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Federal Inc. Taxation > Ch 3 > Flashcards

Ch 3 Flashcards

0
Q

Economic income

A

Income = consumption + change in wealth

Unrealized gains, gifts and inheritances are income

Economists adjust for inflation

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1
Q

Gross income

A

All income from whatever source derived

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2
Q

Accounting income

A

Measured by transaction approach, it’s measured when
Realized in a transaction

Use historical costs as measurement instead of unconfirmed
Estimates of change in market value

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3
Q

Accounting income: realization

A

Occurs when tax payer sells property

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4
Q

3 conditions for amounts of income to be taxable?

A

1 must be economic benefit
2 income must be realized
3 income must be recognized as taxable

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5
Q

Administrative convenience

A

The economic concept of income is too subjective to
determine taxable income

There is need for objectivity in determining tax

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6
Q

Wherewithal to pay concept, ex.

A

Tax should be collected when taxpayer is in best position
To pay tax

Ex. A tax payer that sold property for cash is in better
Position to pay tax than one that holds property that
Increases in value

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7
Q

Why should taxpayers who are using the cash method of accounting be required to include in gross income the value of property or services received?

A

If they were not required, many taxpayers would arrange
Their financial affairs so they would receive property and
Services instead of cash

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8
Q

Why is income in a form different from cash difficult to track?

A

Valuation isn’t as easily determined

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9
Q

Indirect economic receipt, example with employees

Is this taxable for employees?

A

Security guard patrol employers plant protect employees

Not taxable for employees

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10
Q

Who is responsible for paying tax on income from property?

A

The owner of the property

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11
Q

For federal tax purposes, Income is allocated between husband and wife depending on…

A

State of residence

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12
Q

How many states follow common law property system?

How many follow community property system?

A

41 follow common law

9 follow community property system

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13
Q

How is income taxed under common law property system?

A

Income is taxed to individual who earns the income through

Labor or capital

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14
Q

Joint income in common law state

A

Income from jointly owned property

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15
Q

Community income

A

Considered to belong equally to spouses

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16
Q

1) Separate property

2) Can it occur in community property states?

A

1 all property owned before marriage and gifts, inheritances,
Acquired after marriage

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17
Q

The year in which the income is taxed depends on the taxpayer’s…

Name 3?

A

Accounting method

1 cash receipts and disbursements method
2 accrual method
3 hybrid method

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18
Q

Cash receipts and disbursements method

Who uses this method?

A

Income reported in year taxpayer receives rather than year
Income is earned

Used by most individual taxpayers and many small
businesses

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19
Q

Constructive receipt

A

Income made available to taxpayer so he can draw upon

It at any time

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20
Q

Small tax payer exception for inventory

A

Following tax payers at exempt from maintaining inventories
And can use cash method

Taxpayers that have avg. annual gross receipts of $1 million

Or less for prior 3 years ($10 million if principal business is
Not sale of inventory)

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21
Q

When is prepaid income taxable

A

In year of receipt

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22
Q

Accrual method

When is income considered earned?

A

Taxpayers report income in year it is earned

Income is considered earned when all events have occurred
To fix right to receive income

Income can be determined with Accuracy

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23
Q

Hybrid method accounting

A

Combination of cash and accrual methods

Use accrual method for purchase and sale of goods
And cash method for everything else

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24
Q

Why is the cash method generally more favorable for income tax purposes?

A

Offers greater tax planning opportunity and results in taxes

Being owed when income is actually received

25
Q

Why are planning opportunities greater under the cash method?

A

Tax payers can deduct expenses when paid

Accrual can’t

26
Q

Compensation

A

Payment for personal services

Includes salaries, wages, fees, commissions, tips, bonuses

27
Q

Tax law contains 30 non recognition rules, what do these allow

A

Allow taxpayers to postpone recognition of gains and losses

On certain types of property transactions

28
Q

Deductions on property losses are limited to?

