Acct 110 - Ch. 2

Robert's annuity pays him $2,000 per month. His investment in the contract is $30,000 and his annual exclusion is $1,500. Robert has been receiving the annuity since January 1, 2015. On June 30, 2020, Robert dies suddenly of a heart attack. Using the general rule, what amount is included in Robert's final return for 2020 for his annuity income, and also for his remaining investment in the annuity contract? a) $12,000 annuity income only. b) $12,000 annuity income and $21,750 loss on the contract. c) $11,250 annuity income and $21,750 loss on the contract. d) $11,250 annuity income only.

c) $11,250 annuity income and $21,750 loss on the contract. Robert received six payments of $2,000 in 2020, $12,000 less 6 months exclusion of $750, for $11,250 income. His remaining investment in the contract after 5 and 1/2 years is $21,750 [$30,000 - (5.5 x $1,500)]. The $21,750 can be claimed as a loss in his final return.

Michael works for American Airlines. His employer provided the following fringe benefits:1. A pre-tax flexible medical spending account of $2,500. Michael presented receipts for $2,500 and was reimbursed that amount. 2. Group term life insurance coverage of $100,000 at $10 per $1,000. 3. Standby ticket valued at $3,200 for a flight to London for Michael's vacation. 4. A deluxe room valued at $3,000 at American Airline's partner, the London Marriott, for three nights. 5. Typing on his work computer and office copy machine use valued at $10 for his son's 30-page term paper. What amount should Michael include in income? a) $9,710 b) $6,520 c) $3,500 d) $5,500

c) $3,500

Carol owned a life insurance policy with a face value of $100,000 and cash surrender value of $7,000. Her sole beneficiary was her son, Michael. On July 1, 2017, Carol died in a plane crash on her way home from one of her many trips. Michael elected to receive the payout in equal annual installments over 5 years. In 2020, Michael receives $24,000, $20,000 insurance benefits and $4,000 interest, from the insurance company. What, if anything, does Michael include in his 2020 return? a) $0. Proceeds from insurance policies are not taxable. b) $7,000 cash value c) $4,000 interest d) $24,000 payment

c) $4,000 interest

Salaries and Wages (LO 2.2) Indicate whether each of the items listed below is a behavioral factors that could be used to classify a worker as either an employee or an independent contractor. 1.Instruction 2.Training 3.Personally rendered 4.Hiring and supervising assistants 5.Continuing relationship 6.Work hours 7.Time required 8.Workplace 9.Sequence of work 10.Reports

1. Employee. Worker is told when, where, and how work is to be completed is indicative of an employee. 2. Employee. Employee receives training on how to perform the job to company standards. 3. Independent contractor. Independent contractor is hired to perform the work and has the ability to hire a subcontractor to perform the work. 4. Independent contractor. Independent contractor is paid to perform services and realizes help is needed and has the ability to hire and pay an assistant to help complete the job on time. 5. Employee. An employee works for the same business for a long period of time, whereas an independent contractor works on a contract or project basis. 6. Independent contractor. Independent contractor is hired to create technical drawings and completes work at times suitable to his schedule. 7. Employee. Employee works for the business full-time, 40 hours per week. 8. Employee. Employee is required to report to the factory each day to complete the work. 9. Independent contractor. Independent contractor is permitted to complete project in the order suited to his schedule. 10. Employee. Employee provides frequent reports of progress and performance.

Harold is required under a 2019 divorce decree to pay $500 of alimony and $200 of child support per month for 12 years. In addition, Harold makes a voluntary payment of $100 per month. How much of the total monthly payment is deductible by Harold? a) $0 b) $200 c) $500 d) $600 e) None of these items listed are correct.

a) $0

Rosalind and Carl were divorced under an agreement executed July 1, 2019. The terms of the agreement provide that Rosalind will transfer to Carl her interest in a rental house worth $300,000 with a tax basis of $120,000. What is the amount of the gain that must be recognized by Rosalind on the transfer of the property and what is Carl's tax basis in the property after the transfer, respectively? a) $0 and $120,000 b) $0 and $300,000 c) $180,000 and $120,000 d) $180,000 and $300,000 e) None of these items listed are correct.

