Chapter 3 Review - Gross Income: Inclusions and Exclusions

Linda and Mason file a joint return. Their AGI before social security was $22,000, social security benefits received were $9,000, and tax exempt interest was $1,250. What is the amount of their provisional income?

$27,750 ($22,000 + $4,500 + $1,250)

Sandy earned a salary of $50,000 last year. Her parents gave her a car valued at $23,000 for her birthday. In addition, she earned $1,200 in interest income on a savings account and inherited $75,000 from her grandmother's estate. What is the amount of Sandy's gross income?

$51,200

The highest percentage of Social Security benefits that may be taxed is _____, and only for moderate to high income taxpayers.

85

Bobby received a $3,500 scholarship for the semester. He used $3,000 to pay tuition to the community college, and the remaining $500 was paid toward textbooks. How much of the scholarship must be included in gross income? A. $0 B. $500 C. $3,500 D. $3,000

A. $0

Sam traded a parcel of land for a tractor and a car. He had purchased the land five years earlier for $16,000. The market value of the car and tractor is $20,000. What is the amount of gross income resulting from this transaction? A. $4,000 B. $0 C. $16,000 D. $20,000

A. $4,000 Rationale: The gross income is the fair market value received ($20,000) less the basis in the property given ($16,000) which equals $4,000.

Dean is single and has AGI of $50,000. He redeems $5,000 (principal of $3,500 and interest of $1,500) of Series I savings bonds to pay qualified higher education expenses of $2,000. How much taxable income (if any) must Dean report? A. $900 B. $0 C. $1,500 D. $600

A. $900 Rationale: Since the amount redeemed is greater than the qualified education expenses, Dean must recognize a portion of the redeemed savings bond. $1,500 x ($2,000/$5,000) = $600 excluded. $1,500 - $600 = $900.

Certain types of investments may be tax-advantaged when used to help fund higher education. The growth in value and earnings from the investment are nontaxable if the proceeds are used to pay for qualifying educational expenditures. Which of the following types of investments qualify for this treatment? A. Coverdell savings accounts B. U.S. Series EE bonds C. Municipal bonds D. Roth IRA plans E. Section 529 plans

A. Coverdell savings accounts B. U.S. Series EE bonds E. Section 529 plans

Which of the following types of cash receipts is not taxable to the recipient? A. Gift from a friend B. Gambling winnings C. Lottery winnings D. Raffle prizes

A. Gift from a friend

Which of the following statements is false regarding the recognition of income? A. Income is realized when a taxpayer sells an asset for $50 that she had purchased earlier for $50. B. Income is realized when a taxpayer receives a refund of an amount that was deducted in a prior period. C. Income may be in the form of cash, property, or services received in a transaction. D. Income is NOT realized for the return of the capital received in a sales transaction.

A. Income is realized when a taxpayer sells an asset for $50 that she had purchased earlier for $50.

Which of the following debt instruments is used to build roads, schools, and other government needs and generates interest to the bondholders that is exempt from federal taxation? A. Municipal bonds B. Qualified small business bonds C. U.S. savings bonds D. Capital bonds

A. Municipal bonds

Which one of the following choices does not represent an economic benefit to the taxpayer? A. Proceeds from a loan B. Income from investments C. Proceeds from property sales D. Income from services

A. Proceeds from a loan

Which of the following statements is incorrect regarding workers' compensation payments? A. The payments are included in gross income because they are a replacement of wages. B. The payments are received due to work-related physical injury. C. Workers' compensation payments have a different tax treatment from unemployment compensation payments. D. The payments are nontaxable because they are due to a physical injury.

A. The payments are included in gross income because they are a replacement of wages.

Which of the following statements is incorrect regarding municipal bonds? A. They do NOT pay periodic interest payments, but interest accumulates over the term of the bond. B. The proceeds from the issuance of these bonds is often used for building roads, schools and other state and local government projects. C. The interest on the bonds is exempt from federal income taxation. D. The rate of return on these bonds is typically lower than the rate of return on taxable bonds.

A. They do NOT pay periodic interest payments, but interest accumulates over the term of the bond.

Which of the following instruments do not pay periodic interest payments, but rather accumulate interest over the life of the instrument? A. U.S. savings bonds B. Certificate of deposits C. Corporate bonds D. Mutual funds

A. U.S. savings bonds

Brenda received a $15,000 college scholarship for the current year. She used the scholarship to pay the following fees: tuition $9,000, lab fees $60, parking fees $120, books $750, housing $4,000, and a meal plan $1,070. What can she exclude from gross income? A. $750 books B. $9,000 tuition C. $1,070 meals D. $120 parking fees E. $4,000 housing F. $60 lab fees

Answers: A, B, F Rationale: Scholarship proceeds used to pay for housing and meals are fully taxable. Parking is not a required fee, so the proceeds of a scholarship used to pay parking fees is taxable.

Which of the following statements is correct? A. 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. B. A taxpayer must recognize cash received in exchange for services rendered, but NOT property or services if they were received instead of cash. C. When taxpayers sell assets, they may exclude the original cost of those assets from gross income. D. Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income. E. A current year insurance reimbursement of prior year medical expenses is recognized even if the expenses were NOT deducted in the prior year.

