TAX CHP 5

Bart, a single taxpayer, has recently retired. This year, he received $24,000 in pension payments and $5,000 of social security payments. What amount must Bart include in his gross income for the social security payments? $4,250 $2,500 $1,500 $750 Zero

750 His modified AGI + 50% of Social Security benefits is $24,000 + $2,500 = $26,500, which is greater than $25,000 but less than or equal to $34,000. His taxable Social Security benefits are the lesser of (a) $2,500 (50% of his Social Security benefits) or (b) 50 percent of [$24,000 modified AGI + $2,500 (50% of Social Security benefits) − $25,000] = $750. Thus, his taxable Social Security benefits are $750.

For tax purposes, unearned income means income that has not yet been realized.

False

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

False

Constructive receipt represents the principle that cash basis taxpayers will be taxed on income when it is made available to them without substantial restrictions.

True

Generally, 85 percent of Social Security benefits are included in income of high income taxpayers.

True

Interest income is taxed in the year in which it is received by the taxpayer or credited to the bank account.

True

Qualified fringe benefits received by an employee can be excluded from gross income.

True

Realized income is included in gross income unless a tax provision specifies that it can be deferred or excluded.

True

The all-inclusive definition of income means that gross income is defined very broadly.

True

The receipt of prizes and awards is generally taxable

True

A below-market loan (e.g., from an employer to an employee) is a common example of a transaction that generates taxable imputed income. True

true

Jim received a $500 refund of state income taxes this year. Jim will not need to include the $500 in his gross income this year if he did not deduct state income taxes last year.

true

Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clients make their checks payable to his son, Steve. This year Steve received checks in the amount of $62,000 for Dave's plumbing services. Which of the following is a true statement? Dave is taxed on $62,000 of plumbing income this year. Steve is taxed on $62,000 of plumbing income this year. Steve is taxed on $62,000 of income from gifts received this year. Dave may deduct the $62,000 received by Steve. None of the choices are true.

Dave is taxed on $62,000 of plumbing income this year. The assignment of income is not effective for tax purposes.

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year? $200 is included because Mary itemized her deductions last year. $200 is included if itemized deductions exceeded the standard deduction by $200. $200 is included because itemized deductions exceeded the standard deduction. $200 is included even if Mary claimed the standard deduction. None of the choices are correct - refunds of state income taxes are not included in gross income.

$200 is included if itemized deductions exceeded the standard deduction by $200. Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $4,000 of deduction produced a tax benefit of $200 if itemized deductions exceeded the standard deduction by $200.

Claim of right states that income has been realized if a taxpayer receives income and there are substantial restrictions on the taxpayer's use of the income.

False

Gambling winnings are included in gross income only to the extent that the winnings exceed gambling losses incurred during the same period.

False

Loretta received $6,200 from a disability insurance policy that she purchased directly this year. Loretta must include all $6,200 in her gross income.

False

Recognized income may be in the form of cash or property received (but not services received).

False

Rental income generated by a partnership is reported by the partners as dividend income on their own individual tax returns. True

False

A taxpayer generally includes in gross income the amount of debt forgiven by a lender.

True

When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.

True

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has promised to pay Henry in installment payments over the next few years. Identify the principle that will determine when Henry should be taxed on the gain from the sale: Assignment of income. Constructive receipt. Return of capital principle. Wherewithal to pay. All of the choices are correct.

Wherewithal to pay. Wherewithal to pay dictates that gains from installment sales are generally recognized over the periods in which payments are received.

Brad was disabled for part of the year and he received $11,500 of benefits from a disability insurance policy purchased by Brad's employer. Brad must include all $11,500 of benefits in his gross income because Brad was not taxed on the disability insurance premiums paid by his employer.

true

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

true

Ben's employer offers employees the following benefits. What amount must Ben include in his gross income? Benefit Value Health insurance coverage $5,800 Group term life insurance (face $50,000) 4,270 Disability insurance coverage (considered purchased by Ben) 3,600 Whole life insurance coverage ($100,000) 7,000 $9,400 $11,070 $10,600 $7,000 Zero - none of the benefits is included in gross income.

10600 If an employer pays disability premiums, and the employee chooses the premium as taxable compensation, it is considered employee-purchased and the benefits paid (if any) are excluded from the employee's gross income. Employer-paid whole life insurance premiums are included in gross income. Only premiums on up to $50,000 of employer-paid group term insurance are excluded from gross income.