a) $0 and $120,000

Fred and Jean were divorced in 2013. The divorce decree states that Fred will pay Jean monthly alimony of $2,000. Fred must also pay child support of $3,000 monthly, until the youngest child (age 12) graduates from high school. He pays Jean $6,000 a month this entire year. How much is deductible on Fred's return? a) $24,000 b) $72,000 c) $36,000 d) $60,000

a) $24,000

What is the current tax rate for "qualified" dividends received? a) Depends on the taxpayer's tax bracket for other income. b) 0 percent c) 20 percent d) 15 percent

a) Depends on the taxpayer's tax bracket for other income.

Alimony (LO 2.13) Answer the following questions: If your answer is zero, enter "0". a) Under a 2017 divorce agreement, Joan is required to pay her ex-husband, Bill, $700 a month until their daughter is 18 years of age. At that time, the required payments are reduced to $450 per month. 1. How much of each $700 payment may be deducted as alimony by Joan? 2. How much of each $700 payment must be included in Bill's taxable income? 3. How much would be deductible/included if the divorce agreement were dated 2020? b) Under the terms of a property settlement executed during 2020, Jane transferred property worth $450,000 to her ex-husband, Tom. The property has a tax basis to Jane of $425,000. 1. How much taxable gain must be recognized by Jane at the time of the transfer? 2. What is the amount of Tom's tax basis in the property he received from Jane?

a1) $450 Of the $700, only $450 ($700 - $250) is alimony. The $250 is considered child support and therefore does not qualify as alimony. Because this is a pre-2019 divorce agreement, the $450 is deductible by Joan. a2) $450 The same amount ($450), is included in Bill's taxable income. a3) $0 Because this is a post-2018 divorce agreement, no deduction for alimony paid is allowed and no amount is reported as income by the recipient. b1) $0 b2) $425,000 A spouse who transfers property in settlement of a marital obligation is not required to recognize any gain as a result of the property's appreciation. For example, if in a divorce settlement a wife transfers property with a fair market value of $10,000 and a tax basis of $3,000 to her husband, she will not be required to recognize the gain of $7,000 ($10,000 - $3,000). Of course, the husband would be required to assume the wife's tax basis ($3,000) in the property. In this case, no gain is taxable to Jane and Tom assumes Jane's carryover basis of $425,000 in the property.

Dick pays Susan $2,000 a month even though their divorce decree requires $3,000 in monthly payments. Their 2016 divorce decree states that Dick must pay $1,000 a month until Junior, age 6, is 18 years old and alimony of $2,000 a month. How much may Dick deduct on his 2020 return? a) $0, since he did not follow the divorce decree. b) $12,000 c) $36,000 d) $24,000

b) $12,000

Christine was employed by ABC Company from January to March 2020, earning $30,000 for the 3 month period. She was laid off on April 1, 2020, and received unemployment compensation of $2,000 a month for 6 months until she was rehired on October 1, 2020, at the same salary of $10,000 per month. How much total income must Christine report on her return? a) $30,000 b) $72,000 c) $42,000 d) $60,000

b) $72,000 Christine must include $72,000 calculated as follows: Salary - January - March $30,000 Unemployment compensation ($2,000 x 6 months) 12,000 Salary - October - December 30,000 Total $72,000

Which of the following lists only community property states? a) Idaho, Louisiana, North Carolina b) Arizona, Nevada, Texas c) Massachusetts, New Mexico, Washington d) California, Oregon, Washington

b) Arizona, Nevada, Texas

Shirley is in the 35 percent bracket and is comparing a 4 percent corporate bond to a 3 percent municipal bond. Which should Shirley buy and why? a) She should buy the corporate bond because it has an after-tax return of 6.15 percent. b) She should buy the municipal bond because it pays an equivalent yield on a taxable bond of 4.62 percent compared to the corporate bond of 4 percent. c) She should buy the corporate bond because it has a higher interest rate. d) None of these items listed are correct.

b) She should buy the municipal bond because it pays an equivalent yield on a taxable bond of 4.62 percent compared to the corporate bond of 4 percent.

Under the Simplified Method for calculating the taxable amount for an annuity: a) The amount paid by the employee for the annuity is divided by a number based on the length of employment. b) The amount paid in by the employee to the plan is divided by a number based on the age of the employee (or the employee and spouse) at the starting date of the annuity. c) The investment in the annuity is divided by a number based on the age of the older annuitant at the starting date of the annuity when there is more than one annuitant (a joint and survivor annuity). d) The amount paid for the annuity by the employee is recovered first. e) There are separate tables for "well" employees and "sick" employees.

b) The amount paid in by the employee to the plan is divided by a number based on the age of the employee (or the employee and spouse) at the starting date of the annuity.

Julie graduated first in her class from Gatorville High School and earned a scholarship of $10,000 a semester to attend University of Gatorville. The scholarship covers tuition, books, fees, and required equipment. In addition, Julie took out a student loan of $5,000 per semester and works part-time at the campus book store, earning $4,000 a school year. Her parents give her $500 each month. What must Julie include in her tax return? a) The student loan funds b) The earnings from her part-time job on campus c) The scholarship funds d) The support from her parents e) All of these items listed are correct. f) None of these items listed are correct.

b) The earnings from her part-time job on campus

Which of the following is true regarding alimony payments before 2019? a) Alimony payments can be in the form of either cash or property. b) Alimony payments do not include payments made under a decree of separate maintenance. c) Alimony payments do not include payments made while the parties are living in the same household, even though they may be divorced or legally separated. d) Alimony payments are deductible by the person receiving the payments and are income to the person making the payments. e) Alimony payments must still be made after the death of the recipient.

c) Alimony payments do not include payments made while the parties are living in the same household, even though they may be divorced or legally separated.

To the annuity holder, which of the following is true regarding annuity payments? a) Annuity payments are similar to life insurance proceeds in that they are excluded from gross income. b) Annuity payments are first considered to be a tax-free return of the original purchase price. c) Annuity payments are in part a return of the original purchase price and in part taxable income. d) Annuity payments are fully includable in gross income. e) Annuity payments are revised any time the life expectancy of the annuitant changes.

c) Annuity payments are in part a return of the original purchase price and in part taxable income.

Loretta has a scholarship from the University of Azteca which covers tuition and books. In addition, she has a scholarship provided by her local church to cover room and board. She is enrolled in a work-study program in which she earns $5,000. What may she exclude from income? a) Church scholarship b) Work-study earnings c) Azteca scholarship d) All of these items listed are correct.

c) Azteca scholarship

Which of the following is not a feature of a Qualified Tuition Program (a Section 529 plan)? a) The plan may be sponsored by a state or by a private institution of higher learning. b) Reasonable room and board is a qualified expense. c) Contributions to the plan are limited by AGI. d) Distributions from the plan are taxable and subject to a 10 percent early withdrawal penalty if not used for qualified education expenses. e) Distributions are tax free if used to pay qualified expenses. f) Contributions may be made to a plan in a state other than the one in which the contributor resides.

c) Contributions to the plan are limited by AGI.

Linda received the following items in the current tax year. Which items must she include in her return? a) 200 shares of IBM stock from her father, worth $7,000 and A Christmas present from her mother that cost $200 b) A $500 check as a Christmas gift from her boss c) A Christmas present from her mother that cost $200 and A $500 check as a Christmas gift from her boss d) Qualified dividends of $250 on the IBM shares she received from her father e) 200 shares of IBM stock from her father, worth $7,000 and qualified dividends of $250 on the IBM shares from her father f) A Christmas present from her mother that cost $200 g) 200 shares of IBM stock from her father, worth $7,000 h) Qualified dividends of $250 on the IBM shares from her father and A $500 check as a Christmas gift from her boss

h) Qualified dividends of $250 on the IBM shares from her father and A $500 check as a Christmas gift from her boss

Which of the following is not true regarding salaries and wages? a) An employee should receive a Form W-2 from an employer providing information about the wages paid to that employee during the year. b) Serving as an employee of a company is the most common way to earn income in the United States. c) The amount in Box 2 is reported directly on Line 1 of Form 1040. d) In 2020 well over the majority of all tax returns filed included some amount for wages and salaries.

c) The amount in Box 2 is reported directly on Line 1 of Form 1040.

Emily received unemployment compensation of $10,000 in the current year. How much is taxable to Emily? a) The amount taxed depends on the taxpayer's bracket for other income. b) $0. Unemployment compensation is not taxable. c) $5,000. Unemployment compensation is 50 percent taxable. Half may be excluded. d) $10,000. Unemployment compensation is fully taxable.

d) $10,000. Unemployment compensation is fully taxable.

Marjorie is single, over 65, and receives the following income: tax-exempt interest from municipal bonds of $5,000; regular interest and dividends of $7,500; pension from City of New York of $75,000; and Social Security benefits of $15,000. How much of her Social Security income is taxable? a) $3,750 b) $15,000 c) $7,500 d) $12,750

d) $12,750

Arnold purchases an annuity for $50,000 which is to pay him $1,000 a month for the rest of his life. His life expectancy from the table is 20 years. In January 2020, he receives the first payment. Using the general rule for annuities, what amount is included on his 2020 return? a) $0. The $12,000 is return of investment. b) $2,500 c) $12,000 d) $9,500

d) $9,500 ($50,000/$12,000 x 20 years) x $12,000 =$2,500 exclusion $12,000 - $2,500 = $9,500 included in income

For 2020, the minimum percentage of Social Security benefits which must be included in a low income taxpayer's gross income is? a) 50 percent b) 60 percent c) 85 percent d) 0 percent e) 100 percent

d) 0 percent

Life Insurance (LO 2.8) Greg died on July 1, 2020, and left Lea, his wife, a $45,000 life insurance policy which she elects to receive at $9,000 per year plus interest for 5 years. In the current year, Lea receives $9,500. How much should Lea include in her gross income?

$500 Since Lea elected to receive payments over time rather than a lump sum payout, she must include the $500 interest portion ($9,500 - $9,000) of the payments in gross income. Only the $9,000 principal amount may be excluded from gross income.

In which of the following scenarios may the employee exclude the value of meals and/or lodging from income? a) A hospital provides an intern with an on-call room and meals in the cafeteria because he cannot leave the hospital during his shift. b) An oil worker on a rig in the Gulf of Mexico gets meals and lodging in addition to his salary. c) An apartment house manager is given an apartment because the owner insists he live there 24 hours a day, 7 days a week. d) All of these items listed are correct.

d) All of these items listed are correct.

Which of the following may be excluded from income? a) Reimbursement for loss of a limb b) Reimbursement by the insurance company for medical expenses incurred while in Europe c) Health insurance premiums paid by one's employer d) All of these items listed are correct. e) None of these items listed are correct.

d) All of these items listed are correct.

Marsha and Chuck are married and have 2 children. Chuck's employer provides health insurance which covers Chuck and his family. The employer pays 80 percent of the premiums and Chuck pays the remaining 20 percent out of his salary. During the year, Chuck's family incurs $15,000 of medical expenses. The insurance company pays $5,000 directly to physicians and reimburses Chuck for the remaining $10,000. What amount, if any, should Chuck include in his return as income? a) $10,000 paid to him by the insurance company b) $5,000 paid directly to doctors by the insurance company c) Premiums paid by his employer d) None of these items listed are correct.

d) None of these items listed are correct.

Which of the following amounts is not included in the gross income of the recipient? a) Jury duty fees b) Partnership income c) Royalties d) Gambling winnings e) Gifts

e) Gifts

Accident and Health Insurance (LO 2.3) Skyler is covered by his company's health insurance plan. The health insurance costs his company $9,500 a year. During the year, Skyler is diagnosed with a serious illness and health insurance pays $100,000 for surgery and treatment. How much of the insurance and treatment payments are taxable to Skyler?

