31
CALCPA Income
Tax Strategies for
Faculty
Presented by Susan
Barney, CPA
32
33
LO3-4
3-2
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.
35
Examples of Gross Income
Items
Alimony
Awards
Bonuses
Business Income
Commissions
Debts Forgiven
Dividends
Interest
Gains from sale of property
Gambling Winnings
Hobby Income
Partnership Income
Prizes
Rents
Royalties
Salaries
LO3-6
3-3
Exclusions from Gross Income

Exclusions from gross income must be
specifically allowed by statute.
Examples of exclusions from gross income:

Gifts, bequests and inheritances
Life
insurance proceeds paid by reason of
death
Interest
on state and local government
obligations
Lodging
and meals furnished for the
convenience of the employer
Employee
discounts
Tuition
reductions granted to employees
of educational institutions
Accident
and health benefits
37
Adjusted Gross Income (AGI)
2 Types of Deductions
Deductions for AGI =
Above the Line
Deductions
Examples:





Part of the selfemployment 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)
38
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.
39
Timing of Income
Recognition
Accounting
Method
Cash Receipts
Method
Income is
recognized in
the year of
actual or
constructive
receipt ,
regardless of
whether the
income was
earned in that
year.
Accrual Method
Income is
recognized in
year in which
it is earned,
regardless of
when the
income is
collected.
ORDINARY INCOME vs.
CAPITAL GAINS
Ordinary income is taxed
at higher tax rates
•Nonqualified Deferred
Compensation
•Business Income
•If employed, defer
compensation to future
years – no current year
deduction for employer.
•If self-employed,
deposit income received
after year-end.
Capital gains are
taxed at lower tax
rates
Sale of capital asset:
Stocks and bonds
Partnership interest
Artwork
Harvesting losses –
selling capital assets
at a loss to offset
capital gains
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Timing of Expense
Recognition
Accounting
Method
Cash
Method
Expenses
are
deductible
only when
they are
actually paid
with cash or
other
property.
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.
LO3-12
3-2
Prepaid Expenses for Cash Basis
Taxpayers
Business Expenses
Property, 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 Expenses
Pay 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.
RETIREMENT
ACCOUNTS

LO3-13
3-2
Contribution Limits
Year
401(k)/403(b)
Catch-Up
Maximum
Maximum
Contribution
Allocation
(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
LO3-14
3-2
LO3-15
3-2
LO3-16
3-2
317
TAX CREDITS
CREDIT
Child And
Dependent
Care
Credit
COMPUTATION
•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.
COMMENTS
•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.
318
TAX CREDITS
(Continued)
CREDIT
Child Tax
Credit
COMPUTATION
•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.
COMMENTS
•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 lowto-moderateincome families
with children.