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Presentation transcript:

© Copyright by M. Ray Gregg. All rights reserved. 1

Federal Income Tax Chapter 3

© Copyright by M. Ray Gregg. All rights reserved. 3

4 Gross Income Chapters 3 and 4 Inclusions and Exclusions General Concepts

© Copyright by M. Ray Gregg. All rights reserved. 5 Wherewithal To Pay Define See Problem 3-4 Problem 3-6 –Why? –Problems?

© Copyright by M. Ray Gregg. All rights reserved. 6 Wherewithal To Pay Problem 3-15 –Accounting? –Tax? Problem 3-42

© Copyright by M. Ray Gregg. All rights reserved. 7 Problem

© Copyright by M. Ray Gregg. All rights reserved. 8 Problem

© Copyright by M. Ray Gregg. All rights reserved. 9 Problem

© Copyright by M. Ray Gregg. All rights reserved. 10 Constructive Receipt Define in Problem 3-12 Examples Problem 3-35 –Pick 2 of 5

© Copyright by M. Ray Gregg. All rights reserved. 11 Examples of Income Problem 3-44

© Copyright by M. Ray Gregg. All rights reserved. 12 Problem

© Copyright by M. Ray Gregg. All rights reserved. 13 Problem

© Copyright by M. Ray Gregg. All rights reserved. 14 Problem SS

© Copyright by M. Ray Gregg. All rights reserved. 15 Examples of Income Problem 3-44 Problem 3-45 –Long way –Short cut

© Copyright by M. Ray Gregg. All rights reserved. 16 Problem 45 a. Determine “multiple” from table: 58 yr old = 25.9 $500 x 12 mo x 25.9 yrs =$155,400 Less: Cost (excluded) 40,000 Amount to INCLUDE$115,400

© Copyright by M. Ray Gregg. All rights reserved. 17 Problem 45 a. Total$155,400100% Exclude 40, % Include$115, % THEN $500 x 12 mo x 25.7% = $1,542 will be excluded

© Copyright by M. Ray Gregg. All rights reserved. 18 Problem 45 b. After age 84? 100% would be INCLUDED Ch 4

© Copyright by M. Ray Gregg. All rights reserved. 19 Social Security Benefits 1984 excluded up to 50% included 1993 up to 85% included

© Copyright by M. Ray Gregg. All rights reserved. 20 Social Security Benefits None Base 1 Some Base 2 More

© Copyright by M. Ray Gregg. All rights reserved. 21 Social Security Benefits No SS benefits included in GI Base 1 Lesser of: ½ SS benefits ½ (PI – Base 1) Base 2 Lesser of: 85% of SS benefits 85% (PI – Base 2) + lesser of Maximum ½ SS

© Copyright by M. Ray Gregg. All rights reserved. 22 Social Security Benefits No SS benefits included in GI Base 1 Lesser of: ½ SS benefits ½ (PI – Base 1) Base 2 Lesser of: 85% of SS benefits 85% (PI – Base 2) + lesser of Maximum ½ SS

© Copyright by M. Ray Gregg. All rights reserved. 23 Social Security Benefits S = $25,000; MFJ = $32,000Base 1 Base 2 S = $34,000; MFJ = $44,000

© Copyright by M. Ray Gregg. All rights reserved. 24 Provisional Income AGI (without SS) +Tax Exempt Interest +Excluded Foreign Income +½ SS Benefits =Provisional Income

© Copyright by M. Ray Gregg. All rights reserved. 25 text page 3-32

© Copyright by M. Ray Gregg. All rights reserved. 26 Social Security Benefits Problem 3-47

© Copyright by M. Ray Gregg. All rights reserved. 27 Problem 47 (a)

© Copyright by M. Ray Gregg. All rights reserved. 28 Problem 47 (a)

© Copyright by M. Ray Gregg. All rights reserved. 29 Social Security Benefits S = $25,000; MFJ = $32,000Base 1 Base 2 S = $34,000; MFJ = $44,000

© Copyright by M. Ray Gregg. All rights reserved. 30 Social Security Benefits No SS benefits included in GI Base 1 Lesser of: ½ SS benefits ½ (PI – Base 1) Base 2 Lesser of: 85% of SS benefits 85% (PI – Base 2) + lesser of Maximum ½ SS

© Copyright by M. Ray Gregg. All rights reserved. 31 Problem 47 (a)

© Copyright by M. Ray Gregg. All rights reserved. 32 Problem 47 (a)

© Copyright by M. Ray Gregg. All rights reserved. 33 Problem 47 (a) $750

© Copyright by M. Ray Gregg. All rights reserved. 34 Problem 47 (a) $750

© Copyright by M. Ray Gregg. All rights reserved. 35 Problem 47 (b)

© Copyright by M. Ray Gregg. All rights reserved. 36 Problem 47 (b)

© Copyright by M. Ray Gregg. All rights reserved. 37 Social Security Benefits S = $25,000; MFJ = $32,000Base 1 Base 2 S = $34,000; MFJ = $44,000

© Copyright by M. Ray Gregg. All rights reserved. 38 Social Security Benefits No SS benefits included in GI Base 1 Lesser of: ½ SS benefits ½ (PI – Base 1) Base 2 Lesser of: 85% of SS benefits 85% (PI – Base 2) + lesser of Maximum ½ SS

