Gross Income - General Concepts and Interests Flashcards Preview

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Flashcards in Gross Income - General Concepts and Interests Deck (26)
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1
Q

What is a general rule about income and tax?

A

All income is considered to be taxable unless the income is specifically excluded by the tax law.

2
Q

Is “income” limited to cash? What is an example of non cash income?

A

No. Bartering (exchange) - something of value received.

3
Q

What is constructive receipt?

A

A requirement that a cash basis TP to include the value of property in income in the period in which the right to the property is acquired. Considered as income.

4
Q

What are 2 criteria for constructive receipt?

A

Income has been constructively received if;

  • The amount is readily available to TP, and
  • Actual receipt is NOT subject to substantial restrictions.
5
Q

What is assignment of income?

A

Income is always taxed to the individual who earned the income. Can’t be assigned to others.

6
Q

What is tax benefit rule?

A

A TP must include an expense reimbursement (refund) in income if the expense was deducted in a prior period and the deduction reduced the TP’s taxable income.

7
Q

What is an example of tax benefit rule?

A

Interest pmt.

8
Q

What is claim of right doctrine?

A

TP must include property in income in the period in which an apparent claim to the property materializes (even if the potential of receiving the income is challenged).

9
Q

Claim of right doctrine: What must TP do if the income ended up not being received?

A

Generates a deduction, but does not influence the earlier recognition of the income.

10
Q

Interest income: Is all interest income taxable? Any exception?

A

Yes.
Except for municipal interest, which is interest paid on bonds owned by state/local governments or those owned by US (ex: Puerto Rico). (Federal ones taxable).

11
Q

Interest income: Is interest earned from mutual fund that came from the funds own municipal bonds taxable? What about gain from the sale of municipal bonds?

A

No.

Yes.

12
Q

Interest income: When is prepaid interest income taxed?

A

When received.

13
Q

Interest income: What are examples of the sources of interest income?

A
  • United States Treasury notes and bonds.
  • Federal and state tax refunds.
  • Mortgages.
14
Q

What is series EE bonds?

A

Face value and interest both paid at maturity.

15
Q

When is the interest from series EE bonds taxed?

A

At maturity or elect to tax annually.

16
Q

What are 4 criteria for tax exclusion for the interest from series EE bonds?

A
  • Owner (must be sole owner/joint with spouse) of the bond is at least 24 yrs.
  • Proceeds used to pay higher education expenses (tuition and fees) in the year of redemption.
  • Higher education expenses are for TP, spouse, dependents.
  • Exclusion is phased-out at higher income level.
17
Q

If a TP buys a taxable bond at a premium, is it taxable? Exception?

A

Yes.

TP can elect to amortize the premium.

18
Q

Premium on bonds amortized: what does amortization do to the basis of the bond? To Interest income? What is the method used to amortize?

A

Reduce the basis.
Offset interest income.
Constant yield to maturity method.

19
Q

Must TP amortize the premiums on tax-exempt bonds? Is the amortization deductible?

A

Yes.

No because interest income is not taxed.

20
Q

What method is it used to amortize bond discount? What does amortization affect interest income?

A

Effective interest rate method.

Increases interest income.

21
Q

Bond discount amortization: When is the discount taxed if it’s short-term bonds?

A

At maturity as ordinary income for cash basis TP.

As earned for accrual basis TP.

22
Q

If interest rate for loans is not at least equal to Applicable Federal Rate, what will be assumed?

A

The borrower pays the current market rate of interest to the lender.

23
Q

Interest free and below market loans: What are 3 tax implications (will result in)?

A

Results in;

  • Compensation income if the borrower is an employee.
  • Dividend income if the borrower is a shareholder.
  • a gift in most other cases.
24
Q

Interest free and below market loans: What are 2 exceptions?

A
  • Less than $10,000.
  • If less than $100,000, deemed interest is limited to the borrower’s investment income on the loan proceeds. The investment income is deemed to be 0 if $1,000 or less.
25
Q

When a corporation makes a charitable donation using FMV, what is the amount included in gross income?

A

FMV - must be the same as the basis used for donation.

26
Q

If an amount of income has been accrued on the basis of a reasonable estimate with the exact amount to be determined at a later date, how should any difference between the estimate and exact amount be handled?

A

To be included in income or deducted in the year when the exact amount can be determined.