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Unformatted text preview: ChrisNotes 4 - 5 ASSIGNMENT OF INCOME DOCTRINE. The assignment of income doctrine (AID) answers the question, “who?” i.e., who must report the taxable income? The answer is determined by identifying the owner of the corpus producing the taxable income. Example: An uncle detaches the interest coupon from a bond and gives it to his niece. The Niece promptly cashes it and deposits it into her account. If the uncle retains the bond, the interest income is taxable to him and a tax- ree i tto the niece. TAX BENEFIT DOCTRINE. The tax benefit doctrine (TBD) is used to determine whether expense refunds are taxable. If an expense refund can be linked to a prior year deduction, then it is taxable income. If no linkage, then no taxable income. l Example: In Year 2, a taxpayer receives a $300 state income tax refund. His employer had over-withheld state income taxes from his paychecks in Year I. If, i in Year I, he claimed state income taxes as an itemized deduction, he must report the $300 refund as gross income in Year 2. Ifi on the other hand, he claimed the standard deduction in Year I, the $300 need not be reported in Year ‘ 7 LIMIT ON TAXABILITY OF RECOVERY INCOME Expense refunds are taxable only to the extent that the prior year expense was deductible. Sec. 111(a) Lecture Problem on T axability Limits. FACTS. o In Year 1, Jamal incurred $10,000 medical expenses, none of which was reimbursed by his insurance company. - Jamal’s AGI in Year 1 was $100,000. 0 Jamal itemized in Year 1, claiming a medical expenses deduction of $2,500 ($10,000 medical expense — [7 1/2% x $100,000 AGI]) - In Year 2, Jamal received a $9,000 insurance expense reimbursement. How much of the $9,000 reimbursement is taxable in Year 2? SOLUTION. 52,500. i.e., the $9,000 insurance recovery limited by the $2,500 insurance deduction in Year 1. Chapter 4 ...
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