TAX- Gross Income Flashcards
Define Gross Income:
All income that is increases net worth UNLESS there is an item that specifically included in income.
Taxable income differs from accounting income.
T/F: Income is not limited to cash receipts
Income is NOT limited to cash receipts- VERY TRUE!
Example:
- Bartering can also produce income (dentist and a tax accountant, I’ll clean your teeth and you do my tax return)
- Constructive receipt- You may be paid with property
What is the constructive receipt rule?
Constructive receipt requires a CASH BASIS taxpayer to include the value of property in income in the period in which the RIGHT to the property is acquired.
- Amount is readily available to the taxpayer, and
- Actual receipt is NOT subject to substantial restrictions
What is an assignment of income and who is taxed?
Example: You ask a portion of your income to be sent to your father.
Income is taxed to the individual who EARNED the income. Income cannot be assigned to others.
What is the tax benefit rule (important):
if a tax payer pays something deducts something in one year and receives a refund in the next year.
It is the taxpayer received a benefit from the prior year, it is included in income in the next year to the extent of the benefit.
What is the claim of right doctrine?
Taxpayer has received money but the buyer is saying that there is an issue with the product and the money will likely have to be returned.
The claim of right rule requires the taxpayer to include property in income
What is the general rule for interest income?
All interest income is taxable EXCEPT municipal interest.
Federal interest IS TAXED.
IS the gain from the sell of municipal bonds taxed?
True, it is included in income
What are series EE bonds?
Interest is paid and taxed at maturity.
Taxpayer can elect to be taxed each year or you can wait.
If the proceeds are used to pay HIGHER EDUCATION EXPENSES, the interest can be excluded. Owner of the bond has to be at least 24 years old.
This exclusion is phased out for higher income levels
If the interest rate is below the market rate, how does that impact the borrower for an employee, shareholder, or a gift?
It is assumed that the borrower pays the current market rate of the interest to the lender.
This results in:
- Compensation income if the borrower is an employee
- Dividend Income for shareholder
- Gift in most other circumstances
The GIVER OF THE GIFT WILL HAVE INTEREST INCOME EVEN THOUGH NO INTEREST WAS CHARGED (FATHER /DAUGHTER EXAMPLE)
What are the exceptions to the interest free and below market loans?
- Less than $10,000
- Less than $100,000, deemed interest is limited to the borrower’s investment income and the loan proceeds. If the investment income is deemed to be zero if less than $1000
