2. Gross Income

Question 1

How does the IRC define gross income?

Answer 1

The IRC defines gross income as all income from whatever source derived except as otherwise provided.

Question 2

When would a cash-method taxpayer report income?

Answer 2

The cash method of accounting includes income when actually or constructively received.

Question 3

When would an accrual-method taxpayer report income?

Answer 3

An accrual-method taxpayer reports income when
1.All events have occurred fixing the right to receive the income, and
2.The amount can be determined with reasonable accuracy.

Question 4

When is the accrual method required?

Answer 4

The accrual method of accounting is required when there are inventories.

Question 5

p. 4 Test
When is income constructively received?

Answer 5

Income, although not actually in a taxpayer’s possession, is constructively received in the taxable year during which
- it is credited to his or her account,
- set apart for him or her,
- or otherwise made available
so that (s)he may draw upon it at any time, or so that (s)he could have drawn upon it during the taxable year if notice of intention to withdraw had been given.

Question 6

When is a check considered to be income?

Answer 6

A check received in the mail is considered to be income on that date (constructively received), whether or not it is cashed.

Question 7

Is income constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions?

Answer 7

No, this income is not constructively received.

Question 8

Under the claim-of-right doctrine, when is a taxpayer who receives income without restrictions on its use or disposition taxed on that income?

Answer 8

A taxpayer receiving income under a claim of right and without restrictions on its use or disposition is taxed on that income in the year received even though the right to retain the income is not yet fixed or the taxpayer may later be required to return it.

Question 9

Does the form of payment affect whether compensation for personal services is gross income?

Answer 9

No, all compensation for personal services is gross income. The form of payment is irrelevant.

Question 10

If services are paid for in property, what amount is considered gross income?

Answer 10

The fair market value of the property at the time of receipt is considered income.

Question 11

If services are paid for in property, what is the basis of the property?

Answer 11

If services are paid for in property, its fair market value at the time of receipt is gross income. The amount included in income becomes the basis in the property.

Question 12

If income is earned by A but received by B, who must pay the tax on the income?

Answer 12

A. Gross income includes income attributable to a person even though the income is received by other persons. This doctrine imposes the tax on income on those who earn it, produce the right to receive it, enjoy the benefit of it when paid, or control property that is its source.

Question 13

P.4 $$$ Test $$$
Constructive Receipt

Answer 13

• Applies to Cash method of accounting
• Accrual method
  
  • Income reported when earned

Question 14

A owns income producing property. If A wants to assign the income from this property to B, and have the tax imposed on B, what must A do?

Answer 14

A must assign the income producing property to B. Assignment of an income-producing asset is effective to shift the gross income earned after the assignment to the assignee.

Question 15

What does effective assignment of income-producing property require?

Answer 15

Effective assignment requires that the transfer of property be complete and bona fide, with no control retained over either the property or the income it produces, and that the transfer take place before the income is actually earned.

Question 16

$ Test $$
What are royalties?

Answer 16

Payments to an owner from people who use a right belonging to that owner.

Question 17

For divorce decrees executed prior to 2019, alimony and separate maintenance payments are ________(1) in the gross income of the recipient (payee) and ________(2) from the gross income of the payor.

Answer 17

1.Included
2.Deducted

Question 18

When is a payment considered alimony?

Answer 18

A payment is considered alimony when it is
1.Paid in cash
2.Paid pursuant to a written divorce or separation instrument
3.Not designated as other than alimony
4.Terminated at death of recipient
5.Not paid to a member of the same household
6.Not paid to a spouse with whom the taxpayer is filing a joint return

Question 19

Child support payments are ___________(1) from the gross income of the recipient and are __________(2) by the payor.

Answer 19

1.Excluded
2.Not deducted

Question 20

If the payment of an amount to a former spouse is to be reduced based on a contingency relating to a child (e.g., attaining a certain age, marrying, etc.), the amount of the reduction is treated as what?

Answer 20

The amount of the reduction is treated as child support.

Question 21

Is the entire amount received under an annuity contract gross income?

Answer 21

No, the portion of amounts received under an annuity contract for which a statute does not provide an exclusion is gross income. However, taxpayers are permitted to recover the cost of the annuity (the price paid) tax-free.

Question 22

If debt is canceled in whole or in part for consideration, does the debtor need to recognize the amount in gross income?

Answer 22

Yes, the amount should be recognized in gross income.

Question 23

When are discharges of indebtedness not included in gross income?

