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Tax > Gross Income > Flashcards

Gross Income Flashcards

1
Q

How is income defined in economics?

A

The amount that an individual consumes during a period and remain as well at the end as the beginning. It includes the wealth that flows to the individual and changes in the value, including unrealized gains and inheritance- inflation is considered in measuring income.

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2
Q

How is income measured in accounting?

A

Using a transactional approach, so only income, expenses, gains and losses that have realized are considered.

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3
Q

What are the conditions for income to be taxable?

A

Economic benefit
Realized- when the earning process is complete and a transaction permits an objective measure
Recognized- there may be exclusions or special provisions that cause income to not be recognized

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4
Q

What’s the ““wherewithal-to-pay” concept?

A

Tax must be collected when the taxpayer is in the best position to pay the tax

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5
Q

What’s included in gross income?

A

Compensation for services, including fees, commissions, fringe benefits, and similar items
Gross income derived from business
Gains derived from dealings in property
Interest
Rents
Royalties
Dividends
Alimony and separate maintenance payments (prior to January 1, 2019)
Annuities
Pensions
Income from discharge of indebtedness
Distributive share of partnership gross income
Income in respect of a decedent
Income from an interest in an estate or trust
All items of income such as insurance settlements, gambling winnings, or illegal income are also part of gross income. The phrase “except as otherwise provided” means that all sources of income are presumed to be taxable unless there is a specific exclusion in the income tax law.
Not just limited to cash, can be property or services

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6
Q

How is income allocated between spouses in a common-law property system?

A

In 42 states, eg MA, income is taxed to individual who earns the income

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7
Q

How is income allocated between spouses in a community property system?

A

May be separate or community

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8
Q

What are the three accounting methods that determine when tax is payable?

A

Cash- when income is received: any corp/partnership or PSC that meets the gross receipts test for the 3 preceding tax years <29MM
Actual- when income is earned
Hybrid- some are under cash, some under accrual

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9
Q

What are items of gross income per Section 61(a) of the IRC?

A

Compensation
Business Income
Gains from Property Dealings
Interest
Rents and Royalties
Dividends
Alimony and Separate Maintenance Payments (prior to January 1, 2019)
Pensions and Annuities
Income from Life Insurance and Endowment Contracts
Income from Discharge of Indebtedness
Income Passes through to the Taxpayer

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10
Q

What is gross income in the case of manufacturing, merchandising, and mining?

A

Total sales less the Cost of Goods Sold (COGS)

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11
Q

What is the Series EE Bond Exclusion Ratio?

A

Interest x Excess MAGI / (interest + principal)

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12
Q

What is a stock dividend?

A

Distribution of a corporation’s own stock by the corp to its shareholders, normally not taxable unless given the option of receiving cash or stock, which constitutes constructive receipt of cash.

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13
Q

What is a capital gain dividend?

A

Distribution by a regulated investment company (MF) of cap gains realized from the sale of investments in the fund, may include undistributed cap gains allocated to shareholders; considered LT

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14
Q

What are constructive dividends?

A

Constructive dividends are often distributions that are intended to result in a deduction to the corporation and taxable income (such as compensation) to the shareholder. Other constructive dividends are intended to produce a non-reportable benefit to the shareholder or even result in a deduction to the corporation without income to the shareholder.

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15
Q

What requirements are needed to be treated as alimony?

A
  • Cash
  • Pursuant to divorce, separation or written agreement
  • Terminate at the death of the payee
  • Not designated as anything other than alimony (eg child support)
  • Live in separate HH
    (In order to be deductible/taxable, must be before 1/1/2019)
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16
Q

How to determine nontaxable portion of annuity

A
  • Determine expected return multiple/life expectancy
  • Multiply above expected return multiple by annual payment to determine expected return
  • Divide cost (investment in the contract) by the expected return to determine the exclusion ratio
  • Multiply exclusion ratio with amount received during the year to determine current year’s exclusion
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17
Q

