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Taxable vs. Non-Taxable Income

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Generally, most income you receive is considered taxable. However, the tax code is riddled with various exceptions where certain types of income are partially taxed or not taxed at all.

For instance, here is a non-exclusive list of common examples of types of income usually excluded from taxable income:

  • Adoption Expense Reimbursements for qualifying expenses
  • Child support payments
  • Gifts, bequests and inheritances
  • Workers’ compensation benefits
  • Meals and Lodging for the convenience of your employer
  • Compensatory Damages awarded for physical injury or physical sickness
  • Welfare Benefits
  • Cash Rebates from a dealer or manufacturer

The most complicated situations arise where may or may not be included in your taxable income are, depending on your situation. Life insurance is a good example. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. On the other hand, life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.

Scholarships and Fellowship Grants also possess this dual nature. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship; but, the money used for room and board do not qualify.

Remember, even a non-cash income usually should be included in the taxable income. The most common example of this is bartering. Bartering is basically an exchange of property or services between the parties. The fair market value of goods and services exchanged is fully taxable and must be included as income of both parties.

Usually, the rest of the common types of income – such as wages, salaries, tips and unemployment compensation – are fully taxable and must be included in your income unless it is specifically excluded by law.

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Determining what types of income should be included in or excluded from your taxable income can be a complicated, highly fact-dependent process. Sherayzen Law Office can help you determine whether your income is taxable. Contact us NOW to discuss your case with an experienced Minneapolis tax attorney.

What is Closing Agreement

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Closing agreements constitute an important part of tax representation and tax planning. A “closing agreement” is a final agreement between the IRS and the taxpayer on a specific issue or liability. Closing agreements are entered into pursuant to IRC Section 7121.

Usually, closing agreements may be entered into when it is beneficial to permanently and conclusively close a pending matter. However, a taxpayer may use other good reasons for this type of an agreement to convince the IRS. In both cases, however, it should be demonstrated that the agreement will not prejudice the government’s interests.

If a transaction is eligible for a letter ruling, the taxpayer may request a closing agreement with or in lieu of a letter ruling. Sometimes, it is the IRS that may impose closing agreement as a condition for the issuance of a letter ruling.

Sherayzen Law Office offers full IRS representation, including handling your case through a private letter ruling request and entering into a closing agreement, where appropriate.

If you have a case pending before the IRS or you are unsure about the tax consequences of a business transaction, call NOW to discuss your case with an experienced Minneapolis tax lawyer!

Understanding Citations of Treasury Regulations

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Understanding how to cite Treasury Regulations is crucial to being able to find the regulations relevant to a tax case.  This is why I devote this brief essay to explaining the location and basics of citation of Treasury Regulations.

Treasury Regulations are located in Title 26 of the Code of Federal Regulations (“C.F.R.”).  This corresponds to title 26 of the United States Code.

The overall form of citation is as follows: C.F.R. part number, a decimal point, a Code section number, a dash, and a number of further subdivisions.  The “C.F.R. part number” basically indicates the general nature of the regulations – i.e. to what area is the regulation related.  The numbers are assigned to areas in the following way: “1″ relates to income tax, “20″ relates to estate tax, “25″ relates to gift tax; “31″ relates to employment tax (withholding), “301″ relates to administration and procedure, and “601″ relates to the Commissioner’s rules.

Let’s look at a specific example and try to decipher what it says at according to the general form described above: Treas. Reg. § 1.162-1.  “Treas. Reg.” is a common form of abbreviation of “Treasury Regulations”; “1″ is a C.F.R. part number which tells the reader that this regulation relates to the income tax;  “162″ is a Code section number which specifically discusses the deduction of business expenses; “ dash 1″ indicates a citation to the first subdivision of the regulation.  In sum, Treas. Reg. § 1.162-1 refers directly to a first subdivision of the regulation with respect to business expense deduction from income tax.

The ability to quickly read, understand, and find a relevant treasury regulation is just one of the many skills that an experienced tax attorney needs to have.

Higher Education Tax Credits

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This is an education tax credit update from a Minneapolis tax lawyer.  American Opportunity Tax Credit and the Lifetime Learning Tax Credit are two federal tax credits designed to help eligible taxpayers offset their higher education expenses.

To qualify for either credit, a taxpayer must pay postsecondary tuition and fees for himself, spouse or dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.

Only one of the credits is available in a single tax year per each student. This means that, in a given tax year, a taxpayer cannot claim both credits for the same student’s college expenses. If a taxpayer pays college expenses for two or more students in the same year, then he can choose to take credits on a per-student, per-year basis. For example, the taxpayer can claim the American Opportunity Credit for a sophomore daughter and the Lifetime Learning Credit for a senior son.

Let’s look closer at some of the key facts about American Opportunity Tax Credit and Lifetime Learning Tax Credit.

The American Opportunity Credit

The credit is available for students enrolled in a post-secondary education program in pursuit of an undergraduate degree or other recognized educational credential, but only for the first four years. The student must be enrolled at least half time for at least one academic period. Qualified expenses include tuition and fees, coursed related books supplies and equipment.

The credit can be up to $2,500 per eligible student. The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. Moreover the credit is refundable; this means that a taxpayer may be able to receive up to $1,000 in refund even if he owes no taxes.

Lifetime Learning Credit

Unlike the American Opportunity Credit, the Lifetime Learning Tax Credit is available for all years of postsecondary education and for courses to acquire or improve job skills. This also means that the student does not need to be studying in pursuit of a degree or other recognized education credential. Qualified expenses include tuition and fees, course related books, supplies and equipment.

The credit can be up to $2,000 per eligible student. The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return. This tax credit, however, is not refundable and is limited to the amount of tax a taxpayer must pay on his return.

If you have questions with respect to any tax credits, contract us NOW to discuss your case with an experienced Minneapolis tax attorney.

Small Business Health Care Tax Credit

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This is a Small Business Health Care Tax Credit update from a tax attorney in Minneapolis.

Generally, the Small Business Health Care Tax Credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

The credit can be claimed by small businesses during the tax years starting 2010 through 2013 and for any two years after that. The maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Since the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

Eligible small businesses should first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on its income tax return.

If you have any questions with respect to eligibility or calculation of your small business health care tax credit, contact Sherayzen Law Office to discuss your case with an experienced Minneapolis business tax attorney!