Enrolled Agent > EA - Part 1: Individuals > Unit 4: Taxable and Nontaxable Income > Flashcards

Unit 4: Taxable and Nontaxable Income Flashcards

Distinguish between taxable and nontaxable income sources to accurately report total income. (85 cards)

Study These Flashcards
1
Q

What is excluded income?

A

Income that is not taxable under any circumstances and is not included in gross income.

Most excluded income does not need to be reported on a tax return, though there are exceptions like municipal bond interest.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How is Adjusted Gross Income calculated?

(AGI)

A

Start with gross income and subtract adjustments to income (‘above the line’ deductions).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

True or False:

Earned income is subject to FICA taxes.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the doctrine of constructive receipt?

A

Under this doctrine, a cash-basis taxpayer must report income when it is credited to their account or made available without substantial limitations or restrictions, even if they haven’t physically received it.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the ‘Claim of Right’ doctrine under IRC section 1341?

A

If a taxpayer reports income in one year but repays it in a future tax year and the repayment exceeds $3,000, they may claim a tax credit equal to the tax change caused by the income inclusion in the prior year.

If the repayment is $3,000 or less, Section 1341 does not apply and the repayment is generally deducted on the same form or schedule where it was reported in the prior year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is self-employment income?

A

Income earned by taxpayers who work for themselves, including income from independent contracting, partnerships, and certain services by ministers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Is there a wage limit for the Social Security portion of FICA tax?

A

Yes

Social Security tax applies only to wages up to the annual taxable maximum (the wage base), which was $176,100 for 2025. Wages above this limit are not subject to Social Security tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Fill in the blank:

The wage limit for the Medicare portion of FICA tax in 2025 is ____?

A

$0

The Medicare portion is 1.45% on all earned income: there is no yearly maximum for Medicare tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the fair market value according to the IRS?

(FMV)

A

The price at which a property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the Credit for Excess Social Security and RRTA Tax Withheld?

A

A fully refundable credit claimed on a taxpayer’s individual return when the sum of multiple employers’ withholdings exceeds the annual Social Security maximum.

This situation usually occurs when a person changes jobs mid-year or works multiple jobs, leading to excess Social Security tax being withheld.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How is self-employment tax calculated for individuals with multiple businesses?

A

The taxpayer must net the profit or loss from each business to determine the total earnings subject to SE tax.

Married couples may not combine their SE income or losses; SE tax is calculated separately for each spouse

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

True or False:

Employers must withhold taxes from payments to independent contractors.

A

False

Independent contractors are considered self-employed and are responsible for their own taxes, including self-employment tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What form is used to report wages paid to an employee?

A

Form W-2

This form is used by employers to report wages, tips, and other compensation paid to employees, along with the taxes withheld.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the key factors the IRS uses to determine if a worker is an employee or an independent contractor?

A
  • Behavioral control
  • Financial control
  • Type of relationship

Behavioral control – Does the business control how the worker does the job?

Financial control – Does the business control how the worker is paid or reimbursed?

Type of relationship – Are there written contracts, benefits, or ongoing services?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are supplemental wages?

A

Compensation paid to an employee in addition to their regular pay, such as bonuses, commissions, and severance pay.

These amounts are listed on the employee’s Form W-2 and are taxable, just like regular wages.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Fill in the blanks:

An employee who receives property for services performed must generally recognize the _____ _____ _____ of the property as taxable income.

A

fair market value

If the property is restricted, it is not included in income until it is available to the employee without restriction.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How should tips be reported by self-employed individuals?

A

Must be included in gross receipts on Schedule C.

Non-cash tips must be reported and included in gross income at their fair market value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How must employees report tips, and when are they required to report them to their employer?

A

Employees must report all tips as income. If they receive $20 or more in tips in a calendar month, they must report them to their employer by the 10th day of the following month.
Reported tips are included on Form W-2 and are subject to income, Social Security, and Medicare taxes.

