Income Other Income

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Income Other Income

Transcript Of Income Other Income

Income – Other Income

Introduction

This lesson will help you determine other forms of income and how to report other sources of income. Part of the lesson is for all course levels and part is only for the International level.

The International part of this lesson will help you report income earned from worldwide sources. To do this, you need to be able to identify the type of income and, if reportable, convert it to the equivalent U.S. dollar value of the foreign currency.

This lesson will cover the foreign earned income exclusion reported on Form 2555, Foreign Earned Income.
Objectives
At the end of this lesson, using your resource materials, you will be able to determine:
• Other types of income and how to report other sources of income
• Determine the requirements for the cancellation of debt on nonbusiness credit card debt when preparing tax returns
• Determine when canceled credit card debt is included in gross income on Form 1040
• How to properly report income earned from worldwide sources
• Who is eligible for the foreign income exclusion and how to calculate the excludable amount using Form 2555, Foreign Earned Income

What do I need?
□ Form 13614-C □ Publication 4012 □ Publication 17 □ Publication 54 □ Form 1040 Instructions □ Form 1099-NEC □ Form 2555
Optional:
□ Publication 525 □ Publication 970 □ Form W-2G □ Form 1099-MISC □ Form 1099-Q

What is other income?
Income that does not have its own line on Form 1040 is generally reported on the Form 1040, Schedule 1. Here are some examples: • Prizes and awards • Gambling winnings, including lotteries and raffles • Jury duty pay • Alaska Permanent Fund dividends • Recovery of a deduction claimed in a prior year • Nonbusiness credit card debt cancellation
Even if the taxpayer does not receive an income document from the payer, the taxpayer is required to report the income.

The Economic Impact Payment is not taxable and not includible in gross income. Also, a payment will not affect income for purposes of determining eligibility for federal government assistance or benefit programs.

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If you are unsure about sources of other income, consult the Volunteer Resource Guide, Tab D, Income, and Publication 17, Other Income, or discuss the income item with your Site Coordinator.
Use the interview techniques and tools discussed in earlier lessons to ensure that all taxable income has been included.
Health Savings Accounts (HSA) HSA distributions not used to pay or reimburse the taxpayer for qualified medical expenses are generally reported as additional income on Form 1040, Schedule 1. This topic is not covered in this lesson, it is covered in the Adjustments lesson.
What are some examples of other income?
Gambling Winnings The taxpayer may receive one or more Forms W-2G reporting gambling winnings. Total gambling winnings must be reported as other income. If the taxpayer also had gambling losses, the losses can only be deducted on Schedule A. See the Itemized Deductions lesson for more details.

Tax Software Hint: To review information related to reporting gambling income, go to the Volunteer Resource Guide, Tab D, Income, Income Quick Reference Guide.
Cash for Keys Program Cash for Keys Program income, which is taxable, is income from a financial institution, offered to taxpayers to expedite the foreclosure process. The taxpayers should receive Form 1099-MISC with the income in Box 3.
Penal Income
Amounts received for work performed while an inmate is in a penal institution aren’t earned income for the earned income credit. This includes amounts received for work performed while in a work release program or while in a halfway house. Any amount received for work done while an inmate in a penal institution is included in wages. See the Volunteer Resource Guide, Tab D, Income, for instructions on entering penal income in the software.

Under the PATH Act, a wrongfully incarcerated individual does not include in income any civil damages, restitution, or other monetary award received that relates to his or her incarceration.

Qualified Medicaid Waiver Payments
Qualified Medicaid waiver payments may be excluded from gross income. To be qualified Medicaid waiver payments, the care provider and the care recipient must reside in the same home. When the care provider and the care recipient do not live together in the same home, the Medicaid waiver payments are fully taxable.
A taxpayer may choose to include qualified Medicaid waiver payments in the calculation of earned income for the earned income credit (EIC) and the additional child tax credit (ACTC). The taxpayer may include qualified Medicaid waiver payments in earned income even if the taxpayer chooses to exclude those payments from gross income.
• A taxpayer may not choose to include or exclude only a portion of qualified Medicaid waiver payments. Either include all or none of the qualified Medicaid waiver payments for the taxable year in earned income.
• If the taxpayer chooses to include qualified Medicaid waiver payments in earned income, that amount will be included in the calculation for both the EIC and the ACTC.