Answers: A, C, D

Regarding portfolio investments, which types of income are taxed at a rate lower than the taxpayer's marginal tax rate? A. Short-term capital gains B. Qualified dividends C. Long-term capital gains D. Interest on corporate bonds E. Nonqualified dividends

Answers: B, C

Which of the following represents economic benefits to a taxpayer? A. Cash received from a bank loan B. A computer received in exchange for services rendered C. Interest income on investments D. Cash received for completing a job

Answers: B, C, D

Which of the following payments to a taxpayer should be included in gross income? A. Compensatory damages awarded for lost wages due to injuries sustained in a fall at the grocery store B. Emotional distress damages awarded due to slander of the taxpayer's reputation C. Compensatory damages for lost wages awarded in a sex discrimination lawsuit D. Emotional distress damages awarded due to injuries from a car accident E. Punitive damages awarded after an accident at work where the taxpayer sustained a non-physical injury

Answers: B, C, E

Which of the following fringe benefits are excluded from taxation? A. Personal use of a company car B. Qualified moving expenses C. Off-site gym membership D. Medical insurance E. Dependent care benefits F. Life insurance under $50,000 G. Free lodging at the discretion of the employee

Answers: B, D, E, F

Which of the following statements is incorrect regarding the receipt of Social Security benefits? A. Social Security benefits are not taxable if the recipient has relatively low taxable income. B. Up to 85% of Social Security benefits may be taxed to taxpayers with moderate to high taxable income. C. 50% of Social Security benefits are taxable to all taxpayers because the employers contributed funds that were never taxed to the employee. D. Social Security benefits are not taxable because the contributions were taxed when the taxpayer was working.

Answers: C, D

Which of the following cash receipts are taxable to the recipient? A. Child support B. Loan proceeds C. Awards D. Gambling winnings E. Prizes

Answers: C, D, E

Bruce is single and had itemized deductions of $10,000 on his 20X1 tax return. He included $2,000 of state taxes in his itemized deductions. In 20X2, he received a $200 refund of state taxes paid in 20X1. How much of the refund (if any) should Bruce include in his taxable income for the current year (20X2)? A. $10,000 B. $200 C. None D. $6,050 E. $2,000

B. $200 Rationale: The taxable amount is the lesser of (a) the amount received [$200], (b) the amount deducted on Schedule A [$10,000], or (c) the amount by which the itemized deduction exceeded the standard deduction [$10,000 - $3,950 20X1 standard deduction amount = $6,300].

Dean is single and has AGI of $80,000. He redeems $5,000 (principal of $3,500 and interest of $1,500) of Series I savings bonds to pay qualified higher education expenses of $6,000. How much interest (if any) can Dean exclude from income? A. $1,500 B. $45 C. $0 D. $1,800

B. $45 Rationale: Dean's income exceeds the AGI limit of $77,200 for a single filer. $1,500 x [($80,000 - $79,550)/$15,000] = 45.

Andrew invested in a U.S. Treasury bond. He paid $500 for the initial investment one year ago. The redemption value of the bond increased by $25 in the current year. Which of the following options is not acceptable for reporting the income? A. Andrew may permanently exclude all interest if the savings bonds are Series EE or Series I bonds and the proceeds are used for educational expenses. B. Andrew may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax. C. Andrew may recognize no interest in the current year, but recognize the total interest accumulated the year the bond is redeemed. D. Andrew could elect to recognize the $25 as interest in the current year.

B. Andrew may request to receive the $25 in cash in the current year, so that he would have the wherewithal to pay the tax.

Which of the following fringe benefits provided by an employer is not excluded from gross income? A. Medical insurance B. Life insurance coverage in excess of $50,000 C. De minimis (or small) benefits D. Qualified transportation expenses

B. Life insurance coverage in excess of $50,000

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

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

Which of the following choices describes the marginal tax treatment for qualified dividends? A. The income is taxed at the lower of the taxpayer's marginal rate or at a maximum 15%. B. The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate. C. The income may be taxed at a rate as high as 20%, depending on the taxpayer's marginal rate. D. The income is always taxed at the taxpayer's ordinary income tax rate.

B. The income may be taxed as low as 0%, depending on the taxpayer's ordinary income rate. C. The income may be taxed at a rate as high as 20%, depending on the taxpayer's marginal rate.

Sam traded a parcel of land for a tractor and a car. He had purchased the land five years earlier for $16,000. The market value of the car and tractor is $20,000. What is the amount of gross income resulting from this transaction? A. $16,000 B. $0 C. $4,000 D. $20,000

C. $4,000

Which of the following types of imputed income are not included in gross income (i.e. are not taxable)? A. Employee discounts of 25% on services B. An employer's $12,000 loan to an employee with no interest on the note C. A bargain purchase between a father and his son

C. A bargain purchase between a father and his son

Which of the following statements is false? A. Gross income includes income realized in any form, whether in money, property, or services. B. The definition of gross income is all-inclusive, since the IRC states that all income is potentially taxable. C. Gross income includes all income from whatever source derived, unless excluded by law. D. Gross income includes only those sources of income that are specifically excluded in the IRC.

