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ACCT 3361 Income Tax > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

treasury regulation on gross income definition

A

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

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2
Q

three conditions for when taxpayers should recognize gross income:

A
  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
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3
Q

realization principle

A

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

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4
Q

form of receipt

A

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

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5
Q

return of capital principle

A

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

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6
Q

returns of amounts previously deducted

A

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

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7
Q

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

A

given for an amount previously deducted

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8
Q

claim of right doctrine

A

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

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9
Q

“common law” means:

A
  • all income earned from one spouse is assigned to that spouse
  • income from separately owned property is assigned to the owner
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10
Q

“community property” means:

A
  • income earned from one spouse is treated as if both spouses earned it
  • property acquired during marriage is owned equally by each spouse
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11
Q

earned income

A

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

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12
Q

unearned income

A

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

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13
Q

annuity

A

investment that offers a stream of usually equal payments

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14
Q

annuity exclusion ratio formula:

A

original investment / expected return = return of capital %

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15
Q

the return of capital percent is the percent:

A

not taxed

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16
Q

fixed annuity

A

the expected return is known

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17
Q

life annuity

A

payments are made for the life of the annuitant

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18
Q

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

A

extra payments, all taxable

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19
Q

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

A

deducted on the taxpayer’s final income tax return

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20
Q

formula for gains/losses on property dispositions

A

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

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21
Q

alimony

A

financial support to one spouse when couples legally separate or divorce

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22
Q

“C-corp” income is taxed to:

A

the corporation, NOT the shareholders

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23
Q

“S-corps” and partnerships are ________ entities

A

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

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24
Q

cost recovery in S-corps and partnerships

A

distributions reduce the owners basis in their ownership

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25
Q

5 tax law alimony requirements:

A
  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
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26
Q

3 exceptions to prizes/gambling winnings being taxed:

A
  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
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27
Q

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

A

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

28
Q

gambling winnings are taxable even if:

A

not reported

29
Q

gamblers can deduct losses up to:

A

the amount of winnings

30
Q

social security benefits modified AGI formula:

A

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

31
Q

lower income pays _____% tax on SS benefits received

A

0

32
Q

middle income pays ___% tax on SS benefits received

A

50

33
Q

higher income pays ___% tax on SS benefits received

A

85

34
Q

when are bargain purchases taxable/nontaxable?

A

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

35
Q

what is the exclusion on taxable employee discounts?

A

“reasonable employee discounts”

36
Q

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

A

the employee must at least pay the COGS

37
Q

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

A

any discount over 20% is taxable

38
Q

who is taxed when a taxpayer has a loan forgiven?

A

the taxpayer

39
Q

two exceptions to the discharge of indebtedness

A
  1. any debt dismissed through bankruptcy is not taxable
  2. when taxpayer is considered insolvent
40
Q

when is a taxpayer insolvent?

A

net assets < 0

41
Q

two common tax exclusion scenarios

A
  1. municipal bond interest
  2. sale of personal residence
42
Q

sale of personal residence tax exclusion tests

A
  1. ownership test
  2. use test
43
Q

ownership test

A

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

44
Q

use test

A

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

45
Q

fringe benefits

A

benefits provided by an employer to an employee

46
Q

to be excluded, a fringe benefit must be __________

A

qualified

47
Q

exclusion requirement:
medical/dental health insurance

A

full amount excluded from gross income

48
Q

exclusion requirement:
life insurance

A

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

49
Q

exclusion requirement:
deminimis benefits

A

excluded

50
Q

exclusion requirement:
working condition (non-qualified)

A

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

51
Q

exclusion requirement:
no additional cost services

A

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

52
Q

exclusion requirement:
meals and lodging

A

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

53
Q

exclusion requirement:
scholarships

A

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

54
Q

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

A

room and board

55
Q

exclusion requirement:
life insurance proceeds

A

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

56
Q

definition of foreign-earned income exclusion

A

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

57
Q

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

A
  1. tax credit for foreign taxes paid
  2. exclusions up to $120,000 of foreign earned income
58
Q

the foreign-earned income exclusion only counts for _______ income

A

earned

59
Q

requirements for the F-EIE

A
  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
60
Q

exclusion requirement:
workers comp

A

excluded from gross income

61
Q

______ compensation is not taxable, but _______ compensation is

A

workers; unemployment

62
Q

exclusion requirement:
personal injury payments

A
  • compensatory damages for physical injury or illness (includes lost wages and emotional distress)
63
Q

_______ damages are included in gross income

A

punitive

64
Q

when are emotional distress damages included in gross income?

A

when they are not related to physical injury

65
Q

exclusion requirement:
healthcare reimbursements

A

reimbursements received from health insurance for medical expenses are excluded

66
Q

exclusion requirement:
disability insurance

A

when the employee pays the policy for disability insurance

67
Q

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

A

employer

ACCT 3361 Income Tax (8 decks)

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