Tips less than $20 per month are exempt from SS tax and Medicare tax, but are subjected to income tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are some examples of taxable fringe benefits?

A

Certain entertainment expenses such as:

  • tickets to a concert or a sporting event
  • health club memberships
  • employer-provided vehicles if used for personal purposes

Fringe benefits are additional cash, property, or services given to employees on top of their regular taxable wages.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are fringe benefits according to the IRS?

A

Additional cash, property, or services given to employees on top of their regular taxable wages.

Common examples include health insurance, retirement plans, and parking passes. Some fringe benefits are taxable, such as entertainment expenses and certain transportation benefits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Which fringe benefits are considered taxable?

A
  • Off-site athletic facilities and health club memberships
  • Concert and athletic event tickets
  • The value of employer-provided life insurance over $50,000
  • Cash benefits in the form of a credit card or gift card
  • Transportation benefits exceeding the monthly maximum
  • Employer-provided vehicles used for personal purposes

Qualified nonpersonal use vehicles, such as police cars and school buses, are exceptions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are nontaxable fringe benefits for employees?

A
  • Accident or health plan coverage provided by an employer
  • Employer contributions to qualified retirement plans

Distributions from retirement plans are taxable when received. Elective deferrals are excluded from taxable income for income tax purposes but are subject to Social Security and Medicare taxes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a cafeteria plan?

A

A plan allowing employees to receive certain benefits before taxes are taken out, with options for at least one taxable benefit and one qualified benefit.

Qualified benefits can include accident, dental, vision, medical insurance, flexible spending accounts, and adoption assistance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is a Flexible Spending Arrangement?

(FSA)

A

A cafeteria plan benefit that reimburses employees for expenses incurred for qualified benefits like health care and daycare.

