Pope_INDCH03 - Chapter 03I 03/16/2007 9:43 AM Page 3-1 3 C...

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c c c c 3 3-1 LEARNING OBJECTIVES After studying this chapter, you 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 CHAPTER GROSS INCOME: INCLUSIONS
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3-2 Individuals Chapter 3 Computation of an individual’s income tax liability begins with the determination of income. Although the meaning of the term income has long been debated by economists, accountants, tax specialists, and politicians, no universally operational definition has been accepted. The Sixteenth Amendment to the Constitution gave Congress the power to tax “income from whatever source derived.” To ensure the constitutionality of the income tax, this phrase is incorporated in Sec. 61(a), where gross income is defined as follows: “Except as otherwise provided . . . gross income means all income from whatever source derived.” This chapter examines the concept of income for the purpose of determining what items of income are taxable. Chapter I:4 considers items of income that are excluded from gross income. As noted in Chapter I:2, many provisions in the tax law are created by a process of political compromise. Thus, there is no single explanation of why certain items are taxable and others are not. For this reason, determining whether a particular item of income is taxable often proves difficult. CHAPTER OUTLINE Economic and Accounting Concepts of Income. ..3-2 Tax Concept of Income. ..3-3 To Whom Is Income Taxable?. ..3-6 When Is Income Taxable?. ..3-8 Items of Gross Income: Sec. 61(a). ..3-13 Other Items of Gross Income. ..3-23 Tax Planning Considerations. ..3-28 Compliance and Procedural Considerations. ..3-30 E CONOMIC AND ACCOUNTING CONCEPTS OF INCOME OBJECTIVE 1 Explain the difference between the economic, accounting, and tax concepts of income ECONOMIC CONCEPT In economics, income is defined as the amount an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. To the economist, therefore, income includes both the wealth that flows to the individual and changes in the value of the individual’s store of wealth. Or, more simply, income equals consumption plus the change in wealth. Alice earned a salary of $40,000. She consumed $30,000 of food, clothing, housing, medical care, and other goods and services. Assets owned by Alice were worth $100,000 at the begin- ning of the year. Her assets, including $10,000 of salary that was saved, were worth $115,000 at the end of the year. Her liabilities did not change during the year. Alice’s economic income is $45,000 [$30,000 1 ($115,000 2 $100,000)].
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This note was uploaded on 09/13/2010 for the course ACCOUNTING 45089 taught by Professor Kenn during the Spring '10 term at University of Phoenix.

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Pope_INDCH03 - Chapter 03I 03/16/2007 9:43 AM Page 3-1 3 C...

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