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Income – Other Income

Refer to the Volunteer Resource Guide, Tab D, Income, Entering Medicaid Waiver Payments.
Are distributions from ABLE accounts taxable?
A qualified ABLE program is a program established and maintained by a state agency under which a person may make cash contributions to an ABLE account to pay for the qualified disability expenses of an eligible individual (the designated beneficiary). Qualified beneficiaries can have only one ABLE account. Contributions are made in after-tax dollars and can be made by any person. Contributions must be made in cash and are not deductible for federal income tax purposes.
Distributions from an ABLE account that do not exceed the qualified disability expenses of the beneficiary during the taxable year are excluded from gross income. A distribution from an ABLE account that exceeds the qualified disability expenses of the beneficiary is included in the beneficiary’s gross income and is subject to an additional tax of 10% imposed on the amount not used for qualified disability expenses. Taxable distributions from ABLE accounts are out of scope for the VITA/TCE programs.
Qualified disability expenses include: education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses.
Form 1099-QA, Distributions from ABLE Accounts, is used to report distributions from an ABLE Account.
Are distributions from an Educational Savings Account (ESA), such as a Coverdell ESA and a 529 plan, taxable?
Distributions from Coverdell ESAs and Qualified Tuition Plans (QTPs) are reported on Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530). Coverdell ESA distributions can be used to pay for qualified elementary, secondary, and postsecondary expenses. QTP distributions may also be used for qualified educational expenses for elementary and secondary public, private, and religious schools of up to $10,000 per year for each qualified beneficiary, certain expenses of an apprenticeship program, and the principal or interest on a qualified education loan up to a lifetime limit of $10,000 per beneficiary.
A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary’s adjusted qualified education expenses for the year. Qualified education expenses are discussed in more detail in the Education Credits lesson.
The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. The taxable amount must be reported as other income on the tax return. Taxable distributions from ESAs and QTPs are out of scope.
For additional information about educational savings accounts, distributions, and qualified education expenses, refer taxpayers to Publication 970, Tax Benefits for Education.

An American opportunity credit or lifetime learning credit or tuition and fees deduction (if extended) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP or Coverdell ESA, as long as the same expenses are not used for both benefits. See Publication 17 and Publication 970, Tax Benefits for Education, for more details.

Is a recovery taxable?

Reimbursement in a later year for medical or other expenses deducted in an earlier year must be reported as income up to the amount previously deducted as medical or under another provision. However, do not report as income the amount of reimbursement received up to the amount of the prior year deductions that did not reduce the tax for the earlier year.

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Cancellation of Debt – Nonbusiness Credit Card Debt
Cancellation of Debt – Basics
A debt includes any indebtedness for which a taxpayer is liable or which attaches to the taxpayer’s property, such as auto loans, credit card debt, medical care, professional services, mortgages, and home equity loans. Generally, if a debt for which a taxpayer is personally liable is canceled or forgiven, the taxpayer must include the canceled amount in income. There is no income from canceled debt if the cancellation or forgiveness of debt is a gift or bequest.
Use Form 13614-C, Intake/Interview & Quality Review Sheet, to determine if the taxpayer received one or both of Forms 1099-C, Cancellation of Debt, or 1099-A, Acquisition or Abandonment of Secured Property. Refer to the Legislative Extenders section for possible exclusion of cancellation of debt income on a main home.
Taxability of Canceled Debt
Taxpayers often question the taxability of canceled debt because they did not receive money in hand. In situations where property is surrendered, such as a foreclosure, taxpayers feel that by giving up the property they are relieved from any further obligation. Explain that the benefit to the taxpayer is the relief from personal liability to pay the debt. Information in Publication 17, Your Federal Income Tax for Individuals, can assist with the explanation. Refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Generally, when debt is canceled, the lender will issue Form 1099-C, Cancellation of Debt, which is then reported as income by the recipients on their tax return. There are exceptions and exclusions to the general rule that determines whether a canceled debt is included as income. This is covered in greater detail in the Legislative Extenders lesson and later in this lesson.
Form 1099-C
Generally, if a taxpayer receives Form 1099-C for canceled credit card debt and was solvent (assets greater than liabilities) immediately before the debt was canceled, all the canceled debt will be included on the tax return as other income.
Sometimes, Form 1099-C will show an interest amount in Box 3. Because only nonbusiness credit card debt income is in scope, any interest on the account would not have been deductible. The amount shown in Box 3 is included in Box 2; therefore, the full amount shown in Box 2 should be reported as other income.
example John made a deal with his credit card company to pay $2,000 on his $7,000 balance, and the company agreed to take it as payment in full. In January of the current year, John received a Form 1099-C from his credit card company reporting $5,000 (the amount of debt canceled). John was solvent immediately before the debt was canceled. John must include the entire $5,000 as other income on his tax return.
Lenders and creditors are required to issue Form 1099-C if they cancel a debt of $600 or more. If the debt canceled is less than $600, some lenders or creditors may send a letter or some other form of notification to the taxpayer. Generally, taxpayers must include all canceled amounts (even if less than $600) in income.