$0 None of the cost of the insurance or amounts paid by the insurance company for surgery or treatment are taxable to Skyler. These amounts are specifically excluded from taxable income under the tax law.

Lew received a "qualified plan" length of service award of $1,500, and Sally received a $400 award for safety on the job. Which of the following statements is true? a) Lew and Sally both may exclude their awards b) Lew and Sally must include their awards in income c) Sally must include $400 in income but Lew may exclude his $1,500 d) Lew must include $1,100 in income but Sally may exclude her $400

a) Lew and Sally both may exclude their awards

Prizes and Awards, Scholarships (LO 2.6, 2.12) For each of the following independent cases, indicate the amount of gross income that must be included on the taxpayer's 2020 income tax return. If an amount is zero, enter "0". a) Malchia won a $4,000 humanitarian award. b) Rob won a new automobile (with a sticker price of $15,700 and a market value of $14,500) for being the best junior tennis player in 2020. c) George received a $3,500 tuition and fees scholarship to attend Western University.

a) $4,000 Prizes and awards are taxable income to the recipient. Winnings from television or radio shows, door prizes, lotteries, and other contest winnings are income to taxpayers. In addition, all other awards are generally taxable, even if they are awards given for accomplishments and with no action on the part of the taxpayer. b) $14,500 If the prize or award is received in property instead of cash, the fair market value of the property is included in the taxpayer's income. c) $0 A scholarship is an amount paid or awarded to, or for the benefit of, a student to aid the student in the pursuit of his or her studies. Scholarships granted to degree candidates are taxable income, with the exception of amounts spent for tuition, fees, books, and course required supplies and equipment. Therefore, scholarship amounts received for such items as room and board are taxable to the recipient.

Gifts and Inheritances (LO 2.11) In June of 2020, Kevin inherits stock worth $125,000. During the year, he collects $5,600 in dividends from the stock. a) How much of these amounts, if any, should Kevin include in his gross income for 2020? b) Why?

a) $5,600 b) Inheritances are excluded from taxable income and subsequent earnings on inherited property are included in income.

Brenda and Mike are married and live in Washington. They have the following income: Mike's salary $60,000 Brenda's salary $40,000 Interest income from a joint account $400 Dividends from Brenda's inheritance $2,300 Dividends from Mike's stock that was purchased before his marriage to Brenda$700 If Mike and Brenda file separate returns, how much income would Brenda report on her federal tax return? a) $52,500 b) $41,700 c) $51,700 d) $42,500

a) $52,500 Brenda must report: 50% of her earnings $20,000 50% of Mike's salary 30,000 50% of the joint interest 200 100% of her separate dividends 2,300 Total $52,500

Salaries and Wages (LO 2.2) Kristen, a single taxpayer, receives two 2020 Forms W-2 from the two employers she worked for during the year. One Form W-2 lists her wages in Boxes 1, 3, and 5 as $18,700. Her other employer's Form W-2 has $43,000 in Box 1 but only $46,500 in both Box 3 and Box 5. Kristen participated in the second employer's 401(k) plan. She also received health care from her second employer. Lastly, her second employer provided $30,000 of group term life insurance to Kristen. a) What amount should Kristen report as taxable wages in 2020? b) What could explain the difference between Box 1 wages and Boxes 3 and 5 on her second employer's W-2?

a) $61,700 43,000 + 18,700 = 61,700 b) It would appear that Kristen made $3,500 of contributions toward her employer's 401(k) plan. The health care and group term life does not create a difference between Box 1 and wages taxable for Social Security and Medicare in Boxes 3 and 5.

