Usitt 2

INTERNATIONAL TAXATION
COMPONENTS OF FORM 1040
Session 9 (12th Oct 2021)
Arvind L N
Department of Management Studies
TOPICS COVERED
i. Compensation, Basics of Income Sourcing &
ii. W-2 – salaries, wages, tips etc. and
iii. Taxes withheld by employer

COMPENSATION
Various types of employee compensation, includes

• fringe benefits,
• retirement plan contributions,
• stock options, and
• restricted property. (if you receive property for your services, you must include its fair market value in
your income in the year you receive the property.)
WAGES, SALARIES, TIPS, ETC. (LINE 1 OF FORM 1040)
Earned income is any income received for work, such as wages or business/self
employment income.
Form 1040, 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
Form W-2 is the document issued by the employer to employee to report the wages and
taxes withheld.
Form W-2 shows your total pay and other compensation and the income tax, social security
tax, and Medicare tax that was withheld during the year. Include the federal income tax
withheld.
In addition, Form W-2 is used to report any taxable sick pay you received and any income
tax withheld from your sick pay. The Form also reports the taxes withheld towards Federal,
state, Social security and Medicare taxes.
Employers are 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.
In some instances, the employer isn’t required to give the taxpayer Form W-2.
The employer isn’t required to give the taxpayer a Form W-2 if the taxpayer performs
household work in his/her employer's home for less than $2,200 in cash wages during the
calendar year and he/she have no federal income taxes withheld from his/her wages.
Household work is work done in or around an employer's home.
Some examples of workers who do household work are:

Babysitters, Caretakers, House cleaning workers, Domestic workers, Drivers, Health aides,
Housekeepers, Maids, Nannies, Private Nurses, and Yard workers.
WITHHOLDING ON WAGES
Taxpayers can have the following withholding taxes on wages:

a. Federal tax withheld - Goes to the federal government toward the tax, which is
eventually calculated on Form 1040, 1040NR
b. State tax withheld (goes to state government and on state tax returns, e.g., New York
State, California State and so on)
WITHHOLDING ON WAGES
Taxpayers can have the following withholding taxes on wages:

c. Local tax withheld (goes to local authorities such as school district and/or
city/municipal, for example New York City)
d. Social security tax: 6.2% of wages. 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.
EXCESS FICA
If the 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 3 of the tax return form as
additional tax withheld.
FICA - Federal Insurance Contribution Act.

Session 9 (16th Oct 2021)
Arvind L N
FRINGE BENEFITS
Fringe benefits received in connection with the performance of your services are included
in your income as compensation unless you pay fair market value for them or they’re
specifically excluded by law.
Refraining from the performance of services is treated as the performance of service.

FOREIGN INCOME
If the taxpayer is a U.S. citizen or resident alien, 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.
This is 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.
This applies to earned income (such as wages and tips) as well as unearned income (such as
interest, dividends, capital gains, pensions, rents, and royalties).
DE MINIMIS (MINIMAL) BENEFITS
If your employer provides you with a product or service and the cost of it is so small that it
would be unreasonable for the employer to account for it, you generally don’t include its
value in your income.
In most cases, don’t include in your income the value of discounts at company cafeterias,
cab fares home when working overtime, and company picnics.
However, if the taxpayer’s employer gives the taxpayer cash or a cash equivalent, the
taxpayer must include it in his/her income.
TIPS
All tip income (e.g., tip paid to waiter/waitress, bellhop, or motel/hotel housekeeper) is
taxable, whether or not it is reported to the employer.
The tips will be included in the amount on Form W2, boxes 1, 5, and 7.
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.
ALLOCATED 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.
TAXABLE INTEREST (Line 2b of Form 1040)
Unearned income is any income produced by investments, such as interest on savings,

dividends on stocks, or rental income.
Common sources of taxable interest income are checking and savings accounts, certificates
of deposit (CDs), savings certificates, U.S. government bonds, interest on insurance
proceeds, and loans that the taxpayer makes to others.
Some savings and loans, credit unions, and banks call their distributions “dividends.” These
distributions are really interest and are reported correctly as interest on Form 1099-INT.
If a taxpayer received less than $10 in 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. Ask the taxpayer to supply
all Form(s) 1099- INT from institutions that pay interest.
Some institutions issue a year-end statement with the title “In lieu of Form 1099-INT or
Form 1099-DIV” rather than preparing multiple documents.
ORIGINAL ISSUE DISCOUNT
Original issue discount (OID) is a form of interest. You generally include OID in your income
as it accrues over the term of the debt instrument, whether or not you receive any
payments from the issuer.
A debt instrument generally has OID when the instrument is issued for a price that is less
than its stated redemption price at maturity.
ORIGINAL ISSUE DISCOUNT
OID is the difference between the stated redemption price at maturity and the issue price.
All debt instruments that pay no interest before maturity are presumed to be issued at a
discount.
Zero coupon bonds (ZCB) are one example of these instruments.

