Federal Personal Income Tax Flashcards
4 Essential Tax Questions
1) “Income”- what is “Income”?
2) To Whom- to Whom is it income?
3) When- When is it income?
4) Character- what is the “Character” of the income?
Gross Income- definition
Gross income- includes any economic benefit or any clearly realized accession to your wealth
1) Economic Benefit, or 2) Realized accession to one's wealth
“Gross Income”- 4 basic principles to
1) Realization
2) Non-cash Receipts
3) Claim of Right
4) Tax Benefit Rule
Realization - def.
The increased or decreased value of an asset is NOT taken into account for tax purposes UNTIL it is “realized” through the ‘sale’ OR other disposition of the asset.
- asset must be realized by sale or other disposition of it in order to be accounted for
Non-cash Receipts
Gross income includes fair market value of any property received and the fair market value of any services received
- Property, or - Services
Ex. If partners of law firm gives the summer associate who bills the most hours Eagles tickets, that associate must report that gross income
Claim of Right - def.
Taxpayer has received property or funds under a “claim of right” when they are received w/o RESTRICTION as to use or DISPOSITION
1) funds, or
2) property
Claim of Right - rule
Property or funds received under a “claim of right” must be reported for tax purposes, EVEN though taxpayer may later be required to return the property, funds, or other equivalent
Ex. If P sues Beyonce and the court orders Beyonce to pay royalties to the P, even though Beyonce plans to appeal, P must report the royalty as apart of her gross income in year 1.
Claim of Right - what’s the tax consequence if in the following year, the person loses their claim to the money or property acquired in the previous year? (i.e. if appeals court reverses trial court’s award for a P, P won’t have a right to the money paid to her in previous year)
- Deduction in year that it is repaid (i.e. for P)
- Don’t amend year 1 return
Claim of Right: Illegally Acquired Funds rule
- are considered taxable income? - rule
Yes.
R: Stolen, embezzled, or otherwise illegally acquired funds are considered taxable income
Tax Benefit Rule
- rule
- HOW MUCH- is the returned income?
If taxpayer takes deduction in 1 yr and RECOVERS the property that gave rise to the deduction in a LATER tax year, taxpayer has tax benefit income to the extent that the earlier deduction provided a tax savings or a tax benefit
How much: Amount of the prior deduction
Tax Benefit hypo
Y1: Manning donated property to charity valued at $150K and took deduction
Y2: unable to use the property, charity returns the property to Manning, and it’s now valued at $200K.
- Does Manning have income in Y2 from the return of this property?
- If so, how much
- Yes
- 150K$, amount of prior deduction
Alimony Rule
- rule
- receiving spouse
- paying spouse
unless otherwise provided in written agreement, alimony is taxable to the receiving spouse and deductible for paying spouse
1) receiving spouse–> taxed
2) paying spouse–> tax deductible
Alimony - 4 elements
1) Writing- must be pursuant to written divorce or separation agreement
- can’t be verbal promise even if kept
2) No living disallowed- cannot be members of same household
3) Cease At or Before DEATH: liability to make payments must cease at or before death
- Note: this is death of receiving spouse
- Note: if payed to estate, it’s not alimony
4) Cash: payments must be case or it’s equivalent
- Can’t be property
- i.e. check is sufficient
Child Support
1) is it taxable to the receiving spouse?
2) is it deductible for to paying spouse
1) No
2) No
Note: this is opposite of Alimony rule
Child Support in Disguise rule
if payment is reduced upon a contingency relating to a child, amount of the reduction is considered child support
- must relate to a child
- triggering event: look for a reduction
Child Support in Disguise - hypo
Under agreement Dad pays Mom 1,000,000$ per yr until the kid reaches age of 21. at that time, payment is reduced to 700K.
1) How much of this yearly payment should be considered child support?
2) How much should be considered alimony?
1) Amount of the reduction- 300K (Not taxable or deductible)
2) 700K (taxable or deductible)
Which must be paid first if $ is falling short, child support or alimony?
-rule
Child Obligation
R: where total payments for alimony and child support fall short, payments are considered first to be the child obligation.
Gross Income: Prizes and Awards rule
Gross Income includes - the value of cash, property, or services as a prize, award, or windfalls.
1- cash
2-property
3-services
4-windfallsGross Income: Gains or Losses from Gambling rule
1) Winnings- included are gross income
2) Losses - unless taxpayer is actively engaged in trade or business of gambling, gambling losses for taxable yr may be used only to extent of gains
–Net losses–> NO deduction (assuming not a pro)
–Net gains –> taxed
CHECK ON THIS
Cancellation of Indebtedness
- 2 parts
1) Borrow has no gross income upon initial receipt of borrowed funds
- borrowing is NOT a taxable event
2) However, a taxpayer whose debt is CANCELLED or DISCHARGED at less than full amount has discharged of indebtedness income to extent of the difference between the full amount of the obligation and the amount paid in satisfaction
- –When debt cancelled or discharged (i.e. paid off in full) –> taxed at that point
Cancellation of Indebtedness: 3 exceptions
memory device- the debt is RIGed
1) Reduction in Purchase Price
2) Insolvency
3) Gift
Cancellation of Indebtedness
1) Reduction in Purchase Price exception
- If “apparent” discharge of debt is really a reduction in purchase price in connect w/ sale of goods, discharge of indebtedness rules will apply (i.e. won’t have another taxable event)
- apparentness is key
- very fact specific- look for 1) purchase of goods, 2) negotiating
- ex. lecture p. 8
