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.
Alimony
Taxable to payee.
Deductible by payor.
Must be:
- Required
- Made in Cash
- Paid to/on behalf of former spouse
- Terminate upon death of recipient
- Payor/Payee can’t live together
Child Support
Not Taxable to payee.
Not Deductible to payor.
Is Compensation received for physical injury or illness taxable as income?
No, including workers comp
Are Damages taxable as income?
Yes, unless caused by underlying physical illness or injury
Are Punitive Damages Taxable as income?
Yes, including any attorney’s fees recovered
Are annuity payments taxable as income?
Annuity rules determine the answer.
Each payment is part income/part return of capital if taxpayer has basis in annuity/retire plan
Annuity Formula
Cost of annuity / expected return x payment
Includible amount = payment minus answer above
Income: Prizes and Awards
FMV of prizes and awards are income unless for civic, artistic, educational, scientific or literary achievement AND recipient:
- selected w/o action on own part
- not required to perform services
- amount paid directly to tax-exempt or govt. organization
Income: Scholarships
Excluded from income to extent that funds are used for tuition, fees, books, supplies.
Amounts for room/board are earned income.
Income: Life Insurance Proceeds
Life insurance proceeds due to death of insured = not income.
Life Insurance purchased from insured or owner of policy for consideration:
Asset
Proceeds in excess of cost are income
Income: Gifts/Inheritances
Not income
Income: Forgiveness of Debt
Generally income unless forgiveness is gift/related to bankruptcy
Income: Social Security Benefits
Not income unless provisional income exceeds specified amount.
PI = AGI + tax-exempt interest + 50% (SSB)
