Individual taxation
Gross Income and Status
Everything is income unless a section excludes it, and the filing status turns on marital status and who the taxpayer supports.
How the exam words it
- -The stem lists receipts (wages, gifts, scholarships, municipal interest, life insurance) and asks how much is gross income.
- -It asks which filing status applies, often testing head of household or a qualifying surviving spouse.
- -A child has investment income and it asks about the kiddie tax.
- -It tests the taxability of Social Security, unemployment, or a fringe benefit.
The playbook
- 1Start from all income being taxable, then remove the statutory exclusions: gifts and inheritances, life insurance death proceeds, municipal bond interest, qualified scholarships for tuition, and gain excluded under section 121.
- 2Set filing status at year-end: married filing jointly or separately if married, head of household for an unmarried taxpayer who pays more than half the cost of a home for a qualifying person, and qualifying surviving spouse for two years after a spouse's death.
- 3Apply the kiddie tax to a child's net unearned income above the threshold, taxing it at the parents' marginal rate.
- 4Test the gray-area items: a scholarship for room and board is taxable, and Social Security becomes partly taxable as provisional income rises.
The trap
Treating a scholarship as fully excluded. Only amounts used for tuition, fees, and required books are excluded; amounts for room and board are taxable income.
How the exam varies it
The same pattern, re-skinned along these axes:
Inclusion versus exclusion of a specific itemWhich filing status: head of household, joint, or qualifying surviving spouseOrdinary income versus the kiddie tax on a child's unearned income
Drill this pattern
8 questions of Gross Income and Status from across the AUD topics. Clear it by getting 5 right with a streak of 3.