Chapter 3

1. Chapter 3 Gross Income Inclusions

2. CCH Essentials of Federal Income Taxation 2 of 14 Problems in Recognizing Gross Income Recognizing potential income items Identifying those income items specifically excluded by law

3. CCH Essentials of Federal Income Taxation 3 of 14 Compensation Fees Bonuses Commissions Salaries Wages Property Honorariums for making a speech Employee fringe benefits Military service pay

4. CCH Essentials of Federal Income Taxation 4 of 14 Fair Market Value FMV is the price that a willing buyer wants to pay and a willing seller wants to accept. FMV assumes that neither buyer nor seller must buy or sell. FMV also assumes that buyer and seller have reasonable knowledge of all necessary facts. Finally, in the absence of an actual sale or exchange, FMV can be determined by expert appraisal or other supporting evidence.

5. CCH Essentials of Federal Income Taxation 5 of 14 Tips Employees must file tip reports with their employers by the tenth of the month following the month in which they receive tips. When employees fail to turn in tip reports, they include their tips in gross income in the year of receipt. An employee who gets less than $20 in monthly tips while working for one employer need not tell the employer about the tips. However, the employee must report the tips as compensation on either Form 1040EZ, Form 1040A, or Form 1040. When employees of certain large restaurants and cocktail lounges report less than 8% of gross sales in tips to their employers, the employers must report the difference as additional income on the employee�s Form W-2. These are called �allocated tips.�

6. CCH Essentials of Federal Income Taxation 6 of 14 Divorce and Separation Agreements Division of property acquired during the marriage (property settlement) Spousal support (alimony) Support of the children (child support)

7. CCH Essentials of Federal Income Taxation 7 of 14 Dividend Income Ordinary dividends Nominee dividends Dividend reinvestment plans (DRIPs) Return-of-capital distributions Distributions of mutual funds

8. CCH Essentials of Federal Income Taxation 8 of 14 Interest Income Interest as dividends Savings accounts and certificates �Interest� on insurance dividends U.S. savings bonds U.S. Treasury bills, notes, and bonds

9. CCH Essentials of Federal Income Taxation 9 of 14 Net Unearned Income (NUI) Net unearned income of certain children is taxed at the parent�s higher tax rate. Total unearned income Less: $950 Less: The greater of: (1) $950 of the standard deduction or (2) Itemized deductions directly related to unearned income Equals: Net Unearned Income

10. CCH Essentials of Federal Income Taxation 10 of 14 Computation of Child�s Tax NUI ? parent�s highest rate + (Taxable income � NIU) ? child�s tax rate = Child�s total tax

11. CCH Essentials of Federal Income Taxation 11 of 14 Nontaxable IRA Distribution Formula Total nondeductible contributions ? Distribution = Nontaxable Total value of IRA Distribution (including contributions and earnings)

12. CCH Essentials of Federal Income Taxation 12 of 14 Excludable Portion of Annuity Proceeds Taxpayer�s previously taxed investment in the annuity contract ? Amount received = Exclusion Total expected return

13. CCH Essentials of Federal Income Taxation 13 of 14 Annuity Starting Date after November 18, 1996 Taxpayer�s investment in contract = Amount excluded Number of anticipated monthly payments

14. CCH Essentials of Federal Income Taxation 14 of 14 Tax Benefit Rule