Statement of Facts Questions

For this assignment:

Find and prepare PDF versions of the following IRS forms and Schedules, if applicable:Form 1099-S, Form 1099-C, and Form 8949;Schedule 1 and Schedule D; andForm 1040 (page 1 only).Statement of FactsTaxpayer Jane Doe has the following personal information:Name: Jane DoeSSN: 444-44-4444Address: 555 Any Street, Anytown, CA 90000Marital Status: Separated – Living apartMinor Children: 1 (lives with ex-husband)Elections: Standard deduction (never itemized)Summary:Jane Doe (DOE) was an employee at ABC, Inc. (benefit details below). After being injured on the job, DOE received three monthly payments from an disability policy (benefit details below). At the start of the tax year, DOE sold her residence for $600,000 (Payer #1). DOE bought the house she sold for $300,000 and lived in the house for 10 years prior to the sale. During the tax year, DOE received $25,000 in workers compensation payments. By the end of the tax year, DOE had substantial gambling debts that exceed her total assets. Realizing the her debt of $30,000 was uncollectable, the casino (Payer #2) forgave DOE’s gambling debt and issued her a Form 1099. During the tax year, DOE received the following:$1,500 in winnings from slot machines; and$1,000 from a state income tax refund;.With regard to DOE’s job at ABC, Inc., DOE received wages of $20,000 for time she worked. In addition to her salary, DOE received the following employee benefits from ABC, Inc.:Employer paid health care of $15,000;$5,000 in sick pay benefits;$5,000 in vacation benefits; andEmployer paid group term life insurance with $50,000 in coverage.With regard to DOE’s disability policy, DOE receives $2,000 per month. DOE purchased the private disability policy with her own funds.Payer #1: Anytown Escrow, Inc.EIN: 99-9999999Address: 111 Corp. Blvd. Ste 100, Anytown, CA 90000Payer #2: The House Always Wins, LLCEIN: 99-9999998Address: 444 Casino Blvd., Anytown, CA 90000Answer the following questions according to the above statement of facts:1. When completing Form 8949, which entries are correct? A. X in Box A; 1(d) = $600,000; 1(e) = $250,000; 1(h) = $50,000B. X in Box C; 1(d) = $600,000; 1(e) = $300,000; 1(h) = $300,000C. X in Box F; 1(d) = $600,000; 1(e) = $300,000; 1(f) = H; 1(g) = -$250,000; 1(h) = $50,000D. X in Box F; 1(d) = $600,000; 1(e) = $300,000; 1(f) = i; 1(g) = ($250,000); (1(h) = $02. What is DOE’s total income on Form 1040?$70,500$111,500$81,500$80,5003. What is DOE’s taxable income?A. $57,450B. $86,950C. $68,550D. $55,450 Instructor Notes – Chapter 5
Exclusions from Gross Income
These can be found in 26 U.S.C. Code §§ 101 through 140. Exclusion means that something that should
be in taxable income is removed by the tax law. Some examples include:
o
§121 ‐ Exclusion of gain from the sale of a principal residence
• $250,000 Single / $500,000 MFJ
o
§117 ‐ Exclusion of qualified scholarships
• Tuition, fees, and books –not taxable. Room and board – taxable.
o
§104 – Exclusion of compensations for injuries and sickness
• Damages received for physical injury are excluded under the idea that they are
restoring damage to one’s body rather than increasing one’s wealth.
o
§111 – Exclusions under the tax benefit rule
• General rule: If you are refunded money that was used to claim a tax deduction
in prior years, it becomes income in the year the refund is received.
•
Exclusion rule: If you received no tax benefit for the deduction in prior years, the
refund is not income when received.
Example: You receive a refund of an overpayment on a personal expense in year
two. Since the personal expense was not deductible in year one, the refund is
not income in year two.
o
Other Common Exclusions
• Gifts and Inheritance ‐ §102
• Municipal Bond Interest ‐ §103
• Employee Health Insurance ‐ §106
• Forgiveness of Debt ‐ §108
Exclusion ‐ Not Income
o
Exclusions apply to specific income items (i.e. the item must constitute income first). For
example, a gift is income because it is a realized increase in wealth. However, for
income tax purposes, a gift is not income, because it is excluded from gross income.
o
Exclusions do not apply to items that are not income in the first place, such as loans and
returns of capital.
Gifts
Primarily based on the donor’s intent.
Major Court Case for Gifts: Commissioner v. Duberstein
Summary: The taxpayer received a car from a business acquaintance after the taxpayer supplied the
acquaintance with the names of potential customers. The Supreme Court concluded – Not a gift!
