Tax Chapter 5
The terms used when one former spouse is required to provide financial support to the other spouse pursuant to a legal separation or divorce is [].
alimony
For all divorce agreements executed after December 31, 2018, [] payments are excluded from gross income of the recipient and [] for the spouse making the payment.
alimony; nondeductible
An investment that pays a stream of equal payments over time is an [].
annuity
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 under the [][][] doctrine.
assignment of income
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 proceeds used for long-term care is excluded from gross income. If the taxpayer is [] ill, the proceeds are not taxable.
chronically; terminally
Which of the following types of taxable income ins NOT considered to be service income: salary income unemployment compensation business income dividend income
dividend income (unemployment income is a substitute for wages/salary, so it is considered service income)
Action Sport is an S corporation owned equally by three shareholders. During the year, Action Sport generated income of $60,000. What is the tax treatment, if any, of the $60,000 income?
each shareholder will report $20,000 in taxable income
Income received as a result of services provided by the taxpayer, including business income, is referred to as [earned/unearned] income.
earned
Earnings on investments in plans such as 529 plans, Coverdell savings accounts, and U.S. Series EE bonds are excluded from taxation if the proceeds are used for qualifying [] expenses.
education
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
True or false: Gross income only includes income received in cash because cash is a measurable change in wealth.
false; gross income includes income realized in any form - money, property, or services
True or false: In general, prizes awarded to taxpayers are excluded from gross income.
false; prizes and awards are taxable unless they meet very specific exceptions
Taxpayers receiving indirect economic benefits, such as bargain purchases or below-market loans, are said to have [] income which may be taxable.
imputed
In general, when a taxpayer's debt is discharged by a lender, the taxpayer's gross income with [] the amount forgiven.
include
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 year earlier for $20,000. What is the gain or loss on the sale of the land?
loss of $500 (21000-1500-20000)
Interest income on [] bonds is excluded from federal taxation.
municipal
What are the common income exclusion provisions?
municipal bond interest, fringe benefits, and the gain on the sale of a personal residence
In general, life insurance proceeds are [] to the beneficiary of the policy.
nontaxable
Income from [] takes different forms, such as dividends, interest, rents, royalties, and annuities.
property
What are the advantages of the realization principle for defining gross income?
provides the taxpayer with the wherewithal to pay when cash in received in the transaction; provides and objective measure of the value of the transaction
Under the cash method, taxpayers recognize income in the period they [] it, rather than when they actually [] it.
receive; earned
Taxpayers who realize an economic benefit must [] the benefit in gross income unless it is specifically [] by the tax code.
recognize; excluded
When a taxpayer includes and 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
Which of the following options is not available to taxpayers who have worked outside the US and meet the requirements necessary to receive tax relief on their foreign earnings: tax deduction for foreign taxes paid tax credit for foreign taxes paid income exclusion for foreign-earned income tax deduction for foreign-earned income
tax deduction for foreign-earned income
What is the typical tax treatment for income from labor, such as salaries, wages, and fees?
taxable
Under the realization principle, what must occur for income to be realized?
taxpayer must engage in a transaction with another party; transaction must result in a measurable change in property rights
What are characteristics of qualified tuition programs, also known as 529 plans?
the distributions can be made for tuition expenses for kindergarten through 12th grade; distributions made to the beneficiary for purposes other than education are taxable and incur a penalty on the plan earnings; earnings on the account are not taxable if used for qualified education expenses
Which of the following statements is incorrect regarding gambling winnings and losses for recreation gamblers: gambling winnings are included in gross income the excess of gambling winnings over gambling losses are included in gross income gambling losses in excess of gambling winnings are not deductible gambling losses must be deducted as an itemized deduction
the excess of gambling winnings over gambling losses are included in gross income
In order to exclude the maximum amount of foreign-earned income from US taxation, what conditions must be met?
the taxpayer must be considered a resident of or have resided in the foreign country for 330 days in a consecutive 12-month period; the taxpayer must have his ot her tax home in a foreign country
What is the tax treatment for a taxpayer receiving a gold watch valued at #350 in recognition of his 25th year of working for the same company?
the value of the watch is excluded from gross income
Court-ordered cash payments pursuant to a divorce or legal separation which provide financial support to an ex-spouse and do not continue after the death of the ex-spouse are referred to as [].
alimony
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
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 for the year?
$51,200
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
Chester incurred $14,500 in hospital and medical bills during the year. His health insurance policy reimbursed him $11,600 toward those expenses. What amount should be included in Chester's gross income?
0
Allison won $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. Assuming Allison is not a professional gambler and does not itemize deductions, how much of the $5,000 loss will she be able to deduct?