FSAs have annual maximums and a ‘use-it-or-lose-it’ rule, with a short grace period to claim expenses against the prior year’s balance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What is the **annual limit** for **Dependent Care FSA** for unmarried taxpayers and married couples filing jointly?
$5,000 ## Footnote For married couples filing separately, the limit is $2,500. Funds can be used for eligible daycare services and adult daycare for disabled dependents.
26
What happens if a cafeteria plan **discriminates** in favor of highly compensated employees (HCEs)?
If a cafeteria plan favors HCEs in terms of eligibility, contributions, or benefits, the **value of the benefits** received by HCEs becomes **taxable**. ## Footnote Family attribution rules apply, and an HCE is defined by salary, ownership, and family relations.
27
How is a "**highly compensated employee**" defined for 2025?
* A company officer * A 5% or greater shareholder * An employee paid $155,000 or more in 2024 * A spouse or dependent of a person described above
28
What constitutes a "key employee" according to **IRS Publication 15-B**?
* A company officer with annual pay over $230,000 * A 5% owner of the business * A 1% owner with annual pay over $150,000 ## Footnote Key employees can be classified without ownership based solely on salary and position.
29
What happens if a cafeteria plan or a retirement plan **fails IRS non-discrimination testing**?
Highly compensated employees and key employees may **lose the tax benefits** of participating in the plan. ## Footnote If more than 25% of benefits are given to HCEs and key employees, plans lose tax-favored status, and benefits become taxable.
30
What is the **maximum fringe benefit exclusion** for employer‑provided educational assistance (not Education Credits) in 2025?
$5,250 ## Footnote Educational assistance can cover tuition, fees, books, supplies, and equipment for undergraduate or graduate-level courses.
31
What are the **conditions** for **excluding employer-provided meals and lodging** from income?
* Meals and lodging must be provided on the employer’s business premises * They must be for the employer’s convenience * Lodging must be required as a condition of employment ## Footnote The exclusion does not apply if the employee can choose additional pay instead of lodging.
32
What are the **conditions** under which **meals provided to employees are not taxable**?
* Meals are provided for the convenience of the employer * Meals are on the employer’s business premises * The nature of the business requires short meal periods or on-call availability * Eating facilities are not available nearby * Meals are furnished immediately after working hours due to work duties
33
Are transportation fringe benefits taxable to employees?
They are non-taxable up to a certain amount, except for bicycle commuting benefits, which are taxable under the TCJA. ## Footnote In 2025, any expenses exceeding $325 per month for transit and parking benefits are added to the employee’s taxable income.
34
What is the **tax treatment** of company cars used for **commuting**?
The use of a company car for commuting or personal use is generally a **taxable benefit** and is included in the employee's taxable wages. ## Footnote Qualified nonpersonal use vehicles, such as police or fire vehicles, are exempt from fringe benefit reporting.
35
What is the **exclusion limit** for **group-term life insurance coverage**?
**Up to $50,000** of life insurance coverage may be provided as a nontaxable benefit. ## Footnote The cost of insurance coverage exceeding $50,000 is a taxable benefit and is reported with a “code C” in box 12 of Form W-2.
36
Under what conditions must **employer-reimbursed moving expenses** be included in an employee’s **taxable income**?
Moving expense reimbursements are **generally taxable** and must be included in wages, unless the employee is an active-duty member of the Armed Forces moving due to a military order. ## Footnote Moving expenses are no longer deductible for most taxpayers.
37
What qualifies as a **no-additional-cost service**?
Services provided to employees that **do not impose any substantial additional cost to the employer** because the employer already offers those services as part of its business. ## Footnote Typically, no-additional cost services are such things as unused airline seat tickets for airline employees or open hotel rooms for hotel employees.
38
Can the value of employer-provided cell phones be excluded from an employee’s income?
Yes, if the employer has valid business-related reasons for providing the phone. ## Footnote If the phone is given solely for goodwill or morale, its value is taxable.
39
What is the **exclusion limit** for employee **achievement awards**?
* The value of awards for length-of-service or safety achievement are generally excluded from taxable wages. * $400 for awards that are not qualified plan awards. * $1,600 for qualified plan awards. ## Footnote The exclusion for employee awards does not apply to awards of cash, gift cards, lodging, stocks, bonds or tickets to sporting events.
40
What are examples of **de minimis benefits**?
* Occasional personal use of a company copying machine * Holiday gifts with a low fair market value * Flowers or similar items for special occasions * Beverages and snacks for employees ## Footnote Cash is not excludable as a de minimis benefit unless for occasional meal money or transportation fare.
