INTERNATIONAL

TAXATION AND
TECHNOLOGY
Module – 2

Income Types
Overview of Gross Income

 Asper the US income tax system, taxpayers are required

to self-assess tax and file tax returns.

 The US federal income tax systems (and most state)

imposes tax on worldwide income of citizens and
residents
Important Components of Form 1040
Personal details

Page 1 of Form 1040 contains the below

information:
 Filing status
 Name of Taxpayer, Spouse name, SSN /
ITIN
 Mailing Address
 Dependant claimed details
 Signature of Taxpayer and Spouse
 Paid preparer information and signature
Filing requirement
A US citizen or a resident is required to file return based
on 3 factors

1. Gross income or income level

2. Filing status
3. Age

* Residential status
Overview of Gross Income
 The gross income includes all incomes that the taxpayer
receives in the form of money, goods, property, and
services that is not exempt from tax.

 It includes income from sources outside and inside the US

 Adjusted Gross Income (AGI) is defined as gross income

minus adjustments to income
Overview of Form 1040
Gross Income / Total income XX,XXX
Form 1040, page 2 Less: adjustments to (X,XXX)
income

Adjusted Gross X,XXX

Income
Form 1040, page 2 Less: Itemised or standard (XXX)
deduction

Taxable Income X,XXX

Tax XXX
Less: credits (XXX)
Plus: other taxes XXX
Less: Tax payments (XXX)
(Withholdings, Estimates)
Balance of tax owed/refund XXX
Go to next slide for Additional Income
Types of Taxable Income
Types of Taxable Income

 The Income section of Form 1040 is used

to report earned and unearned taxable
income.

 The sum of all earned and unearned

income is reported on Form 1040, line 6,
as total income.
Types of Taxable Income
 Earned income – any income received for
work, such as wages or business/self-
employment income

 Unearned income – any income not

produced from work, such as
unemployment income or income
produced by investments such as interest
on savings, dividends on stocks, or rental
income
Where is income reported?
 Income is reported on a variety of forms depending on its
source.

 The taxpayer will generally have

 Form W-2,
 Forms 1099 and other statements as the source documents
reporting the income.
 Form1099- reports the income the taxpayer has
received

 Form 1098- reports expenses the taxpayers have paid

Form 1040
Wages, Salaries, Tips, etc.
(Line 1 of Form 1040 – page 2)
Wages, Salaries, Tips, etc.
(Line 1 of Form 1040)
 Form1040, line 1 income includes wages, salaries, tips,
and scholarships, generally reported to the taxpayer on
Form W-2.

 Most
employers issue a standardized version of Form W-2,
Wage and Tax Statement.
Form W-2( Wage and Tax Statement)
Form W-2( Wage and Tax Statement)
 FormW-2 is the document issued by the employer to
employee to report the wages and taxes withheld.

 ThisForm reports the federal wages, wages subject to

Social Security tax and Medicare tax and the wages
allocated for states.
Form W-2( Wage and Tax Statement)
 The
Form also reports the taxes withheld
towards Federal, state, Social security and
Medicare taxes.

 Employersare required to issue Form W-2

to the employees by January 31.

 Employees may need to pick up Form W-2

from their employers or obtain it
electronically.
 Form W-2( Wage and Tax
Statement)
Instances where the employer is not required to give the
Form W-2 to taxpayer.

 Theemployer is not required to give Form W-2 if the tax

payer performs household work in his/her employer's
home for less than $2,100 in cash wages during the
calendar year

 Household work is work done in or around an employer's

home.
Form W-2( Wage and Tax
Statement)
Some examplesof workers who do
household work are:
 Babysitters,
 Caretakers,
 House cleaning workers,
 Domestic workers,
 Drivers,
 Health aids,
 Housekeepers,
 Maids,
 Nannies,
 Private nurses, and Yard workers.
 Foreign income
 Ifthe tax payer is a U.S. citizen or Foreign National (Green
card or SPT cleared), he/she must report income from
sources outside the United States (foreign income) on
his/her tax return unless it’s exempt by U.S. law.
Foreign income
 Thisis applicable irrespective of taxpayer
residing inside or outside the United States
and whether or not he/she receive a Form W-
2, Wage and Tax Statement, or Form 1099
from the foreign payer.