C. Gross income includes all income from whatever source derived, unless excluded by law.

Bruce is single and had itemized deductions of $6,200 on his 20X1 tax return when the standard deduction was $6,300. He included $1,000 of state taxes in his itemized deductions. In 20X2, he received a $200 refund of state taxes paid in 20X1. How much of the refund (if any) should Bruce include in his taxable income for the current year (20X2)? A. $200 B. $1,000 C. None D. $100

C. None Rationale: Since Bruce's itemized deductions in 20X1 only exceeded the standard deduction by $200 ($6,300 - $6,100), the most he must include in income is $200.

Which of the following statements is incorrect regarding interest earned on U.S. savings bonds? A. Taxpayers may elect to include the increase in the bond redemption value in income each year. B. Taxpayers may exclude interest from Series EE and Series I bonds if the proceeds are used for educational expenses. C. Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received. D. Taxpayers may recognize the interest that has accumulated on the bonds when they are redeemed.

C. Taxpayers include the periodic interest payments from U.S. savings bonds in gross income each year when received.

During the current year, Sam received interest income from the following investments: $400 from State of Wyoming bonds, $200 from Ford Motor Co., $50 from City of Laramie bonds, and $100 from U.S. Treasury bonds. How much of the interest received will be included in gross income? A. $600 B. $200 C. $700 D. $300

D. $300 Rationale: The State of Wyoming and City of Laramie bonds are not taxable.

Which of the following statements is correct concerning a gift? A. A gift is included in the gross income of the person giving the gift. B. A gift may be subject to "gift tax" which is paid by the person receiving the gift. C. A gift is included in the gross income of the person receiving the gift. D. A gift may be subject to "gift tax" which is paid by the person giving the gift.

D. A gift may be subject to "gift tax" which is paid by the person giving the gift.

Which of the following statements is correct concerning an inheritance? A. An inheritance is included in the gross income of the person who died on his final income tax return. B. An inheritance is included in the gross income of the person receiving the inheritance. C. An inheritance may be subject to the federal estate tax which is paid by the person receiving the inheritance. D. An inheritance may be subject to the federal estate tax which is paid by the estate of the person who died.

D. An inheritance may be subject to the federal estate tax which is paid by the estate of the person who died.

An individual must recognize income on his or her tax return if the transaction meets three conditions. Name the three conditions: ________, ________, ________

Economic benefit, conclusion, not tax-exempt income

A Schedule B is required if an individual receives $1,500 of interest for the tax year. True or False?

False

A corporation can pay only cash dividends to its shareholders. True or False?

False

All interest received from state or local bonds is not taxable. True or False?

False

Holiday turkeys given to employees are included in gross income. True or False?

False

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

False

True or false: Scholarships received by college students are nontaxable regardless of what the money is used for because the scholarship proceeds are considered to be a gift.

False

Name a type of income item that is listed on line 21 of Schedule 1. ____

Jury Duty, Gambling Winnings

An individual can exclude certain income from taxation even though a transaction that has economic benefits has occurred. True or False?

True

An individual is required to impute interest on a deferred payment contract where no interest, or a low rate of interest, is stated. True or False?

True

If someone purchases a debt instrument (such as a bond) from an issuer for an amount less than par value, the transaction creates original issue discount (OID). True or False?

True

If you provide consulting services to your friend and, in exchange, he fixes your car, you and your friend must report on both tax returns the fair market value of the services provided. True or False?

True

In general, scholarships are not taxable if the use of the money is to pay tuition, fees, books, supplies, and equipment. True or False?

True

Income may be realized in any form, whether in money, property, or services. True or False?

True

Qualified dividends arise from the earnings and profits of the payer corporation. True or False?

True

U.S. _____ _____ do not pay out periodic interest payments, but the interest _____ over the term of the bond.

U.S. savings bonds do not pay out periodic interest payments, but the interest accrues over the term of the bond.

Earnings on investments in plans such as Section 529 plans, Coverdell savings accounts, and U.S. Series EE bonds are excluded from taxation if the proceeds are used for qualifying _____ expenses.

education

In addition to receiving a salary from a company, many employers provide _____ _____ that are excluded from gross income.

fringe benefits

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

income/ revenue, expense

Taxpayers receiving indirect economic benefits, such as bargain purchases or below-market loans, are said to have _____ income which may be taxable.

interest

Interest on _____ bonds is excluded from federal income taxation.

municipal, local, city, or state

In general, life insurance proceeds are _____ (taxable/nontaxable) to the beneficiary of the policy.

nontaxable

Regarding portfolio investments, _____ dividends generally are taxed at capital gains rates and _____ dividends are taxed at ordinary rates.

qualified, non-qualified

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

received, earned

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

social security

Gross income means all income from _______ _________ __________.

whatever source derived.

Taxpayers receive _____ _____ when they are unable to work due to work-related injuries. These benefits are _____ because they are due to a physical injury.

workers compensation, nontaxable