As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.
Here's a list of items that are not subject to income tax.
1. Scholarships: If a degree candidate you can exclude scholarship for tuition and course related fees.
Payments receive for room, board, travel or services performed are taxable.
Non-degree candidates are fully taxed on any scholarship.
2. Qualified disability payments from a profit sharing plan may not be taxable.
3. Interest on most State & Municipal bonds
4. Social Security & Basic railroad retirement when under income limits
(But supplemental RR is fully taxable on federal, but not state.)
5. Welfare benefits and disaster relief payments
6. Veterans benefits & certain veterans disability retirement started before 1975.
Also payments for combat related injury or sickness.
7. Workers compensation
8. Child support Foster care payments through govt. program (restrictions over age 18)
9. Gifts and inheritance (Except inherited IRA, tax deferred annuities,
and series EE bond interest are taxable.)
10. Rebate on a purchase (example: car purchase)
11. SAFE program payments for winter energy costs
12. Accident Insurance proceeds
13. Clergy housing allowance (is taxable for FICA)
14. Lawsuits settlements, unless related to employment, loss of profits, injury to reputation,
and other non-personal injuries
A. Punitive damages and interest on awards are taxable.
B. Emotional distress is taxable if not caused by physical injury or illness.
15. Living expense payments due to casualty loss
16. Allowances to VISTA, & action volunteers
17. Payments received from a child for room & board.
18. Life insurance proceeds from death Annuities & Life insurance cashed in on installments
will be partially taxable on the interest they receive.
19. Life insurance dividends are not taxable. Interest on dividends is taxable.
20. Mortgage assistance payments are not taxable.
21. Health Insurance Benefits
Here's a List of Nontaxable Employment Benefits.
- Military pay in a combat zone is not taxable. If combat zone income listed on W-2,
must get corrected W-2.
- Military individuals killed in a combat zone, decedents income tax liability is forgiven
for the tax year in which death occurred and for any earlier tax year ending on or after the first day
the member served in a combat zone in active service.
- Military allowances - travel, allotments
- Military survivor benefit are not taxable.
- Pensions based on combat-related injuries or terrorist attacks
- Certain amounts received by safety officer killed in line of duty.
- Uniforms, tools & allowances provided by employer.
- Job Related Educational expenses paid by employer (up to $5250)
- Employers payment of interview expense
- Minor merchandise gifts ($25) from employer
- Courtesy discounts to employees up to 20% of gross profit
- Company car when used for business use
- Group hospitalization insurance
- Employer contributions to Health Savings Account
- Long Term Care Premiums paid by employer
- Cafeteria Plans that pay for medical, dependent care or group term life expense.
Not subject to FICA either.
- Flexible Spending arrangements uses for medical, or day care expenses.
A. They use it or lose it concept of FSA accounts now may extend end of year deadline
by 2 ½ months. (Not subject FICA)
B. Starting 2013, medical expenses limited to $2500 maximum.
- Payments from health insurance plans or profit sharing plans for permanent physical injury
even if employer paid for plan.
A. Reimbursement for cosmetic surgery do not qualify for tax free treatment.
- Distributions from Health Saving Accounts as long as used for qualified medical expenses.
Report 1040 line 25, form 8889.
- Nondiscriminatory Term life insurance up to $50,000 ($2,000 for dependents)
Only allow for 1 employer.
- Free legal services plan premiums up to $70
- Meals and lodging provided for employer convenience.
- Child care provided under an approved plan (up to $5000).
- Employer provided transportation up to $240 a month.
($125 a month on highway transit passes)
- Qualified employer paid moving expense
- Disability payments received by any individual as a direct result of a terrorist attack
against the U.S. or its allies.
- Company provided retirement planning
- Expense reimbursement under a qualified plan
- Certain length of service awards under $400 or $1600
- Employer provided athletic facilities
- Qualified adoption assistance
Here's a List of Taxable Employment Benefits.
Benefits Considered Wages (usually already in W-2)
1. Wages, bonuses, salaries, advanced pay, back pay, awards, prizes
Taxable fringe benefits will also be included as wages and may be
shown on box 14 of W-2.
2. Allocated Tips, Fees commissions, bonuses, vacation pay
3. Tips you did not report to your employer including allocated tips
(unless you can prove a lower amount - call for details)
4. Strike pay (Except if made from voluntary contributions to a strike fund,
then benefits are tax free up to the amount of your contributions.)
