Chapter 5

Single taxpayers meeting certain home ownership and use requirements can permanently exclude up to $(1) of the realized gain on the sale of their principal residence. (Enter your answer as a whole number.)

1. 250000

The earnings on a(n) (1) plan are NOT taxable to the beneficiary if the distributions from the account are used to pay qualified higher education expenses.

1. 529

The highest percentage of Social Security benefits that may be taxed is (1)%, and only for moderate to high income taxpayers.

1. 85

Earnings on investments in plans such as 529 plans, Coverdell savings accounts, and U.S. Series EE bonds are excluded from taxation if the proceeds are used for qualifying (1) expenses.

1. education

In addition to receiving a salary from a company, many employers provide (1) (2) that are excluded from gross income. (Enter only one word per blank.)

1. fringe 2. benefits

Interest income on ______ bonds is excluded from federal taxation.

municipal

The (1) (2) (3) doctrine holds that the taxpayer who earns income from services must recognize the income, and the income from property is taxed to the person who owns the property.

1. assignment 2. of 3. income

In general, when a taxpayer cashes out a life insurance policy before death, taxable income may result. However, if the taxpayer is (1) ill, the portion of the proceeds used for long-term care is excluded from gross income. If the taxpayer is (2) ill, the proceeds are NOT taxable.

1. chronically 2. terminally

When income has been credited to the taxpayer's account or when the income is unconditionally available to the taxpayer, the taxpayer is aware of the availability and there are no restrictions on the income, (1) (2) is deemed to have occurred. (Enter only one word per blank.)

1. constructive 2. receipt

Income received as a result of services provided by the taxpayer, including business income, is referred to as (1) (earned/unearned) income.

1. earned

Nonrecognition provisions refer to specific types of income that taxpayers realize but are allowed to permanently (1) from gross income or temporarily (2) until a later period.

1. exclude 2. defer

Taxpayers receiving indirect economic benefits, such as bargain purchases or below-market loans, are said to have (1) income which may be taxable. (Enter only one word per blank.)

1. imputed

In general, when a taxpayer's debt is discharged by a lender, the taxpayer's gross income will (1) (include / exclude) the amount forgiven.

1. include

Select all that apply Which of the following payments to a taxpayer should be included in gross income? (Check all that apply.)

Emotional distress damages awarded due to slander of the taxpayer's reputation Punitive damages awarded after an accident at work where the taxpayer sustained a non-physical injury Compensatory damages for lost wages awarded in a sex discrimination lawsuit

True or false: Gross income only includes income received in cash because cash is a measurable change in wealth.

False

True or false: In general, prizes awarded to taxpayers are excluded from gross income.

False

Which of the following statements is CORRECT regarding the recognition of income?

Income may be in the form of cash, property, or services received in a transaction.

Which one of the following choices does NOT represent an economic benefit to the taxpayer?

Proceeds from a loan

Select all that apply Which of the following statements are INCORRECT regarding the receipt of Social Security benefits? (Check all that apply.)

Social Security benefits are not taxable because the contributions were taxed when the taxpayer was working. 50% of Social Security benefits are taxable to all taxpayers because the employer contributed funds that were never taxed to the employee.

Court-ordered cash payments pursuant to a divorce or legal separation which provide financial support to an ex-spouse and do not continue after the death of the ex-spouse are referred to as ______.

alimony

Sec. 61 of the Internal Revenue Code defines ______ income as "all income, from whatever source derived."

gross

To satisfy the ownership test for excluding the gain on a personal residence the taxpayer must have owned the residence for ______.

two or more years during the past five-year period ending on the date of sale

Arnie was the beneficiary of his wife's life insurance policy. He received $100,000 in June from the policy after his wife's death. He also sold some land that he had purchased a couple of years earlier. He sold the land for $6,000. He only paid $3,500 for the land when he bought it. Arnie is self-employed and earned a profit in his business of $55,000 (ignoring the self-employment tax deduction). What is the amount of Arnie's gross income for the current year?

$57,500

Select all that apply Brenda received a $15,000 college scholarship for the current year. She used the scholarship to pay the following fees: tuition $9,000, lab fees $60, parking fees $120, books $750, housing $4,000, and a meal plan $1,070. What can she exclude from gross income? (Check all that apply.)

