TAXATION OF INDIVIDUALS AND BUSINESS ENTITIES EXAM

TAXATION OF INDIVIDUALS AND BUSINESS ENTITIES EXAM gross income - CORRECT ANSWER-Realized income minus excluded and deferred income. realization principle - CORRECT ANSWER-the proposition that income only exists when there is a transaction with another party resulting in a measurable change in property rights. Accelerated Death Benefits - CORRECT ANSWER-early receipt of life insurance proceeds that are not taxable under certain circumstances, such as the taxpayer is medically certified with an illness that is expected to cause death within 24 months Accountable Plan - CORRECT ANSWER-an employer's reimbursement plan under which employees must submit documentation supporting expenses to receive reimbursement and reimbursements are limited to legitimate business expenses. Accural Method - CORRECT ANSWER-a method of accounting that generally recognizes income in the period earned and recognizes deductions in the period that liabilities are incurred. alimony - CORRECT ANSWER-a support payment of cash made to a former spouse. The payment must be made under a written separation agreement or divorce decree that does not designate the payment as something other than alimony, the payment must be made when the spouses do not live together, and the payments must cease no later than when the recipient dies. annuity - CORRECT ANSWER-a stream of equal payments over time. assignment of income doctrine - CORRECT ANSWER-the judicial doctrine holding that earned income is taxed to the taxpayer providing the service, and that income from property is taxed to the individual who owns the property when the income accrues. barter clubs - CORRECT ANSWER-organizations that facilitate the exchange of rights to goods and services between members. Cash Method - CORRECT ANSWER-the method of accounting that recognizes income in the period in which cash, property, or services are received and recognizes deductions in the period paid. claim of right doctrine - CORRECT ANSWER-judicial doctrine that states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income (for example, the taxpayer does not have an obligation to repay the amount). community property systems - CORRECT ANSWER-systems in which state laws dictate how the income and property are legally shared between a husband and a wife. Constructive Receipt Doctrine - CORRECT ANSWER-the judicial doctrine that provides that a taxpayer must recognize income when it is actually or constructively received. Constructive receipt is deemed to have occurred if the income has been credited to the taxpayer's account or if the income is unconditionally available to the taxpayer, the taxpayer is aware of the income's availability, and there are no restrictions on the taxpayer's control over the income. Disability Insurance - CORRECT ANSWER-sometimes called sick pay or wage replacement insurance. It pays the insured for wages lost due to injury or disability. Discharge of Indebtedness - CORRECT ANSWER-debt forgiveness Earned Income - CORRECT ANSWER-compensation and other forms of income received for providing goods or services in the ordinary course of business. Flow-through entities - CORRECT ANSWER-legal entities, like partnerships, limited liability companies, and S corporations, that do not pay income tax. Income and losses from flow-through entities are allocated to their owners. fringe benefits - CORRECT ANSWER-noncash benefits provided to an employee as a form of compensation. As a general rule, fringe benefits are taxable. However, certain fringe benefits are excluded from gross income. gift - CORRECT ANSWER-a transfer of property where no, or inadequate, consideration is paid for the property. gross income - CORRECT ANSWER-realized income minus excluded and deferred income Imputed Income - CORRECT ANSWER-income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives. Inheritance - CORRECT ANSWER-a transfer of property when the owner is deceased (the transfer is made by the decedent's estate). installment sale - CORRECT ANSWER-a sale for which the taxpayer receives payment in more than one period. municipal bonds - CORRECT ANSWER-the common name for state and local government deb Qualified retirement accounts - CORRECT ANSWER-plans meeting certain requirements that allow compensation placed in the account to be tax-deferred until the taxpayer withdraws money from the account. Realization Principle - CORRECT ANSWER-the proposition that income only exists when there is a transaction with another party resulting in a measurable change in property rights. return of capital - CORRECT ANSWER-the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property. tax basis - CORRECT ANSWER-the amount of a taxpayer's unrecovered cost of or investment in an asset; see also adjusted tax basis. Tax Benefit Rule - CORRECT ANSWER-holds that a refund of an amount deducted in a previous period is only included in income to the extent that the deduction reduced taxable income. Unearned Income - CORRECT ANSWER-income from property that accrues as time passes without effort on the part of the owner of the property. Wherewithal to pay - CORRECT ANSWER-the ability or resources to pay taxes due from a particular transaction.