© Copyright by M. Ray Gregg. All rights reserved. 39 Problem 47 (b)

© Copyright by M. Ray Gregg. All rights reserved. 40 Problem 47 (b)

© Copyright by M. Ray Gregg. All rights reserved. 41 Problem 47 (b)

© Copyright by M. Ray Gregg. All rights reserved. 42 Problem 47 (b) $4,250

© Copyright by M. Ray Gregg. All rights reserved. 43 Social Security Benefits Problem 3-47 Problem 3-49

© Copyright by M. Ray Gregg. All rights reserved. 44 Social Security Benefits S = $25,000; MFJ = $32,000Base 1 Base 2 S = $34,000; MFJ = $44,000

© Copyright by M. Ray Gregg. All rights reserved. 45 Social Security Benefits No SS benefits included in GI Base 1 Lesser of: ½ SS benefits ½ (PI – Base 1) Base 2 Lesser of: 85% of SS benefits 85% (PI – Base 2) + lesser of Maximum ½ SS

© Copyright by M. Ray Gregg. All rights reserved. 46 Social Security Benefits Problem 3-47 Problem 3-49 –check figures a.= $1,500 b.= $1,500 c.= $2,550 Problem 3-48 –Decision

© Copyright by M. Ray Gregg. All rights reserved. 47 Social Security Benefits No SS benefits included in GI Base 1 Lesser of: ½ SS benefits ½ (PI – Base 1) Base 2 Lesser of: 85% of SS benefits 85% (PI – Base 2) + lesser of Maximum ½ SS Q45

© Copyright by M. Ray Gregg. All rights reserved. 48 Chapter 4 Meals and lodging? –Problem 4-16 Premiums by employer? –Problem 4-13 “Benefits” included?

© Copyright by M. Ray Gregg. All rights reserved. 49 Problem Insurance premiums paid by ER a.b.c. Benefits received included?

© Copyright by M. Ray Gregg. All rights reserved. 50 Problem Insurance premiums paid by ER a. May ER deduct? b.c. Benefits received included?

© Copyright by M. Ray Gregg. All rights reserved. 51 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included?

© Copyright by M. Ray Gregg. All rights reserved. 52 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included?

© Copyright by M. Ray Gregg. All rights reserved. 53 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical Disability Life

© Copyright by M. Ray Gregg. All rights reserved. 54 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical Yes Disability Life

© Copyright by M. Ray Gregg. All rights reserved. 55 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability Life

© Copyright by M. Ray Gregg. All rights reserved. 56 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability Life

© Copyright by M. Ray Gregg. All rights reserved. 57 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability Yes Life

© Copyright by M. Ray Gregg. All rights reserved. 58 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability YesNo Life

© Copyright by M. Ray Gregg. All rights reserved. 59 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability YesNoYes Life

© Copyright by M. Ray Gregg. All rights reserved. 60 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability YesNoYes Life Yes*

© Copyright by M. Ray Gregg. All rights reserved. 61 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability YesNoYes Life Yes*No*

© Copyright by M. Ray Gregg. All rights reserved. 62 Group Term Insurance Premiums Paid by ER $50,000 of coverage NOT included excess prem INCLUDED

© Copyright by M. Ray Gregg. All rights reserved. 63 Problem Insurance premiums paid by ER a. May ER deduct? b. Must EE include? c. Benefits received included? Medical YesNo Disability YesNoYes Life Yes*No*No

© Copyright by M. Ray Gregg. All rights reserved. 64 Chapter 4 Meals and lodging? –Problem 4-16 Premiums by employer? –Problem 4-13 “Benefits” included? Group term? –Problem 4-14 (not key employees)

© Copyright by M. Ray Gregg. All rights reserved. 65 Group Term Insurance Premiums Paid by ER $50,000 of coverage NOT included excess prem INCLUDED

© Copyright by M. Ray Gregg. All rights reserved. 66 Chapter 4 Meals and lodging? –Problem 4-16 Premiums by employer? –Problem 4-13 “Benefits” included? Group term? –Problem 4-14 (not key employees) –Problem 4-44 (by “inspection” only)

© Copyright by M. Ray Gregg. All rights reserved. 67 Life Insurance Proceeds at death –Problem 4-35 Include $4,000 ($20,000 - $16,000) None included Include $2,500 [$15,000 – ($50,000/4 = $12,500)] –Problem 4-45 None – all excluded $9,000 included [$14,000 – ($100,000/20=$5,000)]

© Copyright by M. Ray Gregg. All rights reserved. 68 Life Insurance Any exceptions? –Problem 4-36 Include $5,000 ($20,000 - $6,000 - $9,000) No (because she would have his “rights”) “Dividends” –Problem 4-38

© Copyright by M. Ray Gregg. All rights reserved. 69 What are “dividends” on life insurance? Are life insurance premiums deductible? –NO Are “refunds” of premiums includable? –NO

© Copyright by M. Ray Gregg. All rights reserved. 70 Problem $8,000 premiums deductible? –NO $6,000 dividends received included? –NO Interest on accumulated dividends? –Included b. Div = $9,000? –Then $1,000 included.

© Copyright by M. Ray Gregg. All rights reserved. 71 Include or Exclude? Death Benefits –Problem 4-48 For past services – deductible Includable as GI Gifts –Problem 4-34 Prizes –Problem 4-39 Pensions