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:
• State and political subdivisions (county or city)
• District of Columbia
• U.S. possessions and political subdivisions
• Port authorities
Interest from bonds issued by the following are exempt from federal income tax:
• Toll-road commissions
• Utility service authorities
• Community redevelopment agencies
• qualified volunteer fire departments
• Amounts indicated on broker statements as tax-exempt interest or tax-exempt dividends

Type of interest Federal return State return
Government or treasury bonds Taxable Non-taxable
State and local municipal bonds Non-taxable Taxable if from another state
Nontaxable if from the same state
TAX EXEMPT 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. Any dividend received on common or preferred stock is an ordinary dividend
unless the paying corporation states otherwise.
Total ordinary dividends are reported on Form 1099-DIV.
Qualified dividends are ordinary dividends that qualify for lower, long-term capital gains
tax rates.
Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary
dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate
rather than at higher tax rate for an individual's ordinary income.
In short, Qualified dividends are dividend payments that are taxed at the long-term capital
gains rate, which is lower than the ordinary income tax rates.
When a taxpayer 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.
Qualified dividends are the better of the two, as they have lower tax rates -- but not all
dividends are eligible.
Criteria for Qualified dividends
• 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.
• The shares must have been owned by the taxpayer 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.
Qualified dividends
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.
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

Introduction to US Taxation &

Legal System
THANK YOU
Arvind L N
Session 10 (21ST Oct 2021) - Revision
Arvind L N
Session 11 (09th Nov 2021)
Arvind L N
TOPICS COVERED
i. IRA Distributions
IRA Distributions (Line 4a and 4b of Form 1040)
Individual Retirement Arrangements (IRAs)
(AKA Original IRA, Ordinary or Regular IRA) is referred to as a “traditional IRA.”
A traditional IRA is any IRA that isn't a Roth IRA or a SIMPLE IRA.
Two advantages of a traditional IRA are:
• You may be able to deduct some or all of your contributions to it, depending on your
circumstances; and
• Generally, amounts in your IRA, including earnings and gains, aren't taxed until they are
distributed.
Who Can Open a Traditional IRA?
You can open and make contributions to a traditional IRA if you (or, if you file a joint return,
your spouse) received taxable compensation during the year.
What is compensation ?
Generally, compensation is what you earn from working. Compensation includes wages,
salaries, tips, professional fees, bonuses, and other amounts you receive for providing
personal services.
What is compensation ?
The IRS treats as compensation any amount properly shown in box 1 (Wages, Salaries, tips,
other compensation) of Form W-2, Wage and Tax Statement.
Scholarship and fellowship payments are compensation for this purpose only if shown in
box 1 of Form W-2.
Compensation also includes commissions and taxable alimony and separate maintenance
payments.
What is compensation ? For Self employment Income
If you are self-employed (a sole proprietor or a partner), compensation is the net earnings
from your trade or business reduced by the total of:
• The deduction for contributions made on your behalf to retirement plans, and
• The deductible part of your self-employment tax.

What isn’t compensation ?

• Earnings and profits from property, such as rental income, interest income, and dividend income.
• Pension or annuity income.
• Deferred compensation received (compensation payments postponed from a past year).
• Income from a partnership for which you don't provide services that are a material income-
producing factor.
• Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b.
• Any amounts (other than combat pay) you exclude from income, such as foreign earned income
and housing costs.
When and how can a Traditional IRA be opened ?

You can open a traditional IRA at any time. However, the time for making contributions for
any year is limited.
Contributions must be made by due date. Contributions can be made to your traditional
IRA for a year at any time during the year or by the due date for filing your return for that
year, not including extensions.
Designating year for which contribution is made.

