Gross Income Item Questions (Chapter 4) Income Taxes

You must include in income, at the time received, the fair market value of property or services you receive in bartering. A. True. B. False.

A. Bartering involves the sale or exchange of property or services (but not for cash). Regulation 1.61-2(d)(1) provides that, if services are paid for with property, the fair market value of the property must be included in income as compensation. If services are paid for by exchanging other services, the fair market value of such other services must be included in income as compensation. If property or services are received in exchange for other property, the taxpayer must compute gain or loss as if the property had been sold.

Medical expenses recovered after being claimed as a deduction in the previous year must be included in your income in the year of recovery to the extent that the deductions decreased the federal income taxes paid in the year they were deducted. A. True. B. False.

A. If a taxpayer obtains a deduction for an item in one year that reduces taxes and later recovers all or a portion of the prior deduction, the recovery is included in gross income in the year it is received [Sec. 111 and Reg. 1.213-1(g)]. Note that to the extent the expense did not reduce federal income taxes in the earlier year, the recovery is excluded from income.

Trish Durwood works for a small retail clothing store. She earned $26,000 during the year. Because of a cash flow problem in April, Trish did not receive her $500 weekly check but instead was given a credit of $500 on the purchased clothing for her family. How much income should be shown on her Form W-2 and reported on her Form 1040? A. $26,000 B. $25,500 C. $26,500 D. $25,000

A. Section 61(a)(1) specifically provides that compensation for services is to be included in gross income. Due to the relationship between an employee and an employer, almost everything received by the employee from the employer is included in gross income as compensation.

Clark filed Form 1040EZ for the previous tax year. In the current year, Clark received a state income tax refund of $900, plus interest of $10, for overpayment of the previous year's state income taxes. In addition, Clark received a $1,000 income tax refund from the IRS. How much income must Clark include in his current-year federal tax return as a result of these refunds? A. $10 B. $900 C. $910 D. $1,910

A. $10 Under Sec. 111, recovery of previously deducted taxes is excluded from gross income only if the prior deduction did not reduce the taxpayer's federal income tax. Since federal income taxes are not deductible, the refund of them is not included in income. Because the state taxes did not reduce federal income taxes (since Clark cannot itemize when he uses Form 1040EZ to report his previous-year income), their refund is not included in income. The interest earned on the state tax refund is, however, included in gross income under Sec. 61.

A scholarship received by a student that represents compensation for his or her past, present, or future services is includible in gross income. A. True. B. False.

A. True Although Sec. 117 excludes from gross income amounts received as qualified scholarships to be used for tuition and related expenses, this exclusion does not apply to any amount received that represents compensation for past, present, or future services [Sec. 117(c)].

Which of the following should not be included in Mr. W's gross income for the current year? A. $200 in dental work Mr. W received in exchange for repairs made by Mr. W to his dentist's residence. B. $5,000 in executor fees received from the estate of Mr. W's brother. C. Life insurance proceeds of $10,000 received as a beneficiary as a result of the death of Mr. W's brother who owned the policy. D. A new car worth $7,000 given to Mr. W by his employer for his valuable services.

Although life insurance proceeds would fall within the broad definition of gross income, Sec. 101(a) specifically excludes from gross income amounts received under a life insurance contract if such amounts are paid by reason of death of the insured.

Dr. Y, a cash-basis taxpayer, received a check for $250 after banking hours on December 31 of the current year from a patient. Since Dr. Y could not deposit the check in his business checking account until January 3 of the next year, the fee of $250 is not included in his current- year income. A. True. B. False.

B. A check is the equivalent of cash; therefore, a cash-basis taxpayer must report income received in the form of a check in the year in which the check is received. The ability to cash or deposit the check is not relevant unless the check is known to be worthless.

Compensation for personal injury or illness is taxable. A. True. B. False.

B. Compensation for personal injury or illness is paid to replace the personal capital destroyed. Section 104(a)(2) specifically excludes such compensation from income. However, the exclusion does not apply to any punitive damages.

