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CALCPA Income Tax Strategies for Faculty

Presented by Susan Barney, CPA

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Gross Income – What is it?

Definition -Section 61(a) of the Internal Revenue Code defines gross income as follows: Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.

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Examples of Gross Income Items

Alimony AwardsBonusesBusiness IncomeCommissionsDebts ForgivenDividendsInterestGains from sale of propertyGambling WinningsHobby IncomePartnership IncomePrizes

Alimony AwardsBonusesBusiness IncomeCommissionsDebts ForgivenDividendsInterestGains from sale of propertyGambling WinningsHobby IncomePartnership IncomePrizesRents

Royalties

Salaries

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Exclusions from Gross Income

Exclusions from gross income must be specifically allowed by statute.

Examples of exclusions from gross income:

Gifts, bequests and inheritancesLife insurance proceeds paid by reason of deathInterest on state and local government obligationsLodging and meals furnished for the convenience of the employerEmployee discountsTuition reductions granted to employees of educational institutionsAccident and health benefits

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Adjusted Gross Income (AGI)

Deductions for AGI = Above the Line Deductions

Examples:

Part of the self-employment tax

Unreimbursed moving expenses

Contributions to traditional IRA accounts and other retirement plans

Interest on student loans

Alimony payments

Deductions for AGI = Above the Line Deductions

Examples:

Part of the self-employment tax

Unreimbursed moving expenses

Contributions to traditional IRA accounts and other retirement plans

Interest on student loans

Alimony payments

Deductions from AGI = Itemized Deductions (Schedule A)

Examples:

Medical Expenses State Income

Taxes Real Estate Taxes Mortgage Interest Charitable

Contributions Unreimbursed

employee business expenses (Form 2106 expenses)

Deductions from AGI = Itemized Deductions (Schedule A)

Examples:

Medical Expenses State Income

Taxes Real Estate Taxes Mortgage Interest Charitable

Contributions Unreimbursed

employee business expenses (Form 2106 expenses)

2 Types of Deductions

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TAX MINIMIZATION STRATEGIES

Postpone income recognition until future years.

Accelerate payment of expenses in current year to

benefit from deduction.

Shift income from high tax bracket years to low tax

bracket years.

Take advantage of tax credits before they expire.

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Accrual Method

Income is recognized in year in which it is earned, regardless of when the income is collected.

Timing of Income Recognition

Cash Receipts Method

Income is recognized in the year of actual or constructive receipt , regardless of whether the income was earned in that year.

Accounting Method

3-10ORDINARY INCOME vs.

CAPITAL GAINS

Ordinary income is taxed at higher tax rates

Capital gains are taxed at lower tax

rates

• Nonqualified Deferred Compensation

• Business Income

Sale of capital asset:Stocks and bonds

Partnership interestArtwork

• If employed, defer compensation to future years – no current year deduction for employer.

• If self-employed, deposit income received after year-end.

Harvesting losses – selling capital assets

at a loss to offset capital gains

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Timing of Expense Recognition

Accrual Method

A deduction can not be claimed until (1) all the events have occurred to create the taxpayer’s liability and (2) the amount of the liability can be determined with reasonable accuracy.

Cash Method

Expenses are deductible only when they are actually paid with cash or other property.

Accounting Method

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Prepaid Expenses for Cash Basis TaxpayersBusiness ExpensesProperty, Plant, And Equipment – new equipment purchased and placed in service prior to year-end is eligible to be expensed in the current year.Any ordinary and necessary business expenses that will be consumed within the next year.

Personal ExpensesPay state estimated tax payments and future real estate tax payments on or before December 31 if not in AMT.Make all charitable contributions , both cash and non-cash, before year-end.

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-2 RETIREMENT ACCOUNTS

Contribution Limits

Year 401(k)/403(b) Catch-Up Maximum

Maximum ContributionAllocation

(if age 50 +)

2015 $18,000 $6,000$53,000

2014 $17,500 $5,500$52,000

2013 $17,500 $5,500$51,000

2012 $17,000 $5,500$50,000

2011 $16,500 $5,500$49,000

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TAX CREDITS

CREDIT COMPUTATION COMMENTS

Child And Dependent

Care Credit

• Maximum base for credit is $3,000 for one qualifying individual , $6,000 for two or more.

• The credit rate varies between 20% and 35% depending on taxpayer’s AGI.

• Nonrefundable personal tax credit.

• No carry back or carry forward.

• Eligible taxpayers must have dependent under age 13 or spouse or dependent who is physically or mentally incapacitated.

• Benefits taxpayers who incur dependent care expenses in order to work or seek employment.

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(Continued)

CREDIT COMPUTATION COMMENTS

Child Tax Credit

• Maximum credit available is $1,000 per child.

• The available credit is phased out when AGI reaches $110,000 for joint filers ($75,000 for single taxpayers).

• The credit is phased out by $50 for each $1,000 (or part thereof) of AGI above the threshold amounts.

• Nonrefundable personal tax credit.

• Credit based solely on the number of qualifying children under age 17 claimed as a dependent on the taxpayer’s return.

• Purpose of the credit is to provide tax relief for low-to-moderate-income families with children.