Chapter 4
T/F Amounts collected under accident and health insurance policies purchased by the taxpayer are excludable from income.
Answer: TRUE
Sharisma suffered a serious stroke and was admitted to a nursing home for 140 days. Nursing home charges, including physician fees and other related expenses were $63,000. Under Sharisma's long-term care insurance contract, she received reimbursements of $56,000. How much of the $56,000 reimbursement must be included in Sharisma's gross income in 2013? A) $-0- B) $11,200 C) $56,000 D) $7,000
Answer: A
Nelda suffered a serious stroke and was admitted to a nursing home for 140 days. Nursing home charges, including physician fees and other related expenses were $33,000. Under Nelda's long-term care insurance contract, she received reimbursements of $36,000. How much of the $36,000 reimbursement must be included in Nelda's gross income in 2013? A) $0 B) $1,400 C) $7,400 D) $3,000
Answer: A Explanation: A) $320/day × 140 days = $44,800 is the limit on the exclusion. Since her reimbursement was less than the maximum exclusion, the difference is not taxable.
Julia suffered a severe stroke and has been admitted to a private hospital where she is expected to remain for the rest of her life. She is certified by a licensed health care practitioner as being a "chronically ill individual." Her hospital expenses amount to $280 per day. She will receive $270 per day from a $500,000 life insurance policy as an accelerated death benefit. In 2013, she was in the hospital for 10 days and received $2,700. How much of this amount is taxable?
Answer: A Explanation: A) Because she is a chronically ill individual, Julia may exclude the full amount she receives as it is less than the amount of actual expenses and the daily limitation of $320 established by law.
40) Rebecca is the beneficiary of a $500,000 insurance policy on her husband's life. She elects to receive $52,000 per year for 10 years rather than receive the entire amount in a lump sum. Of the amount received each year A) $2,000 is taxable income. B) $50,000 is taxable income. C) $52,000 is taxable income. D) $5,000 per year is tax free as a death benefit.
Answer: A Explanation: A) Each year, $50,000 of the payments are tax-free as return of capital (insurance proceeds). $500,000/10 = $50,000; thus, $52,000 $50,000 = $2,000 is taxable.
Connor owes $4 million and has assets of only $1 million. He declares and files personal and business bankruptcy and his creditors approve a payment plan of $.25 per dollar. Connor has a net operating loss carryover of $2 million. The remaining 75 percent of his debt will be canceled. Connor must recognize income of A) $0. B) $1 million. C) $2 million. D) $3 million.
Answer: A Explanation: A) Gross income does not include income from discharge of indebtedness where discharge occurs in bankruptcy even if the reduction exceeds the available tax attributes.
Tim earns a salary of $40,000. This year, Tim's employer establishes a cafeteria plan under which Tim signed a salary reduction of $2,500 for which $1,500 is to cover his health insurance premiums and $1,000 is available to reimburse medical expenses. During the year, he is reimbursed $900 for medical expenses. What is the total taxable to Tim this year? A) $37,500 B) $37,600 C) $38,400 D) $40,000
Answer: A Explanation: A) His taxable salary is $37,500 ($40,000 salary $2,500 amount of salary reduction agreement). The payments for the health insurance premiums and the reimbursement of medical expenses are not taxable. Tim loses the $100 ($1,000 $900) which was set aside for medical expenses and not claimed.
Greg is the owner and beneficiary of a $100,000 policy on the life of his mother. Greg gives the policy to his brother, Don. Don subsequently pays premiums of $40,000. Upon his mother's death, how much of the insurance proceeds must Don include in income? A) $0 B) $40,000 C) $60,000 D) $100,000
Answer: A Explanation: A) If a policy is transferred by gift, the resulting life insurance proceeds paid by reason of death are excludable from income.
Rick chose the following fringe benefits under his employer's cafeteria plan. Which of his chosen benefits will be taxable? A) $150 cash per pay period B) medical insurance on his family C) dental insurance D) group term life insurance of $20,000
Answer: A Explanation: A) If an employee chooses cash as a benefit, the cash is taxable.