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Insolvency (Out of Scope for VITA/TCE)
Insolvency is a condition in which the fair market value (FMV) of all assets is less than one’s liabilities. The amount or level of insolvency is expressed as a negative net worth.
For purposes of determining insolvency, assets include the value of everything owned (including assets that serve as collateral for debt and exempt assets which are beyond the reach of creditors under the law, such as an interest in a pension plan and the value of a retirement account).
Liabilities are amounts owed and include:
• The entire amount of recourse debts
• The amount of nonrecourse debt that is not in excess of the FMV of the property and is security for the debt
Refer to the Insolvency Determination Worksheet in the Volunteer Resource Guide, Tab D, Income, as a resource. Taxpayers must determine if they are considered insolvent.
If the taxpayer had nonbusiness credit card debt canceled, all or part of the debt may be excluded if the cancellation occurred in bankruptcy, or if the taxpayer was insolvent immediately before the cancellation. These situations are beyond the scope of VITA/TCE. If any of these situations apply, refer the taxpayer to a professional tax preparer. See IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, for more information.

Publication 4731, Screening Sheet for Volunteers Assisting Taxpayers with Form 1099-C, located in the Volunteer Resource Guide, Tab D, Income, provides step-by-step guidance for the volunteer tax return preparer to determine if the cancellation of credit card debt is within scope.

Taxpayer Interview and Tax Law Application
Here is how a volunteer advised Michelle regarding her canceled credit card debt.

. . . . . . . . . . . . . . . . . . . . .S.A. M. .P.L.E. I.N.T.E. R. V. I.E.W. . . . . . . . . . . . . . . . . . . . . .

VOLUNTEER SAYS…

MICHELLE RESPONDS…

I notice you received a 1099-C from a credit card company.

Yes, I negotiated with them to cancel $3,000 of my debt.

Yes, Form 1099-C shows the amount of debt discharged.

I could only afford to pay them $1,000, so it really helped me.

Do you think your debts at the time exceeded your assets?

I’m not sure, but it’s certainly possible.

Let’s fill out the Insolvency Determination Worksheet to help us OK. determine whether you were insolvent.

According to the worksheet, you are insolvent. I am afraid I am not able to help you. VITA/TCE volunteers are not trained to compute the nontaxable portion of canceled credit card debt.

Oh, I understand.

I suggest you seek assistance from a professional tax preparer. I will, thank you.

