Federal Income Tax Chapter 5
Under community property systems, the property that a spouse brings into a marriage is treated _____________________________
as that spouse's separate property
Under community property systems, the property acquired by either spouse during the marriage is treated _______________________
as though it is owned equally by each spouse
Designating the award for payment to a federal, state, or local governmental unit or qualified charity has the same effect as claiming that transfer as a deduction ____________
for AGI
By receiving the award, recognizing the income, and then contributing funds to a charity, the taxpayer is deducting the donation as a deduction _____________
from AGI
Income from property may take different forms, such as _________________
gain or losses from the sale of property, dividends, interest, rents, royalties, and annuities
If the premiums paid are treated as a ______________, the benefits resulting from the disability insurance policy are taxable income
tax free fringe benefit
If the premiums paid are _________________, the policy is considered to have been purchased by the employee and the benefits are nontaxable
taxable compensation
Life insurance proceeds are included in the decedent's ___________
taxable estate
If a life insurance policy holder cashes in, what amount is included in gross income?
the amount received less premiums paid
The tax treatment of unearned income depends upon _____________
the character of income
[Life Insurance Proceeds] _____________ benefits are not taxable if used to pay for the taxpayer's long-term care
Accelerate death benefits
Inheritances are typically subject to a ___________
federal estate tax
Gifts are typically subject to the __________
federal gift tax
If either spouse if ineligible because of the once in two years rule, the couple's available exclusion is reduced to ____________
$250,000
The exemption for employee awards for length of service or safety achievement are limited to _____________________
$400 of tangible property other than cash per employee per year
From a tax perspective we must determine two things about an annuity:
(1) how much of each annuity payment represents gross income (ordinary income), AND (2) how much represents nontaxable return of capital (return of investment)
What are three common examples where a taxpayer receives an economic benefit?
(1) Being paid for services rendered (2) Proceeds from property sales (3) Income from investments
Distinguish between Child Support payments and Alimony payments
(1) Child support payments are not taxable (2) Alimony payments cannot change, but Child Support payments can change (3) Alimony payments do not continue after the death of the spouse receiving the payments
What are the 3 exclusions that mitigate double taxation?
(1) Gifts and Inheritances (2) Life Insurance Proceeds (3) Foreign-earned income
What are the types of income subject to taxation?
(1) Income from services (2) Income from property (3) Annuities (4) Property Dispositions
What are 5 common exclusion?
(1) State and Local municipal bond interest (2) Gains on the sale of personal residence (3) Fringe benefits (4) Education-Related Exclusions (5) Other Educational Subsidiaries
Taxpayers recognize income when what three things are met?
(1) Taxpayer receives an economic benefit (2) Taxpayer realizes income (3) No tax provision allows the taxpayer to exclude or defer the income from gross income
Property dispositions
(1) Taxpayers are allowed to recover their investment in property (tax basis) before they realize any gain and recognize the gain on their tax returns. (2) the tax law must allow for a deduction if a loss is realized - a loss will only reduce the taxpayer's taxable income if the loss is deductible (3) any selling expenses reduce the amount realized on the sale/exchange
What are the 4 Sickness and Injury-Related Exclusions?
(1) Workers' Compensation (2) Payments Associated with Personal Injury (3) Health Care Reimbursement (4) Disability Insurance
Income is realized when ______________
(1) a taxpayer engages in a transaction with another party (2) the transaction results in a sale or exchange
What are the 4 aspects of the tax law definition of alimony?
(1) a transfer of cash made under a written separation agreement or divorce decree (2) the separation or divorce decree does not designate the payment as something other than alimony (3) in the case of legally separate or divorced taxpayers, the spouses do not live together when the payment is made (4) the payments cannot continue after the death of the recipient
What are the two basic types of annuities?
(1) annuities paid over a fixed period (2) annuities paid over a person's life
If an employer provides the disability insurance plan, the employee may have the option to treat the benefit as ______________ or ____________________
(1) as taxable compensation (2) as a tax free fringe benefit
If a couple files separate tax returns, or divorces during the year, their combined tax liability depends on whether they live in a ____________________, ________________, or ______________________
(1) common law state (2) a community property state that shares income from separate property equally between spouses (3) a community property state that does not split income from separate property between spouses.
