ACC 330 Module 3 Gross Income and Exclusions Assignment Example

What Counts and What Does Not: Classifying a Composite Ohio Household's Receipts for Tax Year 2024

[Student Name]

Southern New Hampshire University

ACC 330: Federal Taxation I

Module Three Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

What Counts and What Does Not: Classifying a Composite Ohio Household's Receipts for Tax Year 2024

Introduction

The federal income tax starts from a sweeping definition: gross income includes all income from whatever source derived, unless a specific provision of the Code excludes it (Internal Revenue Service, 2024b). The burden runs one way. A receipt is taxable until someone can point to the rule that says otherwise. This assignment applies that principle to the fourteen receipts and benefits of a composite household in Columbus, Ohio, for tax year 2024: Jordan, a heating and cooling technician; Elena, a freelance bookkeeper who also sells pottery; their children Maya and Leo; and Elena's mother, Rosa. Only items received by Jordan and Elena belong on their joint return.

Classification of Each Item

Table 2. Gross Income on the Joint Return

Gross income is not the same as adjusted gross income. Elena's business expenses, the deductible half of her self-employment tax and any other adjustments come later; this assignment answers only the first question of what is income at all.

Three Items That Need Judgment

The gift card. Jordan's employer gave every technician a $250 gift card in December. It felt like a holiday gift, but the Code treats gifts from an employer to an employee as compensation, and cash or cash-equivalent items, which include gift cards, never qualify as excludable de minimis fringe benefits regardless of amount (Internal Revenue Service, 2024a). A holiday ham would have been excluded; a gift card is wages, and the employer correctly included it in Box 1.

The state refund. Elena received $410 back from Ohio for 2023. Whether a refund of state tax is income depends on whether the original payment reduced federal tax. The tax benefit rule includes a recovery only to the extent the earlier deduction produced a benefit. Because the couple took the standard deduction in 2023, their Ohio tax payments did not reduce their federal tax, so the refund is excluded. Had they itemized, at least part of it would be taxable.

The lake lot. Elena's aunt left her a lakeside lot worth $48,000 at the aunt's death in February. The inheritance itself is excluded, and Elena's basis in the lot is its fair market value at death, not the $9,000 the aunt paid in 1988. Elena sold the lot in November. That sale is a separate transaction producing a small gain, which belongs to the property module, not to this one. Confusing the two, taxing the inheritance or using the aunt's old basis, would overstate income by tens of thousands of dollars.

Timing and Reporting

Two timing questions also arise. A long-time client mailed Elena a $1,150 check dated December 28, which arrived on December 30; she deposited it on January 3. Under the cash method, income is received when it is made available without restriction, so the check is 2024 income even though it reached the bank in 2025. The reverse case, a client who promised payment in December but did not send it until January, would be 2025 income, since a promise is not receipt.

The second question is who reports. Three of Elena's larger clients sent Forms 1099-NEC because they paid her $600 or more, covering about $18,000 of her receipts. The rest of her $41,800 came from small clients who sent no form. The obligation to report all $41,800 is the same either way; the forms only determine which part the IRS can match automatically, which is exactly the gap discussed in the first module.

Why Classification Is Hard for Households

Many of these items were new to the family this year: an inheritance, life insurance and a scholarship. Hoopes et al. (2015) found that taxpayers search for tax information mostly around deadlines and when their circumstances change, and that unfamiliar items are a major source of errors and of demand for paid help. Publication 525 exists for exactly these situations, and its examples cover gift cards, refunds and scholarships in plain language (Internal Revenue Service, 2024a). The working rule that follows is to ask the family about every unusual receipt of the year, because the items most likely to be misclassified are the ones nobody thinks to mention.

Conclusion

Jordan and Elena's gross income for tax year 2024 is $114,640: wages, freelance receipts, pottery sales, interest and jury pay. Nine other receipts, including $40,000 of gift and life insurance proceeds and a $48,000 inheritance, are excluded by specific provisions. Each classification follows from the same starting point: everything is income unless the Code says it is not, and the family's preparer should be able to name that section for every excluded dollar.

References

Hoopes, J. L., Reck, D. H., & Slemrod, J. (2015). Taxpayer search for information: Implications for rational attention. American Economic Journal: Economic Policy, 7(3), 177-208. https://doi.org/10.1257/pol.20140050

Internal Revenue Service. (2024a). Taxable and nontaxable income (Publication 525). U.S. Department of the Treasury.

Internal Revenue Service. (2024b). Your federal income tax: For individuals (Publication 17). U.S. Department of the Treasury.