Twenty-year old Helen is a full-time student at Gordon College and is a candidate for a bachelor's degree. During 2020, she received the following amounts: Loan from college financial aid office $1,200 Cash support from parents $2,000 Ordinary cash dividend $600 Cash prize awarded in contest $200 Tuition scholarship $2,500 What is her adjusted gross income for 2020? a) $800 b) $6,500 c) $3,300 d) $4,500 e) None of these items listed are correct.

a) $800

Anthony transfers to Luigi a life insurance policy with a face value of $100,000 and a cash surrender value of $10,000 in settlement of a debt. Luigi continues to pay the annual premiums of $1,000 on the policy. Five years later Anthony dies, and Luigi receives the $100,000. How much, if any, is taxable income to Luigi? a) $85,000 b) $100,000 c) $90,000 d) $0

a) $85,000 Since Luigi received the policy for valuable consideration, his basis in the policy is the cash surrender value at transfer plus any additional premiums paid ($10,000 + $5,000). His taxable income is the amount received less his basis in the policy ($100,000 - $15,000 = $85,000).

If a payment is less than the full amount of the alimony and child support, which of the following is true? a) Any excess over the amount of child support due is considered to be alimony. b) Any excess over the amount of the alimony due is considered to be child support. c) The full amount is treated as alimony. d) The full amount is treated as child support. e) None of these payment can be deducted in the tax return of the spouse making the payment.

a) Any excess over the amount of child support due is considered to be alimony.

Which of the following is not a feature of a Coverdell Education Savings Account? a) Contributions cannot be made by an individual with no earned income. b) Contributions are phased out at higher AGIs. c) Contributions are limited to $2,000 and are not deductible. d) Qualified expenses include those of private, elementary, and high school. e) Distributions are not taxable if used for qualified education expenses. f) If a distribution in a year exceeds expenses, the excess is treated as part return of capital and part earnings.

a) Contributions cannot be made by an individual with no earned income.

Which of the following is true of a Qualified Tuition Program (Section 529 Plan)? a) Earnings on the plan assets are not taxable if the money distributed from the plan is used for qualified education expenses. b) Distributions from a Qualified Tuition Program are not allowed for the expenses of room and board. c) Contributions to the plan are deductible as an itemized deduction from AGI. d) A resident of California may not contribute to a Qualified Tuition Program in another state. e) Contributions to the plan are deductible for AGI.

a) Earnings on the plan assets are not taxable if the money distributed from the plan is used for qualified education expenses.

If Craig and Michelle are married and reside in California, income from which of the following would not be considered community income? a) Interest on investment property inherited by Michelle from her grandmother b) Rental income from a multi-apartment building purchased during their marriage c) Interest on their joint savings account d) Craig's salary e) Income from sale of property acquired during their marriage f) All of these items listed would be considered community income.

a) Interest on investment property inherited by Michelle from her grandmother

Meals and Lodging (LO 2.4) Answer the following questions regarding the tax consequences of meals and lodging. a) Milton is a nurse whose employer provided meals for him on the employer's premises, since he is given only 30 minutes for lunch. Is the value of these meals taxable income to Milton? b) Mary is a San Diego ambulance driver. The city provides Mary with meals while she is working so she will be available for emergencies. Is the value of these meals taxable income to Mary? c) Indigo is the head of security at a casino. The casino operator frequently provides meals from the casino buffet to Indigo as a gesture of goodwill for the great job she is doing. Is the value of these meals taxable income to Indigo?

a) No In this case, the meals are furnished by the employer on the business premises of the employer during working hours because the employer limits the employee to short meal periods. b) No In this case, the meals are furnished by the employer on the business premises of the employer during working hours because the taxpayer must be available for emergency calls. Therefore, Mary may exclude the value of the meals provided from her gross income. c) Yes In this case, the meals are not furnished for the convenience of the employer. Therefore, the value of the meals is taxable to Indigo.