Married couples filing joint returns are eligible for the full $500,000 exclusion if ____________________ and ________________
(1) either spouse meets the ownership test (2) both spouses meet the principal use test
For taxpayers using a cash method of accounting, the Constructive Receipt Doctrine states that income must be recognized when _______________, ______________, and _____________
(1) income is unconditionally available to the taxpayer (2) the taxpayer is aware of the income's availability (3) there are no restrictions on the taxpayer's control of income
What are the four qualifying fringe benefits that are excluded from gross income?
(1) medical and dental health insurance coverage (2) life insurance coverage up to $50,000 (3) De minims small benefits (4) dependent care benefits
What two types of payments do not qualify as alimony?
(1) property divisions (2) child support payments
Taxpayer must not receive cash to realize and recognize income. Examples?
(1) property, the income equals the Fair Market Value of the property (2) bartering income (trade of goods and services) (3) cancelation of debt (when you have $50,000 of stock and you bought it for $20,000 you have $30,000 of taxable income)
Awards for scientific, literary, or charitable achievement such as Nobel Prize are excluded from gross income but only if ________________
(1) the recipient was selected without any action on his part to enter the contest or proceeding (2) the recipient is not required to render substantial future services as a condition to receive the prize or award (3) the payor of the price or award transfers the prize or award to a federal state or local governmental unit or qualified charity such as a church, school, or charitable organization designated by the taxpayer
Income from services includes unemployment compensation and is reported on ________
1099-G
Income from services is often referred to as earned income. If the taxpayer is self employed, he/she will receive _______, and complete ________
1099s, and complete a Schedule C
Other educational subsidies benefits are phased out based on _______
AGI
Modified AGI equals ____________ + ___________
AGI plus tax-exempt interest income
What is an annuity?
An annuity is an investment that pays a stream of equal payments over time
Interest income from a bond is taxed to the person who owns the bond during the time the interest income accrues. This is an example of what doctrine?
Assignment of Income Doctrine
How does the tax benefit rule apply to the health care reimbursement exclusions?
If a taxpayer previously deducted medical expenses, reimbursements become taxable income to the extent the taxpayer previously received a tax benefit
When is Discharge of Indebtedness not taxable?
If the taxpayer is insolvent before and after the debt forgiveness
If a taxpayer uses a cash method of accounting, when is income recognized?
Income is recognized when cash is received and expenses are deducted when cash is paid
If a taxpayer uses an accrual method of accounting, when is income recognized?
Income is recognized when earned and expenses are deducted in the period when liabilities are incurred.
Community property systems apply to ___________
Married couples
Is the economic benefit criterion met when a taxpayer borrows money?
No, because when a taxpayer borrows money, the economic benefit received is completely offset by the liability the taxpayer is required to pay from borrow the funds.
What is the ratio to determine the nontaxable portion of an annuity?
Original investment/expected value of investment
What is an example of the claim of right doctrine?
Security Deposits. Security Deposits are not taxable income because you have an obligation to pay it back.
What is an example of the tax benefit rule?
State and Local Taxes are itemized deductions which result in tax savings (a tax benefit). Therefore we have to include the benefited amount from the previous year as part of this years' gross income.
What is one advantage that the realization principle for defining gross income provides?
The transaction often provides the taxpayer the wherewithal to pay his/her tax liability resulting from the transaction.
