Fundamentals of Taxation

For tax purposes,income is recognized if the transaction meets three conditions: economic benefit,occurrence and completion,and not exempt from tax.

Lisa performed bookkeeping services for Donald charging him $650.Donald agreed that he would pay Lisa's credit card bill for the same amount.Lisa has received an economic benefit and must report $650 in income on her tax return.

Jeff owns 250 shares of Coca Cola common stock that have increased in value by $15 each.He must report the increase in income because a transaction has occurred.

If the process of a transaction begins and ends with an economic benefit for the taxpayer,he or she must report it in income even though the income is specifically exempt from tax.

Almost all individuals use the cash receipts and disbursements method of accounting.

Constructive receipt means the income is available to or in the control of the taxpayer regardless of whether the taxpayer chooses to utilize the income.

Income can only be realized in money or services.

If Lucas,an accountant,agrees to provide tax services to a neighbor in exchange for the neighbor agreeing to fix his pool,Lucas but not his neighbor will have to report income on this transaction at fair market value.

There are some instances where a cash-basis taxpayer can report income as though he or she is an accrual basis taxpayer.

For most individuals,interest income comes from interest-earning deposits at banks,savings and loans,or credit unions.

If an individual owns Series EE bonds,this person must report interest income,i.e.,the increase in bond value on an annual basis.

A taxpayer can exclude from gross income any interest earned on bonds issued by any state,any possession of the United States,any political subdivision of either of the foregoing,or of the District of Columbia as long as these bonds are not issued for private activities.

Interest on state bonds is tax-exempt if the bonds were issued for private activities,such as convention centers,industrial parks,or stadiums.

A taxpayer must file a Schedule B Forms 1040A or 1040)if he or she has received taxable interest of $1,550.

Dividends are generally taxed at capital gains rates if they are made from the corporation's current earnings and profits or accumulated earnings and profits.

A stock dividend in which a shareholder has the option to receive cash is not taxable.

Robert received a tax refund in 2016 from his state,which he deducted on his prior year's return as an itemized deduction.He must report the refund in income in 2016,subject to certain computations to determine the amount that is taxable.

All federal and state unemployment compensation benefits are not subject to income tax.

The taxability of social security benefits depends on the "provisional income" and filing status of the taxpayer.

Jury duty pay is taxable income,but it can be deducted from gross income if the amount must be given to the employer.