Gross Income

<div class="Section1"><br /> <br /> Under certain circumstances, a portion of Social Security benefits and tier 1 railroad retirement benefits may be taxable. If a taxpayer’s modified adjusted gross income plus one-half of the Social Security benefits (including tier I railroad retirement benefits) received during the taxable year <em>exceeds</em> certain base amounts, then a portion of the benefits are includible in gross income as ordinary income. “Modified adjusted gross income” is a taxpayer’s adjusted gross income (disregarding foreign income, savings bonds, adoption assistance program exclusions, the deductions for education loan interest and for qualified tuition and related expenses) <em>plus</em> any tax-exempt interest income received or accrued during the taxable year.<a href="#_ftn1" name="_ftnref1">¹</a>A taxpayer whose modified adjusted gross income plus one-half of his or her Social Security benefits exceed a base amount is required to include in gross income the <em>lesser</em> of (a) 50 percent of the excess of such combined income over the base amount, <em>or</em> (b) 50 percent of the Social Security benefits received during the taxable year.<a href="#_ftn2" name="_ftnref2">²</a> The “base amount” is $32,000 for married taxpayers filing jointly, $25,000 for unmarried taxpayers, and zero ($0) for married taxpayers filing separately who have not lived apart for the entire taxable year.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In addition to the initial tier of taxation discussed above, a percentage of Social Security benefits that exceed an adjusted base amount will be includable in a taxpayer’s gross income. The “adjusted base amount” is $44,000 for married taxpayers filing jointly, $34,000 for unmarried taxpayers, and zero ($0) for married individuals filing separately who did not live apart for the entire taxable year.<a href="#_ftn4" name="_ftnref4">⁴</a> If a taxpayer’s modified adjusted gross income plus one-half of his or her Social Security benefits exceed the adjusted base amount, his or her gross income will include the <em>lesser</em> of (a) 85 percent of the Social Security benefits received during the year, <em>or</em> (b) the sum of – (i) 85 percent of the excess over the adjusted base amount, plus (ii) the smaller of – (A) the amount that is includable under the initial tier of taxation, or (B) $4,500 (single taxpayers) or $6,000 (married taxpayers filing jointly).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <blockquote><em>Example 1.</em> A married couple files a joint return. During the taxable year, they received $12,000 in Social Security benefits and had a modified adjusted gross income of $35,000 ($28,000 plus $7,000 of tax-exempt interest income). Their modified adjusted gross income plus one-half of their Social Security benefits [$35,000 + (½ of $12,000) = $41,000] is greater than the applicable <em>base amount</em> of $32,000 but less than the applicable <em>adjusted base amount</em> of $44,000; therefore, $4,500 [the lesser of one-half of their benefits ($6,000) or one-half of the excess of $41,000 over the base amount (½ × ($41,000 – $32,000), or $4,500)] is included in gross income.<br /> <br /> <em>Example 2.</em> During the taxable year, a single individual had a modified adjusted gross income of $33,000 and received $8,000 in Social Security benefits. His modified adjusted gross income plus one-half of his Social Security benefits [$33,000 + (½ of $8,000) = $37,000] is greater than the applicable <em>adjusted base amount</em> of $34,000. Thus, $6,550 [the lesser of 85 percent of his benefits ($6,800), or 85 percent of the excess of $37,000 over the adjusted base amount (85 percent × ($37,000 – $34,000), or $2,550) plus the lesser of $4,000 (the amount includable under the initial tier of taxation) or $4,500] is included in gross income.</blockquote><br /> An election is available that permits a taxpayer to treat a lump sum payment of benefits as received in the year to which the benefits are attributable.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <p style="text-align: center;"><strong>Reductions of Social Security Benefits that do not Reduce the</strong><br /> <strong>Amount Included in the Computation of Taxable Benefits</strong></p><br /> Workers’ compensation pay that reduced the amount of Social Security received and any amounts withheld from a taxpayer’s Social Security benefits to pay Medicare insurance premiums do not reduce the amount that are included in the computation of taxable Social Security benefits.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> In <em>Green v. Comm</em>.,<a href="#_ftn8" name="_ftnref8">⁸</a> the taxpayer argued that his Social Security disability benefits were excludable from gross income<a href="#_ftn9" name="_ftnref9">⁹</a> because they had been paid in lieu of workers’ compensation. Thus, they should not be included in the computation of taxable Social Security benefits. The Tax Court determined, however, that Title II of the Social Security Act is <em>not</em> a form of workers’ compensation. Instead, the Act allows for disability payments to individuals regardless of employment. Consequently, the taxpayer’s Social Security disability benefits were includable in gross income.<br /> <br /> Similarly, in a case of first impression, the Tax Court held that a taxpayer’s Social Security disability insurance benefits (payable as a result of the taxpayer’s disability due to lung cancer caused from exposure to Agent Orange during his Vietnam combat service) were includable in gross income under IRC Section 86 and not excludable under IRC Section 104(a)(4). The court reasoned that Social Security disability insurance benefits do not take into consideration the nature or cause of the individual’s disability. Eligibility for purposes of Social Security disability benefits is determined on the basis of the individual’s prior work record, not the cause of the disability. Moreover, the amount of Social Security disability payments is computed under a formula that does not consider the nature or extent of the injury. Consequently, because the taxpayer’s Social Security disability insurance benefits were not paid for personal injury or sickness in military service within the meaning of IRC Section 104(a)(4), the benefits were not excluded from gross income under IRC Section 104(a)(4).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Railroad retirement benefits (other than Tier I benefits) are taxed in the same way as benefits received under a qualified pension or profit sharing plan. For this purpose, the Tier II portion of the taxes imposed on employees and employee representatives is treated as an employee contribution, while the Tier II portion of the taxes imposed on employers is treated as an employer contribution.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 86(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 86(a)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 86(c)(1). In a Tax Court case, the term “live apart” means living in separate residences. In that case, the taxpayer lived in the same residence as his spouse for at least thirty days during the tax year in question (even though maintaining separate bedrooms). The Tax Court ruled that he did not “live apart” from his spouse at all times during the year; therefore, the taxpayer’s base amount was zero. <em>McAdams v. Commissioner</em>, 118 TC 373 (2002).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 86(c)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 86(a)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.   IRC § 86(e).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.   Rev. Rul. 84-173, 1984-2 CB 16.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.   TC Memo 2006-39.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.   Under IRC § 104(a)(1).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>. <em>Reimels v. Commissioner</em>, 123 TC 245 (2004), <em>aff’d</em>, 436 F.3d 344 (2d Cir. 2006); <em>Haar v. Commissioner</em>, 78 TC 864, 866 (1982), <em>aff’d</em>, 709 F.2d 1206 (8th Cir. 1983), followed.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.  See IRC § 72(r)(1).<br /> <br /> </div>