Simplified Method For Qualified Retirement Plan Annuities

A

Divide contribution by periods noted on table to calculate return of capital or excluded amount

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18
Q

Taxation of advance pension payments

A

Withdrawals over the contribution are taxable; also 10% penalty applies if under 59.5

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19
Q

Taxation of LI and Endowment Contracts

A

Face amount of LI received is not taxable; however if proceeds left with the insurance company collect interest, then the interest payments are taxable

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20
Q

Taxation of forgiveness of debt

A

Taxable event unless it’s a discharge of indebtedness in bankruptcy, certain student loans and discharge of indebtedness to the extent that the debtor is insolvent

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21
Q

Flow-through entities

A
  • The distributive share of a partnership’s income,
  • Income in respect of a decedent, and
  • Income from an interest in an estate or trust.
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22
Q

Taxation of Prizes, Awards, Gambling, and Treasure Finds

A

FMV included as taxable income; in the case of gambling, professional gamblers can deduct losses up to the amount of winnings

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23
Q

Illegal income

A

Taxable but expenses are not deductible

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24
Q

Unemployment income

A

Fully taxable after 1987

25
Q

Social security benefits

A

Up to 85% may be taxable:
AGI (excluding SS benefits) + Tax-exempt interest, excluded foreign income, 50% of SS benefits, provisional income

26
Q

What is not included as part of a taxpayer’s Social Security benefits?

A

Benefits for long-term facility-based custodial care

27
Q

Insurance proceeds and court awards

A

taxable with exceptions of accident and health insurance benefits and face amount of insurance

28
Q

Recovery of previously deducted amounts

A

More often in cash based accounting

29
Q

Claim of right

A

taxed is there’s access to the funds; if over $3K, can opt to reduce current tax by tax paid in prior yea(s) on paid amount

30
Q

Tax planning considerations/examples of inclusions to reduce taxes

A
  • Shifting income by transferring ownership of the property that produces income, limited by assignment
    Alimony, (pre-December 31, 2018)
    Prepaid income, generally taxable when received
    Bonds (assess if tax exempt /taxable better)
    Reporting bond interest (Series EE bonds for kids if income <$1,250
31
Q

Alternatives to being taxed

A

-Establish item is not income, eg return of capital
-Establish that exclusion applies: IRC, administrative

32
Q

Items that are not income

A
  • Unrealized income (contested stock dividends in Eisner v. Macomber case)
    -self-help income (paining home/repairing car)
    -rental value of personal-use property
    -gross selling price of property (only gain is taxable since there is return of capital)
33
Q

Major statutory exclusions

A

Social policy:
Gifts and inheritances- to avoid paying tax on income, donor must gift the underlying property to the recipient
Life insurance proceeds- if the beneficiary’s basis is based on the transferor’s basis
Public assistance programs
Qualified adoption expenses- $15,950 per child if salary <$239,230-279,230
Distributions for Qualified Tuition Programs: 529 - up to $10k for private/apprenticeships
Payments for personal physical sickness and injury- compensatory damages to make injured party whole- not taxable to recipient. Punitive damages are rewarded to punish the negligent party and are taxable
Discharge of indebtedness during bankruptcy or insolvency
Gain on sale of a personal residence
Partial exclusions for Social Security benefits
Alimony for divorces after December 31, 2018
Foreign earned income- up to $120K

Incentive for private action:
Awards for meritorious achievement,
Various employee fringe benefits, eg Section 132 benefits, employee awards up to $400 or qualified plan award up to $1,600, Dependent Care Assistance Programs of up to $5k/yr, educational assistance up to $5,250, FSAs: Not subject to Social Security and Medicare taxes
Partial exclusions for scholarships (used for tuition and related expenses, NOT accommodation);
Interest on state and local government obligations.

34
Q

When are discharges of indebtedness not taxable?

A
  • In bankruptcy
  • when taxpayer is insolvent
    -qualified farm indebtedness
    -other than a C- Corp, qualified real property business indebtedness
  • qualified principal residence
35
Q

What fringe benefits that are exempt from income tax are also exempt from Social Security and Medicare taxes?

