Gross Income:

1
Chapter 3

• Gross Income
• Inclusions

2
Learning Objectives

• Explain the difference between economic,
  accounting, and tax concepts of income
• Explain the principles used to determine who is
  taxed on a particular item of income

3
Learning Objectives

• Determine when a particular item of income is
  taxable under both the cash and accrual methods
  of accounting
• Apply the rules of sec. 61(a) to determine
  whether such items as compensation, dividends,
  alimony, and pensions are taxable

4
Concepts Of Income

• ECONOMIC
• wealth that flows to individuals
• changes in value in individuals wealth
• unrealized gains
• gifts inheritances are considered income

• ACCOUNTING
• values are measured by a transaction approach
• income realized as a result of completed
  transactions
• use historical cost

5
Tax Concept Of Income

• The tax concept of income has adopted the
  accountants concept of income.
• The reasons for this generally relates to
• Administrative convenience concept
• Wherewithal to pay concept

6
Tax Concept Of Income

• Administrative convenience concept
• the economic concept is considered too
  subjective.
• Objectivity is achieved at the price of equity.

7
Tax Concept Of Income

• Wherewithal to pay concept
• A tax should be collected when the taxpayer can
  most easily pay.

8
Gross Income Defined

• Section 61(a) defines gross income as all income
  from whatever source derived, including (but not
  limited to) the following items
• Compensation for services, fees, commissions, and
  similar items
• Gross income derived from business
• Gains from dealings in property
• Interest

9
Gross Income Defined

• Rents
• Royalties
• Dividends
• Alimony and separate maintenance agreements
• Annuities
• Life insurance and endowments
• Pensions
• Income from discharge of indebtedness
• Distributive share from partnership
• Income in respect of a decedent
• Income from an interest in an estate or trust

10
Gross Income Defined

• Gross income is not limited to amounts received
  in the form of cash.
• Reg. Sec. 1.61-1a, income may be realized in any
  form, whether in money, property, and services.

11
To Whom Is Income Taxable ?

• Assignment of income
• Supreme Court in Lucas vs. Earl ruled that
  individual is taxed on the earnings from his or
  her personal services.

12
To Whom Is Income Taxable?

• Allocating income between Married People
• Community Property
• Common Law
• Earnings of a minor child are taxed to the child.

13
When Is Income Taxable?

• Taxpayers accounting method
• Cash method is used by most individual taxpayers
  and most non-corporate businesses that do not
  have inventory.

14
When Is Income Taxable?

• Constructive receipt - a taxpayer must report
  income in the year in which it is actually or
  constructively received.
• A check received after banking hours
• Interest credited to a bank savings account
• Bond interest coupons that have matured but have
  not been redeemed.

15
When Is Income Taxable?

• It is not considered to be constructively
  received if
• It is subject to substantial limitations
• The payor does not have the funds necessary to
  make payment and/or
• The amount is unavailable to the taxpayer.

16
Accrual Method

• Report income in the year income is earned
• All events fix the right to income
• Amount can be determined with reasonable accuracy
• Prepaid income
• Generally taxable

17
Hybrid Method

• Accrual method for purchases and sales
• Cash method in computing all other income and
  expenses

18
ITEMS OF GROSS INCOME Sec. 61(a)

• Compensation
• Business income
• Gains from property
• Interest
• Rents royalties
• Dividends
• Alimony separate maintenance

19
ITEMS OF GROSS INCOMESec. 61(a)

• Pensions annuities
• Life insurance endowment contracts
• Discharged indebtedness
• Income passed through to taxpayer

20
Other Items Of Gross Income

• Prizes and Awards
• Gambling Winnings
• Treasure Finds

21
Other Items Of Gross Income

• Illegal income
• Ransom
• Bookmaking
• Sale of narcotics
• Bribes
• Unemployment compensation
• Social Security benefits

22
Social Security Benefits

• The portion of social security benefits depends
  on the taxpayers provisional income
• See page 3-25 for formulas.

23
Other Items Of Gross Income

• Insurance proceeds
• Court awards
• Recovery of previously deducted amounts (State
  income tax refunds if taxpayer itemized the
  previous year)
• Claim of right

24
Tax Planning Considerations

• Shifting income from family members who are in a
  high tax bracket to family members who are in low
  tax brackets
• Alimony
• Prepaid income

25
Tax Planning Considerations

• Taxable, Tax-exempt or tax deferred bonds
• Savings bonds interest
• Deferred compensation

26
Compliance And Procedural Considerations

• Form 1040 Wages, Salaries and tips
• Schedule B Interest and Dividends
• Schedule C Business Income
• Schedule D Capital gains
• Schedule E Rents and Royalties
• Schedule F Farm Income