INCOME - Grace College and Seminary

Wages 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 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
Child Support
Worker’s Compensation
Lottery Winnings
 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
 Which of the following types of income are exempt
from federal taxes?
Jury duty pay
IRA distributions
 Which of the following types of income are taxable
Stock and credit union dividends
Veterans' life insurance dividends
Workers' compensation
Child support
 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
 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
 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
 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
 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
 Some scholarships and fellowships may be partially
 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.
 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
 Toni received the following income: long-term care
benefits, interest, alimony, inheritance, and IRA
distributions. Which income is exempt from federal
Long-term care benefits
IRA distributions
 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
 The person paying alimony can subtract it as an
adjustment to income.

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