Enrolled Agent > EA - Part 1: Individuals > Unit 10: Other Taxable Income > Flashcards

Unit 10: Other Taxable Income Flashcards

Identify and report miscellaneous taxable income such as gambling winnings, canceled debt, and unemployment compensation. (69 cards)

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1
Q

What types of income are typically reported on Schedule 1 of Form 1040?

A
  • Taxable alimony
  • Unemployment compensation
  • Jury duty pay
  • Gambling winnings
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2
Q

What is a ‘recovery’ in terms of taxable income?

A

A return of an amount a taxpayer deducted or took a credit for in an earlier year.

Common recoveries include state tax refunds, medical reimbursements, and other rebates of deductions previously reported on Schedule A.

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3
Q

Under what condition are state tax refunds considered taxable?

A

If the taxpayer itemized deductions in the year they overpaid those taxes, and only to the extent the amount paid in the previous year reduced their tax liability.

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4
Q

How did the Tax Cuts and Jobs Act affect the tax treatment of alimony?

A

Starting in 2019, alimony is nondeductible to the payor and nontaxable to the recipient.

Divorce and separation agreements entered into before 2019 are ‘grandfathered,’ allowing for deductions and taxable income for alimony.

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5
Q

Which payments are not considered alimony for federal tax purposes?

A
  • Payments that are a former spouse’s share of income from community property
  • Payments to keep up the payor’s property
  • Noncash property settlements
  • Payments made to an ex-spouse when the divorce was finalized in 2019 or later
  • Payments continuing after the death of the receiving spouse
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6
Q

True or False:

Child support payments are deductible by the payor.

A

False

Child support is viewed as a payment a parent makes to support their own child and is not deductible by the payor.

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7
Q

What happens if an alimony payment is subject to reduction based on a contingency related to a child?

A

The amount subject to a reduction is treated as child support, not alimony, for tax purposes.

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8
Q

Are government welfare benefits such as food stamps subject to federal taxation?

A

No

Most government welfare benefits are exempt from federal taxation.

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9
Q

Is unemployment compensation considered taxable income?

A

Yes

Unemployment compensation is taxable and must be reported as taxable income on the federal tax return.

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10
Q

What determines the taxability of Social Security benefits?

A

The taxability depends on the taxpayer’s income and filing status, comparing the base threshold amount with the total of:

  • One-half of their Social Security benefits
  • All other income, including tax-exempt interest
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11
Q

What are examples of ‘other income’ that must be reported?

A
  • Gambling winnings
  • Cancellation of debt income
  • Hobby income
  • Certain types of court awards
  • Lottery winnings
  • Taxable distributions from education savings accounts
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12
Q

What is the limit on deducting gambling losses?

A

Only up to the amount of gambling winnings for the year.

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13
Q

What must a taxpayer do if a debt is canceled or forgiven?

A

They may be required to report the amount of forgiven debt as part of their gross income.

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14
Q

What is Form 1099-C used for?

A

To report Cancellation of Debt.

The lender will indicate on the form whether the borrower was personally liable for repayment of the debt.

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15
Q

What is a recourse debt?

A

It holds the borrower personally liable.

Whether a debt is recourse or nonrecourse may vary from state to state, depending on state law.

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16
Q

How is a foreclosure treated for tax purposes if the debt is nonrecourse?

A

It is treated as a sale or exchange. The amount realized is the full amount of the nonrecourse debt at the time of foreclosure, abandonment, or short sale, regardless of the property’s FMV.

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17
Q

True or False:

A lender can pursue further compensation if a borrower defaults on a nonrecourse loan.

A

False

A nonrecourse loan does not allow the lender to pursue anything other than the collateral to collect the debt.

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18
Q

When is canceled debt income not taxable?

A
  • Bankruptcy or insolvency
  • Cancellation of qualified farm indebtedness or qualified real property business indebtedness
  • Cancellation of student loan debt
  • Cancellation of qualified principal residence indebtedness
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19
Q

What form must be attached to an individual return to exclude canceled debt under certain exclusions?

A

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness

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20
Q

What is the maximum amount of qualified principal residence debt that can be discharged tax-free in 2025?

A

$750,000

$375,000 for married individuals filing separately.

