Chapter 5 - Gross Income (What is included and excluded)

Question 1

What is economic income

Answer 1

any change in net worth

Question 2

why is economic income problematic

Answer 2

impractical, liquidity problems and prone to disputes

ex: unless you sell something its hard to prove its worth sometimes

Question 3

What is accounting income?

Answer 3

bad because it is based on the realization principle, and is conservative (underreport income) and objective

*exchange has to happen to recognize something

Question 4

What is included in Gross income

Answer 4

any income from whatever source derived unless tax provisions say otherwise

-could be money, property, or services

Question 5

Why does accounting income not work for tax purposes?

Answer 5

accounting objectives may lead to understatement of income, and tax goals are to preserve revenue

Question 6

what is accounting incomes goal

Answer 6

to share useful information with outsiders

Question 7

what is the tax goal

Answer 7

the equitable collection of revenue

Question 8

Asia owns stock that is listed on the New York Stock Exchange, and this year the stock increased in value by $20,000.

what is the economic income and gross income

Answer 8

economic: 20,000 because there was an increase in net worth

gross: 0 because there was no sale or transaction

Question 9

when do tax payers recognize income?

Answer 9

when taxpayers engage in a transaction that results in a measurable change in property rights (ex: cash or assets)

Question 10

when property is exchanged how is the income recognized

Answer 10

realize at market value however they can reduce the proceeds by their unrecovered investments

Question 11

If someone has stock and it increases in value throughout the year but they do not sell the stock then what is their taxable income from it

Answer 11

0, no sale of the stock

Question 12

What does form of receipt mean

Answer 12

it means that income can be received in any form (cash, property or service)

Question 13

How is dividend income taxed differently

Answer 13

• maybe subject to a lower

Question 14

Taxable income shares the return of capital principal with economic income, what does that mean?

Answer 14

when you sell something at a gain the full amount of sales price isn’t taxable just the gain and the rest is considered return on capital

Question 15

how is dividend income taxed

Answer 15

lower tax rates than interest income of 15% as long as the stock was held for a min. of 60 days during the 120 days window around the ex-dividend date

these dividends are called qualified dividends

Question 16

What is the equation for figuring out how much is taxed for property exchanges

what is amount realized and adjusted basis of property entail?

Answer 16

The amount realized from the sale - adjusted basis of the property = realized gain/loss

amount realized = cash + FMV property received + reduction sellers debt - selling expense

Adjusted bases = cost + capital additions - depreciation

Question 17

What are the special rules for capital gains

Answer 17

long term have smaller rates

short-term: (<year) = same tax rates as ordinary income

long-term (>year) = 20, 15 or 0%

medicare: 3.8%

Question 18

what are individual NET capital loss deductions limited to?

Answer 18

$3000/year to offset ordinary income

Question 19

why is capital gains good?

Answer 19

because capital losses can only be used to offset capital gains (except for the $3000 that is allowed to be deduced from ordinary)

Question 20

is ordinary loss or capital loss better?

Answer 20

ordinary loss because it is easier to deduct than capital losses

Question 21

What is the tax benefit rule?

Answer 21

if you made a payment in prior years and it was deductible and later on you were reimbursed for it you have to tax that by the amount you deducted it

Question 22

During 2023, Deb spends 15,000 on medical expenses and had no other itemized deductions, in 2024 she received 1000 worth of reimbursement. The standard deduction was 13,000

how much income is taxable in 2024 and also what principal is this

Answer 22

1000 in taxable income is because she took the itemized deduction so therefore since it was deducted in the prior year this reimbursement is taxable in 2024

this is the tax benefit rule

Question 23

During 2023, Deb spends 5000 on medical expenses and had no other itemized deductions, in 2024 she received 500 worth of reimbursement. The standard deduction was 13,000

how much income is taxable in 2024 and also what principal is this

Answer 23

none of it is taxable since she took the the standard deduction so the 5000 medical expenses never gave her a tax benefit in the previous year

this is tax benefit rule

Question 24

If you receive discharge of indebtedness (meaning you don’t have to pay your debt anymore) is it taxable?