Samantha was ill for four months this year. Samantha missed work during this period, but disability insurance paid $18,000 of disability pay to replace her missed salary. Samantha shares the cost of the insurance with her employer. This year Samantha's employer paid $2,200 in disability premiums for Samantha as a nontaxable fringe benefit and Samantha paid the remaining $1,100 of premiums from her salary. What amount of the disability pay must Samantha include in her gross income (Round your answer to the nearest whole dollar)? $18,000 $12,000 $7,000 $1,100 Zero - none of the disability pay is included in gross income.

12,000 The portion of disability benefits that represents premium paid as a nontaxable fringe benefit is included in gross income. The employer paid 2/3rds of the cost and so 2/3rds of the pay is includible [$2,200/($2,200 + $1,100)] × $18,000 = $12,000. The remaining portion (1/3) of the disability benefits is excluded from gross income because the premiums were paid by the taxpayer.

Mike received the following interest payments this year. What amount must Mike include in his gross income? (for federal tax purposes) Bond Interest General Motors $1,450 City of New York 900 State of New Jersey 1,200 U.S. Treasury 850 $1,450 $2,300 $2,650 $3,550 $4,400

1450 Interest on bonds issued by state and local governments is excluded from gross income.

Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the race track, but he lost $700 on his various wagers. What amount must Rhett include in his gross income? $1,450 $1,200 $750 $250 Zero - gambling winnings are not included in gross income

1450 Taxpayers must include the gross amount of their gambling winnings for the year in gross income.

Deb has found it very difficult to repay her loans. Because of these difficulties, the bank decided to forgive one of her most recent loans, an amount of $45,000. After the loan was discharged, Deb had total assets of $232,000 and her remaining loans total $217,000. What amount must Deb include in her gross income? $15,000 $45,000 $30,000 $28,000 Zero - Deb was not solvent when the loan was discharged

15000 A discharge of indebtedness is not taxable if the taxpayer is insolvent before and after the debt forgiveness. If the discharge of indebtedness makes the taxpayer solvent, the taxpayer recognizes taxable income to the extent of his solvency.

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350? $2,050 $350 $180 $170 None of the choices are correct - refunds of state income taxes are not included in gross income.

170 Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $2,400 of deduction produced a tax benefit of $350 so the entire $170 is included in income.

This year Zach was injured in an auto accident. As a result, he received the following payments. Zach received $18,000 of disability pay. Zach has disability insurance provided by his employer as a nontaxable fringe benefit. Zach's employer paid $4,300 in disability premiums for Zach this year. Zach's hospital bills totaled $4,500 and were paid by his health insurance. Zach has health insurance provided by his employer as a nontaxable fringe benefit. Zach's employer paid $6,250 in health insurance premiums for Zach this year. What amount must Zach include in his gross income? $22,500 $18,000 $4,500 $10,550 Zero - none of the benefits are included in gross income.

18000 Any payment a taxpayer receives from a health and accident insurance policy for medical or dental expenses paid by the taxpayer is excluded from the taxpayer's income. If the employer pays the disability premiums for an employee as a nontaxable fringe benefit, the employee must include all disability benefits in gross income.

Barney and Betty got divorced this year. In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death or remarriage). What amount (if any) is included in Barney's gross income this year? $24,000 $50,000 $74,000 $170,000 None of the payments are included in gross income

24000 Alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient.

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income? $7,500 $4,500 $12,000 $32,400 None of the choices are correct.

4500 The annuity exclusion ratio is [$300,000/(4 × 10)] = $7,500 return of capital per payment. Hence, $4,500 of each $12,000 payment is included in gross income.

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income? $80 $72 $48 $32 None of the choices are correct.

48 The annuity exclusion ratio is ($3,200/100) = $32 return of capital per payment. Hence, $48 of the $80 is included in gross income.

This year, Fred and Wilma, married filing joint, sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is included in gross income? $550,000 $300,000 $250,000 $50,000 None of the choices are correct.

50000 Fred and Wilma may exclude $500,000 of their $550,000 gain ($750,000 sales price − $200,000 cost = $550,000 gain) because they meet the ownership and use tests. Thus, they only include $50,000 of the gain in their gross income.

Charles and Camilla are getting divorced. Under the terms of the decree Charles will pay Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage). In addition, Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son, Clyde, until he turns 19 years old. What amount (if any) is included in Camilla's gross income this year? $2,062,000 $12,000 $50,000 $2,050,000 None of the payments are included in gross income

50000 Property settlements and child support are not included in gross income, but alimony payments (cash) are includible.

This year, Barney and Betty sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Barney and Betty owned and lived in their home for 18 months. Assuming no unusual or hardship circumstances apply, how much of the gain is included in gross income? $550,000 $300,000 $250,000 $50,000 None of the choices are correct.

