Chapter 4: Gross Income Flashcards
Gross income
Defined in the Internal Revenue Code as all income from whatever source derived unless it is specifically excluded by some provision.
Income
Income is an increase in wealth realized by a taxpayer.
Realization
Occurs when the taxpayer has a transaction with another entity. The transaction results in the taxpayer’s receipt of property or a reduction in the taxpayer’s liabilities, which changes his or her wealth.
Type of property
The type of property received is generally irrelevant in determining whether the taxpayer receives income. However, the type of property received can affect the amount of the income recognized by a cash basis taxpayer.
Most individual taxpayers use ______ as their tax year and use _____ and ______ method of accounting
the calendar year, cash receipts, and disbursements.
The taxpayer may elect to use the _____, ____, or ____ method of accounting
cash, accrual, or hybrid
The election to use a method is made by ______________
filing the initial return using that method
T/F Once a method is elected, a change cannot be made.
False, a change can be made only if the IRS grants it.
T/F Most individuals use the accrual method
False, most taxpayers use the cash method. However, if individual’s trade or business requires inventories, the accrual method must be used to account for sales and cost of goods sold.
T/F Gains on property are normally taxed when they can be objectively determined through a sale or exchange.
True
T/F Unrealized gains are normally taxable
False, unrealized gains are normally not taxable.
Interest income
State and local municipal bond income is not taxable
Original Issue Discount
The difference between the redemption price at maturity and the purchase price of bonds. If a zero coupon bond is bought, the interest accrued over the period of the bond is taxed.
What is the dividend tax rate for regular tax rates of 10 and 15 percent?
Qualified Dividend Tax Rate 0 percent
What is the dividend tax rate of the 25, 28, 33, and 35 tax brackets?
15 percent
What is the dividend tax rate of the 39.6 tax bracket?
20 percent.
T/F If you receive 1,000,000 worth of income through dividend income and have no income for the year outside of the dividends, you will be taxed at 0 percent
False, you will be taxed according to the tax brackets for an individual.
T/F Annuity Issues pre 82 are taxed according to LIFO method
False, issues prior to 82 are taxed according to FIFO
T?F Annuity Issues Post-82 are taxed LIFO
True.
Exclusion AMT=
(investment/exp return) x PMT
Annuitization Pre 86
Uses exclusion ratio
Annuitization post 86
Excluded until returned all capital is returned.
T/F If an annuity is surrendered to an insurance company for its cash surrender value, the difference between the amount received and the amount invested in the contract is not included in gross income as ordinary income.
False, the difference is included in gross income as ordinary income and a 10 percent penalty will apply if distribution occurs prior to 59.5 years of age.
The maximum contribution per year for Coverdell Education is ________.
2,000 dollars
Qualified education expense includes:
- qualified elementary and secondary school expenses, 2. certain special needs services. and 3. contributions to qualified tuition programs.
T/F Contributions must be completed by the time the beneficiary of Coverdell Education Savings Account reaches the age of 18
True
T/F Distributions from the account must be completed by the time the beneficiary reaches age 25.
False, account must be completed by age 30.
What is the phase out for Coverdell ESA for married filling jointly or surviving spouse.
Phase out begins 190,000 and ends 220,000.
What is the phase out for Cverdell ESA for everyone else
Phase out begins 95,000 and ends 110,000.
Tony and his wife Kate would like to make a contribution to Coverdell ESA for their son, Jethro. Tony and Kate are married filing jointly and their AGI is 200,500. Because they are in the phase-out range, Tony and Kate will not be able to make the maximum contribution of 2,000 dollars. What is the maximum contribution Kate and Tony can make.
2000 times (200,500-190/000)/(220,000-190,000)= 1300
Tax Payer vs Tax Reporter
Tax payers are individuals and c corporations who pay tax directly. Partnerships and S corporations are simply tax reporters that pass their income through to the owners
Trusts and estates can never be pure tax reporters
False, trusts and estates can either be tax payers (holding money) or tax reporters if income is distributed.
Income tax rate for Estates and Trusts (2016)
Over 0 but not over 2,550 15 of such amount. Over 2,550 but not over 5,950 382.50 plus 25 percent of excess of such amount over 2,550. Over 5,950 but not over 9,050 1,232.50 plus 28 percent of the excess of such amount over 5,950. Over 9,050 but not over 12,400, 2,100.50 plus 33% of the excess of such amount over 9,050. Over 12,400, 3,206 plus 39.6 of the excess of such amount over 12,400.