0; since Allison does not itemize, she will not be able to deduct any of the losses
Jamarcus injured his hand playing softball which prevented him fro being able to work. 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. How much should Jamarcus include in gross income?
1300
Which of the following choices are characteristics of Coverdell Educational Savings Accounts: (1) the maximum yearly contributions to the account are limited to $2,000 per taxpayer ($4,000 for mfj) (2) earnings on the account are not taxable if used for qualified educational expenses (3) the maximum yearly contributions to the account are limited to $2,000 for each beneficiary (4) expenses for higher education, such as tuition and books, are not qualified educational expenses for this type of account (5) reasonable room and board costs are included in qualified higher education expenses (6) the distributions can be made for qualified education expenses from kindergarten through 12th grade (7) the contribution limit is available to all taxpayers and is not subject to any phase out for higher levels of AGI
2, 3, 5, 6
Janice started receiving annuity payments of $1500 per month when she turned 68 years old. She purchased the annuity for $225000 and will continue to draw monthly payments for the remainder of her life. What is the amount of the annuity that represents a return of capital each year and is, therefore, nontaxable?
225000/(17.6*1500*12)= 71% 225000/17.6=12784
Jerry receives an annuity payment of $2,500 per month. Jerry purchased the 20-year annuity for $250,000. What is the amount of the annuity that represents a return of capital and is, therefore, nontaxable?
250000/(20*2500*12) = 41.67% 250000/20 = 12500
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; State of Wyoming and City of Laramie bonds are not taxable
Andrea owed $12,000 on a medical bill to University Hospital. The hospital agreed to discharge the debt due to Andrea;s financial situation. Immediately prior to the discharge of the debt, Andrea's debts exceeded her assets by $5,000. How much of the debt forgiveness will Andrea need to include in her gross income?
7000; by forgiving 12000 in debt, Andrea will be solvent by 7000, so she should include 7000 in gross income
What is the highest percentage of Social Security benefits that my be taxed for moderate to high income taxpayers?
85%
Which of the following types of imputed income is NOT included in the gross income and is not taxable to the person receiving the benefit: and employer's $12,000 loan to an employee with no interest on the note employee discounts of 30% on services a bargain purchase between a father and his son
a bargain purchase between a father and his son; a bargain purchase between family members is generally deemed to be a gift,thus nontaxable to the recipient
When 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, [][] is deemed to have occurred.
constructive receipt
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.
deductions; credits
True or false: Scholarships received by college students qualify as gifts and are nontaxable. The actual use of the money (tuition, fees, housing, meals, and other expenses) does not affect the taxable status of the scholarship.
false; scholarships that pay for tuition, feels, books, supplies, and other equipment required by the student's courses are excluded from the gross income - housing is taxable
True or false: Darlene owns stock in several different companies/ When she received a dividend check from her Avatar stock, she endorsed the checks and deposited the money in her daughter's checking account. Consequently, her daughter will be assessed the tax on the dividends.
false; the assignment of income doctrine states that the owner of income-producing property must pay tax on the income from the property
In addition to receiving a salary from a company, many employers provide [][] that are excluded from gross income.
fringe benefits
Abby sold a parcel of land for $18,000. She paid a real estate 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 sale of the land?
gain of 2300 (18000-1200-14500)
What are advantages of using the cash method for reporting income?
generally simplifies the computation of income; taxpayers recognize income in the period they receive it, giving them the wherewithal to pay the tax; taxpayers have some control over when income is received and expenses are paid which assists in tax planning
When an individual transfers property to another taxpayer during their life, without receiving or expecting to receive value in return, the property transferred is a [] and is [] to the person receiving the property.
gift; nontaxable
Which of the following fringe benefits provided by an employer is NOT excluded from gross income: qualified transportation expenses group life insurace coverage in excess of $50,000 de minimis (small) benefits medical insurance
group life insurance coverage in excess of $50,000
What does gross income mean?
income from whatever source derived
What does the realization principle state?
income is received when a taxpayer completes a transaction with another party that results in a measurable change in the property rights of the two parties
For below-market-loans, the discounted interest rate is treated as interest [] to the lender and interest [] to the borrower.
income; expense
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
True or false: Income and deductions from a partnership or S corporation are taxed on the owners' tax returns rather than the entity tax return.
true; partnership and S corporation entities are 'flow through' entities - the income and deductions flow through to the owners
True or false: Punitive damages are generally fully taxable to the recipient.
true; their purpose is to punish the harm-doer rather than compensate the taxpayer
To satisfy the ownership test for excluding the gain on a personal residence the taxpayer must have own the residence for ______.
two or more years during the past five-year period ending on the date of sale
Is income from property considered earned or unearned income?
unearned income
When is a discharge of indebtedness NOT included in gross income?
when the taxpayer is insolvent before and after the debt forgiveness