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Ind. IO Chap. 3- 2008

Ind. IO Chap. 3- 2008 - Chapter I:3 Gross Income Inclusions...

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Chapter I:3 Gross Income - Inclusions Learning Objectives After studying this chapter, the student should be able to 1. Explain the difference between the economic, accounting, and tax concepts of income. 2. Explain the principles used to determine who is taxed on a particular item of income. 3. Determine when a particular item of income is taxable under both the cash and accrual methods of reporting. 4. Apply the rules of Sec. 61(a) to determine whether items such as compensation, dividends, alimony, and pensions are taxable. Areas of Greater Significance It is important for the student to understand that the tax definitions of income items may vary significantly from lay definitions, and even accounting definitions. Statutory tax definitions of income items should be stressed. Areas of Lesser Significance In the interest of time, the instructor may determine that the following area is best covered by student reading, rather than class discussion: 1. Economic and accounting concepts of income. Problem Areas for Students The following areas may prove especially difficult for students: 1. The differences between legal alimony and tax alimony. 2. The mechanics and tax consequences of alimony recapture. 3. Determination of the taxable portion of social security benefits received. I:IO3-1
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Highlights of Recent Tax Law Changes The following item has changed from the 2007 edition of this chapter: 1. The floors for phase-out of the Series EE savings bond interest exclusion have increased (See page I:3-14). Teaching Tips 1. The calculation for taxable social security benefits may be the students' first exposure to a major complex tax calculation. You may want to spend considerable time in helping the students master the calculation so that they develop confidence in their abilities to deal with the complex calculations that follow (and to avoid undue discouragement). 2. The distinction between inclusions (Chapter I:3) and exclusions (Chapter I:4) is not an important distinction for theoretical or practice purposes. Specific items discussed in Chapter I:3 may also have an exclusion effect (i.e., portion of annuities excluded from gross income, exclusion of municipal bond interest). You may want to take an overall approach to gross income as detailed in Chapter I:3 and Chapter I:4. Lecture Outline I. Tax Concept of Income A. Administrative Convenience The concept of objectivity and administrative convenience support the tax law selection of income on realization, rather than taxing unrealized appreciation. EXAMPLE: If a piece of land owned by the taxpayer appreciates from $100,000 at the beginning of the tax year to $130,000 at the end of the tax year, there is no tax on the $30,000 appreciation until the disposal of the land. B.
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Ind. IO Chap. 3- 2008 - Chapter I:3 Gross Income Inclusions...

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