Federal Taxation II: Gross Income

Question 1

Income Recognition: Constructive Receipt

Answer 1

Cash basis taxpayer must include value of property in income in period when right to (or control of) property is acquired

Question 2

Income Recognition: Tax Benefit Rule

Answer 2

Taxpayer must include expense reimbursement in income

1. if expense was deducted in a prior period
2. if deduction reduced taxable income.

Question 3

Income Recognition: Claim of Right Doctrine

Answer 3

Taxpayer must include property in income when apparent claim to property materializes

Question 4

Income Recognition: Assignment of Income Doctrine

Answer 4

Income cannot be “assigned” to someone other than party that earned it

Question 5

Interest Income: General

Answer 5

Interest is income when received or accrued

Question 6

Common Sources of Interest Income (3)

Answer 6

1. US Treasury notes/bonds
2. Federal and State tax refunds
3. Mortgages

Question 7

Interest Income: Bond Premiums

Answer 7

Amount paid for bond is more than face value.

If amortized, basis of bond is reduced

Question 8

Interest Income: Bond Discounts

Answer 8

Amount paid for bond less than face value.

Should be amortized as interest income (using effective interest rate method).

Amortization INCREASES interest income.

Question 9

Original Issue Discount (Bonds)

Answer 9

Loan made requiring higher payment at maturity than amount of original loan.

Additional payment = discount (considered interest)

Often non-interest bearing.

Question 10

Interest Income: Short-term discounts

Answer 10

Cash Basis: taxed at maturity as ordinary income

Accrual: reported as earned

Question 11

Interest Income: Series EE Bonds

Answer 11

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)

Question 12

Income: Dividends on Stock

Answer 12

Dividend on Common Stock: Not taxable.

Dividend on Preferred Stock: Taxable.

Question 13

Determine Taxability of Dividends (3)

Answer 13

1. dividend income to the extent of earnings and profits (E&P)
2. reduction in the basis of the stock
3. excess is capital gain

Question 14

Municipal Interest

Answer 14

State/Local government obligations. Not Taxable.

Question 15

Dividend Tax Rate

Answer 15

Qualified: Same as LTCG tax rate

Not Qualified: Taxed as regular income.

Question 16

Alimony

Answer 16

Taxable to payee.

Deductible by payor.

Must be:

1. Required
2. Made in Cash
3. Paid to/on behalf of former spouse
4. Terminate upon death of recipient
5. Payor/Payee can’t live together

Question 17

Child Support

Answer 17

Not Taxable to payee.

Not Deductible to payor.

Question 18

Is Compensation received for physical injury or illness taxable as income?

Answer 18

No, including workers comp

Question 19

Are Damages taxable as income?

Answer 19

Yes, unless caused by underlying physical illness or injury

Question 20

Are Punitive Damages Taxable as income?

Answer 20

Yes, including any attorney’s fees recovered

Question 21

Are annuity payments taxable as income?

Answer 21

Annuity rules determine the answer.

Each payment is part income/part return of capital if taxpayer has basis in annuity/retire plan

Question 22

Annuity Formula

Answer 22

Cost of annuity / expected return x payment

Includible amount = payment minus answer above

Question 23

Income: Prizes and Awards

Answer 23

FMV of prizes and awards are income unless for civic, artistic, educational, scientific or literary achievement AND recipient:

1. selected w/o action on own part
2. not required to perform services
3. amount paid directly to tax-exempt or govt. organization

Question 24

Income: Scholarships

Answer 24

Excluded from income to extent that funds are used for tuition, fees, books, supplies.

Amounts for room/board are earned income.

Question 25

Income: Life Insurance Proceeds

Answer 25

Life insurance proceeds due to death of insured = not income.

Question 26

Life Insurance purchased from insured or owner of policy for consideration:

Answer 26

Asset

Proceeds in excess of cost are income

Question 27

Income: Gifts/Inheritances

Answer 27

Not income

Question 28

Income: Forgiveness of Debt

Answer 28

Generally income unless forgiveness is gift/related to bankruptcy

Question 29

Income: Social Security Benefits

Answer 29

Not income unless provisional income exceeds specified amount.

PI = AGI + tax-exempt interest + 50% (SSB)