Common law states credit each spouse with hisher

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Common law states credit each spouse with his/her individual income and share of joint income. Community property states regard certain income as automatically shared by both but other income earned separately. The substantial majority of states are common law states.2.The law may be different between community property states.EXAMPLE:Income from separate property for California residents is separate income. Income from separate property for Texas residents is community income.3.Allocation of income between married persons is important only if separate returns are to be filed. All income of the spouses is included on a joint return.C.Income of Minor Children1.Children are taxed on their own earned income.2.Even though minor children are taxed on their own earned income, minors under the age of 18 may be taxable on certain unearned incomeat their parents’ marginal rates if they have enough unearned income (the Kiddie Tax).III.When is Income Taxable? A.Cash Method 1.The cash method is used by most individuals, with income being reported in the year of actual or constructive receipt.
2.Constructive receipt occurs when the taxpayer has access to the income, but does not actually receive it (i.e., interest is credited but reinvested automatically). Since taxpayer has right to receive income, income is considered realized and recognized by taxpayer.3.In general, the cash method for expense recognition may not be used for inventories if they are a significant source of revenues (although some exception exists for very small sellers of inventory) even if the taxpayer accounts for other expenses and revenues on the cash basis.4.Where inventories are not material (e.g., service providers) the tax law is more generous in allowing smaller corporations to use the cash method.5.“Cash” doesn’t mean just payment in cash. A cash basis taxpayer recognizes revenue received in kind (goods or services), too.B.Accrual Method1.Accrual method taxpayers generally report income in the year the income is earned (i.e. when "all events" have occurred to fix the right to income, and the amount of income can be determined with reasonable accuracy).2.Prepaid income may be taxable in the year of receipt even if the taxpayer reports income on the accrual basis. Accrual taxpayers generally are not allowed to defer recognition of prepaid rent or prepaid interest received. Deferral of prepaid income is available on certain prepayments for goods not on hand (including prepaid subscriptions when magazines, papers, etc.) have not yet been published) and prepayments for services not rendered until the following tax year. 3.Unlike financial accounting, the tax law generally does not allow accruals of estimated reserves (for example, reserves for bad debts, estimated warranty costs, reserves for estimated losses) to be deducted for tax purposes. Accrual of expenses for tax purposes follows the logic of the “all events tests” and that rule generally requires a specific obligation (or loss) rather than some estimated general obligation (or loss). Most exceptions to this rule occur in the financial services

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