BS 336 Tax Law Chapter 3: Gross Income - Inclusions ro!lems: 36"3#"3$"%&"%'"%3"%%"%("%#"%$"(&"()"(3 *+TLI,I. Concepts o. income /. Sec.

6) 0/ll income .rom whate1er source deri1ed...except as otherwise pro1ided.0 ). Some items speci.icall2 excluded. '. Income ma2 !e reali3ed in an2 .orm 4 mone2" propert2 or ser1ices 3. B. ,ot all sources o. cash .low are 5income5

C. VanGelderen

6udicial concepts o. 7ross income ). '. 3. %. 8eturn o. capital 9not income: Su!stance o1er .orm Gi.t 1s. income Bar7ain purchase

(. Constructi1e receipt C. ;ho owns income<

=. ;hen is income reali3ed< ). '. Transaction approach - ser1ices must !e per.ormed or propert2 sold" exchan7ed or con1erted into other propert2 Income 7enerall2 reali3ed>reco7ni3ed under taxpa2er5s method o. accountin7 a. !. c. cash method 4 accrual method 4 h2!rid method 4

-.

;hen is income reco7ni3ed< ). '. 3. ?a2 !e currentl2 reported ?a2 !e de.erred 9postponed: until .uture reportin7 period ?a2 !e excluded

II.

Items o. 7ross income 9not inclusi1e list: /. Compensation B. C. Business income - 7ross income less cost o. 7oods sold Gains .rom dealin7s in propert2 ). Interest on state and local !onds excluded .rom taxation '. Interest income ma2 !e de.erred until maturit2 .or +S sa1in7s !onds 3. Interest ma2 !e excluded on Series -- sa1in7s !onds when used to pa2 certain colle7e expenses a. purchased !2 T o1er a7e '% !. used .or colle7e expenses .or T " spouse or dependents c. phased out !etween /GI o. @#)")&& 9@)&6"6(& Aoint: and @$6")&& 9@)36"6(& Aoint: -. 8ents and ro2alties ). '. 3. 8ents are taxa!le when recei1ed Securit2 deposits not taxa!le Impro1ements !2 lessee a. !. B. =i1idends ). '. 3. %. (. Taxa!le i. paid .rom current or accumulated earnin7s and pro.its Lower tax rates 4 )(C 9&C i. in )&C or )(C tax !racDets: =istri!utions in excess o. - E 7ain. ?utual .unds ma2 desi7nate a portion o. di1idends as a capital 7ain Constructi1e di1idends a. !. 6. taxed as di1idends althou7h not declared examples include excessi1e salaries" disallowed tra1el and entertainment expenses are tax .ree returns o. capital until stocD !asis F &. Then capital B?V taxa!le i. in lieu o. rent 9increases cost !asis: B?V nontaxa!le i. not in lieu o. rent 9no increase in cost !asis:

=. Interest

StocD di1idends - not taxa!le i. proportionate.

G. /limon2 1s. propert2 settlement 1s. child support ). '. 3. 8ules .or alimon2 8ecapture pro1ision riorit2 o. pa2ments

G. /nnuities ). '. -Hual pa2ments recei1ed in eHual inter1als. Bu2 as an in1estment or emplo2er - emplo2ee plan. Iuestion - /s pa2ments are recei1ed" what portion is income and what is return o. capital< exclusion ratio F a.ter tax in1estment in contract expected returnJ Jexpected return multiple x annual pa2ment 3. %. (. *nce net in1estment is reco1ered no amount excluded /d1ance pa2ments .rom pension plans 9!e.ore a7e (K-)>': ma2 !e su!Aect to a )&C nondeducti!le penalt2 /d1ance pa2ments .rom non-emplo2ee annuities are taxa!le to the extent the cash surrender 1alue o. the annuit2 exceeds the taxpa2er5s in1estment in the annuit2 contract I. 6. Gam!lin7" ille7al income" pri3es" awards +nemplo2ment compensation 4 taxa!le

L. ;el.are 4 not taxa!le unless recei1ed .raudulentl2 L. Social securit2 ). '. +p to (&C or $(C o. social securit2 !ene.its ma2 !e taxa!le. Computation .or )st threshold: /GI M exempt interest income M )>' social securit2 !ene.its pro1isional income - '("&&& unmarried 3'"&&& married Aoint x .( Included in income is lessor o. )>' social securit2 or computation amount 3. Computation .or 'nd threshold a. !. Thresholds: @3%"&&& sin7leN @%%"&&& Aoint. Taxa!le social securit2 !ene.its eHual to lessor o.: --$(C o. social securit2 !ene.its" or lessor o. 9): @%"(&& 9@6"&&& Aoint: or 9': (&C o. social securit2 !ene.its M $(C o. pro1isional income o1er @3%"&&& 9@%%"&&& Aoint:

L.

Insurance proceeds" pa2ments and court awards ). '. 3. %. =ama7es .or personal inAur2 and sicDness not taxa!le a2ments .or loss o. pro.its - taxa!le unless paid on taxpa2er .inanced insurance plan 9i. emplo2er plan - taxed: ;orDman5s compensation excluded .rom 7ross income Bace amount o. li.e insurance recei1ed !ecause o. death o. insured not taxa!le 9chapter %:. Interest on li.e insurance proceeds is taxa!le

?. Income passed throu7h to taxpa2er ). Income .rom partnerships and S corporations - taxa!le on prorata share 9not cash recei1ed:. LLCs electin7 to !e taxed as partnerships also ha1e .low throu7h o. income '. Income in respect o. a decedent is taxa!le ,. 8eco1er2 o. pre1iousl2 deducted expenses 9tax !ene.it rule: 8eco1er2 o. item pre1iousl2 deducted taxa!le to the extent o. prior !ene.it recei1ed 9e.7. state income taxes" medical expenses and reim!ursement...: