INCOMEWages and Alimony

Income - Definition

Gross income is all income received in the form of money, goods, property, and services that is not exempt from tax. Income from sources outside the U.S., even if

part or all of that income will not be taxable. Part of unemployment compensation, part of

social security benefits received, and certain scholarship and fellowship grants.

Types of Income Taxable Income Non-taxable Income

Taxable Income

Taxable Income is any income that is subject to federal income tax: Earned Income Unearned Income

Earned income is any income received for work, such as wages; business income

Unearned income is any income produced by investments, such as interest on savings, dividends on stocks, or rental income

All taxable income must be reported on a tax return unless the amount is so small that the individual is not required to file a return.

Nontaxable/Exempt Income

Nontaxable or "excludable" refers to income such as gifts and inheritances. Excludable income is not shown on the return.

Exempt income includes interest income produced from certain types of investments Municipal bond income

Case Study

Source Taxable?

Wages

Interest

Child Support

Alimony

Inheritance

Worker’s Compensation

Lottery Winnings

Exercise

Under what circumstances must a person report taxable income?

a. Always, unless the income is only from interest

b. Always, unless the income is so small that reporting it is not required

c. Always, unless the person is identified as a dependent on someone else's tax return

Exercise

Which of the following types of income are exempt from federal taxes?a. Jury duty pay

b. IRA distributions

c. Tips

d. Inheritances

Exercise

Which of the following types of income are taxablea. Stock and credit union dividends

b. Veterans' life insurance dividends

c. Workers' compensation

d. Child support

W2

It reports the employee's earned income for the year. Employers should issue Form W-2 to every employee and send a copy to the Social Security Administration.

The software will automatically adds up amounts from Box 1 on multiple W2s

Missing W2

All wage, salary, and tip income must be reported on the return, even if the employee does not receive a Form W-2.

A taxpayer who does not receive a Form W-2 by January 31 should first contact the employer and find out if or when the Form W-2 was mailed.

If the taxpayer does not receive the Form W-2 after a reasonable amount of time, the taxpayer should contact the IRS for assistance at 1-800-829-1040, but not before February 15.

Missing W-2

A taxpayer who has requested a Form W-2 or Form 1099-R and has still not received it by the due date of the return should file Form 4852

The taxpayer should: Keep a copy of Form 4852 and file a copy with

the Social Security Administration to ensure proper social security credit, and

Attach Form 4852 to the tax return

Household Employees

Generally, if a household employee earns less than $1,700 a year while working in the employer's home, the employer is not required to provide the taxpayer with a Form W-2 and no social security or Medicare taxes are owed.

However, a Form W-2 is required if the employer withholds federal income taxes.

If the taxpayer’s household employer is not required to issue Form W-2, enter "HSH" and the amount on the dotted line next to line 7, then include the amount in the total on line 7.

Tip Income

If taxpayers have the type of jobs that normally include income from tips (i.e. waiter/waitress, bellhop, motel maid, etc.), be sure to ask about any tips they may have received.

All tip income is subject to federal income tax. Individuals who receive $20 or more per month in tips from one job must report their tip income to their employer.

Tip Income

Noncash tips (for example, tickets or passes) do not have to be reported to the employer, but must be included as taxable income at their fair market value.

Tips that are reported to employers are included in wages on Form W-2, box 1.

Allocated Tips

Allocated tips are tips an employer assigns to an employee. They are in addition to the tips the employee reports to the employer.

Allocated tips are shown separately in box 8, Allocated tips, of Form W-2. They are not included in the amount in box 1.

When allocated tips are reported in box 8 of Form W-2, the software automatically adds them to line 7 of Form 1040 and completes Form 4137. If the amount is not correct, based on the

taxpayer’s records, an adjustment will need to be made on Form 4137.

Exercise

Mandy worked two jobs. She was a quality inspector during the week and a bartender on the weekends. She reported all of her tip income ($3,000) to her employer. Her Forms W-2, box 1, showed income of $21,000 (quality inspector) and $8,250 (bartender). What amount will Mandy report on her Form 1040A, line 7?

Scholarships and Fellowships

Some scholarships and fellowships may be partially taxable. Sometimes taxpayer will get form W2

Form 1098-T lists qualified tuition and related expenses billed by the school. Verify that these amounts have been paid. It also lists scholarship and grant money the student received.

If scholarships or grants exceed the qualified educational costs, some of the grant or scholarship money may be taxable.

Exercise

Cassandra has received a Form W-2 for her part time job and another Form W-2 for a college scholarship she won last year. How should she report the two Form W-2 box 1 amounts on her Form 1040A?a. Enter the total of the two amounts on line 7

b. Enter just her part time income amount on line 7; she doesn't have to report the scholarship

c. Enter the total of the two amounts on line 7 and write "SCH" with the scholarship amount to the left of line 7

d. Enter only her part time income on line 7 and write "SCH" with the scholarship amount to the left of line 7

Exercises

Toni received the following income: long-term care benefits, interest, alimony, inheritance, and IRA distributions. Which income is exempt from federal taxes? Long-term care benefits Alimony Inheritance IRA distributions

Alimony

Payment to or for a spouse or former spouse under a separation or divorce instrument.

May include: medical bills, housing costs and other expenses on behalf of the spouse or former spouse.

It does NOT include child support or voluntary payments outside of instrument.

Reporting Alimony

The person receiving alimony must include it as income

The person paying alimony can subtract it as an adjustment to income.