Chapter 5 Flashcards
treasury regulation on gross income definition
gross income realized in ANY FORM (money, services, property)
three conditions for when taxpayers should recognize gross income:
- they receive an economic benefit
- they realize the income
- no tax provision allows them to exclude or defer the income from gross income that year
realization principle
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
form of receipt
how the income is received does not change the fact you received income
return of capital principle
taxpayers are allowed to recover the cost of their investment (tax basis) tax-free
returns of amounts previously deducted
a refund is usually not included in gross income because it usually represents a reduction in expense
under the tax benefit rule, a refund is taxable if it is:
given for an amount previously deducted
claim of right doctrine
income has been realized if a taxpayer receives income and there are no restrictions on the use of income
“common law” means:
- all income earned from one spouse is assigned to that spouse
- income from separately owned property is assigned to the owner
“community property” means:
- income earned from one spouse is treated as if both spouses earned it
- property acquired during marriage is owned equally by each spouse
earned income
generated through efforts of the taxpayer
- includes salary/wages, business income, and unemployment compensation
unearned income
income from property. taxed differently depending on circumstances
- includes gains/losses on sale of property, dividends/interests, rent/royalties, and annuities
annuity
investment that offers a stream of usually equal payments
annuity exclusion ratio formula:
original investment / expected return = return of capital %
the return of capital percent is the percent:
not taxed
fixed annuity
the expected return is known
life annuity
payments are made for the life of the annuitant
a taxpayer who lives longer than the expected life annuity will receive:
extra payments, all taxable
a taxpayer who dies before the expected life annuity, the amount of unrecovered investment is:
deducted on the taxpayer’s final income tax return
formula for gains/losses on property dispositions
sales proceeds
less: selling costs
= amount realized
less: tax basis
= total gain or loss
alimony
financial support to one spouse when couples legally separate or divorce
“C-corp” income is taxed to:
the corporation, NOT the shareholders
“S-corps” and partnerships are ________ entities
flow-through
- income and deductions “flow-through” to the owners
cost recovery in S-corps and partnerships
distributions reduce the owners basis in their ownership
5 tax law alimony requirements:
- transfer of cash
- made under a written court decree
- not designated as anything other than alimony
- taxpayers do not live together when payment is made
- payments stop at death of recipient
3 exceptions to prizes/gambling winnings being taxed:
- awards for scientific, literary, or charitable achievements
- employee awards for length of service (excluded up to $400 or $1600 of tangible property)
- prizes won by Team USA athletes
gambling winnings must be reported to the IRS for winnings over:
$600
- varies by game but $600 is the general number
gambling winnings are taxable even if:
not reported
gamblers can deduct losses up to:
the amount of winnings
social security benefits modified AGI formula:
AGI (less SS benefits)
+ 1/2 SS benefit
+ tax-exempt interest income
+ excluded foreign income
= modified AGI for SS
lower income pays _____% tax on SS benefits received
0
middle income pays ___% tax on SS benefits received
50
higher income pays ___% tax on SS benefits received
85
when are bargain purchases taxable/nontaxable?
taxable: to the employee in an employer/employee relationship
nontaxable: between friends/family (taxable as a gift in excess of $17,000)
what is the exclusion on taxable employee discounts?
“reasonable employee discounts”
what are the conditions for a discount on tangible goods tax exclusion?
the employee must at least pay the COGS
what are the conditions for a discount on services tax exclusion?
any discount over 20% is taxable
who is taxed when a taxpayer has a loan forgiven?
the taxpayer
two exceptions to the discharge of indebtedness
- any debt dismissed through bankruptcy is not taxable
- when taxpayer is considered insolvent
when is a taxpayer insolvent?
net assets < 0
two common tax exclusion scenarios
- municipal bond interest
- sale of personal residence
sale of personal residence tax exclusion tests
- ownership test
- use test
ownership test
must have owned the residence for 2+ years in the five years before the date of sale
use test
must have used the property as principal residence for 2+ years in the five years before the date of sale
fringe benefits
benefits provided by an employer to an employee
to be excluded, a fringe benefit must be __________
qualified
exclusion requirement:
medical/dental health insurance
full amount excluded from gross income
exclusion requirement:
life insurance
employees can exclude the amount paid by employer up to $50,000
exclusion requirement:
deminimis benefits
excluded
exclusion requirement:
working condition (non-qualified)
employees may excluded any benefit/reimbursement provided by employer if that item would be deductible as a business expense
exclusion requirement:
no additional cost services
employees can exclude the value of a service provided by employer that has minimal cost to employer
exclusion requirement:
meals and lodging
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
exclusion requirement:
scholarships
degree-seeking students can exclude scholarships that provide tuition, fees, books, and supplies
_____ and ______ covered by a scholarship IS included in gross income
room and board
exclusion requirement:
life insurance proceeds
amount received due to death is excluded, however interest paid between payment and death is taxable
definition of foreign-earned income exclusion
US citizens are subject to tax on all income, whether generated in the US or not
two methods to provide relief from double taxation on foreign earned income
- tax credit for foreign taxes paid
- exclusions up to $120,000 of foreign earned income
the foreign-earned income exclusion only counts for _______ income
earned
requirements for the F-EIE
- be considered a resident of that country by living in that country for one full calendar year OR
- live in that country for 330 days in a 12-month period, which can occur over 2 years
exclusion requirement:
workers comp
excluded from gross income
______ compensation is not taxable, but _______ compensation is
workers; unemployment
exclusion requirement:
personal injury payments
- compensatory damages for physical injury or illness (includes lost wages and emotional distress)
_______ damages are included in gross income
punitive
when are emotional distress damages included in gross income?
when they are not related to physical injury
exclusion requirement:
healthcare reimbursements
reimbursements received from health insurance for medical expenses are excluded
exclusion requirement:
disability insurance
when the employee pays the policy for disability insurance
payments from disability insurance is included in gross income when the ______ pays for the policy
employer
