Question & Answer

Distinguish earned income from unearned income, and provide an example of each.

Bonnie and Clyde were married this year. Bonnie has a steady job that will pay her about $37,000, while Clyde does odd jobs that will produce about $28,000 of income. They also have a joint savings account that will pay about $400 of interest. If Bonnie and Clyde reside in a community property state and file married-separate tax returns, how much gross income will they each report? Is there any difference if they reside in a common-law state? Explain.

Yesenia is a lawyer who uses the cash method of accounting. Last year Yesenia provided a client with legal services worth $55,000, but the client could not pay the fee. This year Yesenia requested that in lieu of paying Yesenia $55,000 for the services, the client could make a $45,000 gift to Yesenia’s daughter. Yesenia’s daughter received the check for $45,000 and deposited it in her bank account. How much of this income is taxed, if any, to Yesenia? Explain.

Contrast the constructive receipt doctrine with the claim of right doctrine.

The cash method of accounting means that taxpayers don’t recognize income unless they receive cash or cash equivalents. True or false? Explain.

Janet is a cash-method, calendar-year taxpayer. She received a check for services provided in the mail during the last week of December. However, rather than cash the check, Janet decided to wait until the following January because she believes that her delay will cause the income to be realized and recognized next year. What would you tell her? Would it matter if she didn’t open the envelope? Would it matter if she refused to check her mail during the last week of December? Explain.

Describe in general how the cash method of accounting differs from the accrual method of accounting.

This year Jorge received a refund of property taxes that he deducted on his tax return last year. Jorge is not sure whether he should include the refund in his gross income. What would you tell him?

Compare how the return of capital principle applies when (1) a taxpayer sells an asset and collects the sale proceeds all immediately and (2) a taxpayer sells an asset and collects the sale proceeds over several periods (an installment sale). If Congress wanted to maximize revenue from installment sales, how would it have applied the return of capital principle for installment sales?

What issue precipitated the return of capital principle? Explain.

Andre constructs and installs cabinets in homes. Blair sells and installs carpet in apartments. Andre and Blair worked out an arrangement whereby Andre installed cabinets in Blair’s home and Blair installed carpet in Andre’s home. Neither Andre nor Blair believes he is required to recognize any gross income on this exchange because neither received cash. Do you agree with them? Explain.

Tim is a plumber who joined a barter club. This year Tim exchanges plumbing services for a new roof. The roof is properly valued at $2,500, but Tim would have billed only $2,200 for the plumbing services. What amount of income should Tim recognize on the exchange of his services for a roof? Would your answer change if Tim would have normally billed $3,000 for his services?

Compare and contrast realization of income with recognition of income.

Describe the concept of realization for tax purposes.

Based on the definition of gross income in §61, related regulations, and judicial rulings, what are the three criteria for recognizing taxable income?

Based on the definition of gross income in §61 and related regulations, what is the general presumption regarding the taxability of income realized?

Assume you asked your favorite AI learning tool “Does someone who is married have the option to file using the head of household filing status?” and the AI tool responded as follows:

Suppose you asked your favorite AI query tool the following question: “Is total income on Form 1040 the same thing as gross income?”  The AI tool provided the following response:  

Is the AI response to the question correct?  Explain.

Tiffany is unmarried and has a 15-year-old qualifying child. Tiffany has determined her tax liability to be $3,525, and her employer has withheld $1,000 of federal taxes from her paycheck. Tiffany is allowed to claim a $2,000 child tax credit for her qualifying child. What amount of taxes will Tiffany owe (or what amount will she receive as a refund) when she files her tax return?

Camille Sikorski was divorced in 2018. She currently owns and provides a home for her 15-year-old daughter Kaly. Kaly lived in Camille’s home for the entire year, and Camille paid for all the costs of maintaining the home. Camille received a salary of $105,000 and contributed $6,000 of it to a qualified retirement account (for AGI deduction). She also received $10,000 of alimony from her former husband (per divorce decree issued in 2018). Finally, Camille paid $15,000 of expenditures that qualified as itemized deductions.

Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Jasmine, Michael, and Candice). The Jacksons file a joint tax return. The couple received salary income of $105,000 and qualified business income of $10,000 from an investment in a partnership, and they sold their home this year. They initially purchased the home three years ago for $200,000 and they sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions, and they had $4,000 withheld from their paychecks for federal taxes. They are also allowed to claim a child tax credit for each of their children. However, because Candice was 18 years of age at year end, the Jacksons may only claim the child tax credit for other qualifying dependents for Candice.

Marc and Mikkel are married and file a joint tax return. Marc and Mikkel earned salaries this year of $64,000 and $12,000, respectively. In addition to their salaries, they received interest of $350 from municipal bonds and $500 from corporate bonds. Marc contributed $2,500 to a traditional individual retirement account, and he also paid alimony to a prior spouse in the amount of $1,500 (under a divorce decree effective June 1, 2017). Marc and Mikkel have a 10-year-old adopted son, Mason, who lived with them throughout the entire year. Thus, Marc and Mikkel are allowed to claim a $2,000 child tax credit for Matthew. Marc and Mikkel paid $6,000 of expenditures that qualify as itemized deductions, and they had a total of $2,500 in federal income taxes withheld from their paychecks during the year.

Dax Jones submitted his 2024 tax return on time and elected to file a joint tax return with his wife, Darlene. Dax and Darlene did not request an extension for their 2024 tax return. Dax and Darlene owed and paid the IRS $124,000 for their 2024 tax liability. Two years later, Dax amended his return and claimed married filing separate status. By changing his filing status, Dax sought a refund for an overpayment for the tax year 2024 (he paid more tax in the original joint return than he owed on a separate return). Is Dax allowed to change his filing status for the 2024 tax year and receive a tax refund with his amended return?

Janice Traylor is single. She has an 18-year-old son named Marty. Marty is Janice’s only child. Marty has lived with Janice his entire life. However, Marty recently joined the Marines and was sent on a special assignment to Australia. During the current year, Marty spent nine months in Australia. Marty was extremely homesick while in Australia because he had never lived away from home. However, Marty knew this assignment was only temporary, and he couldn’t wait to come home and find his room just the way he left it. Janice has always filed as head of household, and Marty has always been considered a qualifying child (and he continues to meet all the tests with the possible exception of the residence test due to his stay in Australia). However, this year Janice is unsure whether she qualifies as head of household due to Marty’s nine-month absence during the year. Janice has come to you for advice on whether she qualifies for head of household filing status. How would you advise her?

Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the couple’s joint year 2 tax return and each spouse’s separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewella’s separate year 3 tax return understated Crewella’s self-employment income, causing the joint return year 2 tax liability to be understated by $4,000 and Crewella’s year 3 separate return tax liability to be understated by $6,000. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper.