Chapter 5: Gross Income and Exclusions

agree, wherewithal to pay

Adopting the realization principle for defining gross income provides two major advantages. First, because parties to the transaction must ___ to the value of the exchanged property rights, the transaction allows the income to be measured objectively. Second, the transaction often provides the taxpayer with the ___ ___ ___ taxes (at least when the taxpayer receives cash in the transaction).

annuity

An ___ is an investment that pays a stream of equal payments over time. Individuals often purchase annuities as a means of generating a fixed income stream during retirement.

annuity

An ___ is an investment that pays a stream of equal payments over time. Individuals often purchase annuities as a means of generating a fixed income stream during retirement. There are two basic types of annuities: (1) annuities paid over a fixed period and (2) annuities paid over a person's life (for as long as the person lives).

reimbursement

Any ___ a taxpayer receives from a health and accident insurance policy for medical expenses paid by the taxpayer during the current year is excluded from gross income.

services, owns

Assignment of income doctrine assigns income to taxpayer who: Earns income from ___. ___ income-producing property

nonrecognition provisions

Because taxpayers are not required to recognize income that is excluded or deferred, we refer to tax laws allowing exclusions or deferrals as ___ ___

imputed income

Besides realizing direct economic benefits like wages and interest, taxpayers sometimes realize indirect economic benefits that they must include in gross income as ___ ___.

from whatever source derived

General Definition.---Except as otherwise provided in this subtitle, gross income means all income ___ ___ ___ ___ (emphasis added).

exclude, deferrals

However, there are specific types of income that taxpayers realize but are allowed to permanently ___ from gross income or temporarily defer from gross income until a subsequent period. As we discussed in the previous chapter, exclusions and ___ are the result of specific congressional action and are narrowly defined

taxable

Punitive damages are fully ___.

economic benefit, income, tax provision

Taxpayers recognize gross income when (1) they receive an ___ ___, (2) they realize the ___, and (3) no ___ ___ allows them to exclude or defer the income from gross income for that year.

annuity exclusion ratio

Taxpayers use the annuity exclusion ratio to determine the portion of each payment that is a nontaxable return of capital.

tax basis

Taxpayers, on the other hand, argued that a portion of proceeds from a sale represented a return of the cost or capital investment in the underlyiing proportyin (called ___ ____)

claim of right doctrine

The ___ ___ ___ ___is another judicial doctrine created to address the timing of income recognition. This doctrine was conceived when a taxpayer received income in one period but was required to return the payment in a subsequent period. The claim of right doctrine states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income (e.g., the taxpayer does not have an obligation to repay the amount)

constructive receipts

The ___ ___ doctrine states that a taxpayer realizes and recognizes income when it is actually or constructively received.

assignment of income doctrine

The courts developed the ___ ___ ___ __ to prevent taxpayers from arbitrarily transferring the taxation on their income to others. In essence, the assignment of income doctrine holds that the taxpayer who earns income from services must recognize the income.

disability insurance

The exclusion provisions for ___ ___ are more restrictive than those for workers' compensation payments or reimbursements from a health and accident insurance plan.

fixed, life

There are two basic types of annuities: (1) annuities paid over a ___ period and (2) annuities paid over a person's ___ (for as long as the person lives).

discharge of indebtness

To provide tax relief for insolvent taxpayers—taxpayers with liabilities, including tax liabilities, exceeding their assets—a ___ ___ ___ s not taxable if the taxpayer is insolvent before and after the debt forgiveness.

fixed, life

Two basic types: Annuities paid over a ___ period Annuities paid over a person's ___.

accrual method

Under the ___ ___ income is generally recognized when earned, and expenses are generally deducted in the period when liabilities are incurred.

Cash method

Under the ___ ___, taxpayers recognize income in the period they receive it (in the form of cash, property, or services), rather than when they actually earn it.

realization, party, measurable change

Under the ___ principle income is realized when (1) a taxpayer engages in a transaction with another ___, and (2) the transaction results in a ___ ___ in property rights.

alimony

When couples legally separate or divorce, one spouse may be required to provide financial support to the other in the form of ___.

community property systems

While most states use a common law system, nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) implement ___ ___ ___. Under community property systems, the income earned from services by one spouse is treated as though it was earned equally by both spouses. Also, property acquired by either spouse during the marriage is usually community property and is treated as though it is owned equally by each spouse.

Return of capital

___ ___ ___ principle enables reduction of sale proceeds by unrecovered investment

gross income

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

Gross income

___ ___ means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services.

Tax benefit

___ ___ rule may cause refunds of prior year expenditures (deductions) to be taxable

Payments

___ for services including salary, wages, and fees that a taxpayer earns through services in a nonemployee capacity are all considered income from services and so is unemployment compensation.

All-inclusive income concept

a definition of income that says that gross income means all income from whatever source derived.

accrual method

a method of accounting that generally recognizes income in the period earned and recognizes deductions in the period that liabilities are incurred.

Annuity

a stream of equal payments over time.

Alimony

a support payment of cash made to a former spouse. The payment must be made under a written separation agreement or divorce decree that does not designate the payment as something other than alimony, the payment must be made when the spouses do not live together, and the payments must cease no later than when the recipient dies.

Claim of right doctrine

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 (for example, the taxpayer does not have an obligation to repay the amount).

Barter clubs

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

Assignment of income doctrine

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.

Cash method

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.

physical injury, compensatory damages

In 1996 Congress settled the matter by deciding that all payments associated with compensating a taxpayer for a physical injury (including payments for past, current, and future lost wages) are excluded from gross income. That is, the tax laws specify that any compensatory damages on account of a physical injury or physical sickness are nontaxable. Thus, damages taxpayers receive for emotional distress associated with a physical injury are excluded

fringe benefits

In addition to paying salary and wages, many employers provide employees with ___ ___.

compensation, business, rents, interest

In addition to providing this all-inclusive definition of income, §61 includes a list of examples of gross income such as ___ for services, ___ income, ___, royalties, ___, and dividends.

forgiven

In general, when a taxpayer's debt is ___ by a lender (the debt is discharged), the taxpayer must include the amount of debt relief in gross income.

unearned income

Income from property, often referred to as ___ ___ may take different forms, such as gain or losses from the sale of property, dividends, interest, rents, royalties, and annuities.

earned income

Income from services is often referred to as ___ ___ because it is generated by the efforts of the taxpayer (this also includes business income earned by a taxpayer even if the taxpayer's business is selling inventory).

realization

Learning Objective 1: Apply the concept of ___ and explain when taxpayers recognize gross income.

municipal bonds

The most common example of an exclusion provision is the exclusion of interest on ___ ___.

original investment/expected value of annuity

annuity exclusion ratio =

Accelerated death benefits

early receipt of life insurance proceeds that are not taxable under certain circumstances, such as the taxpayer is medically certified with an illness that is expected to cause death within 24 months.