Contributions not required. You don't have to contribute to your traditional IRA for every
tax year, even if you can.
Session 12 (11th Nov 2021)
Arvind L N
TOPICS COVERED
i. IRA Distributions
ii. Pensions and Annuity
iii. Social Security Benefits

How Much Can You Deduct?
Generally, you can deduct the lesser of:
• The contributions to your traditional IRA for the year, or
• The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if it applies).
However, if you or your spouse were covered by an employer retirement plan, you may not
be able to deduct this amount.
General limit.
For 2020, the most that can be contributed to your traditional IRA is generally the smaller
of the following amounts.
• $6,000 ($7,000 if you are 50 or older).
• Your taxable compensation (defined earlier) for the year.
This is the most that can be contributed regardless of whether the contributions are to one
or more traditional IRAs or whether all or part of the contributions are nondeductible.
Example 1. Betty, who is 34 years old and single, earned $24,000 in 2020. Her IRA
contributions for 2020 are limited to ?
$6,000.
Example 2. John, an unmarried college student working part time, earned $3,500 in 2020.
His IRA contributions for 2020 are limited to ?
$3,500, the amount of his compensation.


Kay Bailey Hutchison Spousal IRA. In the case of a married couple with unequal compensation
who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less
compensation is limited to the lesser of the following amounts.
1. $6,000 ($7,000 if the spouse with the lower compensation is age 50 or older in 2020).
2. The total compensation includible in the gross income of both spouses for the year reduced by
the following three amounts:
• The IRA deduction for the year of the spouse with the greater compensation.
• Any designated non-deductible contribution for the year made on behalf of the spouse with
the greater compensation.
• Any contributions for the year to a Roth IRA on behalf of the spouse with the greater
compensation.

Roth IRAs are similar to traditional IRAs, with the biggest distinction between the two being
how they’re taxed.
Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. But
once you start withdrawing funds, the money is tax-free.
Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get
a tax deduction on your contribution and pay income tax when you withdraw the money
from the account during retirement.

Roth IRAs are best when you think your taxes will be higher in retirement than they are
right now.
Differences
ROTH IRA withdrawal Rules
With a Roth IRA, contributions are not tax-deductible, but earnings can grow tax-free, and
qualified withdrawals are tax- and penalty-free.
Roth IRA withdrawal and penalty rules vary depending on your age and how long you've
had the account and other factors.
ROTH IRA withdrawal Rules
Before making a Roth IRA withdrawal, taxpayer must keep in mind the following guidelines,
to avoid a potential 10% early withdrawal penalty:
• Withdrawals must be taken after age 59½.
• Withdrawals must be taken after a five-year holding period.
• There are exceptions to the early withdrawal penalty, such as a first-time home purchase,
college expenses, and birth or adoption expenses.
Pensions and Annuities (Line 5a and 5b of Form 1040)
• 401(k) plans
• 403(b) plans
• Civil Service Retirement System (CSRS)
• Federal Employees' Retirement System (FERS)
• Foreign pension plans
• Governmental 457(b) plans
• Thrift Savings Plan
Pensions and Annuities (Line 5a and 5b of Form 1040)
What Is a 401(k) Plan?

A 401(k) plan is a retirement savings plan offered by many American employers that has tax
advantages to the saver.
It is named after a section of the U.S. Internal Revenue Code.
The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid
directly into an investment account.
Social Security Benefits (Line 6a and 6b of Form 1040)
The taxpayer needs to pay taxes on a portion of their Social Security benefits.
These benefits include monthly retirement, disability, and survivor payments — but not
supplemental security income (SSI) payments, which are not subject to taxation.
Whether or not the taxpayer will owe taxes on his/her Social Security benefits depends on
his/her filing status and his/her income level. 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.
SUPPLEMENTAL SECURITY INCOME (SSI)
Supplemental Security Income (SSI) is a Federal income supplement program funded by

general tax revenues (not Social Security taxes):
• It is designed to help aged, blind, and disabled people, who have little or no income; and
• It provides cash to meet basic needs for food, clothing, and shelter.
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.
The Social Security Administration will mail the taxpayer Form SSA-1099 each January,
which tells the taxpayer exactly how much he/she received in Social Security benefits
during the previous year.
The taxpayer will need this information to file his/her taxes and to calculate how much of
his/her Social Security benefits are taxable.
To find out whether any of your benefits may be taxable, compare the base amount for
your filing status with the total of:
1. One-half of your benefits; plus
2. All your other income, including tax-exempt interest.

Base Amount: Your base amount (AKA ”base exemption”) is:

• $25,000 if you are single, head of household, or qualifying widow(er);
• $25,000 if you are married filing separately and lived apart from your spouse for all of
2020;
• $32,000 if you are married filing jointly; or
• $0 if you are married filing separately and lived with your spouse at any time during 2020.
To find out whether any of your benefits may be taxable, compare the base amount for
your filing status with the total of:
1. One-half of your benefits; plus
2. All your other income, including tax-exempt interest.

Exclusions. When making this comparison, don’t reduce your other income by any
exclusions for:
• Interest from qualified U.S. savings bonds,
• Employer-provided adoption benefits,
• Foreign earned income or foreign housing, or
• Income earned by bona fide residents of American Samoa or Puerto Rico

Example. You and your spouse (both over 65) are filing a joint return for 2020 and you both
received social security benefits during the year. In January 2021, you received a Form SSA-
1099 showing net benefits of $5,700 in box 5. Your spouse received a Form SSA-1099
showing net benefits of $2,500 in box 5. You also received a taxable pension of $26,800 and
interest income of $700. You didn’t have any tax-exempt interest income. Your benefits
aren’t taxable for 2020 because your income, isn’t more than your base amount ($32,000)
for married filing jointly.
Compare the amount on line E to your base amount for your filing status. If the amount on
line E equals or is less than the base amount for your filing status, none of your benefits are
taxable this year. If the amount on line E is more than your base amount, some of your
benefits may be taxable
Even though none of your benefits are taxable, you must file a return for 2020 because
your taxable gross income ($27,500) exceeds the minimum filing requirement amount for
your filing status.
Introduction to US Taxation &

Legal System
THANK YOU
Arvind L N
Session (23rd Nov 2021)
Arvind L N
TOPICS COVERED
i. Capital gain or (Loss)

Capital gain or (Loss) (Line 7)
The taxpayer will have a capital gain or loss if he/she sells or exchanges a capital asset.
The taxpayer also may have a capital gain if the taxpayer’s section 1231 transactions result
in a net gain.
Section 1231 transactions are sales and exchanges of real or depreciable property held
longer than 1 year and used in a trade or business.
Meaning of Capital Assets
Almost everything the taxpayer owns and uses for personal purposes, pleasure, or
investment is a capital asset.
The following items are examples of capital assets.
• Stocks and bonds.
• A home owned and occupied by the taxpayer and his/her family.

Meaning of Capital Assets
• Household furnishings.
• A car used for pleasure or commuting.
• Coin or stamp collections.
• Gems and jewellery, Gold, silver, and other metals.
• Timber grown on taxpayer’s home property or investment property, even if the taxpayer
makes casual sales of the timber.
Personal-use property
Generally, property held for personal use is a capital asset.
Gain from a sale or exchange of that property is a capital gain.
Loss from the sale or exchange of that property is not deductible.

Investment property
Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its
sale or exchange is a capital gain or loss.
OVERVIEW OF SCHEDULES ATTACHED TO FORM 1040
Schedule 1: Additional Income and Adjustments to Income
Taxable Refunds, Credits, or Offsets of State and Local Income Taxes (Line1 of Schedule 1)
Taxpayers who receive a refund of state or local income taxes may receive Form 1099-G
listing their refund amount(s).
• Taxpayers who claimed the standard deduction on the tax return for the year they
received a refund of state or local income taxes do not have to include the refund in their
taxable income.
Alimony Received (Line 2 of Schedule 1)
Alimony is a legal obligation on a person to provide financial support to their spouse before
or after marital separation or divorce. The obligation arises from the divorce law or family
law of each country.
Alimony Received (Line 2 of Schedule 1)
If the taxpayer received any payments from his/ her spouse or former spouse under a
divorce or separation instrument signed prior to December 31, 2018, he/she liable to pay
tax on it. Under the Tax reforms, Alimony received based on the divorce or separation
instrument signed after December 31, 2018 are not taxable and also, the payor can’t claim
the deduction.
Business Income or (Loss) (Line 3 of Schedule 1)
Business income may include income received from the sale of products or services. For
example, fees received by a person from the regular practice of a profession are business
income. Rents received by a person in the real estate business are business income. A
business must include in income payments received in the form of property or services at
the fair market value of the property or services.
Business Income or (Loss) (Line 3 of Schedule 1)
Use Schedule C (Form 1040) to report income or (loss) from a business the taxpayer
operated or a profession he/she practiced as a sole proprietor. An activity qualifies as a
business if the primary purpose for engaging in the activity is for income or profit and the
taxpayer is involved in the activity with continuity and regularity. For example, a sporadic
activity or a hobby does not qualify as a business
Other Gains or (Losses) (Line 4 of Schedule 1)
Line 4 of Schedule 1 is used as a “catch-all” line item designed to ensure all true income is
reported. Taxpayers realizing gains (or losses) from any of the following three areas must
file a Form 4797 and, thus, will need to list the total gains (or losses) on Schedule 1 Line 4:
Other Gains or (Losses) (Line 4 of Schedule 1)
Sales or Exchanges of Property Used in a Trade or Business (and Involuntary Conversions