A

Medical insurance and group term life coverage up to $50K

36
Q

reasons for creating statutory exclusions

A

Social policy
Indebtedness during bankruptcy
Economic incentive

37
Q

Which types of benefits are covered by section 132 fringe benefits?

A

Working condition benefits (i.e. outplacement services)
De minimis benefits (i.e. professional membership fees)

38
Q

Stan owns stock in a corporation and orders the corporation to pay dividends on the stock to his daughter. Who must include the dividends as gross income on their federal income taxes?

A

Even though his daughter received the dividends, Stan must include the dividends on his gross income. Stan could avoid being taxed on future dividends by making a gift of the stock to his daughter.

39
Q

Exemptions from imputed interest rules

A

Interest is not imputed on gift loans between individuals totaling $10,000 or less, except when the borrowed funds are used to purchase income-producing property.
Interest is not imputed on corporate loans and compensation-related loans totaling $10,000 or less.
For loans between individuals that range between $10,001 and $100,000 inclusive, the imputed interest is limited to the borrower’s net investment income. If the net investment income is $1,000 or less, imputed interest will not apply. In cases when the borrower’s net investment income exceeds what would otherwise be imputed based on the Applicable Federal Rate (AFR), the AFR will apply.

Debt subject to original issue discount provisions.
Sales of property for $3,000 or less.
Any sales where all of the payments are due within six months.
Sales of patents to the extent the payment is contingent on the use or disposition of the patent.
Certain carrying charges for personal property or educational services covered by Section 163(b), when the interest charge cannot be ascertained.
Charges for the purchase of personal-use property. (purchaser only)

40
Q

What are transactions involving related parties whose taxes are lower as a result of low interest or interest-free loans

A

Gift loans: Loans provided out of love, affection, or generosity.
Corporate shareholder loans: Loans from a corporation to its shareholder.
Compensation-related loans: Loans from employer to employee.
Other tax avoidance loans: Other low interest or interest-free loans that significantly affect either the borrower’s or lender’s tax liability.

41
Q

John lent his son $50,000 for the purchase of a new house, with the understanding that in five years, his son would re-pay the loan at face value. For the current tax year, John’s son had net investment income of $2,700. Assume that the Applicable Federal Rate for mid-term loans is 6%. Calculate the imputed interest for the first year.

A

The net investment income amount of $2,700 is what the lender must impute, because the loan was $100,000 or less and net investment income (which was greater than $1,000) is less than what would have been imputed ($3,000) had the AFP been used.

42
Q

A closely-held corporation loaned an employee/shareholder $25,000 with the understanding that the loan would be repaid in three years time when the employee is eligible to receive a bonus. The loaned funds will not be used for investing by the employee. Currently, the AFR rate for mid-term loans is 5%. Calculate the imputed interest the corporation must include in income for the first year of the loan.

A

Since the loan is between $10,000 & $100,000 and no investment income was generated, the imputed interest is the lesser of the AFR applied to the loan amount OR the investment income. Here, $0 of investment income was generated, so there would be $0 of imputed income.

43
Q

In general, the forgiveness of debt is

A

a taxable event unless under exemptions

44
Q

A retail company had sales of $1,000,000 and the following costs: goods sold, $400,000; salaries, $200,000; and rent and other expenses, $100,000. What is the company’s gross income?

A

The gross income is $600,000. The sales figure is reduced by the cost of the goods sold.

45
Q

On December 2, 2022, Dan sold land for $100,000 payable on February 2, 2023. During the negotiations, the buyer offered to pay cash in December, but Dan declined this offer. In what year will Dan have to claim the $100,000 as income?

A

Dan is permitted to defer the recognition of income under the contract until 2023 since the contract is made before the income is earned.

46
Q

Which of the following are reasons for creating statutory exclusions?

A
  • social policy or reasons of incentive
    -economic incentive
    -unlikelihood of payment in the case of discharged debt from bankruptcy
47
Q

Which types of benefits are covered by section 132 fringe benefits?

