3- 1 CALCPA Income Tax Strategies for Faculty Presented by Susan Barney, CPA CALCPA Income Tax Strategies for Faculty Presented by Susan Barney, CPA

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3- 4 LO 3-2 Gross Income – What is it? Definition - Section 61(a) of the Internal Revenue Code defines gross income as follows: Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.

3- 5 Examples of Gross Income Items Alimony Awards Bonuses Business Income Commissions Debts Forgiven Dividends Interest Gains from sale of property Gambling Winnings Hobby Income Partnership Income Prizes Alimony Awards Bonuses Business Income Commissions Debts Forgiven Dividends Interest Gains from sale of property Gambling Winnings Hobby Income Partnership Income Prizes Rents Royalties Salaries

3- 6 Exclusions from Gross Income  Exclusions from gross income must be specifically allowed by statute. Examples of exclusions from gross income:  Gifts, bequests and inheritances  Life insurance proceeds paid by reason of death  Interest on state and local government obligations  Lodging and meals furnished for the convenience of the employer  Employee discounts  Tuition reductions granted to employees of educational institutions  Accident and health benefits LO 3-3

3- 7 Adjusted Gross Income (AGI) Deductions for AGI = Above the Line Deductions Examples:  Part of the self- employment tax  Unreimbursed moving expenses  Contributions to traditional IRA accounts and other retirement plans  Interest on student loans  Alimony payments Deductions for AGI = Above the Line Deductions Examples:  Part of the self- employment tax  Unreimbursed moving expenses  Contributions to traditional IRA accounts and other retirement plans  Interest on student loans  Alimony payments Deductions from AGI = Itemized Deductions (Schedule A) Examples:  Medical Expenses  State Income Taxes  Real Estate Taxes  Mortgage Interest  Charitable Contributions  Unreimbursed employee business expenses (Form 2106 expenses) Deductions from AGI = Itemized Deductions (Schedule A) Examples:  Medical Expenses  State Income Taxes  Real Estate Taxes  Mortgage Interest  Charitable Contributions  Unreimbursed employee business expenses (Form 2106 expenses) 2 Types of Deductions

3- 8 TAX MINIMIZATION STRATEGIES Postpone income recognition until future years. Accelerate payment of expenses in current year to benefit from deduction. Shift income from high tax bracket years to low tax bracket years. Take advantage of tax credits before they expire.

3- 9 Accrual Method Income is recognized in year in which it is earned, regardless of when the income is collected. Accrual Method Income is recognized in year in which it is earned, regardless of when the income is collected. Timing of Income Recognition Cash Receipts Method Income is recognized in the year of actual or constructive receipt, regardless of whether the income was earned in that year. Cash Receipts Method Income is recognized in the year of actual or constructive receipt, regardless of whether the income was earned in that year. Accounting Method

3- 10 ORDINARY INCOME vs. CAPITAL GAINS Ordinary income is taxed at higher tax rates Capital gains are taxed at lower tax rates Nonqualified Deferred Compensation Business Income Sale of capital asset: Stocks and bonds Partnership interest Artwork If employed, defer compensation to future years – no current year deduction for employer. If self-employed, deposit income received after year-end. Harvesting losses – selling capital assets at a loss to offset capital gains

3- 11 Timing of Expense Recognition Accrual Method A deduction can not be claimed until (1) all the events have occurred to create the taxpayer’s liability and (2) the amount of the liability can be determined with reasonable accuracy. Accrual Method A deduction can not be claimed until (1) all the events have occurred to create the taxpayer’s liability and (2) the amount of the liability can be determined with reasonable accuracy. Cash Method Expenses are deductible only when they are actually paid with cash or other property. Cash Method Expenses are deductible only when they are actually paid with cash or other property. Accounting Method

3- 12 Prepaid Expenses for Cash Basis Taxpayers Business Expenses  Property, Plant, And Equipment – new equipment purchased and placed in service prior to year-end is eligible to be expensed in the current year.  Any ordinary and necessary business expenses that will be consumed within the next year. Personal Expenses  Pay state estimated tax payments and future real estate tax payments on or before December 31 if not in AMT.  Make all charitable contributions, both cash and non-cash, before year-end. LO 3-2

3- 13 LO 3-2 RETIREMENT ACCOUNTS  Contribution Limits Year401(k)/403(b)Catch-UpMaximum MaximumContributionAllocation (if age 50 +) 2015$18,000$6,000$53, $17,500$5,500$52, $17,500$5,500$51, $17,000$5,500$50, $16,500$5,500$49,000

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3- 17 TAX CREDITS CREDIT COMPUTATION COMMENTS Child And Dependent Care Credit Maximum base for credit is $3,000 for one qualifying individual, $6,000 for two or more. The credit rate varies between 20% and 35% depending on taxpayer’s AGI. Nonrefundable personal tax credit. No carry back or carry forward. Eligible taxpayers must have dependent under age 13 or spouse or dependent who is physically or mentally incapacitated. Benefits taxpayers who incur dependent care expenses in order to work or seek employment.

3- 18 TAX CREDITS (Continued) CREDIT COMPUTATIONCOMMENTS Child Tax Credit Maximum credit available is $1,000 per child. The available credit is phased out when AGI reaches $110,000 for joint filers ($75,000 for single taxpayers). The credit is phased out by $50 for each $1,000 (or part thereof) of AGI above the threshold amounts. Nonrefundable personal tax credit. Credit based solely on the number of qualifying children under age 17 claimed as a dependent on the taxpayer’s return. Purpose of the credit is to provide tax relief for low- to-moderate- income families with children.