None of None Essay

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CHAPTER 3 GROSS INCOME What is income? How do economists define income? CONSUMPTION PLUS THE CHANGE IN NET WORTH DURING THE PERIOD. Example: Abdul was paid $45,000 in wages in the current year. At the beginning of the year his home was valued at $150,000. He also had investments in stocks and bonds that were worth $50,000 at the beginning of the year. At the beginning of the year he owed $5,000 on his Master Card. At the end of the year his home was valued at $153,000, his stock portfolio was worth $60,000, and he owed $8,000 on his Master Card. He spent $42,000 on living expenses. In addition, had he rented instead of owned his home, he would have spent an additional $12,000. What is Abdul's income as measured by an economist? CHANGE IN NET WORTH: BEGINNING BALANCE HOME $150,000 STOCK 50,000 CREDIT 5,000 NET CHANGE CONSUMPTION: LIVING EXPENSES IMPUTED RENT $42,000 12,000 $54,000 INCOME: $10,000 + $54,000 = $64,000 ENDING BALANCE $153,000 60,000 8,000 CHANGE $ 3,000 10,000 - 3,000 $10,000 1 CHAPTER 3 GROSS INCOME What practical problems arise when taxable income is calculated by using the economist's definition? How do accountants define income? REVENUES MINUS EXPENSES WHERE BOTH ARE BASED ON COMPLETED TRANSACTIONS - THE REALIZATION PRINCIPLE. How is "realization" generally defined by accountants? REALIZATION OCCURS WHEN THE EARNINGS PROCESS IS: 1. COMPLETE 2. AN EXCHANGE HAS TAKEN PLACE AND 3. A MEASURABLE, LIQUID ASSET IS RECEIVED Which definition, economic or accounting, is used to measure income for income tax purposes. THE REALIZATION PRINCIPLE, WITH SOME MODIFICATIONS. How does the Code define income? IRC §61 ...”EXCEPT AS OTHERWISE PROVIDED IN THIS SUBTITLE, GROSS INCOME MEANS ALL INCOME FROM WHATEVER SOURCE DERIVED.” Where can one find a more precise definition of income used for income tax purposes? According to the Supreme Court: In

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