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T11F-Chp-03-1-Income Sources-2011

T11F-Chp-03-1-Income Sources-2011 - Chapter 3 Income...

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1 Chapter 3 Income Sources Howard Godfrey, Ph.D., CPA UNC Charlotte Copyright © 2011, Dr. Howard Godfrey Edited August 30, 2011.
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Part-1. What constitutes income [income from labor or capital, increase in wealth, current view] Part-2. Common income sources [Earned, Unearned (rent, royalty, annuities), Transfers from others (prizes, unemployment income, Social Security, Alimony), Imputed income, Below market loans, Expenses of others, Bargain purchases] Part-3. Capital gains and losses [capital gains, dividends, capital losses, capital gains and losses of conduit entities] Part-4. Effect of Accounting Period
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Income Sources. Capital Gain or Loss Introduction Netting What is Income? Capital Gains Labor & Capital Dividends Increase in Wealth Capital Losses What is Income? Conduit gains & losses Common Sources Accounting Methods Earned Income Cash Method Unearned Income Accrual Method Transfers Hybrid Method Imputed Income Exceptions Chapter 3. GROSS INCOME
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What is Income? From Labor & Capital Increase in Wealth Current View
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Common Income Sources Earned Income Unearned Income Transfers from Others Imputed Income
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Taxpayer had a salary from IBM $60,000 Rent received for rental house 12,000 Repairs expense for rental house 1,000 Property tax on rental house 2,000 Depreciation on rental house 10,000 Repairs on personal residence 500 Property tax on personal residence 1,500 What is adjusted gross income? Rent and Royalty Income-1
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Salary from IBM $60,000 $60,000 Rent received-rental house 12,000 12,000 Repairs exp. for rental house 1,000 (1,000) Property tax on rental house 2,000 (2,000) Depreciation on rental house 10,000 (10,000) Repairs on personal residence 500 Property tax on personal res. 1,500 What is adj. gross income? $59,000 Rent and Royalty Income Where are rental income & expenses reported on the income tax return?
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Annuities An annuity is a series of payments. Typically an individual invests a sum of money and receives periodic payments (often monthly) over a period of years, maybe for as long at the individual lives. Example: invest $120,000 and receive $1,000 per month for life, and life expectancy is 20 years. Half of each payment is return of
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Life expectancy- in years 30 Annuity income per month $1,000 Annuity income per year Income over life expectancy Cost $270,000 Profit expected Profit percentage Profit per year Annuity Example - age 55
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Life expectancy- in years 30 Annuity income per month $1,000 Annuity income per year $12,000 Income over life expectancy $360,000 Cost $270,000 Profit expected $90,000 Profit percentage 25% Profit per year $3,000 What happens when he gets to age 86? Annuity Example - age 55
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Annuity Income. Usually includes taxable & nontaxable amounts Nontaxable amount is a return of capital Nontaxable amount of a payment is equal to: (the Investment in annuity / expected return from annuity) X annuity payment received If the amounts invested in the annuity were all made by the employer (or by the employee using pre -tax dollars), then the employee’s investment is treated as zero
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Annuity Example- Susan-Slide 1 Susan, age 62, purchased an annuity for $30,000. He begins receiving $500 per month in January. What amount is included in his gross income?
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