Exam 4: Gross Income: Concepts and Inclusions

Rachel, who is in the 35% marginal tax bracket, is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120, and the cost is calculated to yield her an expected 6% return on her investment.As an alternative, Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?

George and Erin are divorced, and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is not required to include the alimony payments in gross income because George earned the income and therefore he should pay the tax on the income.

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2012 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2012.

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.Her share of the profits for 2012 was $90,000.She withdrew $40,000 from the partnership in 2012.In January 2013, after her share of the profits for 2012 had been computed, she withdrew her remaining $50,000 share of 2012 profits.As a result, Rhonda must recognize $40,000 of gross income in 2012 and $50,000 in 2013.

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Rachel owns rental properties.When Rachel rents to a new tenant, she usually requires the tenant to pay an amount in addition to the first month's rent.The additional amount serves as security for damages to the property and the tenant's failure to pay future rents.How should the payments be characterized (e.g., on lease documents) to minimize Rachel's current tax liability?

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Under the formula for taxing Social Security benefits, low income taxpayers are not required to include any of the Social Security benefits in gross income.But as income increases, 50% of the Social Security benefits may be included in gross income.Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax.Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support.For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income):

Lois, who is single, received $9,000 of Social Security benefits.She also received $30,000 from dividends, interest, and her employer's pension plan.If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by less than $1,000.

In the case of a zero interest below-market loan by a corporation to a shareholder-employee, what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

Mabel is age 65 and lives on her Social Security benefits and gifts from her son, Fred.Fred is a full-time teacher.He has written a book and receives royalties from it.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Mabel must include the amount of the royalty check in her gross income.

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus, no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

In January 2012, Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year, but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558, with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2012.

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

On November 1, 2012, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2012, the corporation had declared the dividend payable to shareholders of record as of November 22, 2012.The dividend was paid on December 15, 2012.The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock.When Dave collected the dividend on December 15, 2012:

José, a cash method taxpayer, is a partner in J&T Accounting Services, a calendar year partnership.Under the partnership agreement, José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2012. However, in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2012, José received $40,000 as his share of distributed 2011 profits.The partnership earnings before partners' withdrawals for 2012 totaled $1 million.Compute José's gross income from the partnership for 2012.

Judy is a cash basis attorney.In 2012, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services.By the end of the year, the value of the stock had decreased to $2,000.She continued to hold the stock.Judy must recognize $4,000 of gross income from the stock for 2012.

The amount of Social Security benefits received by an individual that he or she must include in gross income:

At the beginning of 2013, Mary purchased a 3-year certificate of deposit (CD) for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%. She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000. Mary must recognize $1,240 of income from the certificate of deposit in 2013, and $3,600 from the Series EE bonds in 2022.