Bryant - Course 4. Tax Planning. Module 2. Gross Income Flashcards
(44 cards)
Which of the following statements is not correct when considering the economic concept of income?
- Under an economist’s definition of income, wealth that flows to the individual and changes in the value of the individual’s store of wealth are considered income.
- An economist includes unrealized gains, gifts, and inheritance as income.
- An economist adjusts for inflation in measuring income.
- An economist believes an individual has no income to the extent that an increase in the measured value of property is caused by a decrease in the value of the measuring unit.
An economist believes an individual has no income to the extent that an increase in the measured value of property is caused by a decrease in the value of the measuring unit.
An economist adjusts income for inflation and believes income includes both the wealth that flows to an individual and changes in the value of the individual’s store of wealth.
An accountant (not economist) believes an individual has no income to the extent that an increase in the measured value of property is caused by a decrease in the value of the measuring unit.
In which of the following forms may gross income be realized?
- Property
- Transactions
- Services
- Each of these may be considered income.
Each of these may be considered income.
As well as money, receipt of property, transactions, and services may be considered income.
Which of the following statements is NOT correct regarding community property?
- Community income is considered to belong equally to both spouses.
- If one spouse’s salary is used to purchase stock, subsequent dividends from the stock are taxed entirely to that spouse.
- Spouses can have separate property in a community property state.
- In a community property state, the income from the personal efforts of either spouse is considered to belong equally to both spouses.
If one spouse’s salary is used to purchase stock, subsequent dividends from the stock are taxed entirely to that spouse.
Income from community property is considered to be community income. Thus, if one spouse’s salary is used to purchase stock, subsequent dividends are community income.
Under which accounting method is all income taxed in the year it is earned?
- Cash method
- Hybrid method
- Accrual method
- Each of these accounting methods require all income to be taxed in the year it is earned.
Accrual method
Under the accrual method of accounting, income is reported in the year it is earned.
Each of the following statements regarding recognition of income is correct EXCEPT:
- Gains realized from property transactions are included in gross income unless a non-recognition rule applies.
- Losses offset against gains in computing gross income.
- Net capital losses for individuals are subject to provisions that limit the amount that can be deducted from income other than capital gains to $3,000 per year.
- Losses from the sale or disposition of an asset held for personal use are not deductible.
Losses offset against gains in computing gross income.
Most losses are deductions for adjusted gross income.
Series EE Bond Exclusion Ratio = ?
Series EE Bond Exclusion Ratio =
Series EE Interest x Excess modified AGI ÷ Series EE interest + principal
Stuart, a single filer, age 55, plans to redeem Series EE bonds, which have $10,000 of interest, this year to help pay college tuition, which is $40,000, for his daughter, Christina, who is age 19. At the time of purchase, Stuart’s AGI was $50,000, but now his AGI is $99,350.
What is the 2023 federal tax treatment of the bond interest?
- Because the bond interest is paying for college tuition, the interest is tax-free.
- The bond interest is fully taxable to Stuart.
- $5,000 of the bond interest is tax-free.
- $7,800 of the bond interest is subject to kiddie tax.
$5,000 of the bond interest is tax-free.
Stuart’s AGI is $7,500 (50%) over the beginning threshold of $91,850. This results in 50% of the interest being taxable.
The 2023 phaseout for tax-exempt interest from Series EE bonds used for education by a single taxpayer is $91,850 to $106,850.
What is the tax treatment of gambling losses?
- Deductible as an itemized deduction up to the amount of gambling winnings
- Fully deductible as an itemized deduction.
- Gambling losses are no longer deductible in any amount
- Deductible up to 30% as a deduction for AGI
Deductible as an itemized deduction up to the amount of gambling winnings
Gambling losses are deductible up to the current year’s gambling winnings as an itemized deduction.
Which of the following is not included as part of a taxpayer’s Social Security benefits?
- Retirement benefits
- Disability benefits
- Lump-sum death benefit
- Benefits for long-term facility-based custodial care
Benefits for long-term facility-based custodial care
Social Security does not provide for long-term custodial care.