 Thisapplies to earned income (such as

wages and tips) as well as unearned income
(such as interest, dividends, capital gains,
pensions, rents, and royalties).
Fringe Benefits
Fringe benefits refers to benefits received in
connection with the performance of tax
payer’s services and such benefits are included
in his/her income as compensation.

If fringe benefits is specifically excluded by US

law, then no need to report
De Minimis (Minimal) Benefits
 If
the employer provides employee a product or service
and the cost of it is so small that it would be
unreasonable for the employer to account for it.

 Then, the tax payer generally doesn’t have include its

value in his/her income
De Minimis (Minimal) Benefits
 Inmost cases, the taxpayer’s income does not include
the value of discounts provided at company cafeterias,
cab fares home when working overtime, and company
picnics.
De Minimis (Minimal) Benefits
 Ifthe employer gives the tax payer any gift, or other item
of nominal value at Christmas or other holidays, the tax
payer is not required to include the value of the gift in
his/her income.

 However, if the tax payer’s employer gives the tax payer

cash or a cash equivalent, the tax payer must include
it in his/her income.
Tips
 Alltip income (e.g., tip paid to waiter/waitress, hotel
housekeeper) is taxable, whether or not it is reported to
the employer.

 Ifindividuals receive more than $20 per month as tips at

one job and report their tip income to their employer, the
tips will be included in the amount on Form W-2, boxes 1,
5, and 7.
Tips
 To ensure that everyone reports their fair share of income from
tips, some employers have tip allocation programs. These
programs are approved by the IRS.
 If an employee reports tips to the employer that were less than
the designated share based on the employer’s formula, the
employer reports the difference as “allocated tips” and
includes it on the employee’s Form W-2.
 Allocated tips are shown separately in Form W-2, box 8. Social
Security and Medicare taxes are not withheld on allocated
tips. Allocated tips are not included in the amount in Form W-2,
box 1.
Wages, Salaries, Tips, etc.
(Line 2 of Form 1040)
 Allwages, salaries and tips the taxpayer
received for performing services as an
employee of an employer must be
included in tax payer’s gross income.

 Amounts withheld for taxes, like Federal

income tax, social security and Medicare
taxes, are considered "received" and
must be included in gross income in the
year they're withheld.
Form W-2( Wage and Tax Statement)
Taxpayers can have the following withholding taxes on
wages:

 Federal tax withheld (goes to the federal government

toward the tax which is eventually calculated on Form
1040, 1040NR)

 State tax withheld (goes to state government and on

state tax returns, e.g., New York State, California State
and so on)

 Local tax withheld (goes to local authorities such as

school district and/or city/municipal, for example New
York City)
Form W-2( Wage and Tax Statement)
 Social security tax: 6.2% of wages (limited by an
upper ceiling). It is commonly called
FICA. Taxpayers pay this to cover old age,
survivors and disability insurance. It is payable on
wages up to the maximum ceiling level of
wages.
Note
 Ifthe taxpayer has two different employers who do not
communicate with each other, the employers won’t
know whether the maximum ceiling has already been
reached.
 Hence, both may withhold up to the ceiling amount.
 This is called excess FICA and the taxpayer can then
claim the excess FICA back on Schedule 5 (Line 72) of
the tax return form as additional tax withheld.
(Remember to check for different employer names and
different employer ID numbers).

 (ReferSchedule 5, Line 74) – Excess Social Security tax

withheld.
 Medicare tax: The medicare tax is withheld at 1.45% of
medicare wages and it has no upper ceiling limit, so we
can never claim anything back. It is used to cover
hospital insurance.
Form W-2( Wage and Tax Statement)
 Additional medicare tax: Beginning tax year 1
January 2013, additional Medicare taxes is levied,
if the individual’s wages, compensation, or self-
employment income (together with that of his or
her spouse, if filing a joint return) exceeded the
threshold amount for the individuals filing status.