550,000 All of the gain is included in gross income because Barney and Betty do not meet the two-year ownership and use tests.

Hal Gore won a $1 million prize for special contributions to environmental research. This prize is awarded for public achievement, and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency. How much of the prize should Hal include in his gross income? $400,000 $600,000 $1,000,000 None of the choices are correct, because all prizes are excludible. None of the choices are correct, because prizes from charities are excludible.

600000 Awards for scientific or public achievement are excluded only if the payor of the award transfers the award to a governmental unit (e.g., EPA) or a public charity.

Jack and Jill are married. This year Jack earned $72,000 and Jill earned $80,000 and they received $4,000 of interest income from a joint savings account. How much gross income would Jack report if he files married-filing-separate from Jill? $72,000 if they reside in a common law state. $74,000 if they reside in a community property law state. $76,000 if they reside in a common law state. $78,000 if they reside in a community property law state. None of the choices are correct.

78000 In a community property state Jack is taxed on ½ of his separate income ($36,000) plus ½ of Jill's separate income ($40,000) plus ½ of joint income ($2,000). In a common law state, Jack is taxed on his separate income ($72,000) plus ½ of joint income ($2,000).

Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of realized gain on the sale of their principal residence.

False

The assignment of income doctrine requires that in order to shift income from the property producing the income to another person, the taxpayer must transfer only the income to the other person.

False

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

False

Unemployment benefits are excluded from gross income

False

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.

False Realization is very similar for both tax and financial accounting

Gross income includes all income realized during the year.

False Deferred and excluded income is not included in gross income

Hillary is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services rendered. Which of the following is a true statement? Hillary is taxed on the $5,000 of service income in the year she cashes the check. Hillary is taxed on the $5,000 of service income in the year the check was mailed. Hillary is taxed on the $5,000 of service income in the year she receives the check. Hillary is taxed on the $5,000 of service income in the year she provides the services. None of the choices are true.

Hillary is taxed on the $5,000 of service income in the year she receives the check. Under constructive receipt Hillary is taxed on income when property is received or made available to her.

Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3%, which of the following is correct? Joyce recognizes $1,500 of taxable interest income. Joyce's employer recognizes $1,500 of deductible interest expense. Joyce recognizes $1,500 of imputed compensation income. Joyce recognizes $1,500 of imputed dividend income. None of the choices are correct.

Joyce recognizes $1,500 of imputed compensation income. Employees recognize compensation income on below market loans from employers calculated using the federal interest rate.

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year? $10,000 $9,000 $1,000 Barney can deduct $10,000 only if he includes $1,000 in his taxable income None of the choices are correct - Barney is not entitled to a loss deduction.

None of the choices are correct - Barney is not entitled to a loss deduction. No realization occurs until the stock is sold or becomes worthless.

Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a true statement? Sally need not recognize any gross income unless she sells the football tickets. Sally's exchange does not result in taxable income. Sally is taxed on the value of the football tickets even if she cannot attend the game. Sally is taxed on the value of her sewing services only if she is a professional seamstress. None of the choices are true.

Sally is taxed on the value of the football tickets even if she cannot attend the game. Gross income includes the value of property received in exchange for services.

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following? Tax basis of the property. Selling expenses. Amount realized. Tax basis of the property and selling expenses. All of the choices are correct.

Tax basis of the property and selling expenses Tax basis and selling expenses reduce proceeds for a "casual" sale of property.

Irene's husband passed away this year. After his death, Irene received $250,000 of proceeds from life insurance on her husband, and she inherited her husband's stock portfolio worth $750,000. What amount must Irene include in her gross income? $1 million. $750,000. $500,000. Zero but only if Irene does not opt to receive the life insurance proceeds in a lump sum. Zero - none of the benefits are included in gross income.

Zero - none of the benefits are included in gross income. Taxpayers exclude inheritances and life insurance proceeds from gross income.

Gross income includes: all income from whatever source derived unless excluded by law. excluded income. deferred income. all realized income. All of the choices are correct.

all income from whatever source derived unless excluded by law. This is the all-inclusive definition of gross income

Barter clubs are an effective means of avoiding realization for tax purposes.

false

The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

false

When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.

false Gross income only includes the net of sales proceeds less related selling expenses and tax basis in the asset sold.

Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as: business income. income from a partnership. interest income. dividend income because the partnership intends to organize next year as a limited liability company. None of the choices are correct.

interest income Income from flow-through entities retains its character when reported on individual returns.