A

$3000 per year

29
Q

Interest

A

Compensation for use of money

30
Q

Taxable interest includes interest on 7 things…

A 
1 bank deposits
2 corporate bonds
3 mortgages
4 life insurance policies
5 tax refunds
6 US government obligations
7 foreign government obligations
31
Q

Tax exempt interest 4 things

A

Obligations of states, territories US possessions and their

Political subdivisions, counties

32
Q

Prepaid rents, security deposits

A

Prepaid rents included in gross income

Security deposit is only included If it is not refunded

33
Q

Royalties, tax treatment

A

Proceeds paid to owner by others who do business under
Some right belonging to the owner

Taxable as ordinary income

34
Q

Improvements made by the lessee that increase the value

Of leased property are included in lessor’s income if the improvements are made in…

A

Lieu of paying rent or rent is reduced due to improvements

35
Q

Capital gained dividend 2 definitions? are they short term or Longterm?

A

Distribution by regulated investment company (mutual fund)

Or capital gains realized from sale of investments in fund

Always long term

36
Q

Constructive dividends, treatment of constructive dividends when their are excessive?

A

When employees or company’s land lords, creditors or
vendors are shareholders

Distributions that result in deduction to corporation and
Taxable income of shareholder

Excessive constructive dividends are no longer deducted but
Taxed as dividends

37
Q

Alimony tax treatment

Tax treatment of child support and property settlement?

A

Deductible by payor spouse and taxable by payee spouse

Neither child support or property settlements are
Subject to deductions or taxes

38
Q

3 classifications of payments required for tax purposes in divorce or legal separation

A

1 alimony

2 child support

3 property settlement

39
Q

5 requirements to be treated as alimony payments

A

1 be made in cash (not property)
2 divorce, separation, written agreement btw spouses
3 terminate at death of payee
4 no designated as being other than alimony
5 made btw people living in separate households

40
Q

Property settlement

A

Division of property pursuant of divorce

Each spouse entitled to property brought into marriage
And share of property accumulated in marriage

41
Q

Recapture provision

A

Established to prevent large property settlement that
Might take place after divorce from being treated as alimony
Deduction for payor

42
Q

Annuity

A

Series of regular fixed payments that continue for fixed

Period of time or til death of recipient

43
Q

Annuity: expected return multiple

A

Number of years annuity is expected to continue

44
Q

Annuity: exclusion ratio

A

Exclusion ratio = investment cost/expected return

45
Q

Annuity: current year’s exclusion

A

Current year’s exclusion= exclusion ratio x amt. received during yr

46
Q

Qualified retirement plan annuities

A

Distributions from pensions and other retirement plans

Both employer and employee contribute funds to these plans

47
Q

Retirement plans involving a combination of pretax and after tax contributions are…

A

Taxed less favorably

48
Q

Treatment of debt forgiveness

A

Taxable event

Taxpayer must report amount forgiven as income unless
It meets exceptions

49
Q

Flow through entities

A

Income is taxed directly to owners of entities, not entities

Themselves

50
Q

4 instances of flow through entities

A

1 distributive share of partnerships income
2 income in respect of descendent
3 income from interest in estate or trust
4 mutual funds and etfs

51
Q

Tax treatment of gambling winnings

A

Taxable, losses can only be deducted up to amount won

52
Q

Unemployment compensation

A

Taxable income

53
Q

Tax treatment of social security benefits

A

Depends on filing status

54
Q

Define social security benefits

A

Basic monthly retirement and disability benefits paid under

Social security

55
Q

Insurance proceeds and court awards are…

4 exceptions?

A

Taxable

Accident insurance, health insurance,
face amount of life insurance, recovery for damaged property

56
Q

Recovery of previously deducted amounts

A

A deduction that leads to a recovery of money must be

Included in gross income the year the money’s recovered

57
Q

Interest on amount of refunded money is…

A

Taxable

58
Q

Claim of right doctrine

A

Recipient of disputed amount of compensation must
Include amount received in gross income

Included As long as funds are unrestricted

59
Q

Tax deferred bonds

A

Generally yield return somewhere close to taxable bonds

60
Q

Deferred compensation arrangements

A

Contracts where money is paid in the future when person
is in lower tax bracket

Differed taxes result in tax savings

Federal Inc. Taxation (11 decks)

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