Income from services is often referred to as earned income. If the taxpayer is an employee, she will receive a _______
W-2
The spouse receiving alimony payment gets an _________________ deduction
above-the-line
All payments associated with compensating a taxpayer for physical injury are excluded from gross income. This includes ____________ damages on account of physical injury or physical sickness
compensatory damages
Contributions to qualifying retirement accounts are not currently included in the employee's gross income, but are _________________________________
deferred until the employee withdraws the contribution + earnings from the plan
If a couple files a joint tax return, the community property rules _________________
do not affect the aggregate taxes payable by the couple because the income of both spouses is aggregated on the return
When some exclusions and deferral opportunities exist, realized gain __________ recognized income
does not always equal
[Other Educational Subsidies] Taxpayers can exclude from gross income earnings on investments in qualified education plans if _________________________
earnings are used to pay for qualifying educational expenses
Any payments a taxpayer receives from a state-sponsored workers' compensation plan are ___________ from the taxpayer's income
excluded
Any reimbursement a taxpayer receives from a health and accident insurance policy are _________ from gross income
excluded
If an individual purchases disability insurance directly, the cost of the policy is not deductible, but any disability benefits are _________ from gross income
excluded
[Education-Related Exclusions] Scholarships that pay for tuition, fees, books, supplies and other equipment required for the student's coursework are __________________
excluded from taxable income
Gambling winnings must be included in __________
gross income
Prizes, awards, and gambling winnings are included in ___________
gross income
Refunds are not typically included in gross income, unless the Tax Benefit Rule applies which states that _________
if the refund is made for an expenditure deducted in a previous year (resulting in tax savings in the previous year), the the tax benefit rule mandates that the refund is included in gross income to the extend the prior deduction provided a tax benefit
For property owned separately, under the common law systems, all of the income from the separately owned property is _________________
included in that spouse's gross income
Under the common law systems, all of the income earned from the services of one spouse is ____________________
included in the gross income of the spouse who earned it
For cash basis taxpayers, 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 (the taxpayer does not have an obligation to repay the amount)
Taxpayers are allowed to deduct their gambling losses to the extent of their gambling winnings, but only as ____________
miscellaneous itemized deductions
[Education-Related Exclusions] The scholarship exclusion applies only if the recipient ______________________
is not required to perform services in exchange for receiving the scholarship
Income from services is often referred to as earned income because ___________________
it is generated by the efforts of the taxpayer
The second exemption of Prizes and Awards is for employee awards for ______________
length of service or safety achievement
For property own jointly, under the common law system, each co-owner is taxed ________________________
on the income attributable to his or her share of the property
To satisfy the _________ the taxpayer must have owned the residence for a total of two or more years during the five-year period ending on the date of the sale
ownership test
Gain in excess of the exclusion generally qualifies as a long-term capital gain subject to tax at _______
preferential rates
If you sell your life insurance policy, the purchaser must include ___________ as taxable income
proceeds
__________ damages are fully taxable
punitive
Gross income is the income that taxpayers _________
realize, recognize, and report on their tax returns for the year
Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $250,000 (or $500,000 if MFJ) of __________
realized gain on the sale of their principal residence
Taxpayers who realize an economic benefit must include the benefit in gross income unless a specific provision of the tax code says otherwise. That is taxpayers must ______________________________________
recognize all realized income by reporting it as gross income
If the discharge of indebtedness makes the taxpayer solvent, the taxpayer _____________
recognizes gross income to the extent of his solvency.
Under community property systems, _______________________
the income earned from services by one soups is treated as though it was earned equally by both spouses
If the payment is alimony, then the amount of the payment is included in the gross income of _____________
the person receiving it
When property is sold or disposed, the realized gain or loss equals _________________
the sale proceeds reduced by the tax basis of the property
The assignment of income doctrine prevents 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
Taxpayers may be required to include up to 85% of their social security benefits in gross income depending on _______________ and ______________
the taxpayer's filing status and modified AGI
Under the claim of right doctrine, if a company paid a cash bonus to employees, the employees would include the bonuses in gross income in __________________
the year received because there are no restrictions on their use of the income
Taxpayers are allowed to deduct __________________________
their gambling losses to the extent of their gambling winnings
[Education-Related Exclusions] Athletic scholarships that cover room and board can be excluded from gross income if ________________________
they are not cancelled if the student cannot participate in the sport
Gift and estate taxes are imposed on the ________________
transfer of the property
Income from property is often referred to as _____________
unearned income
To satisfy the __________, the taxpayer must have used the property as his or her principal residence for a total of two or more years during the five-year period ending on the date of the sale
use test
The Return of Capital Principle states that _____________
when receiving a payment for property, taxpayers are allowed to recover the cost of the property tax free
