When you have completed this chapter, you should understand the following learning objectives: Describe when and how to record income for tax purposes; apply the cash method of accounting to income taxes; explain the taxability of components of gross income, including interest, dividends, tax refunds, and social security benefits;. | Chapter 3 Gross Income: Inclusions and Exclusions “I like to pay taxes. With them I buy civilization.” -- Oliver Wendell Holmes, Jr. 1 LO #1 When and How to Record Income for Tax Purposes Income Recognition for Tax Purposes Similar to the recognition for accounting purposes Income must be realized and earned However, three additional conditions must be present when the transaction occurs: Economic benefit of the transaction Conclusion of the transaction Income from the transaction must not be tax-exempt income 3-2 2 LO #2 The Cash Method of Accounting as It Applies to Income Taxes Cash Receipts and Disbursements Method Used by almost all individuals to file their tax returns Constructive receipt Income is reported in the year the taxpayer receives the right to control the income rather than the year in which it’s earned Receipt of property or services will trigger income recognition 3-3 3 LO #3 The Taxability of Components of Gross Income: Interest, Dividends, Tax Refunds, and Social Security Benefits Interest Taxability Interest from banks, savings and loans, or credit unions is reported on a 1099-INT and is taxable Interest earned on Series E and EE U. S. Savings Bonds is taxable but can be reported gradually on an annual basis or fully at maturity Some interest received is tax-exempt if the debt is issued by a state, . possession, or subdivision thereof 3-4 4 LO #3 The Taxability of Components of Gross Income: Interest, Dividends, Tax Refunds, and Social Security Benefits Other types of interest that must be reported Payments received from seller-financed mortgages Receipts from installment sale receivables Imputed interest on loans made at below-market interest rate Interest on bonds sold between interest dates How to report interest If the amount of interest is more than $1,500, use Schedule B for Forms 1040A and 1040 3-5 5 LO #3 The Taxability of Components of Gross Income: Interest, Dividends, Tax Refunds, and Social Security Benefits Dividends . | Chapter 3 Gross Income: Inclusions and Exclusions “I like to pay taxes. With them I buy civilization.” -- Oliver Wendell Holmes, Jr. 1 LO #1 When and How to Record Income for Tax Purposes Income Recognition for Tax Purposes Similar to the recognition for accounting purposes Income must be realized and earned However, three additional conditions must be present when the transaction occurs: Economic benefit of the transaction Conclusion of the transaction Income from the transaction must not be tax-exempt income 3-2 2 LO #2 The Cash Method of Accounting as It Applies to Income Taxes Cash Receipts and Disbursements Method Used by almost all individuals to file their tax returns Constructive receipt Income is reported in the year the taxpayer receives the right to control the income rather than the year in which it’s earned Receipt of property or services will trigger income recognition 3-3 3 LO #3 The Taxability of Components of Gross Income: Interest, Dividends, Tax Refunds, and .