5. Sub pay (Except if made from voluntary contributions to a unemployment fund,
then benefits are tax free up to the amount of your contributions.)
6. Sick pay, disability pension (before employers minimum Retirement age)
7. Expense allowances that exceed expenses.
8. Cash option on stock plan.
9. Pay in form of property or stock
10. Personal use of employer provided car (should be in W-2)
11. Services or trips - vacations from employer
12. Meals and lodging not for employer convenience
13. Certain other fringe benefits that employer incurs costs for
14. Expense reimbursements under a non-accountable plan.
15. Non-deductible moving expense.
16. Severance pay
17. Wages you received as a household employee for which you
did not receive a W-2 because your employer paid you less than
$1800 are reported under wages, margin entry.
18. Excess salary deferrals (over the allowed limit) & corrective
distributions to a retirement plan are considered wages.
19. Garnished wages or amounts held out of wages are wage income.
20. Wage income incorrectly reported on 1099 must complete form 8919.
21. Taxable portion of dependent care expenses (from form 2441) or
taxable portion of adoption expenses paid by employer
22. Scholarships for non-degree candidates or degree candidates who
receive scholarships for other than books and tuition have taxable income.
Other Income and Its Tax Treatment
1. Odd Jobs: The IRS says do not include any self-employment income,
fees received for notary, or non-employee compensation as other income.
Must list on C or C-EZ .
Odd jobs of short duration (usually less than 6 weeks). An odd job may not be considered
self-employment if different than taxpayers normal line of work, of short duration, and not one
of a series of odd jobs. If they receive 1099 on such a job, to satisfy IRS matching requirements,
list on Schedule C, offset with equal amount of expense and then list on line 21
as odd job of short duration.
2. Gambling & Lottery Winnings
A. Must report full amount of winnings.
B. Can only deduct offsetting losses if they itemize and have records.
(Professional Gambler uses Schedule C.)
C. If winning were split between joint winners, use form 5754 to allocate to
winners. Must also send other party a 1099.
D. Attach W-2G to tax return if federal tax withheld.
E. Casual slot machine users can determine gain or loss based on net proceeds of the day.
3. Jury duty & precinct election duty - take a deduction under other deductions if taxpayer
was required to pay amount to employer.
4. Prizes & awards are only tax free if they did not seek reward, did not perform service
and is in recognition of religious, charitable, scientific, educational, artistic accomplishment.
Contests or services performed are taxable.
A. Taxpayer can assign the prize to a charity to avoid tax on prize or award.
B. Credit card benefits for unemployment or disability are taxable.
C. Gift you receive as party hostess at your house is taxable.
5. Executors of Estates & Election workers: List income they receive if not done
for profit. Not subject to FICA. Expenses are deducted as Misc. Item. Ded. subject to 2%.
6. Not for Profit Income: Must include income taxpayer receives from hobby or
non-business activity. Can only take expenses if they itemize. Hobby Income is reported
as other income and Hobby expenses are deducted as misc. itemized deductions
subject to 2% reduction.
A. Exception: If hobby income is from the sale of products, report net gains from sales
on Schedule D.
7. Rent received for personal property (if not for profit) is included here.
Deduct expenses as other adjustments.
8. Child's Income over $2000 from form 8814.
8. Include amounts recovered on bad debts, medical expenses,contributions,
or other expenses deducted in a prior year. If over $3000, ask us how you can deduct.
9. Amounts received from employer for expenses that exceeded the actual amounts spent.
10. Payment of debt by another person is income unless it was paid as a gift.
(no gifts by employer)
11. Automobile salespersons: An incentive payment made by an auto manufacturer
to retail salesperson is reported as other income and not subject to self employment.
12. Trips, property, and other items received in other than a gift relationship.
Report as wages if business related.
13. Only have to report Taxable distributions from Coverdell education accounts here.
14. Debt Cancellation
Steps to Follow in reporting 1099C on return:
A. Exclusions from tax on cancelled debt.
1. Bankruptcy excludes all of cancelled debt.
a. The State only allows exclusion for bankruptcy.
You should see an add back on line 2 of State return.
b. In 2016 Indiana will allow Principle Residence exclusion.
