ACC 331: Chapter 5

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. Allison heard that she will be able to deduct her gambling losses, so she is feeling a little better. Assuming that Allison is not a professional gambler and does not itemize deductions, how much of the $5,000 loss will she be able to deduct? $3,200 $5,000 $0

$0 Rationale: Because Allison does not itemize, she will not be able to deduct any of the losses. Would be $3200 if Allison itemized her deductions

Which one of the following types of income is NOT generated from owning property? Dividends received from corporate stock Interest income from a certificate of deposit Earnings from services rendered Gain on the sale of land

Earnings from services rendered

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. True False

False Rationale: The assignment of income doctrine states that the owner of income-producing property must pay tax on the income from the property.

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 only excluded from gross income if the taxpayer donates it to a charitable organization. One-half of the value of the watch must be included in gross income. The value of the watch is included from gross income. The value of the watch is excluded from gross income.

The value of the watch is excluded from gross income.

The term used when one former spouse is required to provide financial support to the other spouse pursuant to a legal separation or divorce is ___

alimony

gross income

all income from whatever source derived

A(n) ________ is an investment that pays a stream of equal payments over time.

annuity

The __ __ ___doctrine holds that 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.

assignment of income

Income received as a result of services provided by the taxpayer, including business income, is referred to as (earned/unearned) income.

earned

barter clubs

facilitate the exchange of rights to goods and services between members, many of whom have the mistaken belief that they need not recognize income on the exchanges

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

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 will (include / exclude) 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 years earlier for $20,000. What is the gain or loss on the sale of the land? Gain of $1,000 Loss of $500 Loss of $2,500 Gain of $21,000

loss of $500

Which one of the following choices does NOT represent an economic benefit to the taxpayer? Income from investments Proceeds from property sales Proceeds from a loan Income from services

proceeds from a loan

The ______ principle for determining when income is generated provides taxpayers with an objective measure for valuing the transaction and with the wherewithal to pay the taxes when cash is involved. recognition wherewithal to pay gross income realization

realization

The _____ principle states that 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.

realized

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

receive earn

economic benefits

receive an item of value

individual taxpayers file tax returns

repo

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

social security

tax basis

the amount of a taxpayer's unrecovered cost of or investment in an asset

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 False

true

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. Louie sold stock for $400 that he had purchased for $400 in a prior year. Donald borrowed $400 from his brother on a 6-month note. Dewey received a $400 state tax refund. Dewey did NOT itemize deductions in the prior 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? (Check all that apply.) Interest income on investments Cash received for completing a job Cash received from a bank loan A computer received in exchange for services rendered

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

Which of the following choices does NOT describe an annuity? It is a means of generating a fixed income stream during retirement. It is an investment that pays a stream of equal payments over time. It is a lump sum payment that is usually received by the beneficiary of a life insurance policy.

It is a lump sum payment that is usually received by the beneficiary of a life insurance policy.

What are the advantages of the realization principle for defining gross income? (Check all that apply.) It provides the taxpayer with the opportunity to shift income to a related taxpayer who is in a lower tax bracket. It allows the taxpayer to exclude the transaction from gross income. It provides the taxpayer with the wherewithal to pay when cash is received in the transaction. It provides an objective measure of the value of the transaction.

It provides the taxpayer with the wherewithal to pay when cash is received in the transaction. It provides an objective measure of the value of the transaction.

Janice and Jarrod are married and live in a community property state. Janice is NOT employed outside the home, and Jarrod earns a salary of $98,000. During the year, they earned $2,000 on investments that are owned jointly. The investments were made after they were married, with money earned by Jarrod. How is the gross income treated for federal income tax purposes? Jarrod is deemed to have earned $98,000 and Janice is deemed to have earned $2,000. Janice is deemed to have earned $50,000 and Jarrod is deemed to have earned $50,000. Jarrod is deemed to have earned $99,000 and Janice is deemed to have earned $1,000. Jarrod is deemed to have earned $100,000 and Janice has no income.

Janice is deemed to have earned $50,000 and Jarrod is deemed to have earned $50,000.

