AC 371 Chapter 5 Learnsmart

What are the advantages of the realization principle for defining gross income? a. It allows the taxpayer to exclude the transaction from gross income b. It provides the taxpayer with the opportunity to shift income to a related taxpayer who is in a lower tax bracket c. It provides the taxpayer with the wherewithal to pay when cash is received in the transaction d. It provides an objective measure of the value of the transaction

C/D

Rather than claiming the foreign-earned income exclusion, taxpayers may claim a foreign tax _______ or a foreign tax ________ for income taxes paid to other countries.

Deduction/ Credit

Income from services, including business income, is referred to as _______ income.

Earned

Taxpayers who realize an economic benefit must ______ the benefit in gross income unless it is specifically ______ by the tax code.

Include/ Excluded

For below-market-loans, the discounted interest rate is treated as interest _____ to the lender and interest _____ to the borrower.

Income/Expense

Income from property is referred to as _______ income.

Unearned

Gross income means all income from _______ _________ __________

Whatever/Source/ Derived

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? a. $4,000 b. $20,000 c. $0 d. $16,000

A

Which of the following choices does NOT describe an annuity? a. It is a lump sum payment that is usually received by the beneficiary of a life insurance policy b. It is a means of generating a fixed income stream during retirement c. It is an investment that pays a stream of equal payments over time

A

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? a. $2,900 b. $11,600 c. $0 d. $14,500

C

What are the tax consequences for a taxpayer who dies before recovering his investment in an annuity contract? a. One-half of the annuity payment is taxable on the taxpayer's final income tax return b. The entire amount of the annuity received in the year of death is nontaxable on the taxpayer's final income tax return c. The amount of the unrecovered investment is deducted on the taxpayer's final income tax return d. The entire amount of the annuity received in the year of death is taxable on the taxpayer's final income tax return

C

Which of the following statements is CORRECT regarding the recognition of income? a. Income is realized for the return of the capital received in a sales transaction b. Income is realized when a taxpayer receives a refund of an amount that was not deducted in a prior period c. Income may be in the form of cash, property, or services in a transaction

C

Which of the following statements is NOT correct regarding alimony? a. Alimony is deductible for AGI for the person paying it b. Alimony payments must be made in cash c. Alimony is another term for child support d. Alimony is included in gross income of the person receiving it

C

Which of the following types of interest income is excluded from federal taxation? a. Federal government bonds b. Corporate bonds c. Municipal bonds

C

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? a. $200 b. $700 c. $300 d. $600

C The State of Wyoming and City of Laramie bonds are not taxable.

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

Chronically/ Terminally

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? a. $3,500 b. $500 c. $3,000 d. $0

D

Janice and Jarrod are married and live in a community property state. Janice is NOT employed outside the home, and Jarrod earns a salary of $98,000. During the year, they earned $2,000 on investments that are owned jointly. The investments were made after they were married, with money earned by Jarrod. How is the gross income treated for federal income tax purposes? a. Jarrod is deemed to have earned $99,000 and Janice is deemed to have earned $1,000 b. Jarrod is deemd to have earned $98,000 and Janice is deemed to have earned $2,000 c. Jarrod is deemd to have earned $100,000 and Janice has no income d. Jarrod is deemd to have earned $50,000 and Janice is deemed to have earned $50,000

D

Which of the following statements is correct concerning a gift? a. A gift is included in the gross income of the person giving the gift b. A gift is included in the gross income of the person receiving the gift c. A gift may be subject to "gift tax" which is paid by the person receiving the gift d. A gift may be subject to "gift tax" which is paid by the person giving the gift

D

In general, when a taxpayer's debt is discharged by a lender, the taxpayer's gross income will _____ the amount forgiven.

Increase

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 ______- ________ _________.

Long/Term/Care

In general, life insurance proceeds are ________ to the beneficiary of the policy.

Nontaxable

In personal injury cases, any damages awarded due to _______ injury are exempt from taxation.

Physical

Income from ______ takes different forms, such as dividends, interest, rents, royalties, and annuities.

Property

Jamarcus injured his hand playing softball one weekend. The injury prevented him from being able to work. Luckily for Jamarcus, his employer provides disability insurance as a nontaxable fringe benefit to all employees. Jamarcus received $1,300 in disability benefits while he was away from work. Jamarcus should include $_________ in gross income.

$1,300 Since the employer paid the disability premiums, the benefits received are taxable

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 Distributions to partners are not taxable. Only the portion of the net income allocable to the partner is taxable.

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 $__________ in taxable income from the partnership.

$60,000

Jerry receives an annuity payment of $2,500 per month. Jerry purchased the 20-yer annuity for $250,000. What is the amount of the annuity that represents a return of capital and is, therefore, nontaxable? a. 41.67% or $12,500 per year b. 100% or $30,000 per year c. 10% or $3,000 per year d. 12% or $3,600 per year

A $250,000/(20x2500x12)=0.4167

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? a. $19,500 b. $21,000 c. $1,000 d. ($500)

A Amount realized= Sales proceeds - selling expenses

Which of the following types of imputed income are NOT included in gross income (i.e. are NOT taxable)? a. A bargain purchase between a father and his son b. An employer's $12,000 loan to an employee with no interest on the note c. Employee discounts of 25% on services

A A bargain purchase between family members is generally deemed to be a gift, thus nontaxable to the recipient

Which one of the following choices states that income is realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income? a. Claim of right doctrine b. Business purpose doctrine c. Income recognition doctrine d. Assignment if income doctrine

A

Which one of the following is NOT an advantage of the cash method for reporting income? a. Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them b. Taxpayers recognize income in the period they receive it, giving them the wherewithal to pay the tax c. Taxpayers have some control over when income is received and expenses are paid which assets in tax planning d. The cash method generally simplifies the computation of income

A

Certain types of investments may be tax-advantaged when used to help fund higher education. The growth in value and earnings from the investment are nontaxable if the proceeds are used to pay for qualifying educational expenditures. Which of the following types of investments qualify for this treatment? a. Section 529 plans b. U.S. Series EE bonds c. Coverdell savings account d. Municipal bonds e. Roth IRA plans

A/B/C

Which of the following choices describe exclusions and deferrals for tax purposes? a. These provisions are narrowly defined b. These provisions are the result of specific congressional action c. These provision reduce the tax liability dollar for dollar d. These provisions are often granted in order to subsidize or encourage particular behaviors e. These provisions are generally deducted from AGI and reduce taxable income

A/B/D

Which of the following represents economic benefits to a taxpayer? a. Cash received for completing a job b. Interest income on investments c. Cash received from a bank loan d. A computer received in exchange for services rendered

A/B/D

Which of the following cash receipts are taxable to the recipient? a. Gambling winnings b. Prizes c. Child support d. Loan Proceeds e. Awards

A/B/E

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 judgement for lost wages due to an age discrimination lawsuit. What amounts should Chad include in his gross income? a. $2,000 dividend income b. $500 partnership income c. $4,800 health insurance d. $1,500 municipal bond interest e. $10,000 judgement f. $65,000 salary

A/B/E/F

Choose the type of investments that generate tax-exempt income: a. Educational savings plan b. U.S. Savings Bonds c. Municipal bonds d. Certificate of Deposit e. Life insurance policy

A/C/E

In which of the following situations has constructive receipt occurred in the earlier year? a. Arnold earned interest of $300 on his savings account, but did not withdraw the funds until the following year b. Andrew worked the last two weeks of the year, but he will not be paid for those hours until Jan 4 c. Alex was out of town on Dec 31 and, therefore, unable to pick up his final paycheck. He picked it up on Jan 2 d. Ashley's last paycheck of the year was dated Dec. 30. She was unable to cash the check because the employer had insufficient funds e. Amber received a year-end bonus check dated Dec 28, but she did not cash the check until Jan. 3

A/C/E

Which of the following choices are characteristics of Coverdell Educational Savings Accounts? a. The maximum yearly contributions to the account are limited to $2,000 for each beneficiary b. The maximum yearly contributions to the account are limited to $2,000 per taxpayer ($4,000 for mfj) c. Reasonable room and board costs are included in qualified higher education expenses d. Expenses for higher education, such as tuition and books, are NOT qualified educational expenses for this type of account e. The contribution limit is available to all taxpayers and is NOT subject to any phase out for higher levels of AGI f. The distributions can be made for qualified education expenses from kindergarten through 12th grade g. Earnings on the account are NOT taxable if used for qualified educational expenses

A/C/F/G

Which of the following situations will result in an award being excluded from gross income? a. When the award is a non cash item valued at less than $400, and given for either safety or years of service by an employee b. When the award has a charitable component, such as a television giveaway, where guests are given needed items c. When the award is given during the holidays, such as a Christmas cash bonus, since the intent of the award is to be a gift d. When the award is given for scientific, literary, or charitable achievement and meets certain other requirements

A/D

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? a. $60 lab fee b. $4,000 housing c. $120 parking fees d. $1,070 meals e. $9,000 tuition f. $750 books

A/E/F

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 ________.

Alimony

In the case of a divorced couple, _____ payments are included in the gross income of the recipient and deductible _____ AGI for the payor.

