Ch. 2 Gross Income & Exclusions

If Alimony is paid in cash prior to January 1, 2019, is it taxable to the recipient? And is it deductible to the payor?

Alimony prior to 2019 is taxable to the recipient and deductible for the payer. But as of 2019, it is neither taxable nor deductible.

What is Gross Income?

Any income that isn't specifically excluded by tax law.

Greg died on July 1, 2019, and left Lea, his wife, a $45,000 life insurance policy which she elects to receive at $9,000 per year plus interest for 5 years. In the current year, Lea receives $9,500. How much should Lea include in her gross income?

Because Lea decided to take the amount at 9,000 a year plus 500 for interest, then the interest of $500 is taxable income. If she had taken it in sums, then it would have been tax-free.

A 68-year-old taxpayer has $20,000 in Social Security income and has significant other taxable retirement income. What is the maximum percentage of Social Security that the taxpayer might be required to include in taxable income?

Because he has additional income that will significantly alter his income, 85% of his social security will be taxed.

How much of each of the following is taxable? Jon received a gold watch worth $660 for 25 years of service to his accounting firm (not a qualified award).

Because the max amount for a length of service award is 400, the difference between 660 and 400 will be the taxable amount. $260 is the taxable amount.

As part of the property settlement related to their divorce, Cindy must give Allen the house that they have been living in, while she gets 100 percent of their savings accounts. The house was purchased for $90,000 20 years ago in Southern California and is now worth $700,000. How much gain must Cindy recognize on the transfer of the house to Allen? What is Allen's tax basis in the house for calculating tax on any future sale of the house?

Cindy: Because Cindy transferred ownership of property to Allen, Cindy is not obligated to recognize any gain on the property. Allen: Because Allen has rightful ownership of the property, he is obligated to recognize the tax basis of $90,000.

Ellen is a single taxpayer. Ellen's employer pays $150 per month ($1,800 this year) for her health insurance. During the year, Ellen had medical expenses of $3,500 and the insurance company paid $2,000 of the expenses. How much of the above amounts, if any, must be included in Ellen's gross income? $ Why?

Ellen is not required to include any of the medical expenses for the year. Neither employer contributions not insurance payments towards medical expenses are taxable to the employee.

Are Welfare payments included or excluded for taxable income?

Excluded

How much of each of the following is taxable? Cheline, an actress, received a $6,400 gift bag for attending the Academy Awards Ceremony during 2019.

If Cheline accepts the bag, the entirety of the bag amount is taxable.

How much of each of the following is taxable? Deborah is a professor who received $30,000 as an award for her scientific research from the university that employs her.

If Deborah accepts the reward and unless she decides to donate it to charity, the entirety is taxable.

Are scholarships for room and board included or excluded for taxable income?

Included

Is Hobby Income included or excluded for taxable income?

Included

Is severance pay included or excluded for taxable income?

Included

What amount of interest or dividend income must be reported on a Schedule B of form 1040?

Interest or Dividends exceeding $1,500, must be reported on Schedule B of form 1040

Is child support taxable?

No. Child support is not taxable nor deductible.

Is alimony included in gross income?

No. It is not considered income and therefore not taxable after 2018.

If meals are provided by an employer, is this considered taxable income for the employee?

No. Meals explicitly provided by the employer are not taxable income for the employee.

Are municipal interest bonds taxable?

No. They are excluded and not taxable.

What is the taxable income limit for social security recipients, single and married filing jointly, to have their income tax excluded?

Social security recipients who are single and whose income is under $25,000, and for married filing jointly is $32,000, may have their income excluded from taxation.

What is the limit amount for a small prize for length of service and safety?

The limit for a small prize (length of service and safety) is $400.

What is the limit amount for a "qualified award plan" that may not be taxed by the recipient?

The limit for qualified awards is $1,600.

A 68-year-old taxpayer has $20,000 in Social Security income and $100,000 in tax-free municipal bond income. Does the municipal bond income affect the amount of Social Security the taxpayer must include in income?

Yes. Because her social security income plus her 100,000 tax free bond is greater than the allowed $25,000 income threshold, then 85% of her social security will be taxed equaling $17,000. -Despite the bonds being tax free, it still raises her income level above the threshold.

Are gambling winnings part of gross income?

Yes. It is considered income and therefore taxable.

Can tax payers exclude health insurance premiums paid by their employer?

Yes. They can exclude it from their income.

Under the terms of a property settlement executed during 2019, Jane transferred property worth $450,000 to her ex-husband, Tom. The property has a tax basis to Jane of $425,000. a. How much taxable gain must be recognized by Jane at the time of the transfer? b. What is the amount of Tom's tax basis in the property he received from Jane?

a. Because Jane transferred the property, she is not obligated to recognize any taxable gain to the property. b. The tax basis will be similar to Tom as it was for Jane at $425,000

Under a 2017 divorce agreement, Joan is required to pay her ex-husband, Bill, $700 a month until their daughter is 18 years of age. At that time, the required payments are reduced to $450 per month. a. How much of each $700 payment may be deducted as alimony by Joan? b. How much of each $700 payment must be included in Bill's taxable income? c. How much would be deductible/included in the divorce agreement were dated 2019?

a. Because the year is prior to 2019, then $450 is deducted b. Because the year is prior to 2019, then $450 is taxable c. If the agreement was dated on 2019, then it would be $0.

Kristen, a single taxpayer, receives two 2019 Forms W-2 from the two employers she worked for during the year. One Form W-2 lists her wages in Boxes 1, 3, and 5 as $18,700. Her other employer's Form W-2 has $43,000 in Box 1 but only $46,500 in both Box 3 and Box 5. Kristen participated in the second employer's 401(k) plan. She also received health care from her second employer. Lastly, her second employer provided $30,000 of group term life insurance to Kristen. a. What amount should Kristen report as taxable wages in 2019? b. What could explain the difference between Box 1 wages and Boxes 3 and 5 on her second employer's W-2

a. Taxable wages total: 18,700 + 43,000 = 61,700 b. The difference could be the contribution amount that Kristen put into ther 401k which is not taxed until after it is taken out. 46,500 - 43,000 = 3,500