Basic Principles Flashcards
What is gross income?
Any economic benefit or any clearly realized accession to you wealth
What is realization?
An increase or decrease in value of an asset is not taken into account for tax purposes until it is “realized” through sale or other disposition of the asset.
Ex. stock goes up and down in value, not realized until sold.
What are non-cash receipts
Gross income includes the fair market value of any property received and fair market value of any services received.
The law firm of ABC gives a pair of football tickets for the next season to the summer associate who billed the most hours. Will the lucky associate have to report any gross income?
Yes. Full fair market value of those tickets.
What is the rule for claim of rights?
Property or funds received under a claim of right must be reported for tax purposes even though the taxpayer may later be required to return the property, funds or their equivalent.
A composer sues Beyonce demanding royalties for one of her hit songs. In Year 1, after the trial the court orders Beyonce to pay the composer. Must the composer report the royalty as part of her gross income in year 1?
Yes.
What is the claim of rights definition?
the taxpayer has received property or funds under a “claim of right” when they are received without restriction as to use or disposition
What if the composer who got royalties in Year 1 has the decision revered against her, and has to pay the royalties back. Does she have to amend her Year 1 tax return?
No. Instead she’ll get a tax deduction in year two.
Winner of American Idol gets offered employment to host the show. She gets $500G advance when she signs in year 1, and if she leaves the show in 6 months she must repay half the advance. Does she have to report the entire $500G? What if she leaves in 6 months?
Yes, must report under claim of right. If she leaves, gets a deduction in year 2.
What is the tax benefit rule?
If a taxpayer takes a deduction in one year and recovers the property that gave rise to the deduction in a later tax year, the taxpayer has the tax benefit income, to the extent that the earlier deduction provided a tax savings or a tax benefit.
In year 1, A donates property to a charity valued at $150,000, and properly took the $150,000 deduction in his year 1 tax return. Unable to use the property, the charity returns the property to A in year 2, though now its worth $200,000. Does A have income in year 2 from the return of this property?
Yes, assuming he got tax benefit from the donation, report as income in year 2, but ok to report as the earlier amount ($150G) not fair market value ($200G).
What is the rule for taxable spousal alimony?
Unless otherwise provided in the written agreement:
Taxable on receiving spouse, deductible to the paying spouse.
What is the child support rule?
Child support is NOT taxable on the receiving spouse and NOT deductible to the paying spouse.
What about “child support in disguise”rule?
If a payment is reduced upon a contingency relating to a child, the amount of reduction is considered child support.
In a written agreement, Tiger Woods agrees to pay his ex wife 1million until their kid is 21, at which time he will pay $700,000 until the end of life.
So, the $300,000 is non-taxable, the $700,000 is.