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21
Q

What is the definition of insolvency?

A

A condition in which the fair market value of all assets is less than one’s liabilities.

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22
Q

Fill in the blank:

A repossession or foreclosure is treated as a ______ for tax purposes.

A

sale

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23
Q

What conditions allow student loans to be excluded from taxable income through 2025?

A

The American Rescue Plan Act (ARPA) allows exclusion from taxation on most student loans forgiven through tax year 2025.

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24
Q

What happens if a taxpayer uses the cash method of accounting and has canceled debt that would have been a deductible expense?

A

They should not recognize canceled debt income.

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25
When is **canceled debt** not considered **taxable** income for a **farming business**?
When the canceled debt is qualified **farm indebtedness** meaning, debt incurred directly in the farming business.
26
Under what conditions is **canceled debt** not recognized as **income** for **cash method** taxpayers?
When payment of the debt would have otherwise been a **deductible expense**.
27
What must be reported on **Form 1040, Schedule 1**, if income is earned from a **hobby**?
**Gross income** from a hobby. ## Footnote Hobby expenses are not deductible.
28
Are hobby expenses deductible against other forms of income?
No.
29
What is the **IRS safe harbor test** for determining a **for-profit activity**?
An activity is presumed to be operated for profit if it generates a profit at least **three out of the last five years** including the current year; t**wo out of the last seven years** for horse activities. ## Footnote The safe harbor is two out of the last seven years for activities involving horse breeding or racing.
30
What is the tax treatment for **court awards for lost wages**?
They are generally **taxable** as ordinary income.
31
Are compensatory damages for personal physical injury taxable?
No
32
When are **punitive damages** taxable?
They are **ALWAYS taxable**, even if received in a settlement for personal physical injuries or physical sickness. ## Footnote Punitive damages are legal damages awarded by a jury or court to "punish" the defendant for outrageous or malicious conduct.
33
Are prizes and awards taxable if rejected or transferred to charity?
No
34
What is the **annual maximum** for **employer-provided educational assistance** that is tax-free in 2025?
$5,250
35
Under what conditions can a **scholarship** or **fellowship** be **excluded from income**?
* The taxpayer is a degree candidate at an eligible educational institution. * The amounts do not exceed qualified educational expenses. * It is not designated for other purposes. * It does not represent payment for services.
36
Are payments from **GI Bill programs** taxable?
No, they are tax-free.
37
What is the purpose of a **Section 529 plan**?
To **save** for and **pay** **qualified education expenses**, such as tuition, fees, and room and board, at eligible educational institutions.
38
What **penalty** applies if 529 plan distributions exceed qualified expenses?
An **additional excise tax of 10%** applies to the taxable amount that must be included in income.
39
Can 529 plan distributions be used for K-12 education expenses?
Yes, up to $10,000 for tuition and fees.
40
What is a **qualified rollover** for a **529 plan**?
A **transfer of funds** from one 529 plan to another plan for the **same beneficiary or a family member**, completed within **60 days**. ## Footnote This rollover is not taxable if completed within the specified timeframe.
41
What conditions apply to rolling over **529 funds** to a **Roth IRA**?
The 529 account must have been open for at least **15 years**, and contributions made within the **previous 5 years** (and their earnings) are **not eligible for rollover**.
42
Name two **age** and **income restrictions** for **Coverdell ESAs**.
* Contributions must be made before the beneficiary turns 18 and used by age 30 unless they are special needs. * Income limits for contributions are $95,000 - $110,000 for single filers and $190,000 - $220,000 for joint filers.
43
What happens if a **Coverdell ESA distribution exceeds** qualified education expenses?
A **portion** of the earnings is **taxable** and a **10% penalty** tax applies.
44
What is the **annual contribution limit** for a **Coverdell ESA**?
$2,000 per beneficiary per year. ## Footnote All contributions must be in cash and made by the due date of the donor's tax return, not including extensions.
45
# True or False: A taxpayer can contribute to both a Coverdell ESA and a 529 plan for the same beneficiary.
True ## Footnote Earnings grow tax-free in both accounts, but educational expenses must be allocated between distributions if they exceed adjusted qualified education expenses.