Under the realization principle, what must occur for income to be realized? (Check all that apply.) A measurable change in wealth must occur, regardless of whether a transaction takes place. A taxpayer must engage in a transaction with another party. A taxpayer must receive cash to realize income. The transaction must result in a measurable change in property rights.

-A taxpayer must engage in a transaction with another party. -the transaction must result in a measurable change in property rights.

For all divorce agreements executed after December 31, 2018, ____ payments are excluded from gross income of the recipient and (deductible/nondeductible) for the payor.

-alimony -deductible

economic benefits examples

-compensation for services -proceeds from property sales -income from investments or business activities

advantages for realization principle

-parties to the transaction must agree to the value of the exchanged property, allows the income to be measured objectively -the transaction itself provides the taxpayer with the funds to pay taxes on income generated by the transaction (wherewithal to pay)

taxpayers recognize gross income when

-they receive an economic benefit -they realize the income -no tax provision allows them to exclude or defer the income from gross income for that year

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 years earlier for $20,000. What is the amount realized on the sale of the land? $19,500 $21,000 $1,000 ($500)

19500 Rationale: Amount realized = Sales proceeds minus selling expenses

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

2800

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

2800

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? 12% or $3,600 per year 41.67% or $12,500 per year 10% or $3,000 per year 100% or $30,000 per year

41.67% or $12,500 per year $250,000/(20 x $2,500 x 12 mos.) = 0.4167

Daniels, Edwards, and Findley are equal partners in DEF Industries. The company generated net income of $180,000 during the year and distributed $20,000 cash each of the partners. Edwards will report $ ___ in taxable income from the partnership.

60000

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? $0 $12,000 $5,000 $7,000

7000 $12,000 Rationale: By forgiving $12,000 in debt, Andrea will be solvent by $7,000, so she should include $7,000 in gross income.

Janice started receiving an annuity payment of $1,500 per month when she turned 68 years old. She purchased the annuity for $225,000 and will continue to draw the monthly payment 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? (Round your calculation of the return of capital percentage to the nearest whole number.)

71% or $12,780 per year

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

8160 = social security * 85%

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 types of imputed income are NOT included in the gross income and are not taxable to the person receiving the benefit? A bargain purchase between a father and his son An employer's $12,000 loan to an employee with no interest on the note Employee discounts of 25% on services

A bargain purchase between a father and his son

Which of the following is true for a divorce agreement entered into BEFORE January 1, 2019? Alimony is not deductible for AGI for the person paying it. Alimony can include property divisions between ex-spouses in a divorce agreement. Alimony may be paid to a spouse who is still living with the payor as long as there is a separation agreement in place. Alimony is included in the gross income of the person receiving it.

Alimony is included in the gross income of the person receiving it.

Which of the following is true for a divorce agreement entered into BEFORE January 1, 2019? Alimony may be paid to a spouse who is still living with the payor as long as there is a separation agreement in place. Alimony is not deductible for AGI for the person paying it. Alimony is included in the gross income of the person receiving it. Alimony can include property divisions between ex-spouses in a divorce agreement.

Alimony is included in the gross income of the person receiving it. RATIONALE: Alimony may be paid to a spouse who is still living with the payor as long as there is a separation agreement in place. Rationale: Alimony for persons still living together only works prior to a separation agreement or divorce. Alimony is not deductible for AGI for the person paying it. Rationale: Alimony payments are deductible for agreements prior to January 1, 2019.

In which of the following situations has constructive receipt occurred in the earlier year? (Check all that apply.) Arnold earned interest of $300 on his savings account, but did not withdraw the funds until the following year. Andrew worked the last two weeks of the year, but he will not be paid for those hours until January 4. Alex was out of town on December 31 and, therefore, unable to pick up his final paycheck. He picked it up on January 2. Ashley's last paycheck of the year was dated Dec. 30. She was unable to cash the check because the employer had insufficient funds. 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. Amber received a year-end bonus check dated December 28, but she did not cash the check until Jan. 3.

"Earned income" refers to income that is received in which one of the following situations? Ellen received $50 in interest on her interest-bearing checking account. Bill received $800 over the summer doing lawn care services for his neighbors. Patsy received $200 in dividends from stock that she owns. Arnold sold land for $10,000 that he had originally purchased for $8,000.

Bill received $800 over the summer doing lawn care services for his neighbors.

Action Sport is an S corporation owned equally by three shareholders. During the current year, Action Sport generated taxable 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. Each shareholder will report the portion of income that he or she receives in cash, and Action Sport will pay tax on the remaining income. S corporations are tax-exempt entities, so there is no tax liability resulting from Action Sport's operations. Action Sports will report and pay tax on $60,000.

Each shareholder will report $20,000 in taxable income.

Which of the following types of cash receipts is NOT taxable to the recipient? Gift from a friend Lottery winnings Raffle prizes Gambling winnings

Gift from a friend

Which of the following statements are correct? (Check all that apply.) If a taxpayer receives a state tax refund for a tax year where she deducted the state tax paid, she must report the refund as gross income. A current year insurance reimbursement of prior year medical expenses is recognized even if the expenses were NOT deducted in the prior year. Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income. When taxpayers sell nondepreciable assets, they may exclude the original cost of those assets from gross income. A taxpayer must recognize cash received in exchange for services rendered, but NOT property or services if they were received instead of cash.

If a taxpayer receives a state tax refund for a tax year where she deducted the state tax paid, she must report the refund as gross income. Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income. When taxpayers sell nondepreciable assets, they may exclude the original cost of those assets from gross income.

Which of the following statements are correct? (Check all that apply.) If a taxpayer receives a state tax refund for a tax year where she deducted the state tax paid, she must report the refund as gross income. Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income. When taxpayers sell nondepreciable assets, they may exclude the original cost of those assets from gross income. A taxpayer must recognize cash received in exchange for services rendered, but NOT property or services if they were received instead of cash. A current year insurance reimbursement of prior year medical expenses is recognized even if the expenses were NOT deducted in the prior year.

If a taxpayer receives a state tax refund for a tax year where she deducted the state tax paid, she must report the refund as gross income. Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income. When taxpayers sell nondepreciable assets, they may exclude the original cost of those assets from gross income.

tax benefit rule

Refunds of expenditures deducted in a prior year are included in gross income to the extent that the refund reduced taxes in year of the deduction

Which of the following types of income are generated from property ownership? (Check all that apply.) Salary earned by an accountant Rental income from lessees Gain from the sale of a building Interest earned on U.S. Treasury bonds Dividends received on corporate stock Wages earned by an electrician

Rental income from lessees Gain from the sale of a building Interest earned on U.S. Treasury bonds Dividends received on corporate stock

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. Taxpayers have some control over when income is received and expenses are paid which assists in tax planning. The cash method generally simplifies the computation of income. Taxpayers recognize income in the period they receive it, giving them the wherewithal to pay the tax.

Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them.

Which one of the following is NOT an advantage of the cash method for reporting income? Taxpayers have some control over when income is received and expenses are paid which assists in tax planning. Taxpayers recognize income in the period they receive it, giving them the wherewithal to pay the tax. Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them. The cash method generally simplifies the computation of income.

Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them. Rationale: This is an advantage of the accrual method of reporting income.

return of capital principle

Taxpayers are not taxed on the unrecovered portion of their investment

What are the tax consequences for a taxpayer who dies before recovering his investment in an annuity contract? The entire amount of the annuity received in the year of death is taxable on the taxpayer's final income tax return. One-half of the annuity payment is taxable on the taxpayer's final income tax return. The amount of the unrecovered investment is deducted on the taxpayer's final income tax return. The entire amount of the annuity received in the year of death is nontaxable on the taxpayer's final income tax return.

The amount of the unrecovered investment is deducted on the taxpayer's final income tax return.

What are the tax consequences for a taxpayer who is receiving a life annuity and who has already lived longer than his or her life expectancy? One-half of the annuity payment is taxable. The entire amount of each additional payment of the annuity is taxable. The entire amount of each additional payment of the annuity is nontaxable. The return of capital percentage continues to determine the nontaxable portion of the payment.

The entire amount of each additional payment of the annuity is taxable. Rationale: If someone lives beyond their life expectancy, they have already recovered all of their original investment, so there is not capital percentage necessary.

Which of the following statements is INCORRECT regarding gambling winnings and losses for recreational gamblers? The excess of gambling winnings over gambling losses are included in gross income. Gambling losses must be deducted as an itemized deduction. Gambling winnings are included in gross income. Gambling losses are deductible to the extent of gambling winnings.

The excess of gambling winnings over gambling losses are included in gross income.

Which of the following statements is INCORRECT regarding gambling winnings and losses for recreational gamblers? Gambling winnings are included in gross income. The excess of gambling winnings over gambling losses are included in gross income. Gambling losses are deductible to the extent of gambling winnings. Gambling losses must be deducted as an itemized deduction.

The excess of gambling winnings over gambling losses are included in gross income.

Andrews, Badin, and Carr formed a partnership, ABC. During Year 2, the partnership sold some land that was held for investment and generated a long-term capital gain. How will this income be reported on the partners' individual tax returns? The income will retain its character and be reported as a long-term capital gain. The income will be combined with the profit generated by the partnership and flow through to the partners as ordinary income. The partnership will pay the tax due on the long-term capital gain rather than allocate it to the partners. The income will be reported on the partners' individual tax returns only if they receive the proceeds from the sale.

The income will retain its character and be reported as a long-term capital gain.

Which of the following situations will result in an award being excluded from gross income? (Check all that apply.) When the award has a charitable component, such as a television giveaway, where guests are given needed items When the award is given for scientific, literary, or charitable achievement and meets certain other requirements When the award is a noncash item valued at less than $400, and given for either safety or years of service by an employee When the award is given during the holidays, such as a Christmas cash bonus, since the intent of the award is to be a gift

When the award is given for scientific, literary, or charitable achievement and meets certain other requirements When the award is a noncash item valued at less than $400, and given for either safety or years of service by an employee

When is a discharge of indebtedness NOT included in gross income? When the taxpayer is insolvent before, but not after the debt forgiveness When the taxpayer works out a debt settlement arrangement that lowers his debt, rather than totally discharging it When the taxpayer's debt forgiveness does not exceed $10,000 When the taxpayer is insolvent before and after the debt forgiveness

When the taxpayer is insolvent before and after the debt forgiveness

Ann and Andy live in a state where all of the income earned from the services of Ann are included only in her gross income. They live in a state with ___ ___ system.

common law

In a(n) ___ ___system, the income earned from services by one spouse is treated as though it was earned equally by both spouses.

community property

§ 61 includes an all-inclusive definition of gross income

compensation for services, business income, rents, royalties, interest, and dividends// unless a tax provision says otherwise, gross income includes ALL income

___ ____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 receipts

Which one of the following types of taxable income is NOT considered to be service income? Unemployment compensation Business income Dividend income Salary income

dividend income

Abby sold a parcel of land for $18,000. She paid a real estate agent 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 the sale of the land? Gain of $3,500 Gain of $2,300 Gain of $16,800 Gain of $18,000

gain of $2,300 18000-1200-14500=2300

realization principle

income is realized when: -a taxpayer engages in a transaction with another party -the transaction results in a measurable change in property rights

For below-market-loans, the imputed interest is treated as interest to the lender and interest to the borrower.

income/revenue expense

common misperception of taxes

indicates that taxpayers realize income whether they receive money, property, or services in a transaction

What is the typical tax treatment for income from labor, such as salaries, wages, and fees? It is tax-deferred. It is nontaxable. It is tax-exempt. It is taxable.

its taxable

True or false: Income and deductions generated within a partnership or S corporation that are subject to various tax treatments (i.e. qualified dividends, capital gains, etc.) retain their character when they flow-through to the owners rather than being reclassified as ordinary income or loss. True False

true True Rationale: Certain types of income and deductions will retain their character and be treated as Congress intended on the owners' individual tax returns.

Income from property is referred to as (earned/unearned) income.

unearned

Which of the following terms is used to refer to income from property? Earned income Unearned income Exempt income Deferred income

unearned income

Which of the following terms is used to refer to income from property? Unearned income Exempt income Deferred income Earned income

unearned income