Question

1. On December 29, 2018, an employee received a $5,000 check from her employer’s client. The check was payable to the employer. The employee did not remit the funds to the employer until December 30, 2018. The employer deposited the check on December 31, 2018, but the bank did not credit the employer’s bank account until January 2, 2019. When is the cash basis employer required to include the $5,000 in gross income?
2. What is a “Series EE Bond”? When would a taxpayer elect to include or NOT to include the interest in income for the year?
3. In January 2018, Sonja deposited $20,000 in a bank in the Bahamas. She earned $500 interest income. She closed the account in December 2018.

a)Is Sonja subject to the FBAR reporting requirement?

      b)Is the interest income taxable in the United States?

4. An employer provides all of his employees with life insurance protection equal to twice the employee’s annual salary. Melba, age 42, has an annual salary of $70,000. Is Melba required to recognize income even though she is still alive at the end of the year and thus nothing has been collected on the life insurance policy? Explain.

Answer 1

Part I

The employer will include the $5,000 on 31st December 2018 provided that Cash basis is being followed. But when Bank Statement nd Account Books will be Reconciled, it will be discovered that the check was encashed on 2nd Jaunuary 2019. Then the bank reconciliation statement will automatically cause this income to be included in the income of 2019.

Part II

Series EE Bonds are low risk savings product that can be bought from Treasury Direct in Electronic form. It can be called a safe but less rewarding investment option where investor receives interest income after every fixed period. For Instance, Annually, Half Yearly, Quarterly, Monthly etc. The maximum period that it can be held is 30 years.

A taxpayer has to include the interest in his income in the year in which he has redeemed the bond to the extent he hasn't not include the interest in income in a prior taxable year. However the interest income can be exempted from tax if that income is used towards higher education of self or a dependant.

Part III

As per The Foreign Bank Account Reporting (FBAR) Rules, any US citizen who owns a financial account in any foreign country where the account balance was more than $10,000 at any point of time during the reporting period has to file FBAR. So yes Sonja has to file FBAR report as she owned a Bank account in Bahamas which had a balance of $20,000. And she has to pay tax on interest she has earned from the said Foreign account.

Part IV

As per the IRS when an employer provides life insurance as a part of overall compensation package, such insurance is considered to be taxable income. However, these taxes only apply if the employer has paid for more than $50,000 as insurance cover. That means, the premium for the coverage of first $50,000 is exempted from taxation.

So if we calculate in case of Melba, her employer has provided her insurance cover of twice her annual salary which happens to be $70,000. So the Cover provided will be of $140,000. Hence as per the law, the premium paid for the first $50,000 will be exempted from Melba's income and only premium paid for the rest $90,000 will be taxed as Melba's Income.