Income and Assets Flashcards

Which of the following is generally considered taxable income by the IRS?

Answer: A cash prize won in a contest

The IRS considers prizes and awards to be taxable income. Gifts, child support, and most life insurance proceeds are typically not taxable to the recipient.

A taxpayer purchases a rental property for $250,000. They pay $20,000 in closing costs, including legal fees and transfer taxes. What is the taxpayer's cost basis in the property?

Answer: $270,000

The cost basis of a property is generally its purchase price plus any costs associated with the purchase, such as closing costs, legal fees, and recording fees. Therefore, the taxpayer's basis is $250,000 + $20,000 = $270,000.

A freelance graphic designer receives a check for a completed project on December 30th of the current tax year but does not deposit it until January 2nd of the following year. According to the doctrine of constructive receipt, in which year should the income be reported?

Answer: The current tax year, when the check was received

Under the doctrine of constructive receipt, income is taxable in the year it is made available to the taxpayer without any substantial restrictions. Since the designer had control over the check on December 30th, the income must be reported in that tax year.

Which of the following is NOT a capital asset according to the IRS?

Answer: Inventory of a business

The IRS defines a capital asset as almost everything owned for personal or investment purposes. However, inventory held by a business for sale to customers is specifically excluded from this definition and is treated as ordinary business property.

A taxpayer sells an investment property and has a capital gain. To be classified as a long-term capital gain, how long must the taxpayer have held the asset before selling it?

Answer: More than one year

To qualify for long-term capital gains tax rates, which are typically lower than short-term rates, a taxpayer must hold a capital asset for more than one year before its sale or disposition.

A taxpayer receives a state tax refund for a year in which they took the standard deduction on their federal return. How is this state tax refund treated for federal income tax purposes?

Answer: It is not taxable.

If a taxpayer claimed the standard deduction on their federal return in the year the state tax was paid, the state tax refund is not taxable. The 'tax benefit rule' states that a refund of a previously deducted expense is only taxable to the extent that the original deduction provided a tax benefit. Since no deduction was taken for state taxes, the refund is not considered income.