 The threshold amount for MFJ is US$250,000. (MFS-

US$125,000 and single, HOH, QW –US$ 200,000)
 Form W-2( Wage and Tax Statement)
 Based on the filing status, employer should withhold additional
Medicare Tax on the wages it pays to an employee in excess of
US$200,000 in a calendar year, irrespective of the individual filing
status. (0.9%)

 Anyshortfall of additional Medicare Tax or any excess additional

Medicare Tax paid can be paid or received by reporting the
same on the tax return. Form 8959 should be used to calculate
additional Medicare tax liability.

 (Refer Schedule 4 – Line 62) = says taxes from Form 8959

Form W-2( Wage and Tax Statement)

A W-2C may be issued to correct a W-2. It will only report

the sections that have changed from the W-2.
Taxable Interest (Line 2b of
Form 1040)
Interest Income
 Interest are un-earned income produced by investments

 Common sources of taxable interest income are savings

accounts, certificates of deposit (CDs), savings
certificates, U.S. government bonds, interest on insurance
proceeds, and loans that the taxpayer makes to others
Taxable Interest (Line 2b of Form 1040)
 Ifa taxpayer receives less than $10 as interest, the
financial institution might not issue Form 1099-INT.

 Even if the taxpayer did not receive Form 1099-INT, they

must still report all of their taxable interest income.
 There
are many sources of information about interest
income.

 Thetaxpayer should supply all Form(s) 1099- INT received

from institutions that pay interest.
Tax Exempt Interest (Line 2a of Form
1040)
Tax Exempt Interest (Line 2a of Form
1040)
 Certain types of interest are exempt from federal income
tax.

 However, they may be taxable by the state, and

sometimes the reverse is true; the interest may be taxable
on the federal return and exempt from state income tax
Interest from bonds issued by the following are exempt from
federal income tax:

1. State and political subdivisions (county or city)

2. District of Columbia
3. U.S. possessions and political subdivisions
4. Port authorities
5. Toll-road commissions
6. Utility service authorities
7. Community redevelopment agencies qualified volunteer fire
departments
Tax Exempt Interest (Line 2a of Form
1040)

Type of interest Federal State return

return
Government or
treasury bonds Taxable Nontaxable

Taxable if from another state

Nontaxable
State and local Nontaxable if from the
municipal bonds same state
Ordinary Dividends and Qualified
Dividends (Line 3b and 3a of Form
1040)
Ordinary Dividends and Qualified Dividends ( Line 3b and 3a
of Form 1040)

 Ordinary dividends are corporate distributions paid out of

the earnings and profits of the corporation.

 Dividends received on common or preference shares is

an ordinary dividend.

 Total ordinary dividends are reported on Form 1099-DIV.

Ordinary Dividends and Qualified Dividends ( Line 3b and 3a
of Form 1040)

 Qualified dividends are ordinary dividends that qualify for

lower, long-term capital gains tax rates.
Ordinary Dividends and Qualified Dividends ( Line 3b and 3a
of Form 1040)

 When a tax payer receives a dividend

payment from an investment, it will fall into
one of two categories for tax purposes:
qualified or ordinary.

 The tax rate on these two dividend

classifications varies.
Ordinary Dividends and Qualified Dividends ( Line 9a and 9b
of Form 1040)

 Qualifieddividends are the better of the two,

as they have lower tax rates -- but not all
dividends are eligible.
Ordinary Dividends and Qualified Dividends ( Line 3b and 3a
of Form 1040)

 Qualified dividends are listed in box 1b of the IRS Form

1099-DIV the tax payer receives, and they must meet
the following two main criteria:

1. Must be issued by a U.S. corporation, or by a foreign

corporation that readily trades on a major U.S.
exchange, or by a corporation incorporated in a U.S.
possession.