In order to be treated as alimony, a payment related to a divorce must meet all of the following requirements. (LIST AT LEAST 3)
- It must be paid in cash. 2. It must be received by a spouse under a divorce or separation instrument. 3. The divorce or separation instrument must not identify the payment as anything other than alimony. 4. The payee and the payer must not be members of the same household at the time of the payment. 5. There cannot be any liability to make payments after the death of the payee spouse.
Alimony recapture.
At times, it may appear that the payor of alimony is seeking to take tax deductions for a payment that is really part of a property settlement. The amount of alimony recapture in Year 3 may generally be calculated by using the following shortcut formula. R3= P1 + P2-2P3-37,500
What are the tax consequences of alimony recapture.
- The payor includes in gross income the amount of the alimony recapture. 2. The recipient deducts the amount of the alimony recapture. 3. Alimony recapture does not apply if the decrease in payments is due to the death of either spouse or the remarriage of the payee. IN addition, the recapture rules do not apply to payments where the amount is contingent, the payments are made over the period of three years or longer and the contingencies are beyond the payer’s control.
Recapture can be triggered by a 15,00 reduction in alimony payments between year 1 and 2 and year 2 and 3
True.
If the loan value of a below-market loan I between 0 and 10,000 dollars there is no imputed interest.
True.
If the loan value of a below market loan is between 10,001 and 100,000 dollars, the less of net invested income or interest calculated using state rate of loan is the imputed interest
True.
Above 100,000
Interest calculated using AFR less interest calculated using stated rate of loan.
T/F When a taxpayer’s debt is discharged or forgiven by a lender, the taxpayer does not include the amount of the discharge of indebtedness in gross income.
False, the taxpayer generally does include the amount of the discharge of indebtedness in gross income.
T/F The amount of debt forgiven need not be included in gross income under certain circumstances
True
If the statutory requirements are satisfied the amount of the student loan is forgiven is excluded form the taxpayer’s gross income.
True
What are some other income items that must be included in gross income (list 3)
Gambling winnings, fees for jury duty, fees for being a executor, administrator, or personal representative of an estate and income from a hobby.
Bodily damages are _________ for income tax purposes.
Excludable.
Punitive damages for bodily damages are ________ for income tax purposes.
Included.
T/F When a taxpayer’s debt is discharged or forgiven by a lender, the taxpayer must normally include the amount of the discharge of indebtedness in gross income.
True
The value of a scholarhip or fellowship can be excluded form gross income by an individual who is a ______________ at an eligible educational institution if the proceeds are used for _____ tuition and related expenses.
candidate for a degree, qualified
Books are ________, but room and board is _________.
Excludable, includable.
T/F Certain qualified care payments received by a foster care provider can be excluded for from gross income.
True.
T/F Qualified disaster relief payments received by a taxpayer can not be excluded form gross income.
False, payments received can be excluded from gross income.
Tax Benefit Rule-
If a taxpayer takes a tax deduction for an expenditure in one year and recovers part of all of the expenditure in a later year, the recovered amount should be included in gross income in that later year.
The refund for state taxes is taxable only if the taxpayer itemized deduction in the year to which the refund relate.
True.
Claim of right-
The converse of the tax benefit rule. A taxpayer who has reported income received under a claim of right may deduct amounts he must repay in subsequent tax periods.
Income Recovery
When an expense item resulted in only partial tax benefit, any recovery is first considered to be form the benefit received.
Calendar Year vs Fiscal Year
January 1-December 31. Fiscal year any tax year that ends on the last day of any month other than December. 53-53 weeks a year.
Cash receipts and disbursements method
Income is recognized when the taxpayer actually receives or constructively receives, cash or its equivalent.
Accrual Method
Income is recognized when all the events that determine the taxpayer’s rights to receive income have occurred and the amount of the income can be determined with reasonable accuracy.
Hybrid method.
A combination of the accrual method and cash method. Generally, inventory is an income-producing factor. The accrual method be used for determining sales and cost of goods sold, and the cash method for all other income and expense items.
What are the three exceptions to the cash method?
Original issue discount, constructive receipt, and cash received with an obligation to repay.
What are the four exceptions to the accrual method?
Prepaid income. Advance payments for goods. Advance payment for services. The claim of right doctrine.
