2.1 Gross Income I

Question 1

If a financial institution offers a discount for the early payment of a mortgage loan, what type of debt is it?

And how shouldi t be reported on Form 1040?

Answer 1

It is treated as a canceled debt.

When a canceled debt is a nonbusiness debt, it is to be reported as other income on Form 1040.

Question 2

What types of income constitute gross income?

Answer 2

1. Compensation for services (fees, commissions, and fringe benefits)
2. Derived from business
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Alimony and separate maintenance payments
9. Annuities
10. Income from life insurance and endowment contracts.
11. Pensions
12. Income from discharge of indebtedness
13. Distributive share of partnership gross income
14. Income in respect of decedent (income earned but not received before death)
15. Income from an interest in an estate or trust.

Question 3

Constructive Receipt

Answer 3

Income, not actually in TP’s possession, is constructively received in taxable year and credited to account.

a) check received in the mail is considered to be income on the date received, whether or not cashed.
b) income from securities trades, the trade date (not settlement date) should be used.
c) not constructively reeipt if TP’s control is subject to substantial limitations/restrictions.
d) applies to cash method. under accrual method - income is reported in the year earned.

Question 4

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

Answer 4

The property’s fair market value at the time of receipt is gross income.
The amount included in income becomes the basis of the property.

Question 5

Debt Discharge

Answer 5

If a creditor cancels a debt - debtor must recognize income in the amount of the debt as compensation for services.

If a creditor cancels debt if treated as a gift - it will be excluded from gross income.

Question 6

Compensation for injury or sickness

Answer 6

Gross income does not include benefits specified that might be receive in the form of disability pay, health or accident insurance proceeds, workers’ compensation awards, or other damages for personal physical injury/sickness.

Included in gross income are:

1. compensation for slander of reputation
2. in or out of court settlement for lost profits
3. punitive damages
4. damages received for emotional distress
5. interest earned on an award for personal injuries

Question 7

What amount can be included in income for Security Benefits?

Answer 7

Calculate PI (Provisional Income) = AGI + Tax-exempt interest + Excluded foreign income + 50% of SS Benefits

BA (adjusted base amount) - standard deduction

If PI < BA = 0% is included
If BA < PI ABA = 85% included

Question 8

What can ministers exclude from gross income?

Answer 8

The rental value of a home or rental allowance to the extent the allowance is used to provide a home, even if deductions are taken for home expenses paid with the allowance.

A minister should include any offerings given directly to him/her for church-related functions (example: marriages).

Question 9

Scholarships

Answer 9

Amounts received by as scholarships are excluded from gross income to the extent that the individual is a candidate for a degree from a qualified education institution and amounts are used for required tuition or fees, supplies, or equipment (not personal expenses such as room and board).

Subsistence payments administered by Veteran Affairs are excluded from gross income.

Question 10

Fringe Benefits

Answer 10

Excluded gross income:

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