<div class="Section1">For tax purposes, a &ldquo;capital asset&rdquo; is any property that, in the hands of the taxpayer, is not: (1) property (including inventory and stock in trade) held primarily for sale to customers; (2) real or depreciable property used in his trade or business; (3) copyrights and literary, musical, or artistic compositions (or similar properties) created by the taxpayer, or merely owned by him, if his tax basis in the property is determined (other than by reason of IRC Section 1022, which governs the basis determination of inherited property) by reference to the creator&rsquo;s tax basis; (4) letters, memoranda, and similar properties produced by or for the taxpayer, or merely owned by him, if his tax basis is determined by reference to the tax basis of such producer or recipient; (5) accounts or notes receivable acquired in his trade or business for services rendered or sales of property described in (1), above; (6) certain publications of the United States government; (7) any commodities derivative financial instrument held by a commodities derivatives dealer; (8) any hedging instrument that is clearly identified as such by the required time; and (9) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of his trade or business.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Generally, any property held as an investment is a capital asset, except that rental real estate is generally not a capital asset because it is treated as a trade or business asset (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7791">7791</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1221; Treas. Reg. &sect; 1.1221-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;See IRS Pub. 544.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> As a general rule, the income is taxable to the minor. However, in the case of <em>unearned</em> income (such as trust income) of most children under age nineteen (age 24, if the child is a full-time student), different rules may apply.<br /> <br /> Prior to 2018 and after 2019, the unearned income taxable to the child generally is taxed at the parents’ marginal rate when it exceeds $2,700 (in 2025, $2,600 in 2024, $2,500 in 2023, $2,300 in 2022 and $2,200 in 2015 to 2021, as adjusted for inflation).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Taxpayers had the option of applying a different set of rules in 2018 and 2019 under the 2017 tax reform legislation. If the election was made, earned income of minors would be taxed according to the individual income tax rates prescribed for single filers,<a href="#_ftn2" name="_ftnref2">²</a> and unearned income of minors would be taxed according to the applicable tax bracket that would apply if the income was that of a trust or estate (for both income that is subject to ordinary income tax rates and in determining the capital gains rate that will apply if long-term capital gains treatment is appropriate).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> To the extent that income from the transferred property is used for the minor’s support, it may be taxed to the person who is legally obligated to support the minor.<a href="#_ftn4" name="_ftnref4">⁴</a> State laws differ as to a parent’s obligation to support. The income will be taxable to the parent only to the extent that it is actually used to discharge or satisfy the parent’s obligation under state law.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The 2017 Tax Act aimed to simplify the treatment of unearned income of minors by applying the tax rates that apply to trusts and estates to this income. The SECURE Act<a href="#_ftn6" name="_ftnref6">⁶</a> repealed this rule for tax years beginning in 2020 and thereafter. For 2018 and 2019, taxpayers had the option of electing which set of rules to apply, and may apply for refunds if appropriate for these tax years.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1(j)(4)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 1(j)(4).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. Rev. Rul. 56-484, 1956-2 CB 23; Rev. Rul. 59-357, 1959-2 CB 212.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 677(b).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. PL 116-94, 133 Stat. 2534 (12-20-2019)<br /> <br /> </div>

