Slide 1GROSS INCOME: INCLUSIONS (1 of 2)GROSS INCOME INCLUSIONS (2 of 2)Concepts of Income Economic Concepts of IncomeConcepts of Income Accounting Concepts of IncomeTax Concept of IncomeConditions to Make Income TaxableAdministrative ConvenienceWherewithal to PayGross Income Defined (1 of 2)Gross Income Defined (2 of 2)To whom Is Income Taxable?Assignment of IncomeAllocating Income between Married People (1 of 2)Allocating Income between Married People (2 of 2)Income of Minor ChildrenWhen Is Income Taxable?Cash Method (1 of 3)Cash Method (2 of 3)Cash Method (3 of 3)Accrual MethodHybrid MethodItems of Gross Income (1 of 2)Items of Gross Income (2 of 2)Dividends (1 of 3)Dividends (2 of 3)Dividends (3 of 3)AnnuitiesOther Items of Gross Income (1 of 2)Other Items of Gross Income (2 of 2)Social Security BenefitsClaim of RightTax Planning Considerations (1 of 2)Tax Planning Considerations (2 of 2)Compliance and Procedural ConsiderationsSlide 363-1©2007 Prentice Hall, Inc.©2007 Prentice Hall, Inc.3-2GROSS INCOME: GROSS INCOME: INCLUSIONSINCLUSIONS(1 of 2)(1 of 2)Economic and accounting concepts of incomeTax concept of incomeTo whom is income taxable?When is income taxable?Items of gross income©2007 Prentice Hall, Inc.3-3GROSS INCOME GROSS INCOME INCLUSIONSINCLUSIONS(2 of 2)(2 of 2)Other items of gross incomeTax planning considerationsCompliance and procedural considerations©2007 Prentice Hall, Inc.3-4Concepts of IncomeConcepts of IncomeEconomic Concepts of IncomeEconomic Concepts of IncomeWealth that flows to individualsChanges in value in individuals’ wealthUnrealized gains Gifts & inheritances considered income©2007 Prentice Hall, Inc.3-5Concepts of IncomeConcepts of IncomeAccounting Concepts of IncomeAccounting Concepts of IncomeAccounting concepts of incomeValues are measured by a transaction approachIncome realized as result of completed transactionsUse historical cost©2007 Prentice Hall, Inc.3-6Tax Concept of IncomeTax Concept of IncomeConditions to make income taxableAdministrative convenienceWherewithal to payGross income defined©2007 Prentice Hall, Inc.3-7Conditions to Make Income TaxableEconomic benefit to taxpayerIncome must be realizedEarnings process completeIncome must be recognized©2007 Prentice Hall, Inc.3-8Administrative ConvenienceEconomic concept is considered too subjectiveObjectivity achieved at price of equity©2007 Prentice Hall, Inc.3-9Wherewithal to PayA tax should be collected when the taxpayer can most easily pay©2007 Prentice Hall, Inc.3-10Gross Income Defined(1 of 2)Section 61(a) defines gross income“all income from whatever source derived,” including (but not limited to) the following items:Compensation, income derived from business, gains from dealings in property, interest, rents, royalties, dividends, alimony, annuities, life insurance, pensions©2007 Prentice Hall, Inc.3-11Gross Income Defined(2 of 2)Form of receiptGross income not limited to cash§1.61-1a, income may be “realized in any form, whether in money, property, and services”Indirect economic benefit Items indirectly benefitting taxpayers excluded from gross income©2007 Prentice Hall, Inc.3-12To whom Is Income To whom Is Income Taxable?Taxable?Assignment of incomeAllocating income between married peopleIncome of minor children©2007 Prentice Hall, Inc.3-13Assignment of IncomeSupreme Court in Lucas v. Earl (1930)Ruled that individual taxed the earnings from his personal servicesHelvering v. Horst (1940)Ruled that assignment of income doctrine applies to property©2007 Prentice Hall, Inc.3-14Allocating Income between Married People (1 of 2)Common law property systemUsed in 42 statesIncome taxed to person who earns it or who owns the income-producing propertyJoint income comes from jointly owned property©2007 Prentice Hall, Inc.3-15Allocating Income between Married People (2 of 2)Community property statesAll income deemed to be earned equally by spouses except income from separate propertySeparate propertyProperty owned by each spouse prior to marriageMay be community income or separate income, depending on state of residence©2007 Prentice Hall, Inc.3-16Income of Minor ChildrenTaxed to child regardless of state’s property law systemUnearned income of minor under 14 may be taxed at parent’s higher rateSee Chapter I2©2007 Prentice Hall, Inc.3-17When Is Income Taxable?When Is Income Taxable?Cash methodAccrual methodHybrid method©2007 Prentice Hall, Inc.3-18Cash Method(1 of 3)Used by most individual taxpayers and most non-corporate businesses that do not have inventoryConstructive receiptReport income in year actually receivedCheck received after banking hoursBond interest coupons that have matured but not redeemed©2007 Prentice Hall, Inc.3-19Cash Method(2 of 3)No constructive receipt ifIt is subject to substantial limitations Payor does not have funds necessary to make paymentAmount is unavailable to taxpayer©2007 Prentice Hall, Inc.3-20Cash Method(3 of 3)Exceptions to basic cash methodInterest on Series E or EE Savings BondsSpecial rules apply to farmers and ranchersSmall taxpayer exception for inventories©2007 Prentice Hall, Inc.3-21Accrual MethodReport income in year income earnedRight to incomeAmount can be determined with reasonable accuracyPrepaid incomeGenerally taxable©2007 Prentice Hall, Inc.3-22Hybrid MethodAccrual method for purchases and salesCash method in computing all other income and expenses©2007 Prentice Hall, Inc.3-23Items of Gross IncomeItems of Gross Income(1 of 2)(1 of 2)CompensationBusiness incomeGains from dealings in propertyInterestRents and royaltiesDividends©2007 Prentice Hall, Inc.3-24Items of Gross IncomeItems of Gross Income(2 of 2)(2 of 2)Alimony and separate maintenance paymentsPensions and annuitiesIncome from life insurance and endowment contractsIncome from discharge of indebtednessIncome pass through to taxpayer©2007 Prentice Hall, Inc.3-25Dividends(1 of 3)Included in shareholder gross incomeResults in double taxationEarnings taxed at corporate levelEarnings taxed at shareholder level when distributed as a dividendC corps allowed a 70, 80, or 100% div received deduction depending on ownership to more layers of taxation©2007 Prentice Hall,