Under a 2013 divorce decree, which is true regarding the alimony payments? a) Not considered alimony if the payor and recipient are living in the same household b) Not deductible by the payor c) Cash or property is acceptable as alimony payments d) Payable to the recipient's estate after death

a) Not considered alimony if the payor and recipient are living in the same household

Joe, John, and Ruth are all retiring from ABC Corporation which maintains a qualified plan for employee achievement awards. Joe has been with the company for 3 years and receives a Rolex watch valued at $2,500 for his role in winning a large client from a competitor. John worked for ABC Corporation for 20 years and receives a Bulova watch worth $1,600 for length of service. Ruth also worked for 20 years and receives a gold bracelet worth $1,500 for length of service. What must each retiree include in income? a) Ruth and John may exclude their awards. Joe must include his. b) Each must include the full value of the award received. c) Joe and John may exclude their awards. Ruth must include hers. d) Each may exclude the value of the award.

a) Ruth and John may exclude their awards. Joe must include his.

Which of the following statements is true regarding Form W-2? a) State and local tax information is reported at the bottom of Form W-2 in Boxes 15 through 20. b) Form W-2 does not report the amount of federal income tax withheld from the taxpayer's wages by the employer for the year. c) If a taxpayer receives more than one Form W-2, the amounts in Box 1 are not combined before entering on Form 1040. d) Box 2 of W-2 is where employers should report taxable wages, salary, bonuses and almost every type of taxable compensation.

a) State and local tax information is reported at the bottom of Form W-2 in Boxes 15 through 20.

Which of the following is a feature of the 2020 higher education expenses deduction? a) There is a deduction available for married filing jointly taxpayers with modified AGI below $150,000. b) The deduction is only for graduate tuition. c) The maximum deduction is $3,000. d) The total amount of expenses qualifying for the deduction must be paid out of a Section 529 plan or educational savings account.

a) There is a deduction available for married filing jointly taxpayers with modified AGI below $150,000.

Sam's grandmother contributes $13,000 a year for 8 years to Sam's Section 529 plan in the state of North Carolina. Sam is now 18 years old and has been accepted to the University of North Carolina. He withdraws $50,000 from the Section 529 plan to pay for tuition, books, fees, and room and board. In addition, he uses $20,000 of the distribution to buy a car. What are the tax consequences to Sam and his grandmother? a) Sam is taxed on the full $20,000 not used for educational expenses and his grandmother has no tax consequences. b) His grandmother has no tax consequences. Sam is taxed on the earnings portion of the $20,000 not used for educational expenses. The earnings portion is also subject to a 10 percent penalty for using the distribution for a non-qualifying purpose. c) Sam pays no tax on the distribution and his grandmother may claim a $30,000 deduction. d) Sam pays no tax on the distribution and his grandmother has no tax consequences.

b) His grandmother has no tax consequences. Sam is taxed on the earnings portion of the $20,000 not used for educational expenses. The earnings portion is also subject to a 10 percent penalty for using the distribution for a non-qualifying purpose.

A wealthy family hires a live-in professional nanny for the children. Of the following paid by the family, what must the nanny include in income? a) Medical insurance b) Salary of $12,000 a year c) Room and board d) All of these items listed are correct. e) None of these items listed are correct.

b) Salary of $12,000 a year

Betty is the big winner on Wheel of Fortune. She wins a car with a sticker price of $25,000 and a trip around the world worth $35,000. A local Honda dealer offers to buy the car for $23,000. Betty decides to sell the car to the dealer and leaves on her trip the next day. What amount, if any, must Betty include in her gross income? a) $0. The prizes are considered gifts from the TV network. b) $35,000 c) $58,000 d) $60,000

c) $58,000

Elsie and Elmer received $400 in qualifying dividends from the Devona Mutual Fund. Elmer and Elsie filed a joint income tax return for 2020 reporting $40,000 of taxable income including the dividends. If their tax rate on ordinary income is 12 percent, what is the tax rate for the dividends? a) 5 percent b) 15 percent c) 0 percent d) 20 percent e) None of these items listed are correct.

c) 0 percent

Which is the true statement below? a) The formula for determining the amount of Social Security income to be taxed is the same for every filing status. b) None of your Social Security benefits are taxable because you paid the Social Security tax when you were earning. c) Tax-exempt interest from municipal bonds must be included when calculating the Social Security inclusion amount. d) After age 65, 100 percent of your Social Security income is taxed.

c) Tax-exempt interest from municipal bonds must be included when calculating the Social Security inclusion amount.