from Other than Casualty or Theft) -Recapturing of depreciation and certain other items
that must be reported as ordinary income on the disposition of property. -Other various
gains (or losses) from preferred stock ownership, certain deferred gains, investment in a
small company, and more. If the same asset was used for both business and personal
purposes, the taxpayer must allocate any gain between Form 4797 and Schedule D.
Supplemental Income
The IRS lists several types of income on the first page of Form 1040. Wages and salaries are
first, listed on Line 1. Then other types of income, including income from interest and
dividends and from a small business (filed on Schedule C and entered on Line 3 of the
Schedule 1) are included.
Supplemental Income
Line 5 of the Schedule 1 asks for other types of income, from "Rental real estate, royalties,
partnerships, S corporations, trusts, etc." This is supplemental income, and it is first entered
and calculated on Schedule E and then entered on the tax return on this line. Other types of
supplemental income from Schedule E are entered on other lines of the personal tax
return.
Farm Income or Loss (Line 6 of Schedule 1)
The IRS considers the taxpayer to be in the business of farming if both of these apply:
• The taxpayer cultivates, operates, or manages a farm.
• The taxpayer’s goal is to make a profit or gain as either the owner or a tenant.
Farming includes:
• Cultivating land
• Operating
• Dairy farms
• Fruit farms
• Nurseries
• Orchards
• Poultry farms
Farming includes:
• Poultry farms
• Fish farms
• Plantations
• Ranches
• Stock farms
• Truck farms
• Selling crop shares  Breeding and raising fur-bearing animals that aren’t dogs, cats, or
other pets
Farming includes:
• Selling crop shares
• Breeding and raising fur-bearing animals that aren’t dogs, cats, or other pets
Unemployment Compensation (Line 7 of Schedule 1)
The taxpayer must include in income all unemployment compensation the taxpayers
receive. The taxpayer should receive a Form 1099-G showing in box 1 the total
unemployment compensation paid to him/her.
Types of unemployment compensation
Unemployment compensation generally includes any amount received under an

unemployment compensation law of the United States or of a state. It includes the
following benefits.
• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust
Fund.
• State unemployment insurance benefits.

Types of unemployment compensation
• Railroad unemployment compensation benefits.
• Disability payments from a government program paid as a substitute for unemployment

compensation. (Amounts received as workers' compensation for injuries or illnesses
aren’t unemployment compensation.
• Unemployment assistance under the Disaster Relief and Emergency Assistance Act.
• Unemployment assistance under the Airline Deregulation Act of 1978 Program

Other Income (Line 8 of Schedule 1)
Line 8 is used to report any taxable income not reported elsewhere on his/her return or
other schedules. List the type and amount of income. If necessary, include a statement
showing the required information. Examples of income to report on line 8 include the
following:
• Most prizes and awards.
• Gambling winnings, including lotteries, a lump-sum payment from the sale of a right.
Adjustment to income
Adjustment to income reduces the taxpayer’s adjusted gross income. By reducing the
adjusted gross income, this also lowers the taxable income and hence, lowers the
taxpayer’s tax.
Reducing adjusted gross income (AGI) has a ripple effect, impacting other parts of the
taxpayer’s tax return that are calculated based on the taxpayer’s AGI.
Educator Expenses
If you were an eligible educator in 2020, you can deduct up to $250 of qualified expenses
you paid in 2020 as an adjustment to gross income on Schedule 1 (Form 1040), line 10,
Rather than as a miscellaneous itemized deduction (2% of AGI).
If you and your spouse are filing jointly and both of you were eligible educators, the
maximum deduction is $500. However, neither spouse can deduct more than $250 of his or
her qualified expenses.
Educator Expenses
Educator expenses include amounts paid or incurred after March 12, 2020, for personal
protective equipment, disinfectant, and other supplies used for the prevention of the
spread of coronavirus.
An eligible educator is a kindergarten through grade 12 teacher, instructor, counsellor,