Which type of taxpayer encounters the recovery of previously deducted amounts more often?
- Cash-basis
- Accrual-basis
- Hybrid-basis
Cash-basis
Cash-basis taxpayers encounter deduction recovery more often than accrual-basis taxpayers because their expenses are generally deductible in the year that they are paid.
Each of the following may be used to shift taxable income from a parent to a child except:
- Giving stock in the family business to a child
- Having the child work in the family business
- Transferring income producing property from the parent to the child
- Directing the parent’s employer to pay wages directly to the child instead of the parent
Directing the parent’s employer to pay wages directly to the child instead of the parent
Assignment of income rules prevents shifting by merely redirecting the payment of wages from a parent to a child.
What formula can help determine if someone should invest in tax-exempt bonds or taxable bonds?
Invest in Tax-Exempt Bonds When:
Return on tax-exempt bond ˃ [Return on the taxable bonds × (1 – marginal tax bracket)]
A taxpayer should invest in tax-exempt bonds instead of taxable bonds if the interest on the tax-exempt bonds is greater than the interest on the taxable bonds multiplied by 1 minus the taxpayer’s marginal tax bracket (expressed as a decimal).
Comparison of Bond Yield Example:
Robert’s marginal tax bracket is 24% and he is trying to decide between tax-exempt bonds, which pay 6.4% interest, and taxable bonds paying 8% interest. Robert should invest in tax-exempt bonds because 6.4% is greater than 6.08%. [0.08 x (1 - 0.24)].
This concept of income includes both the wealth that flows to the individual and changes in the value of the individual’s store of wealth?
- Accounting
- Cash method
- Economic
- Accrual method
Economic
Economists define income as the amount an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. To the economist, income includes both the wealth that flows to the individual and changes in the value of the individual’s store of wealth. Under the economists’ definition, unrealized gains, as well as gifts and inheritances, are income. Furthermore, the economist adjusts for inflation in measuring income.
A retail company had sales of $1,000,000 and the following costs: goods sold, $400,000; salaries, $200,000; and rent and other expenses, $100,000. What is the company’s gross income?
- $400,000
- $600,000
- $200,000
- $300,000
The gross income is $600,000. The sales figure is reduced by the cost of the goods sold.
On December 2, 2022, Dan sold land for $100,000 payable on February 2, 2023. During the negotiations, the buyer offered to pay cash in December, but Dan declined this offer. In what year will Dan have to claim the $100,000 as income?
- 2022
- 2023
- 2022 and 2023
- Will not have to claim because he did not take cash offer.
2023
Dan is permitted to defer the recognition of income under the contract until 2023 since the contract is made before the income is earned.
Several years ago, Kim purchased a used grandfather clock at an auction for $50. In the current year, she finds $1,500 dollars hidden in the clock. When should Kim report this income?
- She does not have to report the $1,500
- She needs to file an amendment to her taxes in the year she purchased the clock and include the $1,500
- She needs to report the $1,500 in the current year
- She needs to report $1,450 in the current year
She needs to report the $1,500 in the current year
Kim must report the $1,500 as income in the current year and it is taxable because it is considered a treasure find.
In 2022, Brenda’s employer withheld $2,000 for state income taxes from her wages. She claimed $2,000 as an itemized deduction on her 2022 federal income tax return. Her itemized deductions totaled $14,000. On her 2022 state income tax return, her state income tax liability was only $1,500. As a result, she received a $500 refund from the state in 2023. What must Brenda now do?
- Brenda can list the $500 refund as a negative itemized deduction on her 2021 federal income tax return.
- Brenda must file an amended 2022 state return.
- Brenda must file an amended 2023 federal return.
- Brenda must report the $500 refund as income on her 2023 federal income tax return.
Brenda must report the $500 refund as income on her 2023 federal income tax return.
Because Brenda deducted the full $2,000 in 2022, she must report the $500 refund as income on her 2023 federal income tax return.
Which of the following recognizes self-help income as income?
- IRS
- The courts
- Economists
Economists
Economists recognize self-help income as income.
