According to the US constitution, the sixteenth amendment defines gross income as the income acquired from whatever source. Gross income includes compensation for business transactions, interests, rents, royalties, dividends, pensions, among other forms of income. The sixteenth amendment stipulates that income that is not considered gross income is not subject to federal income tax. From an economic perspective, income is the amount gained and stored as wealth for a particular period. However, from an accounting perspective, income is the amount gained from a taxable transaction. Taxable income must fulfill three conditions where the income must have an economic benefit; the income must be realized and recognized.
In the current case from the readings, the Jack and June, the total income in the case includes the social security fund, pension, income from the sale of the automobile they restored. According to federal taxation laws, social security funds and pensions are taxable to a defined limit of provisional income (Kagan, 2020). The amount Jack and June received for restoration of the automobile may be categorized as compensation from the sale, which is income realized and recognized. The sale of the automobile could also be considered the sale of property, which is also taxable. Therefore, the main tax issue to be considered in the current case is Jack and June's tax liability from the respective income.
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Social security benefits are taxable, depending on the taxpayer's provisional income (Kagan, 2020). Therefore, for Jack and June to realize a lower tax liability, they may maintain a provisional income below the 32,000 dollar limit. The assumption in the current case is that Jack and June are a couple; therefore, they may file a joint return. To minimize the tax liability on the joint return, the capital gains on the automobile sale and pension must be at 32,000 dollars or below to realize a tax-free social security benefit. Considering the capital gains for Jack and June amount to 37,000 dollars, taxation law stipulates their social security benefit be taxed.
References
Kagan, J. (2020, April 3). What is the income exclusion rule? https://www.investopedia.com/terms/i/identified-shares.asp.
