Income and Assets

Begin with why the taxpayer received the money or property. Compensation is generally taxable whether paid in cash or something of value. Loan proceeds ordinarily create a repayment obligation rather than income, although later cancellation can require a separate analysis. A genuine personal gift is generally excluded from the recipient’s income, but an employer’s payment for services does not become a gift because the payer uses that label.

A sale combines recovery of invested capital with a possible gain or loss. Compute amount realized, subtract adjusted basis and then determine whether the result is recognized and how it is classified. Do not treat all bank deposits as income or all sale proceeds as gain. The distinction is also important for inheritances: receiving inherited principal and earning interest on that property after the transfer are separate events.

For a cash-method individual, income generally belongs to the year actually or constructively received. Constructive receipt concerns funds made available without substantial restriction, even if the taxpayer chooses not to collect them. An enforceable right to future payment is not automatically the same as current availability. Read dates and access conditions carefully before moving a receipt into the following year.

Next classify the income. Bank interest, dividends, wages, business profit and a capital gain are not interchangeable. Qualified dividends and qualifying long-term capital gains can use different rate rules from ordinary income. Retirement distributions may include both taxable amounts and recovery of after-tax investment. Keep the source and character attached to each amount as it moves through the return, rather than adding everything together before asking what it is.

For a purchased investment, cost generally starts the basis record; acquisition costs may also belong in basis. Later improvements, depreciation where applicable, stock splits and other events can change the amount. Basis is not necessarily the current market value or the number printed on a broker statement. A missing reported basis does not prove the taxpayer’s actual basis is zero.

For gifts and inheritances, determine the acquisition rule before doing the sale calculation. The property-basis lesson develops the dual-basis rule for a loss-valued gift; the capital-gains lesson handles holding periods, netting and wash sales. This broader income lesson explains the first decision: identify the receipt and the tax attribute it changes. That prevents a correct basis calculation from being applied to the wrong kind of transaction.