41
What are the **requirements for reimbursements** under an accountable plan to be non-taxable?
* Expenses must be incurred while performing duties as employees * Proper documentation for travel, meals, and lodging is provided * Evidence of business expenditures is supplied * Surplus reimbursements are returned within a reasonable timeframe
42
How are **clergy members** taxed on their income?
* Clergy members' salaries are reported on Form W-2 generally without social security or Medicare taxes withheld * Offerings and fees for performing weddings, baptisms, and funerals are reported as self-employment income on Schedule C ## Footnote Clergy members are responsible for paying social security and Medicare taxes themselves on both W-2 wages and self-employment income, computed on Schedule SE.
43
How is a clergy member's **housing allowance** treated for tax purposes?
It may be excluded from gross income (still subject to SE and Medicare tax) to the extent it is used to pay for housing expenses. ## Footnote The exclusion is limited to the lesser of the amount designated as a housing allowance, the amount actually used to provide a home, or the fair market rental value of the home.
44
# True or False: Combat pay is taxable income for military personnel.
False ## Footnote Combat pay is not considered taxable income for military personnel.
45
What are some types of **veterans' benefits** that are **not taxable**?
* Education benefits (GI Bill) * Training * Disability compensation * Work therapy * Dependent care assistance * Pension payments due to disability
46
Under what conditions can **Medicare/Medicaid waiver payments** be excluded from gross income?
* The care provider and care recipient are related, and they live in the same household. * The payments must be for in-home support services.
47
What is the **tax treatment** of worker's **compensation benefits**?
They are **always exempt** from tax. ## Footnote Worker's Compensation only pays workers who are injured on the job.
48
How are **disability retirement benefits** taxed if a taxpayer retires on disability before reaching the minimum retirement age?
They are **taxable** as wages **until the taxpayer reaches retirement age**, after which they are taxable as pension income.
49
# Fill in the blank: If an employer pays 100% of the disability insurance premiums, the benefits are \_\_\_\_\_\_\_ \_\_\_\_\_\_\_.
100% taxable
50
What is the **tax status** of veterans' **disability benefits**?
They are **exempt** from taxation if the veteran was **terminated through separation** or discharged under honorable conditions. ## Footnote Veteran's disability benefits are paid to a veteran for injury or disease linked to their military service.
51
Are **life insurance** proceeds taxable to the beneficiary?
No ## Footnote Life insurance proceeds paid by reason of the insured’s death are excluded from gross income, whether received in a lump sum or in installments. However, any interest paid on the installments is taxable.
52
What is included in **gross income** for tax purposes?
* Wages, salaries, commissions, tips * Self-employment income * Non-monetary compensation (goods, property, services) * Taxable fringe benefits * Interest, dividends, capital gains, stock options
53
Name some '**above the line**' deductions that can be subtracted from gross income.
* Certain IRA contributions * Certain expenses for self-employed individuals * Deductible student loan interest * Penalties paid for early withdrawals of savings
54
List the **additional deductions** available from **AGI** for tax years 2025–2028.
* Up to $25,000 of qualified tips * Up to $12,500 ($25,000 for joint filers) of qualified overtime pay * Up to $10,000 of interest on a car loan for a personal-use vehicle * Up to $6,000 for individuals age 65 and older ($12,000 for married couples filing jointly)
55
What types of income are subject to **FICA taxes**?
**Earned income** such as wages, salaries, tips, professional fees, or self-employment income.
56
# True or False: Investment income is generally subject to FICA taxes.
False
57
What **form** do **independent contractors** usually receive to report income?
Form 1099-NEC
58
What is the **combined FICA tax rate** for 2025?
15.30%
59
What is the FICA tax rate for **Social Security** and **Medicare**?
* 6.2% for Social Security on earnings up to $176,100 in 2025 * 1.45% for Medicare on all earned income ## Footnote For high-income individuals, an additional Medicare surtax of 0.9% applies to wages and self-employment income above certain thresholds.
60
How is **self-employment tax** calculated for individuals with both wages and self-employment income?
The Social Security tax on wages is **paid first** before calculating the self-employment tax. ## Footnote Net earnings from self-employment are reduced by 7.65%, and the taxpayer can deduct the employer-equivalent portion of their self-employment tax for adjusted gross income.
61
Can married taxpayers **combine** their **income or loss** from **self-employment** for SE tax purposes?
**No**, married taxpayers cannot combine their income or loss from self-employment to determine their individual earnings subject to SE tax. ## Footnote Each individual's business income is subject to SE tax separately, regardless of joint filing.
62
What are the **key distinctions** between employees and independent contractors for tax purposes?