$60 lab fees $9,000 tuition $750 books

Daniels, Edwards, and Findley are equal partners in DEF Industries. The company generated net income of $180,000 during the year and distributed $20,000 cash each of the partners. Edwards will report $(1) in taxable income from the partnership.

1. 60000

For all divorce agreements executed after December 31, 2018, (1) payments are excluded from gross income of the recipient and (2) (deductible/nondeductible) for the spouse making the payment.

1. alimony 2. nondeductible

An investment that pays a stream of equal payments over time is a(n) (1). (Enter only one word per blank.)

1. annuity

Rather than claiming the foreign-earned income exclusion, taxpayers may claim a foreign tax (1) or a foreign tax (2) for income taxes paid to other countries. (Enter only one word per blank.)

1. deduction 2. credit

For below-market-loans, the discounted interest rate is treated as interest (1) to the lender and interest (2) to the borrower.

1. income 2. expense

If a taxpayer cashes out a life insurance policy before death due to a chronic illness, she may exclude from income the amount used to pay for her (1) (2) (3). (Enter only one word per blank.)

1. long 2. term 3. care

In general, life insurance proceeds are (1) (taxable/nontaxable) to the beneficiary of the policy.

1. nontaxable

In personal injury cases, any damages awarded due to (1) injury are exempt from taxation. (Enter only one word per blank.)

1. physical

The (1) principle states that income is received when a taxpayer completes a transaction with another party that results in a measurable change in the property rights of the two parties.

1. realization

Under the cash method, taxpayers recognize income in the period they (1) it, rather than when they actually (2) it.

1. receive 2. earn

Up to 85% of (1) (2) benefits, in retirement, may be taxable for taxpayers with moderate to high taxable income.

1. social 2. security

Jerry receives an annuity payment of $2,500 per month. Jerry purchased the 20-year annuity for $250,000. What is the amount of the annuity that represents a return of capital and is, therefore, nontaxable?

41.67% or $12,500 per year

Select all that apply In which of the following situations has constructive receipt occurred in the earlier year? (Check all that apply.)

Amber received a year-end bonus check dated December 28, but she did not cash the check until Jan. 3. Arnold earned interest of $300 on his savings account, but did not withdraw the funds until the following year. On December 28, Alex was made aware that her employer had issued her a check and that she could pick it up at anytime. She went out of town and picked it up on January 2.

Which of the following fringe benefits provided by an employer is NOT excluded from gross income?

Group life insurance coverage in excess of $50,000

Which of the following transactions results in realized income during the current year?

Huey receives a set of new tires valued at $400 for his car in exchange for cleaning and painting the mechanic's garage.

Select all that apply For divorce decrees entered into in 2021 alimony is ______. (Check all that apply.)

NOT included in the gross income of the person receiving it NOT deductible to the person paying it

Select all that apply Which of the following choices are characteristics of qualified tuition programs, also known as 529 plans? (Check all that apply.)

The distributions can be made for tuition expenses for kindergarten through 12th grade. Distributions made to the beneficiary for purposes other than education are taxable and incur a penalty on the plan earnings. Earnings on the account are NOT taxable if used for qualified education expenses.

What is the tax treatment for a taxpayer receiving a gold watch valued at $350 in recognition of his 25th year of working for the same company?

The value of the watch is excluded from gross income.

Which of the following terms is used to refer to income from property?

Unearned income

Select all that apply Which of the following statements are CORRECT when describing "Workers' Compensation?" (Choose all that apply.)

Workers' compensation benefits are not taxable to the recipient because the payments result from a physical injury. Workers' compensation benefits are paid to employees who have been injured in a work-related situation.

An inheritance ______.

may be subject to the federal estate tax which is paid by the estate of the person who died

Select all that apply Which of the following choices describe exclusions and deferrals for tax purposes? (Choose all that apply.)

These provisions are often granted in order to subsidize or encourage particular behaviors. These provisions are the result of specific congressional action. These provisions are narrowly defined.

Select all that apply Under the realization principle, what must occur for income to be realized? (Check all that apply.)

A taxpayer must engage in a transaction with another party. The transaction must result in a measurable change in property rights.

True or false: Scholarships received by college students qualify as gifts and are, therefore, nontaxable. The actual use of the money (tuition, fees, housing, meals, and any other expenses) does not affect the taxable status of the scholarship.