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EXERCISES
Question 1: Greg was released from his obligation to pay $5,000 of personal credit card debt. The credit card company sent Form 1099-C showing canceled debt of $5,000. Greg is fairly certain he has more debt than he has assets.
Can the VITA/TCE site provide tax return preparation assistance to Greg?
A. Yes, since the entire $5,000 in canceled debt is considered income and reported on Form 1040.
B. No, because it appears Greg is insolvent, which might mean some of the canceled credit card debt would be nontaxable and beyond the scope of the VITA/TCE programs.
Question 2: Kay was released from her obligation to pay personal credit card debt. She owed $10,000 to her credit card company, which agreed to accept $2,500 as payment in full. Before paying the credit card company, it was determined Kay was solvent (assets greater than liabilities) and not in bankruptcy. The credit card company issued Kay a Form 1099-C, reporting $7,500 as the amount of debt discharged. Based on the information above, can Kay be assisted at her local VITA/TCE site? ¨ Yes ¨ No
Question 3: Review the information in Question 2 about Kay’s canceled debt. If the VITA/TCE site is able to assist Kay, what amount would be reported on Kay’s Form 1040?
A. $0
B. $10,000
C. $2,500
D. $7,500

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What is worldwide income?
U.S. citizens and U.S. resident aliens are required to report worldwide income on a U.S. tax return regardless of where they live and even if the income is taxed by the country in which it was earned. Filing requirements are the same as for U.S. citizens and U.S. resident aliens living in the United States and apply whether income is from within or outside the U.S. U.S. citizens and U.S. resident aliens living abroad may be able to claim tax benefits such as the foreign earned income exclusion or the foreign tax credit. This part of the lesson covers the foreign earned income exclusion. The foreign tax credit will be covered in another lesson.
example In the current year, Alfredo Kendall earned $40,000 while working in Dallas, Texas, for Dade Corporation. In September of this year, he transferred to their office in Stuttgart, Germany. While in Germany, he earned $30,000 (U.S. dollars). All of Alfredo’s wages, including the income he earned in Germany, is included in his gross income. His Form 1040 will show $70,000 in wages.
Income is treated the same on the return regardless of the country from which it is derived. Similar income earned inside or outside the U.S. is generally taxed in the same way on the return. Likewise, income earned in the U.S. and not taxed will be treated in the same way if earned outside the U.S. The lines on which income is reported on Form 1040 are the same whether the U.S. citizen or U.S. resident alien is living within or outside U.S. boundaries.
Foreign income might be reported to taxpayers on forms or in ways that are not used in the United States. Question taxpayers closely to ensure that they are reporting all worldwide income. Review the income records to ensure that includible amounts are accurate and complete.
Taxpayers with foreign income, bank accounts, or assets may have additional filing responsibilities, which are out of scope. See Schedule B and Form 8938 for additional information.
Tax Software Hint: To review information related to income from a foreign employer, go to the Volunteer Resource Guide, Tab D, Income.

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EXERCISES (continued)
Answers are listed following the lesson summary. Question 4: Marta Bremer, a U.S. citizen, lives in Mussbach, Germany. Her income included $22,000 in wages earned in Germany. She earned $300 in interest from her U.S. bank. What is Marta’s total income? A. $0 B. $22,300 C. $300 D. $22,000 Question 5: Mary Carleton, a U.S. citizen, lives in Belgium. Her income included $10,000 in wages from her Belgian employer, $200 in interest from her U.S. bank, $8,000 in gambling winnings, and $7,000 in child support payments from her ex-spouse. What is Mary’s gross income? A. $8,000 B. $10,200 C. $18,200 D. $25,200
How do I convert foreign income to U.S. dollars?
Exchange rates All amounts on the U.S. tax return must be stated in U.S. dollars. Convert income that taxpayers received in foreign currency into U.S. dollars using the appropriate exchange rate. U.S. exchange rates are stated in two ways: • Units of foreign currency to one U.S. dollar: 0.74855 Euro = 1 U.S. dollar • U.S. dollars to one unit of the foreign currency: 1.33592 U.S. dollar = 1 Euro
Exchange rates shown here are for example only. Use the exchange rates in effect when the income was received.
To convert a sum of money into U.S. dollars, divide the amount of foreign currency by the exchange rate for the foreign currency to one U.S. dollar.
example Ryan received 3,000 Euros (€3000) on a day that the exchange rate was 0.74855 Euros to one U.S. dollar. Based on this exchange rate, the value of Ryan’s €3000 is: €3000 ÷ 0.74855 = $4,007.75

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In other words:
Amount of foreign currency = Amount in U.S. dollars
Exchange rate of foreign currency to one U.S. dollar
3,000 Euros = $4,007.75
0.74855
EXERCISES (continued)
Question 6: Caryn received 200 Euros on a day that the exchange rate was .75514 Euros to one U.S. dollar. In U.S. dollars, she would have ____. A. $264.85 B. $377.57 C. $115.03 D. $11.50 Question 7: Given an exchange rate of .7000, how much is 36,000 Euros worth in U.S. dollars? A. $252.00 B. $25,200.00 C. $51,428.57 D. $61,614.00
Which exchange rate should I use? The exchange rate for a particular currency is likely to change every day. Use the exchange rate prevailing when the taxpayer receives the pay or accrues the item. The exchange rate is determined by the date of transaction, which is either the date on the check or the date the money is credited to the taxpayer’s account. If there is more than one exchange rate, use the one that most properly reflects the income. However, the taxpayer can use the average annual exchange rate if: • Foreign income was received evenly throughout the year, and • The foreign exchange rate was relatively stable during the year
Taxpayers may use the monthly average exchange rates if they earned foreign income evenly for one or more months, but less than twelve months.
example Edward Hall worked in Dallas for Lubbock Incorporated from January until September. On September 29, he was transferred to Lubbock’s Mexico City office, where he will be working for three more years. In Mexico, he is paid in Mexican pesos. Because he did not receive his salary in Mexican pesos evenly throughout the year, he cannot use the annual average exchange rate for Mexico source income. If he does not know the exchange rate at the time he received the funds, he can use the monthly average exchange rate for October, November, and December.

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Where to obtain exchange rates
In mid-January, the IRS distributes exchange rates for various currencies to its worldwide offices, including the prior year’s average annual exchange rate information.
Exchange rates can be found at irs.gov by typing “foreign currency rates” in the search box. You may also contact banks that provide international currency exchange services.
Because taxpayers should use the rate that most closely reflects the value of the foreign currency at the time they receive the income, taxpayers may use an exchange rate that is different from the rates posted in IRS worldwide offices if they find it to be a true representation.
What is the foreign earned income exclusion?
Use Form 2555 to claim the foreign earned income exclusion. Certain taxpayers can exclude income earned in, and while living in, foreign countries. The maximum amount of the foreign earned income exclusion is indexed to inflation annually. For the current year amount go to irs.gov or Publication 17. The foreign earned income exclusion does not apply to wages and salaries of U.S. military members and civilian employees of the U.S. government.
If the taxpayer qualifies to exclude foreign earned income, the excludable amount will be reported as a negative amount on the other income line of Form 1040, Schedule 1. Since the foreign earned income would have been reported on Form 1040 as taxable wages or as self-employment income, the exclusion (negative amount) will reduce the total income calculated. The method of calculating the tax when the taxpayer elects the foreign earned income exclusion is based on the Foreign Earned Income Tax Worksheet. The tax software will do this calculation automatically.
If a taxpayer elects to exclude foreign earned income, he cannot claim the earned income credit and the refundable portion of the child tax credit. The child and dependent care credit does not include excluded foreign income as earned income when computing the credit.

Tax Software Hint: To review information related to the software for the foreign earned income exclusion, go to the Volunteer Resource Guide, Tab D, Income.
When do I choose the exclusion?
The foreign earned income exclusion is voluntary. It is not always an advantage to claim the exclusion. If taxpayers wish to claim the exclusion, they must file Form 2555 with a timely return (including extensions). If the taxpayer is not eligible for the foreign earned income exclusion, any taxes paid on this income to a foreign government may be eligible for the foreign tax credit. See the lesson Foreign Tax Credit for more information. Once the taxpayer chooses to exclude foreign earned income, that choice remains in effect for that year and all later years until revoked. The taxpayer may revoke the exclusion for any tax year by attaching a statement to the return. When the exclusion is revoked, the taxpayer may not claim the exclusion again for the next five tax years without the approval of the IRS.
What are the eligibility requirements?
To claim the foreign earned income exclusion, taxpayers must: • Demonstrate that their tax home is in a foreign country
• Meet either the bona fide residence test or the physical presence test
• Have income that qualifies as foreign earned income

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Income – Other Income
IncomeTaxpayerDebtExchange RateTaxpayers