Exam 4: Gross Income: Concepts and Inclusions

Nicholas owned stock that decreased in value by $20,000 during the year, but he did not sell the stock.He earned $45,000 salary, but received only $34,000 because $11,000 in taxes were withheld.Nicholas saved $10,000 of his salary and used the remainder for personal living expenses.Nicholas's economic income for the year exceeded his gross income for tax purposes.

In some foreign countries, the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?

In December 2012, Mary collected the December 2012 and January 2013 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2012 for the 2013 rent should be included in her 2013 gross income.

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

When stock is sold after the record date for a dividend that has been declared, the seller must recognize as income the dividend received.

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Travis and Andrea were divorced.Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000), and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000).Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks.In addition, Andrea was to receive $50,000 for eight years.

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year), or two years in advance ($950).In September 2011, the company collected the following amounts applicable to future services: As a result of the above, Orange Cable should report as gross income:

ABC Corporation mails out its annual Christmas bonuses to employees on December 24th.Ed, a cash basis taxpayer, is an employee who is on a ski trip until January 7th of the new year, but is aware that his annual Christmas bonus arrives on the 28th of December.Ed cannot delay reporting the income from the bonus until the new year.

Ted earned $150,000 during the current year.He paid Alice, his former wife, $75,000 in alimony.Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

Norma's income for 2012 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.

In some community property states, the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Under the alimony rules:

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

Katherine is 60 years old and is bargaining with her employer over deferred compensation.In exchange for reducing her current year's salary by $50,000, she can receive a lump-sum amount in 5 years, when she will retire. If she receives the $50,000 in the current year, she will invest in certificates of deposit that yield 5%.Katherine in the 28% marginal tax bracket in all relevant years. What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.] $59,669

The alimony rules:

An accrual basis taxpayer who owns and operates a professional basketball team is allowed to allocate income from season ticket sales on the basis of the number of games played during the year.

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

Linda delivers pizzas for a pizza shop.On Wednesday, December 31, 2012, Linda made several deliveries and collected $400 from customers.However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2013.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2013.