False

Select all that apply Which of the following statements are correct? (Check all that apply.)

If a taxpayer receives a state tax refund for a tax year where she deducted the state tax paid, she must report the refund as gross income. When taxpayers sell nondepreciable assets, they may exclude the original cost of those assets from gross income. Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income.

Which of the following choices does NOT describe an annuity?

It is a lump sum payment that is usually received by the beneficiary of a life insurance policy.

How are the proceeds from a life insurance policy treated if the policy is cashed in early for its surrender value when there is no chronic or terminal illness present?

The excess of the cash surrender value over the premiums paid is included in the taxpayer's gross income.

For a divorce agreement entered into BEFORE January 1, 2019, alimony is ______

included in the gross income of the person receiving it and deductible by the person paying it

A gift ______.

may be subject to "gift tax" which is paid by the person giving the gift

Which of the following statements is INCORRECT regarding gross income?

Income is only included in gross income when spelled out in specific tax provisions.

Income from (1) takes different forms, such as dividends, interest, rents, royalties, and annuities.

1. property

Frick and Frack are equal partners in F&F Industries. The company generated net income of $60,000 during the year and distributed $7,000 cash to both Frick and Frack. How much income should Frack report on his individual income tax return due to the partnership interest?

$30,000

Income from property is referred to as (earned/unearned) (1) income.

1. unearned

True or false: Income and deductions generated within a partnership or S corporation that are subject to various tax treatments (i.e. qualified dividends, capital gains, etc.) retain their character when they flow-through to the owners rather than being reclassified as ordinary income or loss.

True

Which one of the following types of income is NOT generated from owning property?

Earnings from services rendered

True or false: Darlene owns stock in several different companies. When she received a dividend check from her Avatar stock, she endorsed the checks and deposited the money in her daughter's checking account. Consequently, her daughter will be assessed the tax on the dividends.

False

Which of the following options is NOT available to taxpayers who have worked outside the United States and meet the requirements necessary to receive tax relief on their foreign earnings?

Tax deduction for foreign-earned income

Which one of the following is NOT an advantage of the cash method for reporting income?

Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them.

Which of the following statements is INCORRECT regarding workers' compensation payments?

The payments are included in gross income because they are a replacement of wages.

Select all that apply Which of the following rules must be met for a taxpayer to be able to exclude the gain on the sale of a personal residence? (Check all that apply.)

The taxpayer must have used the property as their principal residence for a total of two or more years during the five year period prior to the sale. The taxpayer must have owned the residence for at least two years of the five year period prior to the sale.

True or false: Income and deductions from a partnership or S corporation are taxed on the owners' tax returns rather than the entity tax return.

True

Select all that apply Which of the following situations will result in an award being excluded from gross income? (Check all that apply.)

When the award is a noncash item valued at less than $400, and given for either safety or years of service by an employee When the award is given for scientific, literary, or charitable achievement and meets certain other requirements

Select all that apply Life insurance proceeds may be included in gross income when ______. (Check all that apply.)

a life insurance policy is transferred to another party for valuable consideration proceeds are paid over time and a portion represents taxable interest payments

Chester incurred $14,500 in hospital and medical bills during the current year. His health insurance policy reimbursed him $11,600 toward those expenses. What amount should be included in Chester's gross income?

$ 0

Allison won $3,200 betting on a long-shot in the Kentucky Derby. Unfortunately, she lost her lucky streak and ended up losing $5,000 on her next (and last) trip to the racetrack. Allison heard that she will be able to deduct her gambling losses, so she is feeling a little better. Assuming that Allison is not a professional gambler and does not itemize deductions, how much of the $5,000 loss will she be able to deduct?

$0

Bobby received a $3,500 scholarship for the semester. He used $3,000 to pay tuition to the community college, and the remaining $500 was paid toward textbooks. How much of the scholarship must be included in gross income?

$0

Bart sold a parcel of land for $21,000. He paid a real estate agent a commission of $1,500 for assisting with the sale. Bart had purchased the land several years earlier for $20,000. What is the amount realized on the sale of the land?

$19,500

During the current year, Sam received interest income from the following investments: $400 from State of Wyoming bonds, $200 from Ford Motor Co., $50 from City of Laramie bonds, $100 from U.S. Treasury bonds. How much of the interest received will be included in gross income?