principal, or aide who worked in a school for at least 900 hours during a school year.
Educator Expenses
Qualified expenses include ordinary and necessary expenses paid:
• For professional development courses the taxpayer has taken related to the curriculum or
• In connection with books, supplies, equipment (including computer equipment, software,

and services), and other materials used in the classroom.
Educator Expenses
An ordinary expense is one that is common and accepted in the taxpayer’s educational
field.
A necessary expense is one that is helpful and appropriate for his/her profession as an
educator.
An expense doesn’t have to be required to be considered necessary.
Qualified expenses don’t include expenses for home schooling or for non-athletic supplies
for courses in health or physical education.
Business Expenses of Reservists, Performing Artists, and
Fee Basis Government Officials
It includes the following deductions:
• Certain business expenses of National Guard and reserve members who travelled more
than 100 miles from home to perform services as a National Guard or reserve member.
• Performing-arts-related expenses as a qualified performing artist.
• Business expenses of fee-basis state or local government officials.

Health Savings Account (HSA)
Various programs are designed to give individuals tax advantages to offset health care
costs. Health Savings Account (HSA) is one such health care plan.
A Health Savings Account (HSA) is a tax-exempt trust or custodial account the taxpayer has
set up with a qualified HSA trustee to pay or reimburse certain medical expenses he/she
incurs. The taxpayer must be an eligible individual to qualify for an HSA.
An HSA may receive contributions from an eligible individual or any other person, including
an employer or a family member, on behalf of an eligible individual.
Health Savings Account (HSA)
Qualifying for an HSA
To be an eligible individual and qualify for an HSA, the taxpayer must meet the following
requirements.
• The taxpayer is covered under a high deductible health plan (HDHP)
• The taxpayer has no other health coverage except permitted coverage.
• The taxpayer isn’t enrolled in Medicare.
• The taxpayer can’t be claimed as a dependent on someone else’s tax return

Student Loan Interest Deduction
The taxpayer can take this deduction only if all of the following apply.
• The taxpayer paid interest in 2020 on a qualified student loan.
• The taxpayer’s filing status is any status except married filing separately.
• The taxpayer’s modified adjusted gross income (AGI) is less than: $85,000 if single, head
of household, or qualifying widow(er); $170,000 if married filing jointly.
• The taxpayer or his/her spouse if filing jointly, aren't claimed as a dependent on someone
else's (such as the taxpayer’s parent's) 2020 tax return.
Qualified student loan
A qualified student loan is any loan that the taxpayer took out to pay the qualified higher
education expenses. Qualified higher education expenses generally include tuition, fees,
room and board, and related expenses such as books and supplies.
The expenses must be for education in a degree, certificate, or similar program at an

eligible educational institution. An eligible educational institution includes most colleges,
universities, and certain vocational schools.
The qualified student loan should be for any of the following individuals who was an eligible
student.
1. Taxpayer or his/her spouse.
2. Any person who was the taxpayer’s dependent when the loan was taken out.
3. Any person the taxpayer could have claimed as a dependent for the year the loan was
taken out
However, a loan isn't a qualified student loan if
(a) any of the proceeds were used for other purposes, or
(b) the loan was from either a related person or a person who borrowed the proceeds
under a qualified employer plan.
Standard deduction or itemised deductions
Standard Deduction or Itemized deductions is also termed as below the line deduction and
is in addition to the deductions discussed earlier. This is a subtraction from Adjusted Gross
Income (AGI).
Taxpayer can claim Standard Deduction or Itemized Deductions to lower taxable income.
Standard deduction lowers income by one fixed amount. On the other hand, Itemized
deduction is made up of a list of eligible expenses.
Standard Deduction is a fixed amount based on Filing Status and Age.
Taxpayer isn’t entitled to standard deduction if:
1. A married taxpayer filing as married filing separately whose spouse itemizes deductions
2. Taxpayer was a nonresident alien or dual status alien during the year (unless certain
exceptions apply)
3. Taxpayer files a return for a period of less than 12 months due to a change in his or her
annual accounting period
In order to claim itemized deductions, taxpayer must file income taxes using Form 1040 and
list itemized deductions on Schedule A.
Taxpayer cannot file taxes using Forms 1040A or 1040EZ if he/she wants to itemize
deductions; only the standard deduction can be taken on these shorter forms.
1. Medical and Dental Expenses
Taxpayer can generally include medical expenses paid for self, as well as spouse or
dependent. A person generally qualifies as dependent for purposes of the medical expense
deduction if both of the following requirements are met.
• The person was a qualifying child or a qualifying relative, and
• The person was a U.S. citizen or national or a resident of the United States, Canada, or
Mexico.
• Taxpayer can deduct only the part of the medical and dental expenses that exceeds 7.5%
of adjusted gross income (AGI).
Include in medical expenses amounts paid for transportation primarily for, and essential to,
medical care.
If you don't want to use your actual expenses for 2020, you can use the standard medical
mileage rate. of 20 cents per mile.
Expenses you can include
1. Parking fees and tolls whether you use actual expenses or use the standard mileage
rate.
2. Bus, taxi, train, or plane fares, or ambulance service;
3. Transportation expenses of a parent who must go with a child who needs medical care;
Expenses you can include
4. Transportation expenses of a nurse or other person who can give injections,