Answer 24

it is taxable income

Question 25

what are the exceptions for debt indebtedness in terms of taxable income?

Answer 25

you don't have it as taxable income for federal bankruptcy, insolvency and also the mortgagee debt relief of 2017

Question 26

If you enter yourself into a competition and win a prize is that income taxable

Answer 26

yes

Question 27

if someone enters you into a competition and win a prize is that income taxable?

Answer 27

yes because it is based off of a selection process with some criteria to be selected

Question 28

Are gifts considered taxable income?

Answer 28

no they are excluded from gross income if the transfer was made voluntary and made because of a affective or donative intent

Question 29

when are gifts considered taxable income

Answer 29

when they are from an employer or from someone you are conducting business with (technically considered compensation)

Question 30

are inheritances taxable income?

Answer 30

no but any income generated from the inheritance is taxable

Question 31

Example: you are a wait-person at lake park bistro and a regular gives you $100 that says a gift as a token of my appreciation is that taxable?

Answer 31

yes because you wouldn't have gotten it if you weren't working for them

Question 32

if you get reimbursed for expenses are they taxable

Answer 32

no as long as it was not previously deducted *considered to be restoring you to where you previously were

Question 33

is compensation for loss wages taxable income

Answer 33

yes because if you were able to work it would of been taxable income so it keeps you in the same position

Question 34

is payment to damage to or destruction of property taxable income?

Answer 34

no as long as they don't give you more than it was worth

Question 35

is compensation for emotional distress taxable income?

Answer 35

yes as long as it wasn't associated with a physical injury

Question 36

are punitive damages taxable income

Answer 36

yes anytime you punish someone and win money it is taxable because it is not about restoring you to your current condition

Question 37

Example: Jane sued her employer for age discrimination and was awarded 5000 to cover medical bills, 20000 to punish the employer for discrimination and 10,000 to compensate for loss wages what is taxable

Answer 37

30,000 (20,000 emotional distress and 10,000 wage compensation) 5000 isn't because it is a reimbursement for expenses

Question 38

In a divorce settlement when a property settlement happens what is the tax effect

Answer 38

there is no tax effect (not taxable or deductible)

Question 39

in a divorce settlement what is the tax effect of child support payments

Answer 39

they are not deductible by the person paying them and are not taxed to the person receiving them - not deductible and not taxable income

Question 40

what is alimoney

Answer 40

a higher earning spouse in a divorce settlement may pay the lower earning spouse as longer as they are not members of the same household

Question 41

what is the tax effect of alimony

Answer 41

they are deductible by the payor and taxable income to the recipient if divorce settled prior to 2019

Question 42

Example under the terms of their divorce agreement in 2018, James is to transfer common stock (cost of 25,000 and FMV of 60,000) to Nina, James and nina have a 14 year old child, and james is to pay 300 a month as child support. In addition Nina recieves $1000 per month for 10 years . However payments will be reduced to 750 a month when the child reaches 21. In the first year under the agreement Nina receives common stock and correct cash payments for 6 months how does this affect her gross income

Answer 42

stock isn't taxable because it is a property settlement and the child payments arnt either 750 x 6 = 4500 of it is taxable since it is considered alimony *since 250 stops when the child is 21 it is considered child support

Question 43

are scholarships taxable income?

