CH 5: Gross income and exclusions

Mario had $18,000 of student loans discharged in the current year. After the discharge, Mario had $8000 in assets and no remaining liabilities. How much of Mario student loan debt forgiven must be included in gross income?

$0

True or false: a gift may be subject to gift tax for the person giving it

True

True or false: dividends received on corporate stock is income generated from property ownership

True

True or false: gross income includes income realized in any form - money, property, or services

True

True or false: income and deductions from a partnership or S corporation are taxed on the owners tax returns rather than the entity tax return

True

True or false: punitive damages are generally fully taxable to the recipient

True

True or false: unemployment compensation is considered service income

True

True or false: up to 85% of Social Security benefits may be taxed to taxpayers with moderate to high taxable income

True

True or false: tax deduction for foreign earned income is not available to taxpayers who have worked outside the United States and meet the requirements necessary to receive tax relief on their foreign earned earnings

True Income exclusions are available

Accountable Plan

Employees exclude expense reimbursements from gross income and do not deduct the reimbursed expenses

Nonrecognition provisions refer to specific types of income that taxpayers realize but are allowed to permanently _____ from gross income or temporarily _____ until a later period.

Exclude, defer

True or false: in general, prizes awarded to taxpayers are excluded from gross income

Falls

True or false: 50% of Social Security benefits are taxable to all taxpayers because the employer contributed funds that were never taxed to the employee

False

True or false: Social Security benefits are not taxable because the contributions were taxed when the taxpayer was working

False

True or false: alimony is another term for child support

False

True or false: proceeds from a loan are an economic benefit to the taxpayer

False

True or false: scholarship money used for room and board is not included as part of gross income

False

Constructive Receipt Doctrine

Occurs when the income has been credited to the taxpayers account or when the income is unconditionally available to the taxpayer, the taxpayer is aware of the incomes availability, and there are no restrictions on the taxpayers control over the income

Non-recognition provisions

Tax laws allowing exclusions or deferrals of income

Assignment of income doctrine

The taxpayer who earns income from services must recognize the income

Wherewithal to pay

The transaction provides the tax payer with the funds to pay taxes on income generated by the transaction

What is the tax treatment for a taxpayer receiving a gold watch valued at $350 in recognition of his 25th year of working for the same company?

The value of the watch is excluded from gross income

Discharge of Indebtedness

This is not taxable if the taxpayer is insolvent before and after the debt forgiveness

True or false: In general, when the taxpayers debt is discharged by a lender, the taxpayers gross income will include the amount forgiven

True

True or false: a bargain purchase between a father and his son is not considered imputed income to be included in gross income and taxable

True. A bargain purchase between family members is generally deemed to be a gift, thus nontaxable to the recipient

Barter clubs

facilitate the exchange of rights to goods and services between members, many of whom have the mistaken belief that they need not recognize income on the exchanges

Tax basis

the amount of a taxpayer's unrecovered cost of or investment in an asset

List exclusions to mitigate double taxation

Gifts and inheritances , They are already subject to federal transfer tax Foreign earned income

Section 61 of the internal revenue code defines _____ income as "all income, from whatever source derived "

Gross

Claim of right doctrine

Income is realized if a taxpayer receives income and there are no restrictions on the taxpayers use of the income

Accrual Method

Income is recognized when earned, and expenses are generally deducted in the period when liabilities are incurred

Earned income

Income through services in a non-employee capacity

For below market loans, the discounted interest-rate is treated as interest _____ to the lender and interest _____ to the borrower

Income, expense

Imputed Income

Indirect economic benefits that must be included in gross income

Annuity

Investment that pays a stream of equal payments over time

Bart sold a parcel of land for $21,000. He paid a real estate agent a commission of $1500 for assisting with the sale. Bart had purchased the land several years earlier for $20,000. What is the amount realized on the sale of the land?

$19,500 Amount realized equals sales proceeds minus selling expenses

Single taxpayers meeting certain home ownership and use requirements can permanently exclude up to _____ of the realized gain on the sale of their principal residence.

$250,000

Income recognition is based on

Accounting methods, constructive receipt, claim of right

List other sources of income

Alimony, awards, Social Security benefits, dish charge of indebtedness, imputed income

Gross income

All income from whatever source derived

Economic benefit

An item of value. Must receive this to have gross income

The taxpayer who earns income from services must recognize the income, and the income from property is taxed to the person who owns the property under the _____ _____ _____ doctrine

Assignment of income

In general, when a taxpayer cashes out a life insurance policy before death, taxable income may result. However, if the taxpayer is _____ ill, the portion of the proceeds used for long-term care is excluded from gross income. If the taxpayer is _____ ill, the proceeds are not taxable.

Chronically, terminally

Deferral Provisions

Code sections that allowed taxpayers to defer recognition of certain types of realized income

Rather than claiming the foreign earned income exclusion, taxpayers may claim a foreign tax _____ or a foreign tax _____ for income taxes paid to other countries.

Deduction, credit

Action sport is an S corporation owned equally by three shareholders. During the current year, action sport generated taxable income of $60,000. What is the tax treatment, if any, of the $60,000 income?

Each shareholder will report $20,000 in taxable income

Realization Principle

Income is realized when a taxpayer engages in a transaction with another party and the transaction results in a measurable change in property rights

Taxpayers receiving indirect economic benefits, such as bargain purchases or below market loans, or said to have _____ income which may be taxable

Imputed

Flow-through entity

Income and deductions from an entity such as partnership or s corporation is reported by the owners of the entity

Unearned Income

Income from property

Cash Method

Income is recognized in the period it is received no matter when it is actually earned. Deductions are recognized when the expenditure is made rather than when the liability is incurred

List three common exclusion provisions

Municipal bond interest, gain on the sale of a personal residence, fringe benefits

Annuity exclusion ratio formula

Original investment / expected value of annuity = Return of capital percentage

Life insurance proceeds may be included in gross income when:

Proceeds are paid overtime and a portion represents taxable interest payments A life insurance policy is transferred to another party for valuable consideration

Income from _____ takes different forms, such as dividends, interest, rents, royalties, and annuities

Property

Payments from purchase annuities are part income and part _____ __ _____

Return of capital

Return of capital principle

Taxpayers are allowed to recover the capital invested in property tax free

Recognition of income

Taxpayers who realize an economic benefit must include the benefit in gross income unless the specific provision of the tax code says otherwise

Annuity exclusion ratio

Text payers use this ratio to determine the portion of each annuity payment that is a nontaxable return of capital

Community property systems

The income earned Buy one spouse is treated as though it were earned equally by both spouses

Tax Benefit Rule

When the refund is included in gross income to the extent that the prior deduction produced a tax benefit

When is a discharge of indebtedness not included in gross income?

When the taxpayer is insolvent before and after the debt forgiveness

List exclusions related to sickness and injury

Workers compensation Payments associated with personal injury medical expense reimbursements Disability benefit payments

To satisfy the ownership test for excluding the gain on a personal residence the taxpayer must have owned the residence for _____

two or more years during the past five-year period ending on the date of sale

Income from property is referred to as _____ income

unearned