Chapter 5

Question 1

treasury regulation on gross income definition

Answer 1

gross income realized in ANY FORM (money, services, property)

Question 2

three conditions for when taxpayers should recognize gross income:

Answer 2

1. they receive an economic benefit
2. they realize the income
3. no tax provision allows them to exclude or defer the income from gross income that year

Question 3

realization principle

Answer 3

income is realized when 1. a taxpayer engages in a transaction with another party, and 2. the transaction results in a measurable change in property rights

Question 4

form of receipt

Answer 4

how the income is received does not change the fact you received income

Question 5

return of capital principle

Answer 5

taxpayers are allowed to recover the cost of their investment (tax basis) tax-free

Question 6

returns of amounts previously deducted

Answer 6

a refund is usually not included in gross income because it usually represents a reduction in expense

Question 7

under the tax benefit rule, a refund is taxable if it is:

Answer 7

given for an amount previously deducted

Question 8

claim of right doctrine

Answer 8

income has been realized if a taxpayer receives income and there are no restrictions on the use of income

Question 9

“common law” means:

Answer 9

• all income earned from one spouse is assigned to that spouse
• income from separately owned property is assigned to the owner

Question 10

“community property” means:

Answer 10

• income earned from one spouse is treated as if both spouses earned it
• property acquired during marriage is owned equally by each spouse

Question 11

earned income

Answer 11

generated through efforts of the taxpayer
- includes salary/wages, business income, and unemployment compensation

Question 12

unearned income

Answer 12

income from property. taxed differently depending on circumstances
- includes gains/losses on sale of property, dividends/interests, rent/royalties, and annuities

Question 13

annuity

Answer 13

investment that offers a stream of usually equal payments

Question 14

annuity exclusion ratio formula:

Answer 14

original investment / expected return = return of capital %

Question 15

the return of capital percent is the percent:

Answer 15

not taxed

Question 16

fixed annuity

Answer 16

the expected return is known

Question 17

life annuity

Answer 17

payments are made for the life of the annuitant

Question 18

a taxpayer who lives longer than the expected life annuity will receive:

Answer 18

extra payments, all taxable

Question 19

a taxpayer who dies before the expected life annuity, the amount of unrecovered investment is:

Answer 19

deducted on the taxpayer’s final income tax return

Question 20

formula for gains/losses on property dispositions

Answer 20

sales proceeds
less: selling costs
= amount realized
less: tax basis
= total gain or loss

Question 21

alimony

Answer 21

financial support to one spouse when couples legally separate or divorce

Question 22

“C-corp” income is taxed to:

Answer 22

the corporation, NOT the shareholders

Question 23

“S-corps” and partnerships are ________ entities

Answer 23

flow-through
- income and deductions “flow-through” to the owners

Question 24

cost recovery in S-corps and partnerships

Answer 24

distributions reduce the owners basis in their ownership

Question 25

5 tax law alimony requirements:

Answer 25

1. transfer of cash 2. made under a written court decree 3. not designated as anything other than alimony 4. taxpayers do not live together when payment is made 5. payments stop at death of recipient

Question 26

3 exceptions to prizes/gambling winnings being taxed:

Answer 26

1. awards for scientific, literary, or charitable achievements 2. employee awards for length of service (excluded up to $400 or $1600 of tangible property) 3. prizes won by Team USA athletes

Question 27

gambling winnings must be reported to the IRS for winnings over:

Answer 27

$600 - varies by game but $600 is the general number

Question 28

gambling winnings are taxable even if:

Answer 28

not reported

Question 29

gamblers can deduct losses up to:

Answer 29

the amount of winnings

Question 30

social security benefits modified AGI formula:

Answer 30

AGI (less SS benefits) + 1/2 SS benefit + tax-exempt interest income + excluded foreign income = modified AGI for SS

Question 31

lower income pays _____% tax on SS benefits received

Answer 31

0

Question 32

middle income pays ___% tax on SS benefits received

Answer 32

50

Question 33

higher income pays ___% tax on SS benefits received

Answer 33

85

Question 34

when are bargain purchases taxable/nontaxable?