46
What **penalty** applies to **excess** contributions in a **Coverdell ESA**?
A **6% excise tax** on excess contributions not withdrawn by May 31 of the following tax year. ## Footnote The excise tax is imposed on the beneficiary, not the contributor, and reported using IRS Form 5329.
47
# Fill in the blank: Coverdell ESAs offer more \_\_\_\_\_\_\_ in investing compared to 529 plans.
flexibility ## Footnote Coverdell accounts are self-directed, allowing a wide range of investment options.
48
# True or False: Federal income tax refunds are included in a taxpayer’s income.
False ## Footnote Federal income tax refunds (i.e., IRS tax refunds) are not included in a taxpayer’s income because they are never allowed as a deduction.
49
What is the tax treatment of **child support** payments?
Child support is **never taxable income** to the **receiver** and **not deductible** by the **payor**.
50
What conditions must be met for a payment to qualify as **deductible alimony** in a **pre-2019** divorce?
* The divorce agreement may not include a clause indicating the payment is something else. * The payor must have no liability to make any payment after the death of the former spouse.
51
How are **partial payments** of alimony and child support treated for tax purposes?
Partial payments are considered **child support** until all child support obligations are fully paid; any additional amounts paid are then treated as **alimony**.
52
What **types of government welfare** benefits are exempt from federal taxation?
* Food stamps * Heating assistance programs * Poverty assistance from state or local agencies ## Footnote Worker’s compensation is also not subject to federal income tax.
53
What are the **base amounts** for calculating the taxability of Social Security for married filing jointly?
$32,000
54
What must a taxpayer retain to document **gambling winnings and losses**?
An **accurate diary** or similar record, along with **tickets**, **receipts**, **canceled checks**, and other documentation.
55
How is **recourse debt** treated for tax purposes if canceled?
If a lender forecloses on property subject to a recourse debt and cancels the portion of the debt in excess of the FMV of the property, the canceled portion is **treated as taxable income**.
56
How is the **cancellation of debt** on a primary residence treated?
A taxpayer may **exclude canceled debt** if the cancellation occurs on their principal residence and the debt qualifies as 'qualified principal residence indebtedness.'
57
Are **hobby expenses** deductible?
No, **hobby expenses are not deductible**, except for cost of goods sold (COGS) which can be used to reduce the hobby's taxable gross income.
58
What **types of court awards** are generally taxable?
* Compensation for lost wages or profits * Punitive damages * Interest payments on settlement awards
59
Can damages for **emotional distress** be tax-free?
Damages for emotional distress are tax-free only if they are **due to physical injury** or **sickness**.
60
How are **punitive damages** reported for tax purposes?
Punitive damages are taxable and should be reported as '**Other Income**' on line **8z of Schedule 1** (Form 1040).
61
Is an **award for wrongful incarceration** taxable?
**No**, civil damages, restitution, or other monetary awards received as compensation for wrongful incarceration are not taxable.
62
Are settlements related to **sexual harassment** deductible?
**No**, settlements, payouts, or attorney fees related to sexual harassment or sexual abuse are not deductible if the payments are subject to a nondisclosure agreement.
63
How are **prizes and awards** generally treated for tax purposes?
Prizes and awards are taxable and are reported as 'other income' on Line **8i of Schedule 1 of Form 1040**.
64
What is the tax treatment of **Pell Grants**?
Pell Grants are treated as **scholarships for tax purposes** and are tax-free to the extent they are used for qualified educational expenses.
65
What is the penalty for **non-qualified distributions** from a 529 plan?
A **10% penalty** on the earnings portion of the distribution. ## Footnote Non-qualified distributions are also subject to income tax on the earnings portion.
66
# True or False: There are no income limits for contributions to a 529 plan.
True
67
Which **form** must be used to report excess contributions to a Coverdell ESA?
**IRS Form 5329**, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
68
What is the **purpose** of a Coverdell Education Savings Account (ESA)?
A self-directed, tax-advantaged investment account for higher education. ## Footnote Formerly called “Education IRAs,” these accounts offer flexibility in investment choices.
69
Which **expenses** qualify for tax-free withdrawals from a Coverdell ESA?
Educational expenses, including K-12 and higher education costs.
EA - Part 1: Individuals
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