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Questions and Answers
Gross income includes all income from whatever source derived.
True
Alimony and separate maintenance payments are considered included in gross income after TCJA 2017.
False
Gross income can only be realized in the form of cash.
False
Interest is considered as one of the types of income included in gross income.
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The IRC provides a comprehensive and exhaustive list of what constitutes gross income.
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Distributive share of partnership gross income is excluded from gross income.
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Pensions are classified as income that falls under gross income.
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Income from discharge of indebtedness is a type of gross income.
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Emily must include the entire $25,000 first payment in her gross income.
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If Emily dies after receiving 5 payments, her estate must include the amount received in gross income.
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If Emily receives payments for life starting at age 70, all payments must be included in her taxable income.
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David will include none of his Social Security benefits if his Modified AGI exceeds $34,000.
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For a single filer, if the Modified AGI plus 50% of SS benefits is $24,000, all Social Security benefits are excluded from income.
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Income from annuities is reported to the individual taxpayer on Form 1099-R.
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If an individual taxpayer dies before recovering their full investment in an annuity, they cannot deduct the remaining investment on their final tax return.
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Social Security benefits can be included in gross income up to a maximum of 100%.
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Prizes and awards must be reported by the individual taxpayer on Schedule 1.
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Alimony payments made by Sally to Bob will reduce from $10,000 to $8,000 when their youngest child turns 18.
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Annuity payments can only be made over a fixed period of time and not for an individual's lifetime.
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Interest on bonds issued by the U.S. government is excluded from taxable income.
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The expected value of an annuity is calculated based on the number of payments expected multiplied by the payment amount.
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Taxpayers can exclude up to $500,000 in gain from the sale of their personal residence if filing jointly.
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Alimony is reported to the individual taxpayer on Schedule K-1.
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The annuity exclusion ratio helps determine the amount included in gross income from annuity payments.
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Fringe benefits provided to employees are always included in gross income.
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The IRC includes provisions primarily to encourage certain activities and ensure fairness for taxpayers.
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Payments associated with personal injury always exclude compensatory damage payments tied to a physical injury.
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Workers' compensation payments are always included in taxable income.
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If a taxpayer receives disability insurance benefits through their employer as a nontaxable fringe benefit, the benefits are included in taxable income.
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Form 1065 does not include Schedules K-1.
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Health care reimbursement for medical expenses is always excluded from taxable income.
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Study Notes
Realization and Recognition of Income
- Gross income encompasses all income regardless of the source, as per IRC Section 61(a).
- Although IRC section 61(a) lists common types of income, it is not limited to those examples.
Types of Income
- Compensation for Services: Includes salaries, wages, fees, bonuses, and commissions.
- Gross Income from Business: Includes income from operating a business, self-employment, and trade or profession.
- Gains from Property Dealings: Includes gains from selling, exchanging, or otherwise disposing of assets.
- Interest: Includes interest earned on savings accounts, bonds, and other investments.
- Rents: Includes income received from renting out property.
- Royalties: Includes income from the use of intellectual property such as copyrights or patents.
- Dividends: Includes income from investments in corporations, such as shares of stock.
- Annuities: Periodic payments from an investment that pays a stream of equal payments over time.
- Income from Life Insurance and Endowment Contracts: Includes proceeds from life insurance policies and endowment contracts.
- Pensions: Includes income from retirement plans and other pension programs.
- Income from Discharge of Indebtedness: Includes forgiveness of debt, often considered taxable income.
- Distributive Share of Partnership Gross Income: Includes income received from a partner's share of a partnership's profits.
- Income in Respect of a Decedent: Includes income earned by a decedent who passed away during the year, but not yet realized before death.
- Income from an Interest in an Estate or Trust: Includes income received from an estate or trust.
Exclusion Provisions
- Interest on Municipal Bonds: Excluded from gross income, allowing local governments to pay lower interest rates on bonds.
- Gain on Sale of Personal Residence: Up to $250,000 for single filers and $500,000 for married filing jointly can be excluded.
- Fringe Benefits: Noncash benefits provided to employees as additional compensation. Qualified fringe benefits are excluded from gross income. Examples are medical insurance paid by employers, employer-provided life insurance, and wellness programs.
- Sickness and Injury-Related Exclusions: Workers' compensation payments are always excluded from gross income. Compensatory damages for physical injury/sickness are excluded, while punitive damages are always included.
- Disability Insurance: Excluded from gross income when purchased by the individual, but included if provided by the employer as a nontaxable fringe benefit.
Common Forms & Schedules
- Tax Forms: Form 1040, Schedule 1, Schedule B, Schedule C, Schedule E, Form 1065 (including Schedules K-1), Form 1120-S (including Schedules K-1)
- Source Documents: Form W-2, Form 1099-INT, Form 1099-DIV, Form 1099-R, Form SSA-1099, Form 1099-MISC and Form 1099-NEC, Form 1099-G, and Schedule K-1
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Description
This quiz covers the realization and recognition of income as outlined in IRC Section 61(a). Explore various types of income including compensation, business income, and rental income. Test your knowledge on the different sources and categories of income.
