Gross Income
Income that taxpayers report realized and recognized income on their tax returns for the year.
Gross income includes
any income realized in any form, whether in money, property, or services
Gross income is recognized when:
-they receive an economic benefit
-they realize the income
-the tax law does not provide for exclusion or deferral
Economic Benefit
taxpayers must receive an economic benefit ( receive an item of value) to have gross income
-paid for services rendered, proceeds from property sales, and income from investments or business activities
Realization Principle
under this principle, income is realized when 1. a taxpayer engages in a transaction with another party, and 2. the transaction results in a measurable change in property rights.
Advantages of Realization Principle
1.Because parties to the transaction must agree to the value of the exchanged property rights, the transaction allows the income to be measured objectively.
2. The transaction often provides the taxpayer with the wherewithal to pay taxes (reduces the poss
Recognition
Taxpayers are generally required to RECOGNIZE all realized income by reporting it as gross income on their tax returns
Does the form of receipt matter
The taxpayer should report realized income no matter the form of its receipt--cash, property, or services
Return of capital principle
means the tax basis (the cost of an asset) is excluded when calculating realized income (i.e. refund)
-Gain from the sale/disposition of an asset is included in realized income
Recovery of amounts previously deducted
-if a refund is made for an expenditure deducted in a previous year, then under the tax benefit rule the refund is included in gross income to the extent that the prior deduction produced a tax benefit.
When to recognize income?
Individuals file tax returns for a calendar-year period, and corps often use a fiscal year
Accounting methods:
Corps: accrual method
Individuals: cash method
Constructive Receipt
For individuals on cash method, when receive payments near year-end
The constructive receipt doctrine states that a taxpayer realizes and recognizes income when it is actually or constructively received.
-occurs when the income has been credited to the ta
Claim of Right
Income is recognized when there are no restrictions on use of income
Who is recognizing the income
-when shifting income
-Assignment of Income--holds the taxpayer who earns income from services must recognize the income and income from property is taxable to the person who actually owns the income-producing property.
-Community Property Systems: in cer
States of community property systems
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin
Annuities
a portion of each annuity payment as a non-taxable return of capital and the remainder as gross income
Annuity exclusion ration
determines the return of capital, non-taxable, portion of each payment
=original investment / expected value of the annuity
Calculating Gain/Loss from sale of an asset
Sales proceeds - selling exp. = Amount realized - Basis/investment in property sold = Gain/loss on sale
Alimony
1. transfer of cash made under a written separation agreement or divorce decree
2. the separation/divorce decree does not designate the payment as something other than alimony
3. in the case of legally separated taxpayers under a separation or divorce dec
Prizes and awards
excluded only if 1. made for scientific, literary, or charitable achievement, and 2. transferred to a qualified charity
Social Security Benefits
up to 85% taxable of SSB in gross income and modified AG
Single Taxpayer-social security benefits
Modified AGI + 50% of ssb <= $25000 -->
NOT taxable
$25000 < modified AGI + 50% of ssb <= $34000 --> 50% of SSB or .5(modified AGI + 50% of ssb - $25000)
modified AGI + 50% SSB > $34000--> 85% of SSB or .85(modified AGI + 50% of ssb - $34000) + the lesser
Imputed Income
realized indirect economic benefits that the taxpayer must include in gross income
Discharge of Indebtedness
when a taxpayer's debt is forgiven by a lender, the taxpayer must usually include the amount of debt relief in gross income
Exclusion Provisions
-municipal interest: from bonds issued by local and state governments, allows offering at lower before-tax interest rate.
-gains on the sale of a personal residence: may exclude up to $250,000 of gain on sale (memo problem), must satisfy ownership/use tes
Education-Related Exclusions
Scholarships paying for required tuition, fees, books, and supplies
Gifts and inheritances (exclusion)
excluded because these transfers are subject to the federal gift and estate tax
Life Insurance Proceeds (exclusion)
-amounts received due to the death of the insured are excluded from the income of the recipient
-if over time payments, portions must be included in gross income
-
Foreign earned income
-a max. of $95,100 of foreign earned income can be excluded from gross income for qualifying individuals
-a max. of $13,314 of employer-provided foreign housing may be excluded
-The taxpayer MUST be a resident or live in the foreign country for 330 days i
Sickness and injury-related exclusions
-workers' compensation
-payments associated with personal injury (awards related to physical injury/sickness, or payments for medical costs of treatment for emotional distress)
-health care reimbursement
-disability insurance (disability benefits)
Deferral Provisions
allow taxpayers to defer the recognition o certain types of realized income
-installment sales
-like-kind exchanges
-involuntary conversions,
-contributions to traditional qualified retirement accounts