Answer 23

When the discharges of indebtedness
1.Occur in bankruptcy,
2.Occur when the debtor is insolvent but not in bankruptcy,
3.Are related to qualified farm indebtedness,
4.Are a discharge of qualified real property business indebtedness, or
5.Are related to principal residence indebtedness.

Question 24

When can an amount received by an individual as a scholarship be excluded from gross income?

Answer 24

If the amount is used for
1.Required tuition or fees
2.Books
3.Supplies
4.Equipment

Question 25

If a student receives a scholarship in exchange for performing services, such as teaching or research, is that amount included in income?

Answer 25

Yes, gross income includes any amount received, e.g., as tuition reduction, in exchange for the performance of services, such as teaching or research.

Question 26

If a taxpayer receives a prize in a form other than money, how much must the recipient include in gross income?

Answer 26

If the prize or award is in a form other than money, the amount of gross income is the FMV of the property.

Question 27

If a person excludes foreign-earned income, can that person also deduct related expenses?

Answer 27

No, deductions attributed to the foreign-earned income (which is excluded) are disallowed.

Question 28

P.7 Test
When is a payment considered alimony?

Answer 28

A payment is considered alimony when it is
1.Paid in cash
2.Paid pursuant to a written divorce or separation instrument
3.Not designated as other than alimony
4.Terminated at death of recipient
5.Not paid to a member of the same household
6.Not paid to a spouse with whom the taxpayer is filing a joint return

Question 29

How may a taxpayer avoid including a prize or award in gross income?

Answer 29

An award recipient may exclude the fair market value of the prize or award from his or her gross income if
1.The amount received is in recognition of religious, scientific, charitable, or similar meritorious achievement;
2.The recipient is selected without action on his or her part;
3.The receipt of the award is not conditioned on substantial future services; and
4.The amount is paid by the organization making the award to a tax-exempt organization designated by the recipient.

Question 30

When is compensation for injury or sickness not included in gross income?

Answer 30

Damages received for personal physical injury or physical sickness are not included in gross income.

Question 31

Are payments received for emotional distress included in income if the injury has its origin in a physical injury or physical sickness?

Answer 31

No, they are excluded from income.

Question 32

Is compensation for slander of personal, professional, or business reputation included in gross income?

Answer 32

Yes, it is included in gross income.

Question 33

Are punitive damages received in connection with a physical injury or physical sickness excluded from gross income?

Answer 33

No, punitive damages received are included in gross income, even if in connection with a physical injury or physical sickness.

Question 34

Are wrongful death damages excluded from gross income to the extent they were received on account of a personal injury or sickness?

Answer 34

Yes, they are excluded from gross income.

Question 35

Damages received solely for emotional distress are

Answer 35

Included in gross income.

Question 36

Interest earned on an award for personal injuries is

Answer 36

Included in gross income.

Question 37

Are payments received for emotional distress included in income if the injury has its origin in a physical injury or physical sickness?

Answer 37

No, they are excluded from income.

Question 38

When are proceeds from disability insurance policies not taxable?

Answer 38

They are not taxable if the policies are paid for by the employee.

Question 39

Proceeds of a life insurance policy for which the employer paid the premiums are

Answer 39

Excluded from the employee’s gross income.

Question 40

P.14
The cost of group term life insurance is excluded from the employee’s gross income for up to what amount of coverage?

Answer 40

Up to $50,000 is excluded.

Question 41

All employer-paid death benefits (not benefits from a life insurance plan provided by the employer) received by the beneficiaries of an employee from an employer are

Answer 41

Included in gross income.

Question 42

Is the value of property acquired by gift or inheritance excluded from the gross income of the recipient?

Answer 42

Yes, it is excluded from gross income.

Question 43

Can gambling losses be deducted?

Answer 43

Yes. However, gambling losses are deductible only to the extent of winnings as an other itemized deduction.

Question 44

Qualified reimbursements incurred by members of the military on active duty for moving expenses are

Answer 44

Excluded from gross income.

Question 45

P.16
Military officers exclude compensation amount
- Up to the highest rate of basic
* At highest pay grade of enlisted personnel + any hostile fire/imminent danger pay

Answer 45

The exclusion applies
1. compensation received while in combat zone / hospitalized as a result of
* wounds, disease, or injury incurred in a combat zone.
b. ersonnel below officer level (i.e., enlisted)
* allowed the same exclusion without the cap.

Question 46

P.17
Military Moving Exp
- Qualified reimbursements incurred
* active duty
- excluded from gross income.

Answer 46

Not Qualified exp, non-military
included in gross income.

Question 47

P.16
A gift test*
1. transfer for less than full or adequate consideration
* results from the detached, disinterested generosity of transferor
2. Voluntary transfers from employer to employee
* presumed to be compensation, not gifts

Answer 47

Gift transfers include
* Inter vivos gifts (btw the living), gifts by bequest (of personal property by a will)
* Devise ((of real property by a will)
*Inheritance (under state intestacy law)

Question 48

Qualified adoption expenses paid to a third party or reimbursed to an employee by an employer under a written adoption assistance program are

Answer 48

Excludable (up to $14,890 for 2022) from the employee’s gross income.

Question 49

What is an adoption assistance program?

Answer 49

A written plan that
1.Benefits employees who qualify under rules set up by the employer that do not favor highly compensated employees or their dependents,
2.Does not pay more than 5% of its payments each year to shareholders or owners of more than 5% of the stock,
3.Provides for adequate notice to employees of their eligibility, and
4.Requires employees to provide reasonable substantiation of qualified expenses that are to be paid or reimbursed.

Question 50

What is the maximum adoption exclusion for 2022?

Answer 50

The maximum exclusion for 2022 is $14,890.

Question 51

What are considered qualified adoption expenses for the purposes of the adoption exclusion?

Answer 51

Qualified adoption expenses are reasonable and necessary adoption expenses, including
1.Adoption fees,
2.Court costs,
3.Attorney fees, and
4.Other directly related expenses.

Question 52

Under what circumstances is an employee allowed to exclude reimbursed employee expenses from income?

Answer 52

If reimbursements equal expenses and the employee makes an accounting of expenses to the employer, the reimbursements are excluded from the employee’s gross income, and the employee may not deduct the expenses.

Question 53

Test
An employee’s gross income does not include the cost of any fringe benefit supplied or paid for by the employer that qualifies as a(n)

Answer 53

1.No-additional-cost service
2.Qualified employee discount
3.Working condition fringe
4.De minimis fringe
5.Qualified transportation fringe
6.Qualified moving expense reimbursement (active military only)
7.Employer-provided educational assistance

Question 54

Are payments received for emotional distress included in income if the injury has its origin in a physical injury or physical sickness?

Answer 54

No, they are excluded from income.

Question 55

Is the value of a no-additional-cost fringe benefit provided to employees, their spouses, or their dependent children by employers excluded from gross income?

Answer 55

Yes, the value is excluded from gross income.

Question 56

What is a no-additional-cost fringe benefit?

Answer 56

A no-additional-cost fringe is a service or product that the employer offers for sale to customers in the ordinary course of business in which the employee performs substantial services.

Question 57

p.19 Qualified Employee Discount
- Certain employee discounts on property or services of employer
* excluded from gross income.
- offered in the ordinary course of business
* employee performing services
* purchased by the employee for personal use

Answer 57

The employee discount
- may not exceed
* gross profit % in normal offers by the employer to customers
or
*20% of the price offered to customers in the case of qualified services.
- Discount must be non-discriminatory

Question 58

Are payments received for emotional distress included in income if the injury has its origin in a physical injury or physical sickness?

Answer 58

No, they are excluded from income.

Question 59

How much of the fair market value of property or services provided to an employee by an employer as a working condition fringe benefit is excludable by the employee?

Answer 59

The FMV of property or services provided to an employee by an employer as a working condition fringe benefit is excludable by the employee to the extent the employer can deduct the costs as an ordinary and necessary business expense.

Question 60

P.19 Working Condition Fringe

When does property or services provided to an employee qualify as a working condition fringe benefit?

Answer 60

1.The employee’s use of the property or services relates to the employer’s trade or business,
2.The employee would have been entitled to a business expense deduction if the property or services that were provided by the employer had been purchased by the employee, and
3.The employee maintains the required records.

Question 61

When is the value of property or services provided to an employee excludable as a de minimis fringe?

Answer 61

When the value is so minimal that accounting for it would be unreasonable or impracticable.

Question 62

Up to what amount per month (2022) may be excluded for the value of employer-provided transit passes and transportation in an employer-provided “commuter highway vehicle” between the employee’s residence and place of employment.

Answer 62

Up to $280 a month may be excluded.

Question 63

An exclusion of up to what amount per month (2022) is available for employer-provided parking (except residential)?

