Tax Exam 1

All of the following items are included in gross income except: a) Income from discharge of indebtedness. b) rent income c) interest earned on a bank account d) child support payments received

d)

Elise, age 20, is a full-time college student in 2019 with earned income from wages of $4,400 and interest income of $500. Elise's parents provide more than 1/2 of her support and claim her as a dependent. When filing her tax return, Elise's taxable income is:

$150 ***AGI = $4,400 earned income + $500 unearned income = $4,900. $4,900 - standard deduction ($4,400 + 350) = taxable income of $150. See example 2-34 and 2-35.

Carla redeemed EE bonds which potentially qualify for the educational exclusion. The redemption consists of $14,000 principal and $6,000 interest. The net qualifying educational expenses are $11,000. Her AGI is below the threshold for phase-out of the exclusion. The taxable interest amount is:

$2,700 ***$6000 x [$11,000 / ($14,000 + $6,000)] = $3,300 exclusion. Taxable amount = $6,000 - $3,300 = $2,700. See pg 3-14

Paul, a cash basis taxpayer, owns an apartment building. The following information was available for the current year: 1. An analysis of the bank deposit slips showed recurring monthly rents received totaled $50,000 for the current year. 2. On December 31, the tenant in Apartment 2B paid Paul a $2,000 fee to cancel the lease on December 31 (the lease expired in June of next year). 3. The lease of the tenant in Apartment 3A expired on December 31 of the current year and the tenant left improvements valued at $1,000. The improvements were not made by the tenant in lieu of any required rent. In computing rental income for the year, Paul should report gross rents of

$52,000

FOR THIS QUESTION, PLEASE TURN TO PAGE 3-22 OF YOUR TEXTBOOK, AND USE THE TABLE IN THE TEXT TO REFERENCE THE CORRECT NUMBER OF ANTICIPATED PAYMENTS. Mr. Kitten, age 72, will be receiving an annuity (from a qualified retirement plan) through his employer. His contribution to the annuity is $80,000. He is to receive $1,500 per month starting April 1 of the current year, and continuing for life. Mr. Kitten's reportable annuity income to be included on his current year tax return is:

$9,000

Squeak Corporation, a calendar year cash basis taxpayer, sells packages of foreign language lessons to individuals planning to work overseas. In December 2019, it sold and received payment of $600,000 for 24-month lesson packages to be provided evenly through 2020 and 2021. Squeak Corporation will recognize the $600,000 of income: a) all in 2019. b) half in 2020 and half in 2021. c) all in 2020. d) all in 2021.

a) ***See pages 3-8 and 3-9. Remember, this is a cash-basis taxpayer, not an accrual-basis taxpayer as per the discussion on pages 3-11 through 3-12!

Michael is an employee of StayHere Hotels, Inc. in Washington, DC. On his vacation, Michael travels to San Francisco and stays at a StayHere Hotel for six nights free of charge. The regular rate for a hotel room at StayHere in San Francisco is $300 a night. His ability to stay in the hotel without charge is based on the availability of empty rooms. How much income must Michael report due to the use of the San Francisco hotel room? a) $0 b) $300 c) $360 d) $1,800

a) $0 ***The hotel rooms are considered a no-additional cost benefit. Pages 4-13 through 4-14; and Topic Review I:4-2.

Mr. T has been a night watchman at Y Company for 10 years. During the current year, he received the following benefits from Y Company: 1. Salary = $15,000 2. Hospitalization insurance premiums paid for by the company = $3,600 3. Required lodging on Y's premises for Y's convenience as a condition to Mr. T's employment = $2,400 4. Reward for preventing a break-in = $1,000 5. Christmas ham = $15 What amount is includable in Mr. T's gross income in the current year? a) $16,000 b) $17,400 c) $16,015 d) $15,000

a) $16,000

Rebecca is the beneficiary of a $500,000 insurance policy on her husband's life. She elects to receive $52,000 per year for 10 years rather than receive the entire amount in a lump sum. Of the amount received each year: a) $2,000 is taxable income. b) $50,000 is taxable income. c) $52,000 is taxable income. d) $5,000 per year is tax free as a death benefit

a) $2,000 is taxable income. ***Each year, $50,000 of the payments are tax-free as return of capital (insurance proceeds). $500,000/10 = $50,000; thus, $52,000 - $50,000 = $2,000 is taxable. See pages 4-5 through 4-6 including example I:4-6.