In September of 2013, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize? A) $ -0- B) $100,000 C) $800,000 D) $900,000
Answer: A Explanation: A) If the proceeds from the sale of small business stock held more than 6 months are reinvested in other small business stock within 60 days of the sale, no gain is recognized.
For a taxpayer who is not insolvent nor under bankruptcy proceedings, the discharge of debt is generally A) taxable. B) nontaxable. C) partially taxable. D) none of the above.
Answer: A Explanation: A) If the taxpayer is solvent at the time of cancellation of debt, any discharge of indebtedness is includable in gross income.
38) During the year, Cathy received the following: •Dividends of $4,000 from Lindsay Corporation. Cathy's father owned the stock and directed the corporation to send the dividends to Cathy. •A car worth $30,000 for being the 100th customer at a car dealership. •$5,500 cash gift from her uncle. •$10,000 inheritance from her grandmother. What amount must Cathy include in gross income? A) $30,000 B) $34,000 C) $39,500 D) $49,500
Answer: A Explanation: A) Only the fair market value of the prize or award, $30,000, is taxable. Dividends are taxed to Cathy's father who is the shareholder. Gifts and inheritances are not taxable.
Carl filed his tax return, properly claiming the head of household filing status. Carl's employer paid or provided the following to Carl: Wages $65,000 Fair market value of qualified dependent care services 4,000 Premiums for $50,000 qualified group term life insurance 500 Medical insurance premiums 600 How much of this income should Carl report? A) $65,000 B) $69,000 C) $69,500 D) $70,100
Answer: A Explanation: A) Only the wages are taxable. Qualified dependent care services up to $5,000 are not taxable; premiums paid for group term insurance coverage up to $50,000 are not taxable; medical insurance premiums are not taxable.
A department store sold a stereo to an employee for $300, even though the retail price was $500. The gross profit percentage is 40%. Such discounts are available to all employees. How much income should be recognized by the employee from these transactions? A) $0 B) $100 C) $120 D) $200
Answer: A Explanation: A) The employee's purchase price is equal to the employer's cost ($500 ($500 × 40%)) of $300 so the discount does not exceed the gross profit, and the full discount can be excluded.
Michael is an employee of StayHere Hotels, Inc. in Washington, DC. On his vacation, Michael travels to San Francisco and stays at a StayHere Hotel for six nights free of charge. The regular rate for a hotel room at StayHere in San Francisco is $300 a night. His ability to stay in the hotel without charge is based on the availability of empty rooms. How much income must Michael report due to the use of the San Francisco hotel room? A) $0 B) $300 C) $360 D) $1,800
Answer: A Explanation: A) The hotel rooms are considered a no-additional cost benefit.
All of the following fringe benefits paid for by the employer may be excluded from an employee's gross income except A) discounts on services of 25 percent. B) subscriptions to professional publications. C) recreational facilities on employer's premises. D) unused airline seats for airline employees where the employee is required to fly "standby."
Answer: A Explanation: A) The maximum discount for services is 20%.
David has been diagnosed with cancer and is expected to live less than 18 months. David is covered by a life insurance policy with a $400,000 face amount. David cashes in the policy early under a special option and receives 80% of the face amount or $320,000. In the year of collection, David will report A) no income. B) $80,000. C) $320,000. D) $400,000.
Answer: A Explanation: A) The amount David receives is excludable from gross income because he is a terminally ill individual.
In September of 2013, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. What is the basis in the new stock she purchased? A) $200,000 B) $300,000 C) $800,000 D) $1,100,000
Answer: B Explanation: B) Cost of new stock $1,100,000 Less unrecognized gain ( 800,000) Basis of new stock $ 300,000
Bob, an employee of Modern Corp., receives a fringe benefit (in lieu of a salary increase) of $1,000. Bob is in a 33% tax bracket. The fringe benefit is nontaxable to Bob and is not deductible as an itemized deduction. Bob's after-tax savings from receiving the tax-free benefit is A) $0. B) $333. C) $667. D) $1,000.
