Federal Taxation II: Gross Income Flashcards
Income Recognition: Constructive Receipt
Cash basis taxpayer must include value of property in income in period when right to (or control of) property is acquired
Income Recognition: Tax Benefit Rule
Taxpayer must include expense reimbursement in income
- if expense was deducted in a prior period
- if deduction reduced taxable income.
Income Recognition: Claim of Right Doctrine
Taxpayer must include property in income when apparent claim to property materializes
Income Recognition: Assignment of Income Doctrine
Income cannot be “assigned” to someone other than party that earned it
Interest Income: General
Interest is income when received or accrued
Common Sources of Interest Income (3)
- US Treasury notes/bonds
- Federal and State tax refunds
- Mortgages
Interest Income: Bond Premiums
Amount paid for bond is more than face value.
If amortized, basis of bond is reduced
Interest Income: Bond Discounts
Amount paid for bond less than face value.
Should be amortized as interest income (using effective interest rate method).
Amortization INCREASES interest income.
Original Issue Discount (Bonds)
Loan made requiring higher payment at maturity than amount of original loan.
Additional payment = discount (considered interest)
Often non-interest bearing.
Interest Income: Short-term discounts
Cash Basis: taxed at maturity as ordinary income
Accrual: reported as earned
Interest Income: Series EE Bonds
Interest only paid when bond matures.
Interest income not income until maturity (unless elected otherwise)
Interest can not income even at maturity if proceeds pay higher education expenses (owner is at least 24 yr old)
Income: Dividends on Stock
Dividend on Common Stock: Not taxable.
Dividend on Preferred Stock: Taxable.
Determine Taxability of Dividends (3)
- dividend income to the extent of earnings and profits (E&P)
- reduction in the basis of the stock
- excess is capital gain
Municipal Interest
State/Local government obligations. Not Taxable.
Dividend Tax Rate
Qualified: Same as LTCG tax rate
Not Qualified: Taxed as regular income.