000 + $24,000 fair rental value of the parsonage.)
During the current year, Jack sold 500 shares of stock. On December 31 of the current year, he also received a capital gain distribution of $750 from his mutual fund. He owned his mutual fund shares since June 30 of the current year. How should Jack report the capital gain distribution on his current year tax return?
$750 long-term capital gain
All capital gain distributions (also called capital gain dividends) are treated as long-term capital gains no matter how long you have held the investment.
Elden is 78 years of age and single. He received Social Security benefits of $15,000, which includes $500 for Medicare premiums. His pension income was $57,000. He also had received $1,500 dollars of interest income, $700 of rental income and $1,600 of dividends. How much is Elden's adjusted gross income?
$73,550
Elden's provisional income of $68,300 is the sum of 1/2 of his social security benefits or $7,500, $57,000 of pension income, interest income of $1,500, dividends of $1,600, and rental income of $700. His provisional income of $68,300 is compared to the upper base amount for single taxpayers of $34,000. The amount of his social security benefits included in income is limited to a maximum of 85% of his social security amount. This question asks for the amount of Elden's adjusted gross income. His adjusted gross income is the sum of 85% of his social security benefits $12,750 (85% × $15,000), pension income of $57,000, interest income of $1,500, gross rental income of $700, and $1,600 of dividends for adjusted gross income of $73,550.
Bart McHenry likes to gamble and has won money several times during the year but lost money during other periods. What are the tax consequences of these gains and losses?
Gambling winnings are included as taxable income but gambling losses are other itemized deductions but only up to the amount reported as winnings.
Winnings from gambling activities are reported within the income of the taxpayer. Losses are shown as Other Itemized Deductions. However, the losses deducted cannot exceed the amount of gambling winnings being reported.
Tips are subject to what form of taxation?
All of the above
Tips are subject to social security and Medicare tax (or railroad retirement tax) and income tax withholding. IRS Form 4137.
Sarah is a U.S. citizen employed by the International Red Cross and is receiving her paycheck from the headquarters in Geneva, Switzerland, even though she is currently based in the U.S. Which of the following statements is true?
Sarah has to pay self-employment taxes on her earnings.
Employees of an international organization or a foreign government in the United States are exempt from Social Security and Medicare employee taxes. However, such an employee must pay self-employment taxes on earnings from services performed in the United States, even though the employee is not self-employed.
J. R. Jackson received cash dividends of $3,000 this year. The tax information provided by the company indicated that these were qualified dividends. Which of the following statements is true?
These dividends are taxed at the lower rate that is applicable for net long-term capital gains.
Qualified dividends are those dividends collected from a U.S. domestic corporation or a qualified foreign corporation. To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to long-term capital gains.
George and Martha are married and filed a joint tax return for 20X1. George had $8,000 of Social Security benefits and Martha received $4,000. Their income also included $10,000 of taxable pension income and $2,000 of interest income. What part of their Social Security benefits is taxable for 20X1 based upon the base amount for married filing jointly of $32,000?
$0
Their total income from sources excluding Social Security is $12,000 ($10,000 taxable pension + $2,000 interest income). One-half of Social Security income is $6,000 ($12,000 ÷ 2). When the total provisional income plus half of Social Security is less than $32,000 for married filing joint taxpayers, none of the Social Security benefits are taxable.
Melanie owns a cupcake business in a Cleveland shopping mall. She is a sole proprietor and therefore reports her income and expenses on a Schedule C of her personal tax return. Melanie had previously obtained a bank loan for some equipment that she stopped using in 20X1 when it broke down. She did not make any loan payments for 10 months and her bank canceled the $5,000 loan balance in 20X2. What does Melanie have to report as a result of this debt forgiveness in 20X2?
$5,000 as income on Schedule C
The conditions for excluding canceled debt from gross income are the same for individuals and sole proprietors. The question does not indicate that she is bankrupt or insolvent, so we must presume none of these conditions are met.
To answer this question correctly, you must recognize that this is a business debt, and any resulting Cancellation of Debt (COD) income is reported on the business tax return. In the case of a nonfarm sole proprietorship, Schedule C, line 6).
Section 61(a)(11) of the Internal Revenue Code provides that gross income includes "income from discharge of indebtedness."