2. Debts discharged while you are insolvent are not taxable
to extent of taxpayers insolvency:
a. Insolvency means your liabilities (loans) exceed the fair market
value of your assets immediately before the debt cancellation.
b. Use insolvency worksheet in Reference section to make
a list of assets and liabilities (loans). Mail with return.
c. Warn taxpayer that IRS may ask them to send proof.
3. Principle residence indebtedness is excludable up to $2
million. Expires 12/31/2016 unless extended …
a. The debt must be from acquiring, constructing, or
improving taxpayer’s principal home.
b. Debt used for other personal purposes is not excludable.
For example, if taxpayer refinanced to get extra money or
pay off bills, they cannot exclude extra amount borrowed.
4. Certain student loans forgive debt if work in certain occupation.
5. Qualified Business Real Property Indebtedness (QRPBI)
6. Qualified Farm Debt. 50% of gross receipts from farming last 3
years. See IRS pub. 4681
B. Steps to Report on Tax Return.
1. Box 2 should be amount left on loan after deducting value of
item. If severely incorrect, client may want to get a correct 1099 C
from bank or attach form 8082 for inconsistent treatment.
2. If doesn’t qualify for exclusion, enter debt*** on 1040 line 21.
3. For total or partial exclusion:
a. On form 982 check box for exclusion type.
b. Only check box 10B if they still have the home.
c. Enter total amount of cancelled debt*** from box 2 of 1099-C.
***If box 3 shows interest, to the extent it would have been
deductible (business, home or rental interest) reduce the
amount in box 2 by box 3
d. Enter taxable amount on 1040 line 21.
4. If property is Home, Real Estate or Business Property:
a. In addition to doing steps 2 or 3 above, you need to
1. Only check box 10B on form 982 if still have the home.
2. Report as a sale. Use the fair market value from box 7 of
1099-C as sales price on Sch. D worksheet or 4797
worksheet. Use rules for home sale or supplemental gain.
a. If 1099A reported home sale in previous year, enter
amount on capital gains worksheet and offset amount
as reported in prior year from 1099A to satisfy IRS
15. If taxpayer receives 1099-LTC for long term care insurance, report as income
on form 8853. If used for long term care, take a deduction on form 8853 to offset income.
Deduction is limited to $330 per day for 2015 except if pays actual costs. Then limited to actual costs paid.
16. For Health Savings Accounts taxpayer will receive 1099-SA showing a distribution
17. Alternate trade adjustment assistance from 1099-G
was made from account. This must be entered on form 8889 and a deduction
taken if expenses were used for medical purposes.
A. If not used for medical purposes, income is taxable. Also, subject to 20% penalty
if taxpayer is under 65. Exceptions to penalty are death and disability.
B. Qualified expenses are those that Schedule A covers.
C. Form 8889 also used for deduction for HSA contribution.
are reported as other income.
18. Reimbursement of prior deducted expenses
19. Embezzled or illegal income
20. Punitive legal damages are taxable.
21. Treasure—found property is taxable when it comes into the possession of the taxpayer.
22. If Tuition Statement 1098-T shows in box 4 adjustment made for prior year (such as child dropped
class & received refund), and you claimed Tuition and Fees deduction on front of 1040, you must
recompute deduction claimed and add as other income the amount that should not have been claimed.
Here's a List of Other Taxable Income.
1. Savings interest & dividends (whether received or not), bonds cashed in and interest on tax refunds
2. State tax refunds if itemized in prior year or elected to claim general sales tax
3. Alimony received (do not see much in Indiana)
4. Business, royalties, partnerships, rental, farm, administrators of estates pay, trust-estate income
5. Pensions, annuities, endowments, lump-sum distribution, some life insurance cashed in,
supplemental railroad retirement, part if not all of ESOP distributions (Employee Savings Plans)
6. Some Property Sales or exchanges Sale of stocks & securities. Stock options depend on the plan.
7. Bartered income, including meals & lodging & other non-cash goods & services you receive.
8. Unemployment is fully taxable. (Except for low income taxpayers on the Indiana return.)
9. Social Security & Supplemental Railroad Retirement over specified limits
10. If someone discharges your debt for a non-gift reason. Bank and credit card companies
are required to send 1099 on discharged debts over $600.
Give us a call if you have questions or we can be of help, 765-452-8000. Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.