Chapter 2 Tax

Elsie and Elmer received $400 in qualifying dividends from the Devona Mutual Fund. Elmer and Elsie filed a joint income tax return for 2021 reporting $40,000 of taxable income including the dividends. If their tax rate on ordinary income is 12%, what is the tax rate for the dividends?

0%

For 2021, what is the minimum percentage of Social Security benefits that must be included in a low income taxpayer's gross income?

0%

Which of the following must be included in gross income?

A "scratch-off" lottery prize of $300

Linda received the following items in the current tax year. Which item must she include on her return? •A Christmas present from her mother that costs $200 •A $500 check as a Christmas gift from her boss •200 shares of IBM stock from her father worth $7,000 •A $250 watch from her company as a 10-year service award

A $500 check as a Christmas gift from her boss

Which of the following fringe benefits is taxable to the employee receiving the benefit?

A 15% discount on a building sold to an employee of the developer

Which of the following fringe benefits is taxable to the employee receiving the benefit?

A 15% discount on investment real estate granted to the employee of a real estate developer

To the annuity holder, which of the following statements regarding annuity payments is true?

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

Which of the following lists only community property states?

Arizona, Nevada, Texas

Joe, John, and Ruth are all retiring from ABC Corporation which maintains plan for employee achievement awards. Joe has been with the for 3 years and receives a Rolex watch valued at $2,500 for his role in winning a large client from a competitor. John a qualified worked for ABC Corporation for 20 years and receives a Bulova watch worth company $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?

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

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?

Salary of $12,000 a year

Shirley is in the 35% bracket and is comparing a 4% corporate bond to a 3% municipal bond. Which should Shirley buy and why?

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

Which of the following statements regarding Form W-2 is true?

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

Under a 2013 divorce decree, which of the following statements is true regarding alimony payments?

Such payments are not considered alimony if the payor and recipient are living in the same household

Which of the following statements regarding salaries and wages is true?

The amount in Box 1 of Form W-2 is reported directly on Line 1 of Form 1040.

Under the simplified method for calculating the taxable amount for an annuity, which of the following statements is true?

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 the 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 on her tax return?

The earnings from her part-time job on campus

Which of the following describes a difference between a Section 529 plan and an Educational Savings Account?

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 pan may be larger than $2,000 and are not phased out for high-income individuals.

which of the following statements regarding life insurance proceeds is true?

The proceeds are generally excluded from gross income.

In 2021, Nithya lost her job when her employer had to close as a result of losses because of damages to many of its properties from demonstrators. Because Nithya is struggling to pay her monthly expenses, she arranges a decrease in her mortgage from $180,000 to $120,000 with her mortgage lender. Her basis in the home is $220,000, and the fair market value at the time of the mortgage reduction is $280,000. What amount of the cancellation of debt must Nithya include in her income in 2021?

$0

Rosalind and Carl were divorced under an agreement executed on July 1, 2021. 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 amount gain 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?

$0 and $120,000

Emily received unemployment compensation of $10,000 in the current year. How much is taxable to Emily?

$10,000 Unemployment compensation is fully taxable

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, 2016. On June 30, 2021, Robert dies suddenly of a heart attack. Using the general rule, what amount is included in Robert's final return for 2021 for his annuity income and for his remaining investment in the annuity contract?

$11,250 annuity income and $21,750 loss on the contract

Dick pays Susan $2,000 a month even though their divorce decree requires $3,000 in monthly payments. Their 2017 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 2021 return?

$12,000

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?

$12,750

In 2021, Nithya lost her job when her employer had to close as a result of losses because of damages to many of its properties from demonstrators. Because Nithya is struggling to pay her monthly expenses, she arranges a decrease in her mortgage from $180,000 to $120,000 with her mortgage lender. Her basis in the home is $220,000, and the fair market value at the time of the mortgage reduction is $280,000. What is Nithya's basis in her home after applying exclusion provisions (if any)?

$160,000

(1) a pre-tax flexible 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 Airlines' partner, the London Marriott, for three nights; and (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?

$3,500

Carol owned a life insurance policy with a face value of $100.000 and a cash surrender value of $7,000. Her sole beneficiary was her son, Michael. On July 1, 2018, 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 2021, Michael receives $24,000 ($20,000 insurance benefts and $4,000 interest) from the insurance company. What, if anything, does Michael include on his 2021 return?

$4,000 interest

Arnold and Annette are married and live in California. Arnold's salary is $50,000, and Annette earns $40,000. They have interest from a joint savings account of $400, and Annette has dividends of $5,000 from an investment account she inherited from her father during the marriage and that she has maintained as separate property. They decide to file separate returns. How much income does Annette report on her separate return?

$50,200

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?

$52,500

Betty is a 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?

$58,000

Jackie took a $7,000 distribution from her educational savings account and used $6,500 to pay for qualified higher education expenses. The $500 balance was used to purchase new clothes. On the date of the distribution, her educational savings account had a $28,000 balance including $21,000 she had contributed. How much of the $7,000 distribution is tax free?

$6,875

Christine was employed by ABC Company from January to March 2021, earning $30,000 for the 3-month period. She was laid off on April 1, 2021, and received unemployment compensation of $2,000 a month for 6 months until she was rehired on October 1, 2021, at the same salary of $10,000 per month. How much total income must Christine report on her return?

$72,000

Twenty-year old Helen is a full time student at Gordon College and is a candidate for a bachelor's degree. During 2021, 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 2021?

$800

Anthony transfers to Luigi a life insurance policy woth a face value of $100,000 and a cash surrender value of $10,000 in a settlement of 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?

$85,000

Municipal bond interest is

A better source of income for taxpayers in high tax brackets than it is for taxpayers in the lowest tax brackets

Which of the following must be included in income?

A cash allowance from an employer to pay for meals while visiting a coworker in the hospital

In which of the following scenarios must the employee include the value of meals and/or lodging in income?

A property manager receives a cash allowance to pay for meals while on duty.

Which of these taxpayers would most likely have to include forgiveness of debt as income?

A taxpayer who used the loan to purchase a vacation home

Rosalie received the following during 2021. What, if anything, is includable on her return?

Dividends of $380 from stock she received as a gift from her father

Which of the following is excluded from gross income?

Gifts

Sam's grandmother contributes $13,000 a year for eight 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?

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% penalty for using the distribution for a nonqualifying purpose.

Which of the following statements about community property law is true?

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

Which of the following items is not specifically excluded from income?

Income from a partnership

Generally speaking, which of the following statements is true regarding interest on Series EE and Series I U. S. savings bonds?

It is taxed when the bonds are cashed in.

Lew received a "qualified plan" length of service award of a $1,500 watch, and Sally received a 5400 bracelet as an award for safety on the job. Which of the following statements is true?

Lew and Sally both may exclude their awards.

Marsha and Chuck married and have two children. Chuck's employer provides health insurance, which covers Chuck and his family. The employer pays 80o% of the premiums, and Chuck pays the remaining 20s out are 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. Which of these, if any, should Chuck include on his return as income?

None of these items listed are correct.

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?

Only the Azteca scholarship

Which of the following employee fringe benefits may be excluded from income?

Pre-tax payments of up to $270 per month to employees to cover parking at work

Which of the following statements regarding tax-free employee fringe benefits is true?

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 is a feature of the 2020 higher education expenses deduction?

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

Which of the following is included in gross income?

Unemployment compensation