<div class="Section1">Generally, an interest surcharge is an interest charge payable by the seller to the IRS with respect to a portion of a tax liability that is deferred as a result of installment reporting. In other words, installment reporting allows the taxpayer to defer the gain realized from the installment over time rather than in the year of sale. The tax on that gain is considered a deferred tax liability. The interest surcharge applies to all installment obligations held by the taxpayer (meaning it applies to multiple installment sales) in which deferred payments for sales during the taxable year exceed $5,000,000. There is an exception to the surcharge with respect to: (1) property used or produced in the trade or business of farming, (2) timeshares and residential lots, and (3) personal use property.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> The amount of the interest surcharge is determined by multiplying the “applicable percentage” of the deferred tax liability by the underpayment rate in effect at the end of the taxable year (with respect to tax deficiencies). The “applicable percentage” is determined by dividing the portion of the aggregate obligations for the year that exceeds $5,000,000 by the aggregate face amount of such obligations that are outstanding at the end of the taxable year. If an obligation remains outstanding in subsequent taxable years, interest must be paid using the same percentage rate as in the year of the sale.<a href="#_ftn2" name="_ftnref2">²</a> In addition, if the installment obligation is pledged as security for a loan, the net proceeds of the loan will be treated as a payment received on the installment obligation (up to the total contract price); however, no additional gain is recognized on subsequent payments of such amounts already treated as received. The date of such constructive payment will be (a) the date the proceeds are received <em>or</em> (b) the date the indebtedness is secured, whichever is later.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 453A(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 453A(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 453A(d)(1). <em><em>See</em></em> Revenue Act of 1987 Conf. Rept., at pages 22-23.<br /> <br /> </div>

<div class="Section1">If an installment sale between related parties is canceled or payment is forgiven, the <em>seller</em> must recognize gain in an amount equal to the difference between the fair market value of the obligation on the date of cancellation (but in no event less than the face amount of the obligation) and the seller&rsquo;s basis in the obligation.<a href="#_ftn1" name="_ftnref1">¹</a> The seller&rsquo;s basis in the obligation is the difference between the face value of the obligation less the amount of income that would be includible in gross income had the obligation been actually satisfied.<a href="#_ftn2" name="_ftnref2">²</a><br /> <blockquote><em>Example:</em> Asher sells a tractor to Samuel for $10,000 with an adjusted basis of $2,000. In exchange, Samuel conveys five installment notes ($2,000 each). Asher&rsquo;s gross profit ratio would be 80 percent (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="666">666</a>) meaning that 80 percent of each payment would be included in gross income ($1,600) and 20 percent ($400) would be tax-free return of basis. Therefore, each note would have a basis of $400 ($2,000 face value less $1,600 income). So, if Asher were to forgive a $2,000 installment note, he would recognize a gain of $1,600 (the difference between the face amount of the note and his basis in the note). In other words, a forgiven note is essentially taxed in the same way as it would have been had the seller actually received payment.</blockquote><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 453B(f).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;IRC &sect; 453B(b).<br /> <br /> </div></div><br />

<div class="Section1">A rollover from one ESA to another ESA is not treated as a distribution (that would be potentially taxable) provided the beneficiaries of both ESAs are the same, or members of the same family. The new beneficiary must be under 30 years old as of the date of such distribution or change, except in the case of a special needs beneficiary.<a href="#_ftn1" name="_ftnref1">¹</a> The rollover contribution must be made no later than 60 days after the date of the distribution from the original ESA. However, no more than one rollover may be made from an ESA during any 12-month period.<a href="#_ftn2" name="_ftnref2">²</a> Similarly, the beneficiary of an ESA may be changed without taxation or penalty if the new beneficiary is a member of the family of the previous ESA beneficiary and has not attained age 30 or is a special needs beneficiary.<a href="#_ftn3" name="_ftnref3">³</a> Transfer of an individual’s interest in an ESA can be made from one spouse to another pursuant to a divorce (or upon the death of a spouse) without changing the character of the ESA.<a href="#_ftn4" name="_ftnref4">⁴</a> Likewise, non-spouse survivors who acquire an original beneficiary’s interest in an ESA upon the death of the beneficiary will be treated as the original beneficiary of the ESA as long as the new beneficiary is a family member of the original beneficiary.<a href="#_ftn5" name="_ftnref5">⁵</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 530(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 530(d)(5).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC §§ 530(b)(1), 530(d)(6).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 530(d)(7).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 530(d)(7).<br /> <br /> </div>