* **Employees**: Businesses must withhold income taxes, Social Security, and Medicare taxes. * **Independent Contractors**: Responsible for their own taxes, including self-employment tax. ## Footnote The level of control the payor has over the work performed is the main distinction.
63
What **form** should a worker file if they believe they were **misclassified** as an independent contractor?
Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) ## Footnote If determined to be an employee, they will also file Form 8919 with their tax return.
64
When must income from **advance wages** be recognized?
In the year it is actually or constructively received. ## Footnote If the employee must repay a portion later, it is deducted from taxable wages at that time.
65
What are examples of **supplemental wages**?
* Bonuses and commissions * Taxable prizes and awards * Severance pay, back pay, and holiday pay * Payment for nondeductible moving expenses ## Footnote Supplemental wages are taxable and included on the employee’s Form W-2.
66
How is **overtime pay** treated for tax purposes?
Overtime pay is **fully taxable** as gross income and subject to **income tax withholding**, **Social Security**, and **Medicare** taxes. ## Footnote All overtime pay is taxable, but for 2025 a separate deduction may apply only to the FLSA-required premium portion of qualified overtime.
67
How should wages paid in the form of **property or services** be valued?
By their fair market value. ## Footnote Restricted stock is not included in income until it is available without restriction.
68
How should **noncash tips** be treated for tax purposes?
The **fair market value** of noncash tips must be included in gross income for federal income tax purposes. ## Footnote Noncash tips are not subject to Social Security and Medicare taxes.
69
# True or False: The $20 tip reporting threshold applies to an employee's total income from all jobs combined.
False ## Footnote The $20 tip reporting threshold applies on a per job basis.
70
Which **form** is used to report **unreported tip income** for Social Security and Medicare tax purposes?
Form 4137
71
What is the tax treatment of **cash tips** of **$20 or more** per month?
Subject to Social Security and Medicare taxes (FICA) and federal income tax.
72
What is the maximum carryover amount for a **Healthcare FSA** from 2025 to 2026?
$660 ## Footnote The maximum carryover is 20% of the maximum available salary reduction for the year.
73
What is the **maximum adoption assistance exclusion** for 2025 under a cafeteria plan?
$17,280
74
What conditions must be met for **employer-provided meals** to be excluded from an employee's income?
* Meals must be provided on the employer’s business premises. * Meals must be for the employer’s convenience.
75
# True or False: Employer -paid transportation fringe benefits are generally not deductible by the employer.
True ## Footnote These benefits can still be excluded from the empolooyee's income, up to the applicable limits.
76
What type of vehicle is considered a qualified **'nonpersonal use' vehicle** and is exempt from fringe benefit reporting?
* Police or fire vehicles * School buses * Ambulances
77
What is the exclusion limit for **employee discounts** on services?
**20% discount** of the price charged to non-employee customers.
78
Under what conditions are **travel expenses** excludable from an employee's income?
Travel expenses are excludable if incurred for **temporary business travel** away from the employee’s tax home. ## Footnote Travel expenses for an indefinite work assignment (more than one year) are not excludable.
79
# True or False: Clergy members can apply for exemption from self-employment tax for religious reasons.
True ## Footnote Clergy members must file IRS Form 4029, and the exemption is irrevocable.
80
What types of **military income** are excluded from taxation?
* Combat pay. * Hazardous duty pay for enlisted personnel in a combat zone.
81
Can **Medicaid** waiver payments be included in earned income for tax credits?
Yes, taxpayers may choose to include all or none of their Medicaid waiver payments in earned income for the EITC or ACTC.
82
How does the taxability of **disability insurance benefits** vary based on who pays the premiums?
* 100% employer-paid premiums: 100% taxable. * Partially employer-paid (post-tax employee portion): Partially taxable. * 100% employee-paid (post-tax): Not taxable.
83
What is the tax treatment of **sick pay** compared to **disability pay**?
Sick pay is always **taxable as wages**, unlike disability pay which can be **non-taxable**. ## Footnote Sick pay is treated similarly to vacation and holiday pay for tax purposes.
84
What happens if a taxpayer receives **life insurance proceeds** in installments?
Part of each installment can be **excluded from income**, but any amount **over the excluded portion** is taxable as **interest income**. ## Footnote The excluded part is determined by dividing the total lump sum payable by the number of installments.
85
What is a **viatical settlement** and its tax treatment?
A viatical settlement is when a **terminally ill person** receives funds from their **life insurance policy**, and these funds are **tax-free**.
EA - Part 1: Individuals
flashcards
Decks in class (19)
# Cards
Brainscape helps you reach your goals faster, through stronger study habits.
© 2026 Bold Learning Solutions. Terms and Conditions