Answer 34

taxable: to the employee in an employer/employee relationship nontaxable: between friends/family (taxable as a gift in excess of $17,000)

Question 35

what is the exclusion on taxable employee discounts?

Answer 35

"reasonable employee discounts"

Question 36

what are the conditions for a discount on tangible goods tax exclusion?

Answer 36

the employee must at least pay the COGS

Question 37

what are the conditions for a discount on services tax exclusion?

Answer 37

any discount over 20% is taxable

Question 38

who is taxed when a taxpayer has a loan forgiven?

Answer 38

the taxpayer

Question 39

two exceptions to the discharge of indebtedness

Answer 39

1. any debt dismissed through bankruptcy is not taxable 2. when taxpayer is considered insolvent

Question 40

when is a taxpayer insolvent?

Answer 40

net assets < 0

Question 41

two common tax exclusion scenarios

Answer 41

1. municipal bond interest 2. sale of personal residence

Question 42

sale of personal residence tax exclusion tests

Answer 42

1. ownership test 2. use test

Question 43

ownership test

Answer 43

must have owned the residence for 2+ years in the five years before the date of sale

Question 44

use test

Answer 44

must have used the property as principal residence for 2+ years in the five years before the date of sale

Question 45

fringe benefits

Answer 45

benefits provided by an employer to an employee

Question 46

to be excluded, a fringe benefit must be __________

Answer 46

qualified

Question 47

exclusion requirement: medical/dental health insurance

Answer 47

full amount excluded from gross income

Question 48

exclusion requirement: life insurance

Answer 48

employees can exclude the amount paid by employer up to $50,000

Question 49

exclusion requirement: deminimis benefits

Answer 49

excluded

Question 50

exclusion requirement: working condition (non-qualified)

Answer 50

employees may excluded any benefit/reimbursement provided by employer if that item would be deductible as a business expense

Question 51

exclusion requirement: no additional cost services

Answer 51

employees can exclude the value of a service provided by employer that has minimal cost to employer

Question 52

exclusion requirement: meals and lodging

Answer 52

employees can exclude employer provided meals if: 1. provided on business premesis 2. provided for employer's convenience 3. acceptance of lodging is a condition of employment

Question 53

exclusion requirement: scholarships

Answer 53

degree-seeking students can exclude scholarships that provide tuition, fees, books, and supplies

Question 54

_____ and ______ covered by a scholarship IS included in gross income

Answer 54

room and board

Question 55

exclusion requirement: life insurance proceeds

Answer 55

amount received due to death is excluded, however interest paid between payment and death is taxable

Question 56

definition of foreign-earned income exclusion

Answer 56

US citizens are subject to tax on all income, whether generated in the US or not

Question 57

two methods to provide relief from double taxation on foreign earned income

Answer 57

1. tax credit for foreign taxes paid 2. exclusions up to $120,000 of foreign earned income

Question 58

the foreign-earned income exclusion only counts for _______ income

Answer 58

earned

Question 59

requirements for the F-EIE

Answer 59

1. be considered a resident of that country by living in that country for one full calendar year OR 2. live in that country for 330 days in a 12-month period, which can occur over 2 years

Question 60

exclusion requirement: workers comp

Answer 60

excluded from gross income

Question 61

______ compensation is not taxable, but _______ compensation is

Answer 61

workers; unemployment

Question 62

exclusion requirement: personal injury payments

Answer 62

- compensatory damages for physical injury or illness (includes lost wages and emotional distress)

Question 63

_______ damages are included in gross income

Answer 63

punitive

Question 64

when are emotional distress damages included in gross income?

Answer 64

when they are not related to physical injury

Question 65

exclusion requirement: healthcare reimbursements

Answer 65

reimbursements received from health insurance for medical expenses are excluded

Question 66

exclusion requirement: disability insurance

Answer 66

when the employee pays the policy for disability insurance

Question 67

payments from disability insurance is included in gross income when the ______ pays for the policy

Answer 67

employer