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