Gross Income Flashcards
What is the economic definition of income
In economics, income is defined as the amount that an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. To the economist, income includes both the wealth that flows to the individual and changes in the value of the individual’s store of wealth. Under the economist’s definition, unrealized gains, as well as gifts and inheritances, are income. Furthermore, the economist adjusts for inflation in measuring income.
What is the accounting definition of income.
The accounting definition (or Tax definition) of income has three criteria
1. There must be economic benefit
2. The income must be realized
3. The Income must be recognized
Wherewithal-to-Pay
The “wherewithal-to-pay” concept holds that tax must be collected when the taxpayer is in the best position to pay the tax. A taxpayer who sells property and collects the cash is in a better position to pay the tax than one who owns property that is merely increasing in value without a sale.
Gross Income calculation philosophy
Gross Income calculation philosophy is that all income is taxable unless there is a specific exception in the tax law. Gross income is not limited to amounts received in the form of cash. According to Reg. Sec. 1.61-1(a) of the Internal Revenue Code, income may be “realized in any form, whether in money, transactions, property, or services.”
What exclusion can apply to income
This judicially developed rule holds that an expenditure is excludable if it is made in order to serve the business needs of the employer and any benefit to the employee is secondary and incidental.
What rules apply to gains (or loss) from dealing in property
Net capital losses for individuals are subject to provisions that limit the amount that can be deducted from income other than capital gains to $3,000 per year.
Losses from the sale or disposition of an asset held for personal use are not deductible.
what is OID
for Gross Income calculation, Interest income may also include interest that is not actually paid. Original Issue Discount (OID) bonds will be taxable as the interest accrues even though the interest is not realized until the bond is cashed in.
Taxable portion of the annuity
Individuals receiving an annuity are permitted to exclude their cost, but are taxed on the remaining portion of the annuity. The following steps can be followed to determine the nontaxable portion of the annuity:
- Determine the expected return multiple. This multiple is the number of years that the annuity is expected to continue and may be a stated term, for example ten years, or it may be for the remainder of the taxpayer’s life. In the latter situation, the expected return multiple (life expectancy) is determined by referring to a table developed by the IRS.
- Determine the expected return. This return is computed by multiplying the amount of the annual payment by the expected return multiple.
- Determine the exclusion ratio. This ratio is computed by dividing the investment in the contract (its cost) by the expected return (from above).
- Determine the current year’s exclusion. This exclusion is computed by multiplying the exclusion ratio (from above) with the amount received during the year.
For Example, David, age 65, purchases an annuity for $30,000. Under the terms of the annuity, David is to receive $300 per month ($3,600 per year) for the rest of his life. - The expected return multiple is 20.0.
- The expected return is $72,000 (20.0 × $3,600).
- The exclusion ratio is 0.417 ($30,000 / $72,000).
- The exclusion is $1,500 (0.417 × $3,600).
How is unemployment income taxed
From 1987, all unemployment compensation is fully taxable for both government-financed programs and employer-financed benefits.
Is Social Security Benefits taxable?
Beginning in 1994, up to 85% of Social Security benefits may be taxable. Under Section 86, the portion of Social Security benefits that are taxable depends on the taxpayer’s provisional income and filing status.
Is Insurance Proceeds and Court Awards taxable?
In general, insurance proceeds and court awards are taxable. Two exceptions are accident and health insurance benefits and the face amount of life insurance. Insurance proceeds or court awards received because of the destruction of property are included in gross income only to the extent that the proceeds exceed the adjusted basis of the property. Involuntary conversion provisions permit taxpayers to avoid being taxed if they reinvest the proceeds in a qualified replacement property. If the proceeds are less than the property’s adjusted basis, they reduce the amount of any deductible loss. Proceeds of insurance guarding against loss of profits because of a casualty are taxable. Similarly, if a taxpayer had to sue a customer to collect income owed to the taxpayer, the amount collected is taxable just as it would have been had the taxpayer collected the income without going to court.
For example, Gulf Corporation’s factory was destroyed by fire. Gulf Corporation collected insurance of $400,000, which equaled its basis in the building, and $250,000 for the profits lost during the time the company was rebuilding its factory. The $400,000 is not taxable because it constitutes a recovery of the basis of the factory. The $250,000 is taxable because it represents lost income. Recall that the income would have been taxable had it been earned by the company from regular operations.
Who creates exclusion from revenue?
Exclusions exist because specific provisions in the Internal Revenue Code allow them. While the IRS has no authority to create exclusions, the IRS does have the authority to interpret the meaning of the Code. A liberal interpretation of the statute by the IRS may result in a broad definition of what constitutes an exclusion, and such a broad definition may reasonably be termed as an administrative exclusion.
what items are not considered income?
Some items are not income and therefore, are not subject to income tax. In addition to amounts obtained by a loan, four other items are not considered income:
- Unrealized income
- Self-help income (doing work for yourself)
- Rental value of personal-use property (staying in your own home)
- Gross selling price of property (cost basis for the home)
is life insurance Proceeds excluded from income tax.
Yes. there are two scenarios
1. lump sum payment - the whole lump sum is excluded
2. installment payment - the lump sum divided by years (i.e. principal) is excluded from income. but the interest is taxable income.
If a life insurance is transferred to another family member, then the proceeds are still excluded from AGI. However, if it is sold to someone else then the whole income - cost basis is included as income.
Are adoption expense exempt from gross income?
Qualified adoption expenses include adoption fees, court costs, attorney fees, and other expenses related to an adoption.
