Income and Assets
Gross income and asset transactions
Gross income is all income from whatever source derived unless specifically excluded. Wages, salaries, tips, interest, dividends, rents, royalties, annuities, pensions, and unemployment compensation are includible. Exclusions include gifts, inheritances, life insurance proceeds paid by reason of death, municipal bond interest, qualified Roth IRA distributions, and most employer-provided fringe benefits such as health insurance.
Capital transactions turn on basis, amount realized, and holding period. Gain is realized when a sale occurs; recognized gain remains after exclusions and nonrecognition provisions. Long-term means held more than one year and is taxed at preferential rates. Capital losses offset capital gains, then up to $3,000 of ordinary income ($1,500 MFS), with the excess carried forward. Inherited property gets a stepped-up basis to fair market value at death; gifted property carries over the donor's basis. The Section 121 exclusion shelters up to $250,000 of home-sale gain ($500,000 MFJ) when ownership and use tests are met.
Traps. Wash sales disallow a loss when substantially identical securities are bought within 30 days before or after the sale, and the disallowed loss is added to basis. Short-term gains are ordinary. Installment sales defer gain as payments are received. Cancellation of debt is income unless an exclusion applies, such as insolvency. Social Security benefits become taxable as provisional income rises, up to 85%.
Worked example. A taxpayer has a $10,000 long-term gain and a $4,000 short-term loss. The loss offsets gain first, leaving a $6,000 net long-term gain taxed at preferential rates; the $3,000 ordinary-income limit is not needed.