Tax chapter 5 text book notes

Under the realization principle, income is realized when 2 things occur:

1.) a taxpayer engages in a transaction with another party 2) the transaction result is in a measurable change in property rights

Tax payers must receive an ____ _____ to have gross income.

Economic benefit

____ ____ is the amount of a taxpayers unrecovered cost of or investment in an asset.

Tax basis

____ ____ ____ holds that a refund of an amount deducted in a previous period is only included in income to the extent that the deduction reduced taxable income.

Tax benefit rule

The general definition of gross income is states as "Gross income means all income from _____ _____ _____."

Whatever source derived

Earnings on investments in plans such as 529 plans, Coverdell savings accounts, and U.S. Series EE bonds are excluded from taxation if the proceeds are used for qualifying _____ expenses.

educational

For non-government employees working outside the United States, there is a foreign-earned income ______ available if certain residency requirements are met.

exclusion

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

false

True or false: Taxpayers who do not meet the resident requirement or live in a foreign country for at least 330 consecutive days in a 12 month period are NOT eligible to receive ANY of the foreign-earned income exclusion on otherwise eligible income.

false

_______ _____ income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives.

imputed income

For a divorce agreement entered into BEFORE January 1, 2019, alimony is Blank______

included in the gross income of the person receiving it and deductible by the person paying it

Any reimbursement a taxpayer receives from a medical or accident insurance policy for medical expenses paid by the taxpayer during the current year are _______ for the taxpayer.

nontaxable

In general, life insurance proceeds are ________ to the beneficiary of the policy.

nontaxable

n personal injury cases, any damages awarded due to _______ injury are exempt from taxation.

physical

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: Income and deductions generated within a partnership or S corporation that are subject to various tax treatments (i.e. qualified dividends, capital gains, etc.) retain their character when they flow-through to the owners rather than being reclassified as ordinary income or loss.

true

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

true

______ ______ is income that taxpayers realize, recognize, and report on their tax returns for the year.

Gross income

The earnings on a _____ plan are NOT taxable to the beneficiary if the distributions from the account are used to pay qualified higher education expenses.

529

____ of _____ _____ the judicial doctrine holding that earned income is taxed to the taxpayer providing the service, and that income from property is taxed to the individual who owns the property when the income accrues.

Assignment of income doctrine

_____ ____ are organizations that facilitate the exchange of rights to goods and services between members.

Barter clubs

_____ ____ is the method of accounting that recognizes income in the period in which cash, property, or services are received and recognizes deductions in the period paid.

Cash method

The ___ of ____ ____ judicial doctrine that states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income.

Claim of right doctrine

What are some examples of gross income?

Compensation for services, business income, rents, royalties, interest, and dividends.

Common examples of economic benefit include:

Compensation for services, proceeds from property sales, and income from investments or business activities.

Taxpayers who realize an economic benefit must ______ the benefit in gross income unless it is specifically ______ by the tax code.

Include/ Excluded

_____ ______ the proposition that income only exists when there is a transaction with another party resulting in a measurable change in property rights.

Realization principle

_____ __ _____ is the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property.

Return of capital

_______ ____ ____ is the ability or resources to pay taxes due from a particular transaction.

Wherewithal to pay

In addition to receiving a salary from a company, many employers provide _____ _____ that are excluded from gross income.

fringe benefits

If a taxpayer cashes out a life insurance policy before death due to a chronic illness, she may exclude from income the amount used to pay for her ______ - _______ _____.

long-term care