Roger Burrow, age 19, is a full-time student at Marshall College and a candidate for a bachelor's degree. His tuition and fees are $4,000 per year. During the current year, he received the following payments: State scholarship for 10 months $3,600 Loan from college financial aid office $1,500 Cash support from parents $3,000 Cash dividends on investments $700 Cash prize awarded in newspaper contest $500 What is Burrow's gross income for the current year? A. $1,100 B. $1,200 C. $4,800 D. $9,300

B. Gross income includes all income from whatever source derived unless specifically excluded. Section 117 excludes, to the extent of actual tuition and fees, amounts received as a scholarship from a government or other qualified organization. Therefore, the $3,600 state scholarship is excluded from gross income. The $1,500 loan is not considered income as long as there is a bona fide obligation to repay it. The cash support from the parents of $3,000 is a gift that is excluded from gross income under Sec. 102(a). The $700 of dividends should be included in gross income in full. The cash prize of $500 is specifically included by Sec. 74. The taxpayer's total gross income is $1,200 ($700 dividends + $500 prize).

Optimistic borrowed $20,000 to buy a machine for his printing business. Shortly thereafter, the economy went into a deep recession, and Optimistic was not able to repay the debt, although he was not insolvent. In the current year, the creditor reduced the debt by $10,000 so Optimistic could afford to pay it. The creditor was not the seller of the machine. As a result of this reduction of debt, A. The purchase price of the machine is adjusted to reduce Optimistic's basis in the machine. B. Optimistic has $10,000 of income. C. The debt is a qualified business indebtedness and the basis of the machine must be reduced. D. Any tax effect from the reduction of the debt is deferred until final payment by Optimistic.

B. The cancelation of indebtedness is included in gross income under Sec. 61(a)(12). Under Sec. 108, the discharge of indebtedness is excluded from gross income if the debtor is insolvent, in bankruptcy reorganizations, a farmer, or a taxpayer other than a C corporation that has invested in real property. The canceled debt can also be excluded if it relates to a purchase- money debt reduction. Since none of these apply, the $10,000 reduction of debt is included in Optimistic's income.

Which of the following is not subject to federal income tax? A. Interest on U.S. Treasury bills, notes, and bonds issued by an agency of the United States. B. Interest on federal income tax refund. C. Interest on New York State bonds. D. Discount income in installment payments received on notes bought at a discount.

C. Gross income is defined under Sec. 61 as all income from whatever source derived which is not specifically excluded. Section 103 specifically excludes from gross income interest on most obligations of a state or any political subdivision thereof.

Colin Rosson is a freelance writer who reports income on the cash basis. Some of his current-year transactions follow: Cash fees received for articles, etc. TV won in resort promotion: 55,000 (had to attend promotion to win) 300 Loss on sale of business furniture (100) Appreciation on investment property 1,000 What is Colin's gross income? A. $55,000 B. $55,900 C. $55,300 D. $55,200

C. $55,300 Under Sec. 61, gross income includes income from whatever source derived. The cash fees are compensation for services. The TV won in the promotion is a prize included in gross income under Sec. 74. These two items total $55,300. Appreciation on property is not included in gross income until there is a sale or exchange or some other event causing the taxpayer to realize or receive the economic benefit. Losses (if deductible) are deducted from gross income; i.e., they do not affect the computation of gross income.

During the previous year, Carrie paid $500 of estimated state income tax payments, which she also deducted for federal income tax purposes. Early in the current year, Carrie received a refund of $300 of these state tax payments. Carrie immediately placed an illegal bet at 5-to-1 odds and won an additional $1,500. Later in the year, Carrie was short of money and robbed a tavern of $4,000. How much should Carrie include in her income for the current year? A. $0 B. $1,500 C. $1,800 D. $5,800

D. All of the amounts received, which total $5,800, must be included in gross income. The state tax refund is included in income since it was previously deducted when paid. Under Sec. 111 (known as the "tax benefit rule"), recovery of previously paid taxes is excluded from gross income only if the prior deduction did not reduce the taxpayer's federal income tax. Income from betting, whether legal or illegal, must be included in gross income. Likewise, the $4,000 of proceeds from the robbery must also be included in gross income. Carrie took the money with an expectation of an unrestricted right to it ("claim of right" doctrine).

Generally, which of the following should be included in gross income? A. Life insurance proceeds. B. Child support payments. C. Cash rebate from a dealer when a car is purchased. D. Reimbursements from your employer of a moving expense you properly deducted on last year's tax return.

D. Section 82 specifically provides that, except as provided in Sec. 132(a)(6), gross income includes amounts received as reimbursement of moving expenses that are attributable to employment. Under Sec. 132(a)(6), the reimbursement is excluded if the expense would be deductible under Sec. 217 if paid by the employee. It may not be excluded, however, if the expense was actually deducted on the individual's return for any prior tax year.