Answer 43

it depends - it is not taxable if 1. you are a candidate for a degree at a educational institution 2. it is used for books, tuitions fees and supplies it is taxable if 1. it is used for room and board 2. payments are disguised as compensation 3. scholarship is a form of tuition waver

Question 44

Alejandro was awarded an academic scholarship to State University for the 2023-2024 academic year. He received $5,000 in August and $6,000 in December 2023. Alejandro had enough personal savings to pay all expenses as they came due. Alejandro’s expenditures for the relevant period were as follows Tuition, August 2023 $3,300  Tuition, December 2023 $3,400  Room and board  August-December 2023 $3,000  January-May 2024 $2,400  Books and educational supplies  August-December 2023 $1,000  January-May 2024 $1,200 Determine the effect on Alejandro’s gross income for 2023 and 2024.

Answer 44

2023: none 2024: it would be scholarship minus the amount he payed in fees not related to room and board 11,000- 3300-3400-1000-1200 = 2100 is taxable income

Question 45

What is imputed interest

Answer 45

when a loan is made between related parties at a rate that is below market interest rate then the lender is deemed to have received interest and paid back the difference between the market and state interest rates

Question 46

Example: Tim (MTR=36%) loans his son Matt (MTR=15%) $50,000 interest-free. Matt invests the $50,000 and earns 10% (the same rate that Tim can earn). How much in income taxes does the family save with this plan?

Answer 46

1050 5000(.35)-5000(.15)

Question 47

why does the imputed interest rule exist?

Answer 47

to prevent the shifting of income for tax purposes

Question 48

What are the three steps to determining if we have to impute interest

Answer 48

Step 1. type of loan Step 2. Calculate imputed interest Step 3. are there any exceptions

Question 49

what are the types of loans for imputed interest

Answer 49

gift loan: family compensation loan: employer or doing work corporation-shareholder loan:

Question 50

how do you calculate max imputed amount

Answer 50

loan amount x Applicable market rate

Question 51

What are the exceptions that apply for imputed interest

Answer 51

#1: If it is a loan that is $10,000 you don't impute unless... it is not a gift loan and the purpose is tax avoidance or if it is a gift loan and they use it to buy income producing property #2: ONLY GIFT LOAN if a gift loan is less than or equal to 100,000 the imputed interest is limited to the net investment of the borrower - if it is less than 1000 you don't impute

Question 52

1. Sasha loans $5,000 to her son Jeff. Jeff uses the proceeds to pay his daughters college tuition. 2. Sasha loans $5,000 to her son Jeff. Jeff uses the proceeds to invest in real estate Impute or not?

Answer 52

1. do not impute 2. Impute

Question 53

For each scenario, discuss the income tax implications for both parties. Assume the applicable Federal interest rate is 8%. 1) Alamo Corporation loans Sandy, an employee, $15,000 on Jan. 1. The loan is to be repaid over 4 years, and the full amount of the loan is outstanding at the end of the year. Sandy uses the proceeds to buy a used automobile. She has $1,100 in investment income during the year.

Answer 53

On Alamo: 1200 interest income - 1200 compensation expense (deductible) = 0 On sandy: 1200 compensation expense - 1200 interest expense (ND) = 1200 *interest expense was for a personal use

Question 54

Sasha loans $50,000 to her son Jeff. Jeff uses the proceeds to pay his daughters college tuition. His net investment income for the year is $1,200. What is imputed

Answer 54

1200 because capped at investment income

Question 55

Sasha loans $50,000 to her son Jeff. Jeff uses the proceeds to invest in real estate. His net investment income for the year is $500. Do not Impute Interest Imputed interest is limited to $1,200 What is imputed

Answer 55

don't impute because exception 2 applies and investment income is less than 1000

Question 56

is municipal bond interest income taxable

Answer 56

no its is excluded from taxable income

Question 57

are life insurance proceeds taxable

Answer 57

no it is excluded from taxable income

Question 58

What is the assignment of income doctrine?

Answer 58

income earned from personal services must be reported by the taxpayer who performs the services

Question 59

who reports income for pass through entity

Answer 59

owners rather than the entity

Question 60

who reports income from property - from the actual property -from interest income -from dividend income

Answer 60

owner of the property dividend income: whoever gets the dividend interest income: however long you have had it for