Which of the following is a true statement regarding tax-free employee fringe benefit? a) A dependent care plan can only be used to cover the costs of caring for a child. b) Payments up to $100,000 for group term life insurance for employees are tax free. c) The cost of using a company car for personal purposes are tax free. d) Reimbursements paid to employees for public transportation to work and for parking at work up to certain limits each month are tax free. e) Employee discounts on real estate investments are tax free.

d) Reimbursements paid to employees for public transportation to work and for parking at work up to certain limits each month are tax free.

Which of the following describes a difference between a Section 529 Plan and an Educational Savings Account? a) Distributions from Section 529 Plans are non-taxable if used for qualified education expenses. The Educational Savings Account distribution is taxable on the earnings portion of the distribution even if used for qualified education expenses. b) The contributions to a Section 529 Plan are not deductible while contributions to an Educational Savings Account are deductible. c) An Educational Savings Account income exclusion for distributions may be available in the same year as an education credit is claimed, but not if distributions from a Section 529 Plan are also taken. d) The maximum annual contribution to an Educational Savings Account is $2,000 which is phased out for high-income individuals. The contributions to a Section 529 Plan may be larger than $2,000 and are not phased out for high-income individuals.

d) The maximum annual contribution to an Educational Savings Account is $2,000 which is phased out for high-income individuals. The contributions to a Section 529 Plan may be larger than $2,000 and are not phased out for high-income individuals.

Which of the following are municipal bonds? a) Los Angeles County bonds b) New York State bonds c) Bonds issued by Puerto Rico d) Bonds issued by the city of Chapel Hill e) All of these items listed are correct. f) None of these items listed are correct.

e) All of these items listed are correct.

Which of the following employee fringe benefits may be excluded from income? a) Cost of group term life insurance coverage up to $50,000 b) Pre-tax dependent care up to $5,000 c) Pre-tax payments of up to $270 per month to employees to cover parking at work d) Pre-tax health care flexible expense spending account up to $2,750 e) All of these items listed are correct. f) None of these items listed are correct.

e) All of these items listed are correct.

Which of the following is true regarding life insurance proceeds? a) Are included in gross income if they are qualified accelerated benefits received before the death of the insured and used for long-term care. b) Are never taxable. c) Are included in gross income in full if they are received as periodic payments with interest. d) Are generally included in gross income. e) Generally are excluded from gross income.

e) Generally are excluded from gross income.

Nine states have a community property system of marital law. Which of the following statements is correct? a) Separate property acquired before marriage becomes community property after marriage in community property states. b) Married couples in community property states filing joint tax returns allocate their income per their state community property laws. c) Even though the spouses have been living apart for an entire year, personal earnings will generally be treated as having been earned one-half by each spouse. d) Federal law determines how income will be allocated between spouses in community property states. e) In some states, separate property can give rise to community income.

e) In some states, separate property can give rise to community income.

Rosalie received the following during 2020. What, if anything, is includable in her return? a) A gift from her father of 100 shares of IBM stock worth $3,800 b) A birthday present from her mother of $500 c) A ring from her boyfriend worth $10,000 d) An inheritance from her great-aunt of $5,000 e) All of these items listed are correct. f) None of these items listed are correct.

f) None of these items listed are correct.

Which of the following is a true statement regarding tax-free fringe benefits? a) Tax-free fringe benefits may include group term life insurance of $100,000 b) Tax-free fringe benefits may include a flexible bicycle spending account up to $2,000 c) Tax-free fringe benefits may include discounts on public transportation but not parking at work d) Tax-free fringe benefits may include discounts at a hotel owned by an airline to a flight attendant working for the airline e) All of these items listed are correct. f) None of these items listed are correct.

f) None of these items listed are correct.

Which of the following is not included in gross income? a) Hobby income b) Prizes c) Strike benefits d) Sale of home grown marijuana e) Forgiveness of indebtedness f) Payment to a beneficiary of life insurance proceeds

f) Payment to a beneficiary of life insurance proceeds