medications, or other treatment required by a patient who is traveling to get medical
care and is unable to travel alone; and
5. Transportation expenses for regular visits to see a mentally ill dependent, if these visits
are recommended as a part of treatment.
1. Medical and Dental Expenses - Insurance Reimbursement
You must reduce the total medical expenses for the year by all reimbursements for medical
expenses that received from insurance or other sources during the year. This includes
payments from Medicare.
i. If the reimbursement is more than the medical expenses, then the excess should be
included in income.
ii. If the reimbursement is received in a later year for medical expenses deducted in an
earlier year, you must report the reimbursement as income up to the amount
previously deducted as medical expenses.
2. Taxes
Limitation on deduction for state and local taxes. The deduction for state and local taxes is
limited to $10,000 ($5,000 if married filing married separately).
i. State and Local Income Taxes – This includes state and local taxes withheld, estimated
tax payments, or other tax payments (such as a prior year state or local income tax
refund that the taxpayer chose to credit to their estimated tax for the current year) are
deductible.
ii. State and Local General Sales Tax - You can elect to deduct state and local general sales
taxes, instead of state and local income taxes. You can use either your actual expenses
or the state and local sales tax tables to figure your sales tax deduction.
iii. Real Estate Taxes – Taxes (state, local, you paid on real estate property you own that
wasn't used for business.
iv. Personal Property Taxes – State and local personal property taxes you paid, but only if
the taxes were based on value alone and were imposed on a yearly basis.
Example. You paid a yearly fee for the registration of your car. Part of the fee was based on
the car's value and part was based on its weight. You can deduct only the part of the fee
that was based on the car's value.
3. Interest Expenses
1. Home Mortgage Interest
Home mortgage interest is any interest paid on a loan secured on home (main home or a
second home). The total amount of home mortgage interest paid by a taxpayer is shown on
Form 1098, Mortgage Interest Statement.
1. Home Mortgage Interest
The date you took out your mortgage or home equity loan may also impact the amount of
interest you can deduct. If your loan was originated or treated as originating on or before
Dec. 15, 2017, you may deduct interest on up to $1,000,000 ($500,000 if you are married
filing separately) in qualifying debt. If your loan originated after that date, you may only
deduct interest on up to $750,000 ($375,000 if you are married filing separately) in
qualifying debt. The limits apply to the combined amount of loans used to buy, build or
substantially improve the taxpayer’s main home and second home.
2. Investment Interest
The IRC allows deduction of limited amount of investment interest as an itemized

deduction. Investment interest is interest paid or incurred to purchase or carry property
held for investment. Investment interest may be deducted only to the extent of net
investment income. Disallowed investment interest is carried forward indefinitely. It is
deductible to the extent of investment income in subsequent tax years.
4. Charitable Contributions
Charitable Contributions You can deduct your contributions only if you make them to a
qualified organization. Most organizations other than churches and governments must
apply to the IRS to become a qualified organization.
You can use the Exempt Organizations Select Check tool at IRS.gov/EOSelectCheck.
This online tool will enable you to search for qualified organizations. Contributions
can be in cash, property, or out-of-pocket expenses you paid to do volunteer work for the
kinds of organizations described earlier. If you drove to and from the volunteer work, you
can take the actual cost of gas and oil or 14 cents a mile. Add parking and tolls to the
amount you claim under either meth-od. But don't deduct any amounts that were repaid to
you.
Contributions of Property If you contribute property to a qualified organization, the

amount of your charitable contribution is generally the fair market value of the property at
the time of the contribution. Limits on Deductions
The amount you can deduct for charitable contributions can't be more than 60% of your
AGI. Your deduction may be further limited to 30% or 20% of your AGI, depending on the
type of property you give and the type of organization you give it to. If your total
contributions for the year are 20% or less of your AGI, these limits don't apply to you.
Carryovers You can carry over any contributions you can't deduct in the current year
because they exceed your adjusted-gross-income limits. Contributions of $250 or More You
can claim a deduction for a contribution of $250 or more only if you have an
acknowledgment of your contribution from the qualified organization or certain payroll
deduction records. For a contribution not made in cash, the type of records you must keep
depend on whether your deduction for the contribution is:
Less than $250, At least $250 but not more than $500, Over $500 but not more than
$5,000, or Over $5,000
V: Other Miscellaneous Deductions

Gambling losses to the extent of gambling winnings − Deduction for repayment of amounts
under a claim of right if over $3,000

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INTERNATIONAL TAXATION

COMPONENTS OF FORM 1040

Session 9 (12th Oct 2021)

i. Compensation, Basics of Income Sourcing &

ii. W-2 – salaries, wages, tips etc. and

iii. Taxes withheld by employer

Various types of employee compensation, includes

• retirement plan contributions,

• stock options, and

WAGES, SALARIES, TIPS, ETC. (LINE 1 OF FORM 1040)

WAGES, SALARIES, TIPS, ETC. (LINE 1 OF FORM 1040)

WAGES, SALARIES, TIPS, ETC. (LINE 1 OF FORM 1040)

Household work is work done in or around an employer's home.

Some examples of workers who do household work are:

Taxpayers can have the following withholding taxes on wages:

Taxpayers can have the following withholding taxes on wages:

FICA - Federal Insurance Contribution Act.

COMPONENTS OF FORM 1040

Session 9 (16th Oct 2021)

Refraining from the performance of services is treated as the performance of service.

DE MINIMIS (MINIMAL) BENEFITS

Allocated tips are shown separately in Form W-2, box 8.

TAXABLE INTEREST (Line 2b of Form 1040)

Unearned income is any income produced by investments, such as interest on savings,

TAXABLE INTEREST (Line 2b of Form 1040)

TAXABLE INTEREST (Line 2b of Form 1040)

ORIGINAL ISSUE DISCOUNT

ORIGINAL ISSUE DISCOUNT

Zero coupon bonds (ZCB) are one example of these instruments.

TAX EXEMPT INTEREST (Line 2a of Form 1040)

Certain types of interest are exempt from federal income tax.

TAX EXEMPT INTEREST (Line 2a of Form 1040)

• State and political subdivisions (county or city)

• U.S. possessions and political subdivisions

TAX EXEMPT INTEREST (Line 2a of Form 1040)

• Utility service authorities

• Community redevelopment agencies

• qualified volunteer fire departments

• Amounts indicated on broker statements as tax-exempt interest or tax-exempt dividends

TAX EXEMPT INTEREST (Line 2a of Form 1040)

Type of interest Federal return State return

Government or treasury bonds Taxable Non-taxable

Total ordinary dividends are reported on Form 1099-DIV.

The tax rate on these two dividend classifications varies.

Criteria for Qualified dividends

• Must be issued by a U.S. corporation, or by a foreign corporation that readily trades on a

For example, if a stock's ex-dividend date is Oct. 1,

• 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

Introduction to US Taxation &

COMPONENTS OF FORM 1040

Session 10 (21ST Oct 2021) - Revision

COMPONENTS OF FORM 1040

Session 11 (09th Nov 2021)

IRA Distributions (Line 4a and 4b of Form 1040)

Individual Retirement Arrangements (IRAs)

(AKA Original IRA, Ordinary or Regular IRA) is referred to as a “traditional IRA.”

IRA Distributions (Line 4a and 4b of Form 1040)

Two advantages of a traditional IRA are:

IRA Distributions (Line 4a and 4b of Form 1040)