REG individual-tax coverage for gross income, exclusions, capital gains, and kiddie-tax issues.
This chapter covers the starting point for individual taxation: identifying what belongs in gross income and what may be excluded. REG questions in this area reward careful categorization, because the treatment of one item often affects later deductions, rates, and limitations.
Gross income questions should be solved in order: identify the item, decide whether the broad inclusion rule applies, then test whether a specific exclusion, character rule, or rate rule changes the result. Many wrong answers come from recognizing that an item is favorable without identifying whether it is excluded, deferred, capital, or merely taxed at a different rate.
| Income item | First classification question | Common REG trap |
|---|---|---|
| Compensation and pensions | Is the amount taxable now as wages, retirement income, or another inclusion? | Assuming withholding or reporting treatment determines taxability. |
| Interest and dividends | Is the item fully taxable, tax-exempt, qualified, or otherwise specially treated? | Treating tax-exempt interest as irrelevant when it may affect other calculations. |
| Capital gains and losses | Is the asset capital, and is the holding period short term or long term? | Netting gains and losses before classifying character and holding period. |
| Gifts, insurance, scholarships, and fringe benefits | Does a specific statutory exclusion apply, and are its conditions met? | Excluding an amount because it feels noncommercial rather than because the statute allows it. |
| Child’s unearned income | Does the kiddie-tax framework apply to shift the rate result? | Confusing inclusion in income with the rate used to tax the income. |
| Step | Classification task | Exam reason |
|---|---|---|
| 1. Identify the receipt | Determine whether the item is cash, property, services, debt relief, investment return, benefit, or transfer. | The form of the receipt affects valuation and tax treatment. |
| 2. Apply the broad inclusion rule | Ask whether the taxpayer has accession to wealth that is clearly realized and not otherwise excluded. | REG starts with inclusion before exceptions. |
| 3. Test specific exclusions | Check gifts, inheritances, life insurance, scholarships, fringe benefits, municipal bond interest, and other statutory exclusions. | Favorable treatment must come from a specific rule, not intuition. |
| 4. Determine character and timing | Classify ordinary income, capital gain, tax-exempt income, deferred income, or special-rate income. | Character and timing affect later deductions, netting, credits, and rates. |
| 5. Consider dependent or child rules | Apply kiddie tax, dependency, and reporting rules when the taxpayer is not the primary earner. | The same income may be taxable but at a different rate or on a different return. |