GROSS INCOME DEFINED

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including compensation for services, including fees, commissions, fringe benefits, and similar items and gross income derived from business.

Code 1001

GAIN REALIZED

Computation of Gain or Loss

Amount Realized - Basis (Cost/Gift/Death) = Gain

1.61-1(a)

Definition of Gross Income

Gross income means all income from whatever source derived, unless excluded by law.

Constructive Reciept

1.451-1

Gains, profits and income are to be included in income for the taxable year in which hey are actually or constructively received as long as it is not subject to substantial limitations

Accrual Method

Report income when all the events test is satisfied.

• All events have occurred
• Amount cen be reasonably estimated

Accrual Method (EXCEPTION)

Prepayment of income -

• Normally the taxpayer would report income when cash is recieved
• EXCEPTION - Service Taxpayer

June, 2012 - Cable Co, accrual tax payer allows customers to pay by the year in advance, In June they collected the following amounts

July 12 - June 14 (two year) ----- 68,000

July 12 - June 13 (one year) ----- 70,000

How is the income reported?

OF (two year) -- Report (68,000*.25 of the 2 year period)

 = 17,000

OF (one year) -- Report ( 70,000*.5 of the 1 year period)

= 35,000

TOTAL = 52,000 to report in 2012

*REPORT REST IN 2013

Interest Free Loans

(What is the CODE #)

7872 - Interest Free Loans

Code 7872 (a)(1)

Interest Free Loans - Treatment of Gift Loans

- In the case of any below-market-loan, the foregone interest shall be treated as

(A) Transfered from the lender (dad) to the borrow (son) as a GIFT and

(B) Deemed retransfered by the borrower to the lender as interest income

Name the exception described in Code Section

7872 (d)(1), (d)(1)(A) and (d)(1)(E)(ii)

• (d)(1) - Applies to Loans under $100,000
• (d)(1)(A) -  Amount treated as interest income shall not exceed the borrowers net investment income (NII)
• (d)(1)(E)(ii) - De minimus rule - if the borrowers NII does not exceed $1,000, income shall be treated as ZERO

DIVORCE

Name Code and Describe

Code 1041

• State Law requires division of property accumulated during the marriage.
• Property transfered is NOT TAXBLE - the recipient has a basis in the property equal to the transferor

ALIMONY

Specific Code and description

Payor                    Recipient

Alimony - Deduction from Income  Included in income 

• Payments are in cash
• Made pursuan to a seperation agreement
• Does not specify that it is NOT alimony
• NOT members of the same household
• No obligation to pay after death

ANNUITY

Code and how to calculate the EXCLUSION

CODE SECTION 72

Annuitant can exclude from income the exclusionary amount: 

(Investment in Contract/Total Expected Return)xAmount Recieved annually

• Payments may be for life or a set period
• Once the investment is recovered, all subsequent payments are taxable
• If taxpaer dies, unrecovered cost is deductible in the year the payments cease

Group-Term Life Insurance

Code # - Explain

Code Section 72

Group-Term Life Insurance purchased for an employee, the amounts tax free are:

• The cost of $50,000 of the insurance
• The amount paid by the employee

USE TABLE 4-3 to Calculate

FIRST $50,000 is tax free

Using table 4-3 : Tax regulation is $.23 per month per $1,000

$40,000/$1,000(Table is based on 1,000)=40

40 X 12(Annual) X .23 = $110.40