$300

Sam traded a parcel of land for a tractor and a car. He had purchased the land five years earlier for $16,000. The market value of the car and tractor is $20,000. What is the amount of gross income resulting from this transaction?

$4,000

Select all that apply Chad has received the following income and benefits during the current year: $65,000 salary, $4,800 employer-provided health insurance, $1,500 municipal bond interest, $2,000 dividend income, $500 from a partnership, and a $10,000 judgment for lost wages due to an age discrimination lawsuit. What amounts should Chad include in his gross income? (Check all that apply.)

$65,000 salary $2,000 dividend income $500 partnership income $10,000 judgment

Andrea owed $12,000 on a medical bill to University Hospital. The hospital agreed to discharge the debt due to Andrea's financial situation. Immediately prior to the discharge of the debt, Andrea's debts exceeded her assets by $5,000. How much of the debt forgiveness will Andrea need to include in her gross income?

$7,000

Andrew earned $5,000 in wages while working a part-time job during the current year. He also received a scholarship for $12,000. He used $9,000 for tuition and $800 for books. The remaining $2,200 went to help cover the cost of housing. During the summer, Andrew's uncle died and Andrew inherited $30,000. What is the amount of Andrew's gross income for the current year?

$7,200

Select all that apply Mary has received the following income and fringe benefits during the current year: a $73,000 salary; $600 premiums paid by the employer in employer-provided disability insurance; $5,000 in workers' compensation; $1,200 in corporate bond interest; a $23,000 car won on a game show; and a $1,200 health insurance reimbursement for medical expenses paid during the year. Which of these amounts should Mary include in her gross income? (Check all that apply.)

$73,000 salary $1,200 corporate bond interest

The term used when one former spouse is required to provide financial support to the other spouse pursuant to a legal separation or divorce is (1).

1. alimony

Janice started receiving an annuity payment of $1,500 per month when she turned 68 years old. She purchased the annuity for $225,000 and will continue to draw the monthly payment for the remainder of her life. What is the amount of the annuity that represents a return of capital each year and is, therefore, nontaxable? (Round your calculation of the return of capital percentage to the nearest whole number.)

71% or $12,780 per year

Which of the following types of imputed income is NOT included in the gross income and is not taxable to the person receiving the benefit?

A bargain purchase between a father and his son

Select all that apply Which of the following represents economic benefits to a taxpayer? (Check all that apply.)

A computer received in exchange for services rendered Cash received for completing a job Interest income on investments

Select all that apply Which of the following cash receipts are taxable to the recipient? (Check all that apply.)

Awards Prizes Gambling winnings

Which of the following represent "earned income"?

Bill received $800 over the summer doing lawn care services for his neighbors.

Select all that apply Certain types of investment earnings are nontaxable if the proceeds are used to pay for qualifying educational expenditures including ______. (Check all that apply.)

Coverdell savings accounts U.S. Series EE bonds Section 529 plans

Action Sport is an S corporation owned equally by three shareholders. During the current year, Action Sport generated taxable income of $60,000. What is the tax treatment, if any, of the $60,000 income?

Each shareholder will report $20,000 in taxable income.

Select all that apply Which of the following types of income are generated from property ownership? (Check all that apply.)

Gain from the sale of a building Rental income from lessees Dividends received on corporate stock Interest earned on U.S. Treasury bonds

Abby sold a parcel of land for $18,000. She paid a real estate agent a commission of $1,200 for assisting with the sale. Abby had purchased the land several years earlier for $14,500. What is the gain on the sale of the land?

Gain of $2,300

Bart sold a parcel of land for $21,000. He paid a real estate agent a commission of $1,500 for assisting with the sale. Bart had purchased the land several years earlier for $20,000. What is the gain or loss on the sale of the land?

Loss of $500

Which of the following statements is INCORRECT regarding gambling winnings and losses for recreational gamblers?

The excess of gambling winnings over gambling losses are included in gross income.

Andrews, Badin, and Carr formed a partnership, ABC. During Year 2, the partnership sold some land that was held for investment and generated a long-term capital gain. How will this income be reported on the partners' individual tax returns?

The income will retain its character and be reported as a long-term capital gain.