William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Taxable income’

Taxable and Nontaxable Income

Posted by William Byrnes on March 5, 2014

The IRS published another tax tip (2014-12) to assist tax filers this tax season addressing when income is taxable, and when it is not.

With individual tax returns due at the post office within 6 weeks, the IRS is stepping up efforts to help guide taxpayers with basic income tax questions and filing requirements.  Excerpted below, in its Tax Tip, the IRS states:

Taxable income includes money you receive, such as wages and tips. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Some types of income are not taxable except under certain conditions, including:

  • Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
  • If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses

For more on this topic see Publication 525, Taxable and Nontaxable Income.

IRS YouTube Videos:

Posted in Taxation | Tagged: , , , | 1 Comment »

When are policy loans taxable?

Posted by William Byrnes on November 23, 2011

Generally, life insurance policies be withdrawn without income tax consequences. However, there are circumstances where a “loan” is immediately taxable. We have covered situations where a policy is surrendered with a loan outstanding, resulting in taxable income. This article discusses another case where a policy “loan” will be treated as taxable income.

In Frederick D. Todd II et ux. v. Commissioner (T.C. Memo. 2011-123), the Tax Court considered whether a distribution from a welfare benefit fund to a fund participant was a policy loan or a taxable distribution.

For previous coverage of life insurance policies held by welfare benefit funds in Advisor’s Journal, see Deductions for Life Insurance Premium Payments to Welfare Benefit Plan Denied (CC 10-29).

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of welfare benefit funds, see Advisor’s Main Library: B—Welfare Benefit Funds.


Posted in Wealth Management | Tagged: , , , , , , , | Leave a Comment »

Tax-Free Exchange Can Erase Policy’s Tax Benefits

Posted by William Byrnes on July 18, 2011

A recent IRS Revenue Ruling provides an important reminder for us of the rules for deducting interest that’s paid or accrued on a business life insurance policy loans. Knowing how and when policy loan interest is properly deductible can mean the difference between closing the sale in the first instance and an IRS audit down line if these rules are ignored.

In general, interest paid on a life insurance policy loan is not deductible for income tax purposes; but there are some exceptions for life insurance purchased for business purposes. The deductibility of policy loan interest has changed significantly over the past 20 years, so an intimate knowledge of the specifics is imperative when selling or transacting on a policy that’s issued to a business.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous Advisor’s Journal coverage of the exception to the pro rata limitation on interest deduction, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC-11-41).

For in-depth analysis of corporate-owned life insurance, see Advisor’s Main Library: D—Deductibility Of Business Insurance Premiums, E—Premiums As Taxable Income To The Insured & F—Taxability Of Corporate Owned Life Insurance Proceeds At Death.

Posted in Taxation, Wealth Management | Tagged: , , , , , , , | Leave a Comment »

Obama Tax Cuts Alternative Minimum Tax Exemption Extensions

Posted by William Byrnes on January 15, 2011

“For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to impose taxes on high-income individuals who have no liability under the regular income tax.” [1]

Current law imposes an alternative minimum tax (AMT) only on individuals.  “The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code.” [2]

The parallel tax structure to the regular income tax law requires individuals “to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences.” [3]

Generally, the AMT is an amount that is the excess of the “tentative minimum tax” over the regular income tax.

Tentative minimum tax is equal to the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess, which is essentially an individual’s taxable income adjusted to take into account certain specified preferences and adjustments (also known as alternative minimum taxable income (“AMTI”)) minus the exemption amount.  To read this article excerpted above, please access http://www.advisorfyi.com/2010/12/obama-tax-cuts-alternative-minimum-tax-exemption-extensions/

Posted in Taxation | Tagged: , , , , , , , | Leave a Comment »

New Tax Brackets under the Obama Tax Cuts

Posted by William Byrnes on January 14, 2011

History of top marginal income tax rates in th...

Image via Wikipedia

In 2001, the Economic Growth and Tax Relief Reconciliation Act first created a new 10-percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent.  That law also reduced the other regular income tax rates. The otherwise applicable regular income tax rates of 28 percent, 31 percent, 36 percent and 39.6 percent were reduced to 25 percent, 28 percent, 33 percent, and 35 percent, respectively.

Under Section 101 of the new Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act of 2010, the law creates an extension of the taxable income brackets created almost a decade ago.

Generally, a taxpayer determines his or her tax liability by applying the tax rate schedules (or the tax tables) to his or her taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer’s income increases. Separate rate schedules apply based on an individual’s filing status.

Below are the new tax rate tables for those filing as single taxpayers, married filing jointly, as well as head of household.

To read this article excerpted above, please access http://www.advisorfyi.com/2010/12/new-tax-brackets-under-the-obama-tax-cuts/

Posted in Taxation | Tagged: , , , , , , , | Leave a Comment »

%d bloggers like this: