Chapter 03: Gross Income: Inclusions and Exclusions

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

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.

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?

$528

T/ F Gross income only includes income received in cash because cash is a measurable change in wealth.

False

T/F Under the cash method, taxpayers recognize income in the period they earn it, rather than when they actually receive it.

False

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

False

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?

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

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.

Which of the following statements is incorrect regarding municipal bonds? Multiple choice question.

They do NOT pay periodic interest payments, but interest accumulates over the term of the bond.

Debt instruments issued by state and local governments are not taxable for federal income tax purposes.

True

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

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

chronically; terminally

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

educational

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

include excluded

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

nontaxable

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

physical

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

recognized

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

social security

Interest on bonds is excluded from federal income taxation.

state

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.

Which of the following represents economic benefits to a taxpayer? Multiple select questions.

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

Bruce is single and had itemized deductions of $20,000 on his 2021 tax return. He included $2,000 of state taxes in his itemized deductions. In 2022, he received a $200 refund of state taxes paid in 2021. How much of the refund (if any) should Bruce include in his taxable income for the current year (2022)?

$200

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

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?

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

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?

$900

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

1. fringe 2. benefits

Arnie is single and receives Social Security benefits. His AGI is $27,000 (includes half of the social security) and his Social Security benefits are $7,200 per year. $ of his Social Security benefits are taxable.

1000

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

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.

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

8160

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

85

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.

Which of the following statements is correct concerning an inheritance?

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

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? Multiple choice question.

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

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

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. Amber received a year-end bonus check dated December 28, but she did not cash the check until Jan. 3.

Match the type of dividend with relevant tax rates. Qualified Dividends

Capital Gain rates (0%, 15%, 20%)

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 Punitive damages awarded after an accident at work where the taxpayer sustained a non-physical injury Emotional distress damages awarded due to slander of the taxpayer's reputation

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 2021 tax return when the standard deduction was $12,550. He included $1,000 of state taxes in his itemized deductions. In 2022, he received a $200 refund of state taxes paid in 2021. How much of the refund (if any) should Bruce include in his taxable income for the current year (2022)?

None

Match the type of dividend with relevant tax rates. Non-Qualified Dividends

Ordinary Income rates

Which of the following cash receipts are taxable to the recipient?

Prizes Awards Gambling winnings

Which one of the following choices does not represent an economic benefit to the taxpayer? Multiple choice question.

Proceeds from a loan

Which of the following fringe benefits are excluded from taxation?

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

U.S. do not pay out periodic interest payments, but the interest over the term of the bond

Savings bond accrues

Which of the following statements is incorrect regarding interest earned on U.S. savings bonds? Multiple choice question.

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

Which of the following choices describes the marginal tax treatment for qualified dividends? Multiple select question.

The income may be taxed at a rate as high as 20%, depending on the taxpayer's marginal rate. The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate.

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

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

Gross income means all income from _______ _________ __________

whatever source derived