Mitch has hired his son, Tom, age 14, to work in the family business for approximately 10 hours per week. Mitch feels it is important for Tom to work rather than to receive an allowance. Tom performs essential custodial and lawn care duties at the company. For this, he receives a salary of $75 per week from the business. What is the tax treatment of Tom’s salary?
- The salary is reasonable compensation and is deductible by the business and is taxed as earned income to Tom.
- The salary is likely to be classified as a gift from parent to child and will not be deductible by the business nor taxable to Tom.
- Tom is subject to kiddie tax and will pay income tax at his parents’ income tax rate on any amount received in excess of $2,500 in 2023.
- The payments will be considered dividends to Tom and will not be deductible to the business.
The salary is reasonable compensation and is deductible by the business and is taxed as earned income to Tom.
The salary, which is approximately minimum wage given the hours worked, is reasonable compensation for the duties performed and is deductible by the business and is taxed as earned income to Tom.
A couple whose AGI is $200,000 in 2023 adopted two children in the U.S. this year. They paid a total of $30,000 in qualified adoption-related expenses. One spouse’s employer has an adoption assistance program. What is the tax treatment of funds received by the employee under the adoption assistance program?
- Assistance received is taxable as an income bonus to the employee.
- Assistance received up to the total qualified adoption-related expenses is tax-free.
- Assistance received is tax-free subject to a per-child adopted maximum.
- Assistance received is taxable up to an annual threshold; excess amounts are tax-free.
Assistance received is tax-free subject to a per-child adopted maximum.
Under an employer adoption assistance program, assistance received is tax-free subject to a per-child adopted maximum. In 2023, the maximum per child tax-free assistance is $15,950.
Identify the exception(s) where the discharge of an indebtedness is not taxable. (Select all that apply)
- The discharge occurs when the taxpayer pays their tax.
- The discharge occurs in bankruptcy.
- The discharge occurs when the taxpayer is insolvent.
- The discharge occurs when the taxpayer has more assets than liabilities.
The discharge occurs in bankruptcy.
The discharge occurs when the taxpayer is insolvent.
The discharge of indebtedness is not taxable when the discharge occurs in bankruptcy or when the taxpayer is insolvent.
Which of the following are reasons for creating statutory exclusions? (Select all that apply)
- Social policy
- Indebtedness during bankruptcy
- Economic incentive
- Revenue revising
Social policy
Indebtedness during bankruptcy
Economic incentive
Congress has created statutory exclusions for reasons of social policy or reasons of incentive. Other exclusions are created in terms of economic incentive, that is, the government’s desire to encourage or reward a particular type of behavior. In addition, income from the discharge of indebtedness during bankruptcy is excluded from gross income because such taxpayers would be unlikely to have the resources needed to pay the tax.
Which of the following conditions qualify for the foreign-earned income exclusion? (Select all that apply)
- Taxpayer must be a bona fide resident of one or more foreign countries for an entire taxable year.
- Taxpayer must be present in one or more foreign countries for 330 days during a period of 12 consecutive months.
- Taxpayer must not be present in, or a resident of, a foreign country or countries for the entire year.
- Taxpayer must be present in one or more foreign countries for 130 days during a period of 12 consecutive months.
Taxpayer must be a bona fide resident of one or more foreign countries for an entire taxable year.
Taxpayer must be present in one or more foreign countries for 330 days during a period of 12 consecutive months.
To qualify for the foreign-earned income exclusion, the taxpayer must either be a bona fide resident of one or more foreign countries for an entire taxable year, or be present in one or more foreign countries for 330 days during a period of 12 consecutive months.
Which of the following item(s) is not considered income and is not subject to income tax? (Select all that apply)
- Borrowed funds
- Scholarships
- Interest
- Self-help income
- Rental value of personal-use property
Borrowed funds
Scholarships
Self-help income
Rental value of personal-use property
Borrowed funds, scholarships, unrealized income, self-help, rental value of personal-use property and gross selling price of property are all considered items that are not income and therefore are not subject to income taxes.