Instructor: Jerome Jenkins
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Instructor Notes – Chapter 5
The courts have defined a gift as “a voluntary transfer of property by one to another without adequate
[valuable] consideration or compensation therefrom.”
To qualify as a gift, the payment must be made “out of affection, respect, admiration, charity or like
impulses.”
General Rule: No gifts between employer and employee. This is compensation.
Life Insurance
o
Generally, life insurance proceeds paid to the beneficiary because of the death of the
insured are excluded from gross income.
o
Expansions and Exceptions
• Accelerated death benefits (Expansion); and
• Transferred for valuable consideration (Exception)
Damages
Three buckets:
o Compensation for lost wages and punitive damages – taxable
o
Compensation for physical injury – not taxable
• Workers Compensation payments are treated similarly.
o
Compensation for losses and damage – mixed
• Losses, if previously deducted, give rise to income under the tax benefit rule.
• Damage, can be treated as a deemed sale. May trigger capital gains.
o
Study Concept Summary Table 5.1 in textbook.
Employer Health and Medical Plans
o Insurance premiums paid by an employer are excluded from income. This is true for
other payments as well, like HSA contributions, QSEHRA reimbursements, and even self‐
insured plan payments.
Other Employer/Employee Benefits
o
o
o
o
o
o
o
o
Meals, Travel, & Lodging – Generally not taxable if they are provided “for the
convenience of the employer, as a condition of employment, or at a work site”.
Child and dependent care services – Generally not taxable.
Gym at work – Generally not taxable.
Educational assistance programs ‐ Generally not taxable (up to $5,250 / year).
Cafeteria plans ‐ Generally not taxable until given cash.
Flexible spending plan ‐ Generally not taxable (up to $2,750 / year).
Group Term Life Insurance ‐ Generally not taxable (up to $50,000 policy).
Other – see list on 5‐8d in textbook.
Instructor: Jerome Jenkins
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Foreign Earned Income ‐ §911
o
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Instructor Notes – Chapter 5
If a taxpayer’s tax home is in foreign country, the taxpayer can exclude up to $108,700
of foreign earned income.
The book lists two tests: 1) bona fide resident and 2) number of days. However, even if
the taxpayer meets either of these tests, they cannot claim the exclusion if their abode
is in the U.S. See CFR 1.911‐2
Educational Savings Plans ‐ §529 and §530
o
Commonly called 529 plans and Coverdell plans. Both allow taxpayers to save for college
by investing money in stocks and bonds. If the money in the plan is used for college
related expenses, the accumulated earnings in the plan are non‐taxable.
Exclusion of Income from Forgiveness of Debt
o
o
General Rule: Forgiveness of debt is income.
Exclusions:
• Insolvency
• Bankruptcy
• Principle residence debt forgiveness
• Student Loan Forgiveness – See §108(f)
• Also see 5‐14 in Text
The Tax Benefit Rule
Basically, if you get money back on something you previously deducted for taxes, the amount refunded
is income. This is basically the reason why state income tax refunds are included as income on Form
1040. If you claimed a state income tax deduction on Schedule A, a subsequent tax refund becomes
taxable. From the text:
Often a person will incur a cost or an expense in one year but receive a refund or recovery in a
subsequent year. If the item purchased did not result in a tax deduction (e.g., the purchase of a
personal automobile), the rebate does not affect taxable income. However, if the original payment
resulted in a tax deduction in one year and the rebate is received in a subsequent year, the tax
benefit rule will apply. Generally, if a taxpayer claims a deduction for an item in one year and in a
later year recovers all or a portion of the prior deduction, the recovery is included in gross income in
the year received.
Looking Ahead – Discussion Questions:
Question 1
•
Taxpayers can claim an exclusion of foreign earned income under 26 U.S.C. 911. However, this
all depends on where taxpayers have their “tax home”. Administrative regulations and the
courts have looked to different tests to determine a taxpayer’s tax home. Since all tests
Instructor: Jerome Jenkins
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Instructor Notes – Chapter 5
basically boils down to a “facts and circumstances” analysis, describe what facts are used in the
determination of” tax home”.
•
Cite a court case and administrative regulations (CFR) associated with this determination.
Question 2
Certain types of U.S. Government bond interest can be excluded from gross income if used to pay for
higher education expenses. However, what happens if the bonds mature before taxpayers, or their
dependents, are ready for higher education. Is there a way to keep the tax benefits of these bonds, even
if they mature before college expenses are incurred?
Instructor: Jerome Jenkins
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