<div class="Section1">Renewal commissions payable after the death of an insurance agent are “income in respect of a decedent” for income tax purposes. Additionally, the value of the right to the commissions is includable in the agent’s gross estate for estate tax purposes. As income in respect of a decedent, the renewal commissions are taxable to the ultimate recipient of the commissions (e.g., the agent’s estate, beneficiaries, or a trust) in the year in which they are received.<a href="#_ftn1" name="_ftnref1">¹</a> However, the person who reports such commissions as income is entitled to an income tax deduction (an itemized deduction) for the portion of federal estate taxes and generation-skipping transfer taxes attributable to their inclusion in the decedent’s gross estate. If the decedent has purchased renewal commissions from another agent, the recipient will be allowed to amortize any portion of the decedent’s cost unrecovered at death.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> If prior to receipt of the renewal commissions, the recipient sells or otherwise disposes of the right to commissions, all income is accelerated as the recipient must include the entire fair market value of the right to the commissions in the year of sale or other disposition (e.g., the recipient gifted the right to another person). On the other hand, if the recipient dies prior to receiving the commissions, the fair market value of the right to commissions will not be included on the final income tax return. In that case, the person who receives the income right from the second decedent by will or inheritance must include such commissions in gross income (as income in respect of a decedent) as they are received.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. <em>Latendresse v. Commissioner</em>, 243 F.2d 577 (7th Cir. 1957); <em>Estate of Goldstein v. Commissioner</em>, 33 TC 1032 (1960), <em>aff’d</em>, 340 F.2d 24 (2d Cir. 1965); <em>Estate of Remington v. Commissioner</em>, 9 TC 99 (1947).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <em>Latendresse v. Commissioner, supra.</em><br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 691(a); Treas. Reg. § 1.691(a)-1.<br /> <br /> </div>

<div class="Section1">A taxpayer&rsquo;s tax basis in property acquired by purchase or in a taxable exchange is its cost (money paid or the fair market value exchanged).<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Special rules apply to stock exchanges made pursuant to a plan of corporate reorganization.<a href="#_ftn2" name="_ftnref2">²</a> For the final regulations under IRC Section 358 providing guidance regarding the determination of the basis of stock or securities received in exchange for, or with respect to, stock or securities in certain transactions, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7517">7517</a>. For the rules applicable to stock received in a demutualization, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7517">7517</a>. Proposed regulations relating to redemptions of stock in which the redemption proceeds are treated as a dividend distribution have been withdrawn.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1012.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;See IRC &sect; 354.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;See 71 Fed. Reg. 20044 (4-19-2006).<br /> <br /> </div></div><br />

<div class="Section1">Where property is transferred between spouses, or former spouses incident to a divorce, after July 18, 1984 pursuant to an instrument in effect after that date, the transferee&rsquo;s basis in the property is generally the adjusted basis of the property in the hands of the transferor immediately before the transfer and no gain or loss is recognized at the time of transfer (unless, under certain circumstances, the property is transferred in trust).<a href="#_ftn1" name="_ftnref1">¹</a> These rules may apply to transfers made after 1983 if both parties elect.<a href="#_ftn2" name="_ftnref2">²</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="789">789</a> regarding transfers incident to divorce.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect;&sect; 453B(g), 1041; Temp. Treas. Reg. &sect; 1.1041-1T, A-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;Temp. Treas. Reg. &sect; 1.1041-1T, A-16.<br /> <br /> </div></div><br />

<p>An insurance premium rebate, which is illegal in most states, is a transaction in which a life insurance agent returns all or a portion of a commission to the purchaser, or simply pays the policy&rsquo;s first-year premium without contribution from the purchaser. The transaction is economically feasible to the insurance agent because the commission, allowance and/or bonus paid by the insurance company to the agent for the sale of the policy often exceeds the policy premium. As a result, the purchaser may ultimately receive free or less expensive life insurance coverage. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="659">659</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="660">660</a> for the tax consequences of insurance premium rebating to the insurance agent and the purchaser, respectively.</p><br />