A

-no additional cost (i.e. telephone),
-qualified employee discounts,
-working condition (i.e. outplacement services),
- De minimis (i.e. professional membership fees),
- qualified transportation and parking, and
- recreation and athletic facilities.

48
Q

Which of the following item(s) is not considered income and is not subject to income tax? (Select all that apply)

A

Borrowed funds, scholarships, unrealized income, self-help, rental value of personal-use property and gross selling price of property are all considered items that are not income and therefore are not subject to income taxes.

49
Q

Which of the following conditions qualify for the foreign-earned income exclusion?

A

a bona fide resident of one or more foreign countries for an entire taxable year, or be present in one or more foreign countries for 330 days during a period of 12 consecutive months.

50
Q

Joan is involved in several transactions during the current year. No interest is stated on any of the transactions. In which situations would imputed interest apply?
-Purchases furniture for her residence. Full price is payable within four months.
-Sells a boat for $2,000. Payment is due in one year.
-Sells land for $100,000. Payment is due in five years.
-Purchases a newly issued bond for $650, with a par value of $1,000.

A

Interest must be imputed on the land sale because no exception applies.

51
Q

John lent his son $50,000 for the purchase of a new house, with the understanding that in five years, his son would re-pay the loan at face value. For the current tax year, John’s son had net investment income of $2,700. Assume that the Applicable Federal Rate for mid-term loans is 6%. Calculate the imputed interest for the first year.

A

The net investment income amount of $2,700 is what the lender must impute, because the loan was $100,000 or less and net investment income (which was greater than $1,000) is less than what would have been imputed ($3,000) had the AFP been used.

52
Q

A closely-held corporation loaned an employee/shareholder $25,000 with the understanding that the loan would be repaid in three years time when the employee is eligible to receive a bonus. The loaned funds will not be used for investing by the employee. Currently, the AFR rate for mid-term loans is 5%. Calculate the imputed interest the corporation must include in income for the first year of the loan.

A

Since the loan is between $10,000 & $100,000 and no investment income was generated, the imputed interest is the lesser of the AFR applied to the loan amount OR the investment income. Here, $0 of investment income was generated, so there would be $0 of imputed income.

53
Q

In general, the forgiveness of debt is

A

a taxable event

54
Q

Archie is the beneficiary of a $200,000 insurance policy on his father’s life. Upon his father’s death, Archie elects to receive $10,000 per year for 25 years instead of the lump sum.

Calculate the amount that will be taxable to Archie on an annual basis throughout the payment period.

A

Of the $10,000 received annually, Archie receives $8,000 tax-free ($200,000 ÷ 25), but the remaining $2,000 per year is taxable as interest.

55
Q

Identify the items that are excluded from gross income

A

Gifts and inheritances
Life insurance proceeds
Public assistance programs
Qualified adoption expenses
Payments for personal physical sickness and injury
Discharge of indebtedness during bankruptcy or insolvency
Gain on sale of a personal residence
Partial exclusions for Social Security benefits
Alimony for divorce agreements initiated after December 31, 2018

56
Q

Which of the following is taxable?
Worker’s compensation payments received.
Payments for compensatory damages.
Payments collected under an accident and health insurance policy purchased by the taxpayer.
Payments for punitive damages.

A

“punitive damages” are taxable even when they are awarded for physical injuries.

57
Q

To qualify for the foreign-earned income exclusion, the taxpayer must either be a bona fide resident of one or more foreign countries for an entire taxable year or be present in one or more foreign countries for ________ during a period of 12 consecutive months.

A

330 days

58
Q

Each of the following is a tax exclusion EXCEPT:

Compensatory Damage Compensation
Fringe Benefits
Educational Assistance Programs above $5,250
Meals and Lodging for Employees

A

Tax exclusions apply to educational assistance programs from one’s employer up to $5,250. Any funds received beyond the $5,250 threshold are considered income.

Tax (16 decks)

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