Annisa, who is 28 and single, has adjusted gross income of $55,000 and itemized deductions of $5,000. Annisa will have taxable income in 2019 of: a) $42,800 b) $55,000 c) $38,800 d) $50,000

a) $42,800 ***$55,000 - $12,200 (standard deduction) = $42,800

Emil won $5,000 in a state lottery, and spent $400 for the purchase of lottery tickets. Emil elected the standard deduction on his income tax return. The amount of lottery winnings that should be included in Emil's current-year adjusted gross income is: a) $5,000 b) $0 c) $700 d) $4,600

a) $5,000

Marcy, age 12, earned $300 from babysitting during the current year (2019). Her parents claim her as a dependent. She also had interest and dividends of $2,700 during the year. She did not itemize deductions. What is her net unearned income for the current year (assume Marcy has no itemized deductions connected with the production of her unearned income)? a) $500 b) $1,600 c) $2,700 d) $3,000

a) $500 *updated for 2019 tax law; 1,100 statutory deduction and 1,100 standard deduction

Judith spend several years studying the human body. Finally, her research provided a new method for making surgical incisions that left no scars. Much to Judith's amazement, she was awarded a Nobel Prize that year. Judith was awarded $50,000 outright (which was paid directly to a recognized charity designated by Judith) and another $75,000 on the condition that she continue her research. How much must Judith include in her gross income for the year? a) $75,000 b) $0 c) $50,000 d) $125,000

a) $75,000

Ruby Diaz is a commission salesperson. She is a cash-method taxpayer. At the end of the year, her earnings for the year were $75,000. During the year, she also received $10,000 in advances on future commissions and repaid $8,000 of those advances during the year. How much should Ruby report for the year? a) $77,000 b) $75,000 c) $87,000 d) $85,000

a) $77,000

In 2019, if a single individual with taxable income of $37,200 has a long-term capital gain, it is taxed at: a) 0%. b) 20%. c) 10%. d) 15%

a) 0%

Mr. and Mrs. P are filing a joint return for the current year (2019). They have two children. Marie, who is 18, lived with them and earned $4,200 from a part-time job. James is 24, lives with them all year, and attends college as a full-time student. He earned $4,000 during the summer. Mr. and Mrs. P provide over 1/2 of their children's support. Mrs. P's mother also lives with them, but is self supporting. How many persons can Mr. and Mrs. P claim as dependents? a) 2 b) 3 c) 4 d) 5

a) 2

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

a) Life insurance proceeds of $10,000 received as a beneficiary as a result of the death of Mr. W's brother

All of the following income items are included in an employees gross income except: a) Medical insurance premiums paid by an employer for the employee and spouse b) Severance pay for cancellation of employment c) Vacation allowance d) Payment from an employer while sick or injured

a) Medical insurance premiums paid by an employer for the employee and spouse

Which of the following is NOT excluded from gross income of the recipient taxpayer? a) Payments in lieu of wages (while not able to work due to an injury) from an insurance policy paid for by the taxpayer's employer b) Worker's compensation benefits c) Payments in lieu of wages (while not able to work due to an injury) from an insurance policy paid for by the taxpayer d) Lump-sum payment from an insurance policy for loss of a hand in an automobile accident

a) Payments in lieu of wages (while not able to work due to an injury) from an insurance policy paid for by the taxpayer's employer

For 2019, the general rule is that taxpayers must file a tax return only if their gross income equals or exceeds a) their standard deduction b) their adjusted gross income c) their personal exemption d) tax returns are not required to be filed for 2018!

a) their standard deduction

Over the years Rianna paid $65,000 in premiums on a life insurance policy with a face value of $100,000. Upon reaching 65, while still in good health, Rianna surrendered the policy and collected $95,000. In the year of collection, Rianna will report a) no income. b) $30,000 of taxable income. c) $5,000 of tax loss. d) $95,000 of taxable income.

b) $30,000 of taxable income. ***$95,000 - $65,000 = $30,000. The basis is recovered tax free. See text pages 4-5 through 4-6.