Answer 63

Up to $280 per month may be excluded.

Question 64

P.21
employer-provided educational assistance

CARES Act

Answer 64

Employer-provided educational assistance:
Up to $5,250 may be excluded by the employee
1) does not apply to graduate teaching or research assistants who receive tuition reduction under Sec. 117(d).
2) may not include tools or supplies that the employee retains after the course or the cost of meals, lodging, or transportation.

CARES Act:
Payment up to $5,250 per employee made by ER to EE/lender between 3/27/2020 - 1/1/2026 on qualified educational loan incurred by EE for education may be excluded by ER from employee’s taxable wages.

Question 65

P.21
U.S. citizens and qualifying resident aliens may exclude up to what amount of foreign-earned income from gross income?

Answer 65

U.S. citizens and qualifying resident aliens may exclude up to
- $112,000 of foreign-earned income
- Tax home in foreign country

Question 66

P.21

What is necessary for a taxpayer to qualify for the foreign-earned income exclusion?

Answer 66

The taxpayer must
1.Have foreign-earned income;
2.Have a tax home in a foreign country; and
3.Be one of the following:
a). A U.S.citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire year,
b). A U.S. resident alien who is a citizen of a country with which the U.S. has an income tax treaty and who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire year, or
c). A U.S. citizen or U.S. resident alien who is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

Question 67

If a person claims the foreign-earned income exclusion, can they also claim the Foreign Tax Credit?

Answer 67

No, this exclusion is in lieu of the credit.

Question 68

Is a rebate to the purchaser included in gross income?

Answer 68

No, a rebate to the purchaser is treated as a reduction of the purchase price.

Question 69

What is a statutory employee?

Answer 69

A statutory employee is a person who is in business for himself or herself, but who works primarily or wholly for a specific company.

Question 70

If a taxpayer receives a prize in a form other than money, how much must the recipient include in gross income?

Answer 70

If the prize or award is in a form other than money, the amount of gross income is the FMV of the property.

Question 71

Proceeds of a life insurance policy for which the employer paid the premiums are

Answer 71

Excluded from the employee’s gross income.

Question 72

Is the value of a no-additional-cost fringe benefit provided to employees, their spouses, or their dependent children by employers excluded from gross income?

Answer 72

Yes, the value is excluded from gross income.

Question 73

Interest earned on an award for personal injuries is

Answer 73

Included in gross income.

Question 74

How may a taxpayer avoid including a prize or award in gross income?

Answer 74

An award recipient may exclude the fair market value of the prize or award from his or her gross income if
1.The amount received is in recognition of religious, scientific, charitable, or similar meritorious achievement;
2.The recipient is selected without action on his or her part;
3.The receipt of the award is not conditioned on substantial future services; and
4.The amount is paid by the organization making the award to a tax-exempt organization designated by the recipient.

Question 75

P.14
The cost of group term life insurance is excluded from the employee’s gross income for up to what amount of coverage?

Answer 75

Up to $50,000 is excluded.

Question 76

Damages received solely for emotional distress are

Answer 76

Included in gross income.

Question 77

When are proceeds from disability insurance policies not taxable?

Answer 77

They are not taxable if the policies are paid for by the employee.

Question 78

Are punitive damages received in connection with a physical injury or physical sickness excluded from gross income?

Answer 78

No, punitive damages received are included in gross income, even if in connection with a physical injury or physical sickness.

Question 79

Are payments received for emotional distress included in income if the injury has its origin in a physical injury or physical sickness?

Answer 79

No, they are excluded from income.

Question 80

When would an accrual-method taxpayer report income?

Answer 80

An accrual-method taxpayer reports income when
1.All events have occurred fixing the right to receive the income, and
2.The amount can be determined with reasonable accuracy.

Question 81

Are wrongful death damages excluded from gross income to the extent they were received on account of a personal injury or sickness?

Answer 81

Yes, they are excluded from gross income.

Question 82

When is a payment considered alimony?

Answer 82

A payment is considered alimony when it is
1.Paid in cash
2.Paid pursuant to a written divorce or separation instrument
3.Not designated as other than alimony
4.Terminated at death of recipient
5.Not paid to a member of the same household
6.Not paid to a spouse with whom the taxpayer is filing a joint return

Question 83

Are payments received for emotional distress included in income if the injury has its origin in a physical injury or physical sickness?

Answer 83

No, they are excluded from income.