Chapter 4 - Gross Income from Personal & Investment Activities

Question 1

Cash basis

Answer 1

Recognize income when it is received and expenses when they are actually paid

Question 2

Accrual basis

Answer 2

Recognize income when it is earned and expenses when they have been accrued

Question 3

Realization

Answer 3

When income is received

Question 4

Recognition

Answer 4

When income is reported on the tax return

Question 5

Separated spouse relief

Answer 5

1. Couple lives apart at all times during the year
2. Do not file a joint return
3. None of earned community income is transferred between them

Question 6

Innocent spouse relief

Answer 6

1. Does not file a joint return
2. The return shows the taxpayer did not know or have reason to know of the community income
3. It is inequitable to include it in the taxpayer’s income

Question 7

Exclusion ratio

Answer 7

(Investment / Expected return) x Distributions received

Question 8

Taxable equivalent yield

Answer 8

Tax Exempt Yield / (1-marginal tax rate)

Question 9

Tax free equivalent yield

Answer 9

Taxable yield x (1-marginal tax rate)

Question 10

Imputed interest

Answer 10

Less than $10,000 loan value = $0
$10,000 - 100,000 lesser of net investment income or interest using AFR
over $100,000 interest using AFR

Question 11

Punitive damages

Answer 11

Included in income

Question 12

Compensatory

Answer 12

Only bodily injury excluded from income