Chap17 - Chapter 17 Tax Consequences of Personal Activities...

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Chapter 17 - Tax Consequences of Personal Activities Chapter 17 Tax Consequences of Personal Activities Questions and Problems for Discussion 1. The basic income recognition rule is that income from whatever source derived is subject to tax. Under this inclusive rule, income from personal activities is just as taxable as income from business, employment, or investment activities. In contrast, the basic rule regarding personal expenses and losses is that they are nondeductible. 2. Gifts and inheritances usually represent intrafamily transfers of wealth. Because the aggregate wealth of the family as a social unit does not increase, the gift or inheritance does not represent economic income. A second rationale is that gifts and inheritances represent after-tax income of the donor or decedent, and private transfers of such after-tax income to loved ones should not be taxed a second time. Finally, a requirement that donees and beneficiaries report the value of gifts and inheritances as taxable income would be extremely difficult for the IRS to enforce. 3. First, custodial parents do not include child support payments from noncustodial parents in taxable income. Second, custodial parents may qualify to file their tax returns as heads of household rather than single individuals. Third, custodial parents can claim an exemption and child credit for each child unless they grant the exemption and credit to the noncustodial parent. 4. Welfare payments are based on financial need of the recipient. Therefore, the recipient, by definition, has minimal ability to pay tax. In contrast, unemployment benefits are a substitute for lost compensation income. These benefits are not based on financial need of the recipient and do not suggest that the recipient has a reduced ability to pay tax. 5. Only individuals who paid employee payroll tax or self-employment tax during their working years are eligible to receive Social Security. Many people believe that these employment tax payments constitute their personal investment in the Social Security system - a mandatory savings account to which they are entitled when they retire. In other words, their current Social Security benefits are simply a return of their after-tax contributions and should not be taxed a second time. 6. The annual premium to carry insurance on business property is an expense that must be deducted against gross revenues to properly measure net business income. In contrast, the annual premium to carry homeowner’s insurance is a nonbusiness, personal expense. 7. Mr. Cox could argue that his stamp collection is an investment asset, and the $25 monthly charge for a safety deposit box is an investment expense allowable as a miscellaneous itemized deduction. The alternative is that the collection is a personal asset, and the monthly charge is a nondeductible personal expense.
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