Class 04. Flashcards
gross income inclusions
what is the GI formula?
- GI
- (minus) AGI deduction
- = AGI
- (minus) greater of SD or itemized (“from AGI”) deduction
SD =
ID = - = taxable income
- tax liability (ref. the schedule)
- (minus) tax credits / pre-payments
- final tax liability
how are dividends taxed?
at the preferential rate
what is considered in recognition?
- economic benefit
- realization
- recognition
what is economic benefit?
net worth inc. (assets inc. or liability going down)
what is realization?
engagement in a transaction
what is recognition?
when there aren’t tax exclusions/deferral
what is the tax basis?
cost of an asset
how does the tax basis affect income?
it’s excluded from realized income + transaction costs
what is the tax benefit rule?
a refund for an expense deducted in a prior year (the net refund is taxable)
what is a claim of right?
reported income received in prior years that can be deducted if repaid (opposite tax benefit)
when do you recognize income?
cash + accrual + hybrid method (always based on the FMV)
what are characteristics of the cash method?
- FMV of cash/property/services included in GI
- when income’s earned doesn’t matter, only when cash appears
what is constructively received?
- made to the taxpayer
- without substantial restriction
why is constructively received used?
prevents delay of recognized income
what is the accrual method?
cash/property is accounted when earned
what is considered earned?
all events passed to gain rights to income + amount can be determined
what is the claim of doctrine?
it is the amount received even while income is disputed (deduct only once you refund)
when is prepaid income taxed?
the year of receipt (immediately)
when can you get a deferral?
for goods/services delivered in advance of receiving payment
what is alimony?
payment between 2 ex-spouses
what is not alimony?
- property divisions
- child support payments
- separate spouses can’t live together
who can get an AGI deduction for a divorce?
finalized cases 2019 + prior
what if the divorce allows an AGI deduction?
the recipient has to note the deduction as income
what are the characteristics of child support?
- nondeductible by payor + not taxed by recipient
- if you stop paying once the recipient dies, it’s deemed alimony (clarify this point)
T/F: debt forgiven is considered income
true (unless you’re insolvent)
what is an annuity?
prepaying for equal payments in the future overtime
how is an annuity taxed?
a portion considered non-tax + rest considered GI
what happens when an annuity actual > estimated?
estate can claim a loss in the year of death
what happens when an annuity actual < estimated?
the balance is taxable (it’s GI)
what is the exclusion amount?
exclusion ratio x annuity payment
what is the exclusion ratio?
initial investment / expectation of return
what is an expected return?
annual amount x # year payments
