ch5 part 3 gross income and exclusions

Question 1

Income from Flow-Through Entities

Answer 1

Individuals may invest in various business entities
* Entity type determines how income is taxed
* If the entity is a flow-through entity such as a
partnership, the income and deductions of the
entity “flow through” to the owners of the entity
(partners or shareholders)
* Flow-through income is taxable to the partner or shareholder and retains its character

Question 2

Chris and Emily own ELL Partnership. Emily is a
60% partner. If ELL Partnership earns $100,000
in business income and $2,000 in municipal
bond interest, what amount should Emily include in her gross income for the year?

Answer 2

100,000 * 60% = 60,000 in her gross income

2,000* 60%=1200 NOT include because it is a muni bond which is tax free

Question 3

Alimony

Answer 3

Cash payments from one ex-spouse to another
per divorce decree

Divorces finalized by Dec. 31, 2018: Spouse
receiving payment includes as gross income &
spouse paying gets deduction
* Divorces on or after Jan. 1, 2019: nothing
happens

Question 4

Prizes and Awards

Answer 4

• Generally included in gross income
• Excluded only if:
  1. Made for scientific, literary, or charitable
  achievement,
  2. Payer transfers prize to a government unit or
  qualified charity,
  3. Recipient not required to render future services, and
  4. Recipient was selected without any action on their part to enter the contest or proceeding

Question 5

May exclude prizes and awards if:

Answer 5

• Employee award of tangible property worth less
  than $400 for service or safety achievement (pen,
  watch, etc.)
• Medals/prize money for competing in Olympics
  unless athlete has AGI > $1M

Question 6

Gambling Winnings

Answer 6

Gross amount of gambling winnings is
included in gross income
* (Chapter 7 - Can only deduct gambling losses
to the extent of winnings as an itemized
deduction)

Question 7

Discharge of Indebtedness

Answer 7

• When a taxpayer’s debt is forgiven by a
  lender, the taxpayer must usually include the
  amount of debt relief in gross income
• Exception: If taxpayer is insolvent (liabilities
  exceeding assets) a discharge of
  indebtedness is not taxable

Question 8

What is the exception to indebtedness?

Answer 8

Exception: If taxpayer is insolvent (liabilities
exceeding assets) a discharge of
indebtedness is not taxable