Which of the following statements regarding qualified tuition plans (QTP) is incorrect? a) Distributions can be made tax-free to pay for room and board at college. b) Distributions made from the QTP for college tuition will be tax-free in addition to qualifying for the American Opportunity Tax Credit or Lifetime Learning Credit. c) Katie's parents had established a QTP for Katie, but she has received a "full-ride" scholarship. Katie's parents can name her sister as a replacement beneficiary of the QTP. d) Distributions of income not used for qualified higher education expenses are taxable and subject to a 10% penalty.

b) Distributions made from the QTP for college tuition will be tax-free in addition to qualifying for the American Opportunity Tax Credit or Lifetime Learning Credit. ***The amount of any QTP exclusion is reduced by any American Opportunity Tax Credits and Lifetime Learning Credits used by the beneficiary (page 4-8).

Elisa sued her former employer for discrimination. She was awarded $200,000 for lost wages, $30,000 for medical expenses related to emotional distress resulting from the discrimination, and $300,000 in punitive damages. The amount taxable is a) $0. b) $200,000. c) $500,000. d) $530,000.

c) $500,000. ***$200,000 + $300,000 = $500,000. The medical expenses are not taxable. See pages 4-8 through 4-9 including example 1:4-13.

Anna is supported entirely by her three sons John, James, and Joseph who provide for her support in the following percentages: John = 10% James = 40% Joseph = 50% Assuming a multiple support declaration exists, which of the brothers may claim his mother as a dependent? a) any of the sons b) James or Joseph c) Joseph only d) none of them

b) James or Joseph ***No one person provides more than 50% of the support, but those that provide over 10% up to and including 50% are qualifying individuals, and can claim a dependency exemption if a multiple support agreement is executed.

Which one of the following items is not considered gross income for tax purposes? a) gambling winnings b) illegal income c) face amount of life insurance received due to the death of the insured d) cash dividends

c) ***Page 3-22. The face amount of life insurance received because of the death of the insured is not taxable.

Deborah, who is single, is claimed as a dependent by her parents. She had a part-time job during the current year (2019) and earned $850 during the year, in addition to $500 of interest income. What is her standard deduction? a) $850 b) $1,050 c) $1,200 d) $6,300

c) $1,200 ***Standard deduction = the greater of (i) $1,100, or (2) earned income + $350 (up to the maximum standard deduction of $12,200). $850 + $350 = $1,200.

Which of the following item(s) must be included in the income of the respective employees? a) ABC Hospital Corporation provides free meals in the hospital cafeteria to employees while on duty in order that they be available for emergency calls. b) The state of California highway patrol organization provides its officers with a daily meal allowance to compensate them for meals eaten at any location while they are on duty. c) IBX Corporation requires its employees to work overtime three evenings each year when the company takes inventory. The corporation pays for take-out dinners on its premises on these evenings. d) More than one, but not all, of the amounts must be included in income.

c) IBX Corporation requires its employees to work overtime three evenings each year when the company takes inventory. The corporation pays for take-out dinners on its premises on these evenings.

Which of the following distributions is nontaxable? a) Mutual fund distribution from its net realized long-term capital gains in the amount of $1,000. You have adjusted basis of $10,000 in the mutual fund. b) Return of capital distribution from a utility company in the amount of $2,000. You have a zero basis in this stock. c) Your $25,000 share of ordinary income earned in the current year by an S corporation. d) Dividend on an insurance policy in the amount of $1,000. As of the date of this dividend, your net premiums exceed the total dividends by $3,500.

d) Dividend on an insurance policy in the amount of $1,000. As of the date of this dividend, your net premiums exceed the total dividends by $3,500.

Child support is: a) deductible by both the payer and the payee. b) deductible by the payer and included in income by the payee. c) included in income by the payer and deducted by the payee. d) an item which does not affect the payer's or the payee's tax reporting (i.e. not deductible or included in income).

d) an item which does not affect the payer's or the payee's tax reporting (i.e. not deductible or included in income). ***The code specifically excluded child support from taxable income, and does not allow a deduction for child support payments. Page 3-18.

Mrs. Doe, by herself, maintains her home in which she and her unmarried daughter resided for the entire year. Her daughter does not qualify as her dependent. Mrs. Doe's husband died last year. What is Mrs. Doe's filing status for the current year? a) surviving spouse b) married filing joint c) head of household d) single

d) single