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Unformatted text preview: axpayer with community
income from a spouse may be able to exclude that income if the taxpayer does not file a
joint return, establishes that he or she did not know of or have reason to know of that community income, and it is inequitable to include that community income in the taxpayer’s
The third type of relief is equitable relief. Even if the requirements for separated spouse
relief or innocent spouse relief are not met, the Internal Revenue Service is authorized to
allow a taxpayer not to report half of the community income of the taxpayer’s spouse if, taking into account all of the facts and circumstances, the failure to grant such relief would be
“inequitable.” 6. 7. What types of investments generate interest income and how is interest income reported?
Interest income is generated by a variety of debt instruments, including bank accounts,
money market instruments, corporate bonds, government agency securities, Treasury securities, and municipal bonds. Interest income of $10 or more per year is normally reported to
a taxpayer on Form 1099-INT by the payor of the interest, but the interest must be recognized by the taxpayer even when this form is not received or when the interest income is less
than $10. 8. 20 Give several examples of income generated by investment activities that are included in
Capital gains, interest income, original issue discount (OID), dividend income, rental and
royalty income, income from annuities, income from life insurance and endowment contracts, income from IRAs, income from partnerships, income from S corporations, income
from LLCs, and income from trusts and estates. What are the requirements for a dividend to be a qualified dividend?
Qualified dividends must meet all three of the following requirements: (1) they must be
paid by a U.S. corporation or a qualified foreign corporation; (2) the dividend must not be
a type of dividend excluded by law from the definition of a qualified dividend; and (3) the
shareholder must meet a holding period requirement. CHAPTER 4: G ROSS INCOME FROM PERSONAL AND INVESTMENT ACTIVITIES 9. How is an annuity contract annuitized?
An annuity contract is annuitized when regular periodic (such as monthly or annual) payments begin for life or for a specified period of time in excess of one year. When a contract
is annuitized, each payment is deemed to include both a nontaxable return of invested
money and gross income. The amount of each payment that is a nontaxable return of
investment is determined using the exclusion ratio in the following formula:
Investment in the Contract
Excluded Amount =
x Distributions (Payments) Received
Expected Return 10. What are the tax consequences of taking distributions from an annuity without annuitizing?
When distributions are taken from an annuity without annuitizing, every dollar distributed
must be included in gross income until all of the income in the contract has been included
in gross income. Only then is a tax-free return of invested dollars allowed. This is a...
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- Spring '12