The IRS has ruled that if the principal amount of an under-secured nonrecourse debt that arose out of the purchase of property is reduced by the holder of the debt who was not the seller of the property, this debt reduction may not be treated as a purchase price adjustment (in the absence of an infirmity that clearly relates back to the original sale), but results in discharge of indebtedness income under Code Sec. 61(a)(11). Source: Revenue Ruling 92-99.
The reduction of the principal amount of an under-secured nonrecourse debt who was not the seller of the property securing the debt results in the realization of discharge of indebtedness income. Source: Revenue Ruling 91-31
In this example, the creditor was not the seller of the property. If that had been the case, the statutory exclusion for reductions of purchase price debt would have caused this reduction to be treated as an adjustment to purchase price rather than as discharge of indebtedness income.
When a debt is compromised in a manner other than transferring the encumbered property, the debtor realizes discharge of indebtedness income in the amount by which the debt discharged exceeds the amount paid by the debtor.
Form 4137 is used _________?
To calculate the social security and Medicare tax owed on tips not reported to employer.
A taxpayer must file Form 4137 if receiving cash and charge tips of $20 or more in a calendar month and he or she did not report all of those tips to the employer. Form 4137 is also used when box 8 of Form W-2 shows allocated tips that the taxpayer must report as income. However, Form 4137 should not be used to report tips received for work covered by the Railroad Retirement Tax Act. In order to get railroad retirement credit, the taxpayer must report these tips to his or her employer. IRS Form 4137.
Randy Lee is an ordained minister of a tax-exempt church. Randy receives a salary plus a housing allowance for rent and utilities. Which of the following statements is correct?
Randy has to pay both income tax and self-employment tax on his salary, but only self-employment tax for the housing allowance. The housing allowance is not subject to income tax.
Members of the clergy must include in income any salary and fees received for masses, marriages, baptisms, funerals, etc. Payments to the religious institution are not taxable. The rental value of a home (including utilities) or any designated housing allowance provided is not income. However, the exclusion cannot be more than the reasonable pay for services rendered. Exclude an allowance designated for utility cost only up to the actual utility cost. The home or allowance must be compensation for services rendered as an ordained, licensed, or commissioned minister. However, the rental value of the home or the housing allowance must be included as earnings from self-employment (on Schedule SE) if self-employment tax is applicable.
Joan and Jim had income from investments in 20X1. They also earned a substantial amount of wages. Most of their dividends and interest are reinvested.
The reinvested income included $2,000 in dividends from mutual funds, interest from a savings account of $3,000, and interest from certificates of deposit of $4,000.
Dividends from stocks of $5,000 were received and spent. Interest of $1,000 earned in 20X1 on a loan to a friend was not received until the following year.
How much interest and dividend income must Joan and Jim report on their tax return for 20X1?
$14,000
The mutual fund dividends, the savings account interest, the CD interest and the stock dividend amounts (which combined total $14,000) are all taxable when constructively received, no matter what they did with the proceeds. The $1,000 in accrued interest on the loan to a friend was not constructively received in 20X1, so it does not need to be reported on the 20X1 tax return.
Carl's 75-year-old mother moved in with him in June 20X1 and Carl provided more than half her support for the year. In order to determine if his mother qualifies as his dependent, Carl must calculate her gross income. For 20X1, his mother had income of $4,000 from Social Security, $1,400 of dividends, $1,200 of municipal bond interest, $4,000 of rental income, and $1,000 of rent expenses. What amount does Carl use for his mother's gross income for dependency test purposes?
$5,400
Social Security and municipal bond income are not taxable income to Carl's mother and are not included in her gross income determination. The rental income is included without allowing for expenses. Carl's mother's gross income for dependency test purposes is $5,400 ($1,400 dividends + $4,000 rental income).
John is a cash basis taxpayer. He received the following items of income in Dec. 20X1:
How much of this income must John include on his 20X1 tax return?
$3,300
The cancellation of the truck loan is in return for services provided to the lender and is considered income (payment for services). The retainer for future services is considered income in the year received, as is the money received in 20X1 for work completed in 20X0 (both under the constructive receipt rule). $2,000 + $500 + $800 = $3,300