Alimony/ For

Under the realization principle, what must occur for income to be realized? a. A taxpayer must receive cash to realize income b. A taxpayer must engage in a transaction with another party c. A measurable change in wealth must occur, regardless of whether a transaction takes place d. The transaction must result in a measurable change in property rights

B/D

Choose the types of investments that generate taxable income: a. Educational savings plan b. Corporate bonds c. Municipal bonds d. U.S. Savings Bonds e. Certificate of Deposits

B/D/E

Mary has received the following income and fringe benefits during the current year: a $73,000 salary; $600 in employer-provided disability premiums; $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? a. $1,200 health insurance reimbursement b. $1,200 corporate bond interest c. $5,000 workers' compensation d. $600 disability premiums e. $73,000 salary

B/E

Allison won't $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. How much of Allison's losses will she be able to deduct? a. $0- Gambling is not a business venture, so she will not deduct any of her losses b. $3,200- She can only deduct the losses to the extent of her winnings c. $5,000- She can deduct the full amount if she has documentation that verifies the losses

B

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? a. The excess of the cash surrender value over the premiums is deducted from the taxpayer's gross income b. The excess of the cash surrender value over the premiums is included from the taxpayer's gross income c. The proceeds from the policy are excluded from the taxpayer's gross income d. The proceeds from the policy are fully included in the taxpayer's gross income

B

What is the typical tax treatment for income from labor such as salaries, wages, and fees? a. It is nontaxable b. It is taxable c. It is tax-deferred d. It is tax-exempt

B

Which of the following fringe benefits provided by an employer is NOT excluded from gross income? a. Medical insurance b. Group life insurance coverage in excess of $50,000 c. Qualified transportation expenses d. De minimis (or small) benefits

B

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? a. Income exclusion for foreign-earned income b. Tax deduction for foreign-earned income c. Tax deduction for foreign taxes paid d. tax credit for foreign taxes paid

B

The _______ ____ __________ 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,

Assignment/Of/Income

Which of the following statements are CORRECT when describing "Workers' Compensation?" a. Both "worker's compensation" and "unemployment compensation" are taxable to the recipient b. Workers' compensation is another term for "unemployment compensation" c. Workers' compensation benefits are not taxable to the recipient because the payments result from a physical injury d. Workers' compensation benefits are paid to employees who have been inured in a work-related situation e. Workers' compensation benefits are taxable to the recipient because this insurance was provided tax-free by the employer

C/D

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? a. The taxpayer must NOT have used the gain exclusion provision in the five years prior to the sale b. The taxpayer may use the exclusion on a vacation home or second home if NOT used for the principal residence c. The exclusion is $500,000 for taxpayers who are married filing jointly d. The taxpayer must have owned the residence for at least two years of the five year period prior to the sale e. The taxpayer must have used the property as a personal residence for a total of two or more years during the five year period prior to the sale

C/D/E

Which of the following types of income are generated from property ownership? a. Wages earned by an electrician b. Salary earned by an accountant c. Gain from the sale of a building d. Rental income from lessees e. Dividends received on corporate stock f. Interest earned on U.S. Treasury bonds

C/D/E/F

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? a. Gain of $3,500 b. Gain of $16,800 c. Gain of $18,000 d. Gain of $2,300

D

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 he inherited $30,000. What is the amount of Andrew's gross income for the current year? a. $14,800 b. $35,000 c. $44,800 d. $7,200 e. $36,200 f. $17,000

D

Which of the following types of cash receipts is NOT taxable to the recipient? a. Lottery winnings b. Gambling winnings c. Raffle prizes d. Gift from a friend

D

In order to exclude the maximum amount of foreign-earned income form U.S. taxation, the following conditions must be met. a. The taxpayer must have lived in the country for at least 6 months in the current year b. The Taxpayer must NOT be a U.S. citizen c. The taxpayer must be an employee of the U.S. government on a temporary assignment in the foreign country d. The taxpayer must be considered a "resident" of the foreign country e. The taxpayer must have resided in the foreign country for 330 days in a consecutive 12-month period

D/E

Which of the following choices are characteristics of qualified tuition programs, also known as Section 529 plans? a. The distributions can be made for qualified education expenses from kindergarten through 12th grade b. The maximum yearly contributions to the account are limited to $2,000 for each beneficiary c. Distributions to contributors are NOT subject to income tax, but they do incur a 10% penalty d. Earnings on the account are NOT taxable if used for qualifying higher education expenses e. Distributions made to the beneficiary for purposes other than education will incur taxation and a penalty on the earnings of the plan

D/E

Up to 85% of ________ ________ benefits, in retirement, may be taxable for taxpayers with moderate to high taxable income.

Social/Security

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

Exclude/Defer

Interest on _____ bonds is excluded from federal income taxation.

Municipal