Chapter 5 key terms

Question	Answer
Accelerated death benefits	early receipt of life insurance proceeds that are not taxable under certain circumstances, such as the taxpayer is medically certified with an illness that is expected to cause death within 24 months.
Accountable plan	an employer’s reimbursement plan under which employees must submit documentation supporting expenses to receive reimbursement and reimbursements are limited to legitimate business expenses.
Accrual method	a method of accounting that generally recognizes income in the period earned and recognizes deductions in the period that liabilities are incurred.
Alimony	a support payment of cash made to a former spouse. The payment must be made under a written separation agreement or divorce decree that does not designate the payment as something other than alimony, the payment must be made when the spouses do not live together, and the payments must cease no later than when the recipient dies.
Annuity	a stream of equal payments over time.
Assignment of income doctrine	the judicial doctrine holding that earned income is taxed to the taxpayer providing the service, and that income from property is taxed to the individual who owns the property when the income accrues.
Barter clubs	organizations that facilitate the exchange of rights to goods and services between members.
Cash method	the method of accounting that recognizes income in the period in which cash, property, or services are received and recognizes deductions in the period paid.
Claim of right doctrine	judicial doctrine that states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer’s use of the income (for example, the taxpayer does not have an obligation to repay the amount).
Community property systems	systems in which state laws dictate how the income and property are legally shared between a husband and a wife.
Constructive receipt doctrine	the judicial doctrine that provides that a taxpayer must recognize income when it is actually or constructively received. Constructive receipt is deemed to have occurred if the income has been credited to the taxpayer’s account or if the income is unconditionally available to the taxpayer, the taxpayer is aware of the income’s availability, and there are no restrictions on the taxpayer’s control over the income.
Disability insurance	sometimes called sick pay or wage replacement insurance. It pays the insured for wages lost due to injury or disability.
Discharge of indebtedness	debt forgiveness.
Earned income	compensation and other forms of income received for providing goods or services in the ordinary course of business.
Flow-through entities	legal entities, like partnerships, limited liability companies, and S corporations, that do not pay income tax. Income and losses from flow-through entities are allocated to their owners.
Fringe benefits	noncash benefits provided to an employee as a form of compensation. As a general rule, fringe benefits are taxable. However, certain fringe benefits are excluded from gross income.
Gift	a transfer of property where no, or inadequate, consideration is paid for the property.
Gross income	realized income minus excluded and deferred income.
Imputed income	income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives.
Inheritance	a transfer of property when the owner is deceased (the transfer is made by the decedent’s estate).
Installment sales	sales for which taxpayers receive payment in more than one period.
Municipal bonds	the common name for state and local government debt.
Nonrecognition provisions	tax laws that allow taxpayers to permanently exclude income from taxation or to defer recognizing realized income until a subsequent period.
Qualified retirement accounts	plans meeting certain requirements that allow compensation placed in the account to be tax-deferred until the taxpayer withdraws money from the account.
Realization principle	the proposition that income only exists when there is a transaction with another party resulting in a measurable change in property rights.
Return of capital	the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property.
Tax basis	the amount of a taxpayer’s unrecovered cost of or investment in an asset; see also adjusted tax basis.
Tax benefit rule	holds that a refund of an amount deducted in a previous period is only included in income to the extent that the deduction reduced taxable income.
Unearned income	income from property that accrues as time passes without effort on the part of the owner of the property.
Wherewithal to pay	the ability or resources to pay taxes due from a particular transaction.

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	Created by QUINLAN WILSON over 1 year ago