Ch. 6 Gross Income Defined

Lucas v. Earl

"fruit (income) is taxed to the tree (person providing services) from which the fruit grew"

Social Security Benefits

Amount could be 0%, 50%, or 85% of benefits received are included in Gross Income based upon the individual's AGI and filing status.

IRC Section 61(a)

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) compensation for services, gross income derived from business, gains derived from dealings in property, interest, rents, royalties, dividends, alimony, annuities, income from life insurance and endowment contracts, pensions, etc.

Property Transactions

Seller's Consequences: Amount Realized (Cash/FMV of property received) Less: Adjusted Basis (Cost) Realized Gain/Loss Recognized? Flavor (Character)? (Van/Choc/Swirl) (Ord/Capital/§1231)

Schedule C of IRS Form 1040

Taxpayer reports business income, deductions, and expenses from self-employment

Compensation Income

Wages, salaries, tips, commissions, bonuses included in gross income

IRS Form 1040-ES

independent contractor must pay estimated income taxes usually on a quarterly basis because no withheld income taxes

85%

of SS benefits could be included in Gross Income of a single individual if modified AGI exceeds $34,000. For MFJ if modified AGI exceeds $44,000.

Section 85: Unemployment Compensation

substitute for what otherwise would be taxable compensation so included in Gross Income

Assignment of Income Doctrine

taxpayer is not allowed to shift the tax burden to someone else, a mere assignment of income doesn't shift the tax liability on that income

Wherewithal to Pay Concept

the law should impose an income tax when individual is in the best position to pay the tax

Employer-Employee Relationship

If an employer can control the behavior of an individual and can control the financial aspects of the relationship

Independent Contractor

If the relationship indicates that the person has his/her own business where the person can make a profit or loss, the personal provides his/her own tools, and determines his/her own hours

Other sources of Gross Income

Income from Flow-through Entities; Alimony; Prizes, Awards, & Gambling Winnings; Social Security Benefits; Imputed Income; Discharge of Indebtedness

Unearned Income

Income from property including gains/losses on property, dividends, interest, rents, royalties, annuities

Earned Income

Income from services including salary, wages, fees earned

Exceptions

-Bartering for goods -Receipt of non-cash goods in lieu of payment -Non-cash prizes, jackpots, etc.

Examples Indicating Employer-Employee Relationship

-Provides training -Instructs the individual how to do the work -Determines when the individual shows up for work -Paying wage based on time instead of payment by project -Furnishing of tools/equipment/place to work -Support services such as assistance -Providing Fringe Benefits -Reimburses costs

Key Tax Doctrines in regard to Income

1. Assignment of Income Doctrine 2. Wherewithal to Pay Concept

Business Income

included in Gross Income if the taxpayer is self-employed

Gross Income

all income from whatever source derived less any specific exclusions provided by the Code

IRS Form 1099

business(es) for whom the individual provided services will send this to the individual

W-2

employer reports to IRS and an employee shortly after the end of the year (usually by January 31) how much in wages, salary, and/or tips the employee earned during the year as well as taxes withheld

0%

excluded from Gross Income if the individual's modified AGI is $25,000 or less