ACC 3343 CH 3 LEARNSMART

Dean is single and has AGI of $50,000. He redeems $5,000 (principal of $3,500 and interest of $1,500) of Series I savings bonds to pay qualified higher education expenses of $2,000. How much taxable income (if any) must Dean report?

$1,500 x ($2,000/$5,000) = $600 excluded. $1,500 - $600 = $900.

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

Which of the following statements is incorrect regarding the receipt of Social Security benefits?

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

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?

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

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

False

True or false: Scholarships received by college students are nontaxable regardless of what the money is used for because the scholarship proceeds are considered to be a gift.

False

Which of the following instruments do not pay periodic interest payments, but rather accumulate interest over the life of the instrument?

U.S. savings bonds

Earnings on investments in plans such as Section 529 plans are excluded from taxation if the proceeds are used for qualifying __________ expenses

educational

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

false

Taxpayers receiving indirect economic benefits, such as bargain purchases or below-market loans, are said to have ________ income which may be taxable.

imputed/interest

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

include; exempt

Debt instruments issued by state and local governments are referred to as ________ _________. The interest on these bonds is __________ for federal income tax purposes.

municipal bonds; nontaxable

Interest on __________ bonds is excluded from federal income taxation

municipal, local, city, or state

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

nontaxable

In personal injusry cases, any damages awarded due to ____________ injury are exempt from taxation

physical

Regarding portfolio investments, _____________ dividends generally are taxed at capital gains rates and _____________ dividends are taxed at ordinary rates.

qualified; nonqualified

Under the cash method, taxpayers recognize income in the period they ___________ it, rather than when they actually _____________ it.

receives; earns

When a taxpayer includes an economic benefit in gross income, he is said to have ___________ the income

recognized

When a taxpayer includes an economic benefit in gross income, he is said to have ____________ the income

recognized

US _________ _________ do not pay out periodic interest payments, but the interest ___________ over the term of the bond

saving bonds; accrues

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

social security

Which of the following types of cash receipts is not taxable to the recipient?

Gift from a friend

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.

Bruce is single and had itemized deductions of $20,000 on his 2018 tax return. He included $2,000 of state taxes in his itemized deductions. In 2019, he received a $200 refund of state taxes paid in 2018. How much of the refund (if any) should Bruce include in his taxable income for the current year (2019)?

$200

Sandy earned a salary of $50,000 last year. Her parents gave her a car valued at $23,000 for her birthday. In addition, she earned $1,200 in interest income on a savings account and inherited $75,000 from her grandmother's estate. What is the amount of Sandy's gross income?

$51,200

In which of the following situations has constructive receipt occurred in the earlier year?

-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. -Alex was out of town on December 31 and, therefore, unable to pick up his final paycheck. He picked it up on January 2.

Which of the following represents economic benefits to a taxpayer?

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

Which of the following payments to a taxpayer should be included in gross income?

-Compensatory damages for lost wages awarded in a sex discrimination lawsuit -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

Which of the following fringe benefits are excluded from taxation?

-Medical insurance -Dependent care benefits -Life insurance under $50,000 -Qualified educational assistance

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?

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

Holly is entitled to receive $1,000,000 upon John's death, but rather than take a lump sum payment, she agreed to take $10,000 a month for 10 years. Holly will report $ __________ of interest income per year.

20000

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, and $100 from U.S. Treasury bonds. How much of the interest received will be included in gross income?

300

Arnie is single and receives Social Security benefits. His AGI is $27,000 and his Social Security benefits are $7,200 per year. $___________ of his Social Security benefits are taxable.

3600

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

Mitchell and Midge are married and file a joint return. Mitchell receives $9,600 in Social Security each year. Their AGI is $48,000. $______ of the social security benefits is subject to taxation

8160

Mitchell and Midge are married and file a joint return. Mitchell receives $9,600 in Social Security each year. Their AGI is $48,000. $ __________ of the Social Security benefits is subject to taxation.

9600x85%= 8160

Which of the following types of imputed income are not included in gross income (i.e. are not taxable)?

A bargain purchase between a father and his son

Which of the following statements is correct concerning a gift?

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

Andrew invested in a U.S. Treasury bond. He paid $500 for the initial investment one year ago. The redemption value of the bond increased by $25 in the current year. Which of the following options is not acceptable for reporting the income?

Andrew may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax.

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

Income is realized when a taxpayer sells an asset for $50 that she had purchased earlier for $50.

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

Life insurance coverage in excess of $50,000

Which of the following debt instruments is used to build roads, schools, and other government needs and generates interest to the bondholders that is exempt from federal taxation?

Municipal bonds

Which of the following types of interest income is excluded from federal taxation?

Municipal bonds

Bruce is single and had itemized deductions of $11,800 on his 2018 tax return when the standard deduction was $12,000. He included $1,000 of state taxes in his itemized deductions. In 2019, he received a $200 refund of state taxes paid in 2018. How much of the refund (if any) should Bruce include in his taxable income for the current year (2019)?

None

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

Proceeds from a loan

Regarding portfolio investments, which types of income are taxed at a rate lower than the taxpayer's marginal tax rate?

Qualified dividends

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 interest earned on U.S. savings bonds?

Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received.

Dean is single and has AGI of $85,000. He redeems $5,000 (principal of $3,500 and interest of $1,500) of Series I savings bonds to pay qualified higher education expenses of $2,000. How much interest (if any) can Dean exclude from income?

[1,500 x (2,000/5,000)] = 600 Then Dean is further limited by AGI: $600 x [($85,000 - $81,100)/$15,000] = 156

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

_______ _________is deemed to occur when the 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.

constructive; receipt

In addition to receiving a salary from a company, many employers provide _________ ____________ that are excluded from gross income

fringe benefits

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

Taxpayers receive __________ __________ when they are unable to work due to work-related injuries. These benefits are ___________ because they are due to a physical injury.

workers compensation; nontaxable