Gross Income- Concepts, Interest, and Dividends Flashcards
Is finding property income?
-Yes. Also FMV of property and services received must be included in income.
What is constructive receipt?
- Include in income in period in which right to (or control of) property is acquired
- No constructive receipt if substantial restrictions exist on property
What is the tax benefit rule?
-If it was deducted in prior years, it’s income in the current year limited to amount deducted
What is the claim of right doctrine?
-Include property in income in period in which apparent claim to property materializes
How do we treat income recognized when it turns out receipt was invalid and we repaid it?
-Generates a deduction but doesn’t influence earlier recognition of income
What is the assignment of income doctrine?
- Income is taxed to individual who earns it
- Income cannot be assigned for tax purposes other than to party that earned it
When is interest included in income?
- When received (cash basis) or accrued (accrual basis)
- Prepaid interest income always taxed when received
How do we treat premiums on bonds purchased?
- Election can be made to amortize premium
- Amortization reduces basis of bond
- Amortization offsets interest income from bond
- Amortization calculated using constant yield to maturity
- For tax exempt bonds, must amortize premiums but no deduction available
How do we treat bond discounts?
- Amortize bond discounts as interest income (remember this portion won’t be capital gain)
- Original issue discounts must be amortized using effective interest rate method
How are short term discounts on bonds taxed?
-As ordinary income
What are features of Series EE bonds?
- Interest not paid annually but when bond matures
- Interest can be excluded at maturity if proceeds used to pay higher education expenses (tuition and fees) of taxpayer, spouse, or dependent
- Owner must be at least 24 years old (cannot be in child’s name)
How are municipal bonds treated?
- Interest on state or local government obligations not taxed (include possessions of US)
- Capital gains on these will be taxable and losses deductible
When are distributions of cash and property to shareholders taxable as dividend income?
-When made from E&P (Earnings and profits)
What is the three step process for taxability of dividends?
- Dividend income to extent of E&P
- Then a reduction in basis of stock
- Excess is capital gain
Are stock dividends to common and preferred stockholders taxable?
- On Common Stock: No
- On Preferred Stock: Yes