2. The shares must have been owned by the tax payer

for more than 60 days of the "holding period" -- which
is defined as the 121-day period that begins 60 days
before the ex-dividend date, or the day on which the
stock trades without the dividend priced in.
For example:
 If
a stock's ex-dividend date is Oct. 1, then the shares
must be held for more than 60 days in the period
between Aug. 2 and Nov. 30 of that year in order to
count as a qualified dividend.
Ordinary Dividends and Qualified Dividends ( Line 3b and 3a
of Form 1040)

And some types of dividends are automatically excluded

from being qualified dividends, even if they meet the other
requirements. These include (but are not limited to)
 Capital gains distributions
 Dividends on bank deposits
 Dividends held by a corporation in an Employee Stock
Ownership Plan (ESOP)
 Dividends paid by tax-exempt corporations
Tax Implications
 The difference between qualified and ordinary dividends
is quite substantial when the time comes to pay taxes. As
the name implies, ordinary dividends are taxed as
ordinary income, while qualified dividends are taxed at a
lower rate.
Tax Implications
Ordinary Qualified
income tax dividend tax
rate rate

10% 0%

12% 0%

22% 15%

24% 15%

32% 15%

35% 15%

37% 20%
Tax Implications
 Note:There is an additional 3.8% Net Investment Income
Tax (NIIT) for investors whose modified adjusted gross
income exceeds $200,000 ($250,000 for married
taxpayers filing jointly).
Benefits of qualified dividends
Consider an example of an investor in the 24% tax bracket who
owns $500,000 worth of dividend stocks, with an average yield
of 4% per year. This investor receives $20,000 in annual income
from dividends.

If those dividends were counted as ordinary income, this investor

would get hit with a $4,800 tax bill, dropping the dividend
income to $15,200. However, if these dividends met the
definition of "qualified," the tax bill would be reduced to $3,000.
In other words, the special rules for qualified dividends mean an
extra $1,800 in this investor's pocket.
IRA Distributions, Pensions and Annuities
(Line 4a and 4b of Form 1040)
IRA Distributions (Line 4a and 4b of Form 1040)

 An IRA is a personal savings plan that gives tax advantages for

setting aside money for retirement.
 Two tax advantages of an IRA are that:
1. Contributions the taxpayer makes to an IRA may be fully or
partially deductible, depending on which type of IRA he/she
has and on the circumstances; and
2. Generally, amounts in his/her IRA (including earnings and
gains) aren’t taxed until distributed. In some cases, amounts
aren’t taxed at all if distributed according to the rules.
Traditional IRAs
A traditional IRA is any IRA which is not Roth IRA or a SIMPLE IRA. The
following are two advantages of a traditional IRA.

 The taxpayer can (claim deduction) deduct some or all of his

contributions.

 Generally, amounts in the taxpayer’s IRA account (contribution +

earnings and gains), are not taxed until they are distributed.
Traditional IRAs
One can open and make contributions to a traditional IRA if:

1. The taxpayer himself (or, if he/she file a joint return, his/her spouse)
received taxable compensation during the year, and

2. The tax payer wasn’t aged 701/2 by the end of the year.
Roth IRAs
A Roth IRA is an individual retirement plan. Unlike a
traditional IRA, the tax payer cannot deduct contributions
made to a Roth IRA. But, if the tax payer satisfies the
requirements, qualified distributions are tax free.

