Dewey is a lawyer who uses the cash method of accounting. Last year Dewey provided a client with legal services worth $55,000, but the client could not pay the fee. This year Dewey requested that in lieu of paying Dewey $55,000 for the services, the client could make a $45,000 gift to Dewey's daughter.
False—under the cash method, taxpayers recognize income in the period they receive it (in the form of cash, property, or services). Contrast the constructive receipt doctrine with the claim of right doctrine. The constructive receipt doctrine states that a taxpayer realizes and recognizes income when it is actually or constructively received.
Explain. False—under the cash method, taxpayers recognize income in the period they receive it (in the form of cash, property, or services). Contrast the constructive receipt doctrine with the claim of right doctrine.
A cash method taxpayer recognizes income on the value of property received, so $45,000 of income will be recognized in this year. The assignment of income doctrine holds that earned income is taxed to the taxpayer providing the goods or services. Hence, Dewey and not his daughter is taxed on the entire amount of service income.
When a capital asset that has been held for more than one year is sold, it generates a long-term capital gain. Long-term capital gains are taxed at preferential rates. When it has been held for one year or less, it generates a short-term capital gain when sold. Short-term capital gains are taxed as ordinary income.
Annuities. an investment that pays a stream of equal payments over time. Tax law deems a portion of each annuity paymernt as a nontaxable return of capital and the remainder as gross income. Taxpayers use the annuity exclusion ratio to determine the return of capital (non taxable) portion of each payment.
Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next 10 years. Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity. Anne will recognize 5,500 per year in gross income and 55,000 over the course of ten years.
Refunds of expenditures deducted in a prior year are included in gross income to the extent that the refund reduced taxes in year of the deduction. When to recognize income. -Individual taxpayers file tax returns for a calendar-year period. -Corporations often use a fiscal year end.
The assignment of income doctrine holds that earned income is taxed to the taxpayer providing the goods or services. Hence, Dewey and not his daughter is taxed on the entire amount of service income. Because the money went to Dewey's daughter, his daughter will be treated as though she received a gift from Dewey.
When the tax basis exceeds the sale proceeds, the return of capital principle generally applies to the extent of the sale proceeds. The excess of basis over sale proceeds is generally not considered to be a return of capital, but rather a loss that is deductible only if specifically authorized by the tax code.
A taxpayer should be interested in the character of income received because the character of the income determines how the income is treated for tax purposes (including the rate at which the income is taxed). For example, ordinary income is taxed at the rates provided in the tax rate schedule.
AGI minus "from AGI deductions" equals taxable income. "For AGI deductions" are often referred to as deductions above the line, while deductions from AGI are referred to as deductions below the line. The line is AGI (the last line on the front page of the individual tax return).
Though both types of deductions may reduce a taxpayer's taxable income, "for AGI" deductions are generally more valuable to taxpayers because they reduce AGI which may allow taxpayers to deduct more of their from AGI deductions (and other tax benefits) that are subject to AGI limitations.
Explain. A deduction generally reduces taxable income dollar for dollar (although from AGI deductions may not reduce taxable income dollar for dollar). This translates into a tax savings in the amount of the deduction times the marginal tax rate. In contrast, credits reduce a taxpayer's taxes payable dollar for dollar.