Chapter 3 - Income Sources

Chapter 3 - Income Sources - Chapter 3 Income Sources I...

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Chapter 3: Income Sources I. What Constitutes Income a. Current View: i. The first requirement of what constitutes income is that there is an increase in wealth to the taxpayer ii. The second requirement is that this wealth must be realized 1. A change in form and/or substance of the taxpayer’s property 2. The involvement of a second party in the income process II. Common Income Sources a. Earned Income: i. Providing labor for compensation produces earned income 1. All amounts paid by an employer to or on behalf of an employee are taxable unless specifically excluded by law ii. Most common forms of earned income: 1. Wages, salaries, tips, bonuses, and commissions 2. Income from the active conduct of a trade or business 3. Income from the rendering of services 4. Income from the performance of illegal activities iii. Cash-Equivalent Approach: 1. Used to measure receipts of income a. Receipt of anything with a fair market value will trigger recognition of income b. Unearned Income: i. Includes the earnings from investments and gains from the sale, exchange, or other disposition of investment assets 1. Constitutes a return on an investment and producing the income does not require an labor by the owner of the investment a. Interest income b. Dividend income c. Income from rental and royalty-producing activities d. Income from annuities e. Income from conduit annuities f. Gains from the sale of investments producing any of the five forms of unearned income ii. Rental and Royalty Income: 1. Gross income from the property, less the related expenses to produce the income iii. Annuities: 1. String of equal payments received over equal time periods for a determinable period a. Annuity exclusion ratio: i. Cost of the contract divided by the number of payments from the contract 1. Gives the tax excludable portion of each annuity payment 2. Annual accounting period concept:
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a. Requires an annual reporting of income and embodies the notion that the vents of each tax year are to stand apart from the events of other years iv. Calculation of Gain/Loss on Sale of Investments: Proceeds from sale of property Less: Selling expenses Equals: Amount realized from sale of property Less: Adjusted basis of property sold
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Chapter 3 - Income Sources - Chapter 3 Income Sources I...

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