 Contributions can be made to the tax payer’s Roth IRA

after the tax payer reaches age 701/2 and he/she can
leave amounts in his/her Roth IRA as long as he/she lives.
Comparing Roth and Traditional IRAs
Roth IRA
2018 Contribution Limits $5,500; $6,500, if age 50 or older
2018 Income Limits Eligible are single tax filers with modified AGIs
of less than $135,000 (phase-out begins at
$120,000); married couples filing jointly with
modified AGIs of less than $199,000 (phase-
out begins at $189,000).
Tax Treatment No tax break for contributions; tax-free
earnings and withdrawals in retirement.
Traditional IRA
$5,500; $6,500, if age 50 or older
Anyone with earned income can
contribute, but tax deductibility is based on
income limits and participation in an
employer plan.
Tax deduction in contribution year; ordinary
income taxes owed on withdrawals.
Comparing Roth and Traditional IRAs
Withdrawal Rule Contributions can be withdrawn at
any time, tax-free and penalty
free. Five years after the first
contribution and age 59½,
earnings withdrawals are tax-free,
too. No withdrawals required
during account holder’s lifetime;
beneficiaries can stretch
distributions over many years.
Extra Benefits After five years, up to $10,000 of
earnings can be withdrawn
penalty-free to cover first-time
home-buyer expenses. Qualified
education and hardship
withdrawals may be available
without penalty before the age
limit and five-year waiting period.
These may be taxed.
Withdrawals are penalty free
beginning at age 59½. Distributions
must begin at age 70½;
beneficiaries pay taxes on
inherited IRAs.
Contributions lower taxpayer’s
AGI, potentially qualifying him or
her for other tax incentives. Up to
$10,000 penalty-free withdrawals
to cover first-time home-buyer
expenses, but taxes due on
distributions. Qualified education
and hardship withdrawals also
available
Extra Benefits & Considerations
Traditional IRAs:
 Contributions to Traditional IRAs generally lower the
taxable income in the contribution year. That lowers the
taxpayers adjusted gross income, helping him/her to
qualify for other tax incentives he/she wouldn’t otherwise
get, such as the child tax credit or the student loan
interest deduction.
Extra Benefits & Considerations
Roth IRAs:
 Roth contributions (but not earnings) can be withdrawn
penalty- and tax-free at any time, even before age 59½.
 Roth IRAs can be invested in virtually anything the tax
payer wants: index funds, lifecycle funds, individual
stocks, or many alternative investments.
Extra Benefits & Considerations
 Both Traditional and Roth IRAs provide generous tax
breaks. But it’s a matter of timing when he/she get to
claim them.
 Traditional IRA contributions are tax-deductible on both
state and federal tax returns for the year the tax payer
makes the contribution; withdrawals in retirement are
taxed at ordinary income tax rates.
 Roth IRAs provide no tax break for contributions, but
earnings and withdrawals are generally tax-free
Pensions and Annuities

 Retirement funds that are reported on Line 4b are:

 401(k) plans
 403 (b) plans
 Civil service retirement plan (CSRS)
 Foreign pension plans
Social Security Benefits (Lines 5a and 5b of Form
1040)
Social Security Benefits (Lines 5a and 5b
of Form 1040)
 The tax payer needs to pay taxes on a portion of their
Social Security benefits.
 These benefits include monthly retirement, disability, and
survivor payments.

 Whether or not the tax payer will owe taxes on his/her

Social Security benefits depends on his/her filing status
and his/her income level.
Social Security Benefits (Lines 5a and 5b
of Form 1040)
 Although many people find that they aren’t required to
pay taxes on their benefits, it is possible that up to 85% of
the Social Security benefits the taxpayers receive may be
considered taxable income.

 TheSocial Security Administration will mail the tax payer

Form SSA-1099 each January, which tells the tax payer
exactly how much he/she received in Social Security
benefits during the previous year.
Taxable Portion of the tax payers Social
Security Benefit
To determine if any of the tax payer’s benefits are taxable, the tax payer should
compare the “base amount” (exempted amount) for his/her filing status with
the sum of:
 One-half of the tax payer’s Social Security benefits
+
 All of the other income (including tax-exempt interest)

The base amount (also referred to as the “base exemption”) for each filing
status is as follows:
 $25,000 for single, head of household, or qualifying widow(er) filers
 $25,000 for married couples filing separately (who lived apart for the entire
year)
 $0 for married couples filing separately (who lived together at any time during
the tax year)
 $32,000 for married couples filing jointly
Example
 Forexample, if the tax payer’s other income plus one-half
of his/her Social Security benefits is less than $25,000 (or
$32,000 for married joint filers), he/she will not have to pay
taxes on his/her benefits
 Form SSA-1099. If taxpayers received Social Security
benefits in 2018, they should receive a Form SSA-1099,
Social Security Benefit Statement, showing the amount of
their benefits
 Only Social Security. If Social Security was a taxpayer’s
only income in 2018, their benefits may not be taxable.
They also may not need to file a federal income tax
return. If they get income from other sources, they may
have to pay taxes on some of their benefits.