Answer: B Explanation: B) $1,000 × .33 = $333 tax savings
Hope receives an $18,500 scholarship from State University. The university specifies that $8,500 is for tuition, books, supplies, and equipment, while $10,000 is for room and board. In addition, Hope works part-time at the campus library and earns $5,000. Hope's gross income is A) $5,000. B) $15,000. C) $18,500. D) $23,500.
Answer: B Explanation: B) $10,000 + $5,000 = $15,000. Room & board scholarships are taxable along with wages.
This year, Jason sold some qualified small business stock that he acquired in 2006. His basis in the stock was $95,000 and he sold it for a $30,000 gain. How much of Jason's gain is taxable? A) $-0- B) $15,000 C) $30,000 D) $47,500
Answer: B Explanation: B) $30,000 × .50 = $15,000. Note that qualified stock acquired between February 18, 2009 and December 31, 2013 may instead be eligible for a 75% or 100% exclusion.
Joe Black, a police officer, was injured in the line of duty. He received the following during the current year: Salary $50,000 Workers' compensation 5,000 Compensatory damages for physical injury 18,000 Punitive damages for physical injury 14,000 Cash reward for preventing a break-in 2,000 What is the amount that is taxable? A) $57,000 B) $66,000 C) $71,000 D) $84,000
Answer: B Explanation: B) $50,000 + $14,000 + $2,000 = $66,000
Which of the following is not excluded from income? (Assume that any amounts received by the taxpayer were kept.) A) public assistance payments. B) fair market value of prize won on a game show. C) gifts and inheritances. D) life insurance proceeds paid by reason of death.
Answer: B Explanation: B) All except the prize are specifically excluded from income.
Which of the following statements regarding qualified tuition programs is incorrect? A) Distributions from income earned by a qualified tuition program are tax-free if used for qualified higher education expenses. B) Distributions of income are taxed to the donor if the proceeds are not used for higher education expenses. C) A qualified tuition program may be established by parents or grandparents. D) Contributions to a qualified tuition program are distributed tax-free.
Answer: B Explanation: B) Distributions from income are taxed to the beneficiary if not used for higher education expenses.
Linda was injured in an automobile accident caused by another driver. Her son, Matthew, was in the automobile but not physically injured. The other driver's insurance company was required by a court to pay Linda $75,000 to cover medical bills relating to her injuries, $30,000 to compensate her for emotional distress attributable to the injuries and $40,000 of punitive damages. Matthew was paid $15,000 to compensate him for emotional distress attributable to his witnessing his mother's injuries. What is the amount taxable to Linda? A) $30,000 B) $40,000 C) $105,000 D) $145,000
Answer: B Explanation: B) Only the $40,000 of punitive damages are taxable to Linda as the other amounts are compensatory damages related to her physical injuries. Matthew's damage award of $15,000 is also excludable.
Ahmad's employer pays $10,000 in tuition this year for Ahmad to attend a graduate business program. How much of the employer-provided tuition is taxable to Ahmad? A) $0 B) $4,750 C) $5,250 D) $10,000
Answer: B Explanation: B) The exclusion for employer-provided tuition is limited to $5,250. $4,750 is taxable.
Which of the following statements regarding the qualified tuition plans (QTP) is incorrect? A) Distributions can be made tax-free to pay for room and board at college. B) Distributions made from the QTP for college tuition will be tax-free in addition to qualifying for the American Opportunity credit or lifetime learning credit. C) Katie's parents had established a QTP for Katie, but she has received a "full-ride" scholarship. Katie's parents can name her sister as a replacement beneficiary of the QTP. D) Distributions of income not used for qualified higher education expenses are taxable and subject to a 10% penalty.
Answer: B Explanation: B) The exclusion for the QTP distribution must be reduced by any amounts used to claim the American Opportunity credit or lifetime learning credit.
Fatima's employer funds childcare for all employees' children. She pays nothing for this service. The cost of Fatima's child care is $7,200 a year. How much of the child care benefits are taxable to Fatima? A) $0 B) $2,200 C) $5,000 D) $7,200
Answer: B Explanation: B) The maximum exclusion for child care assistance is $5,000. $7,200 $5,000 = $2,200 of the benefit is taxable.
Which of the following item(s) must be included in the income of the respective employees? A) ABC Hospital Corporation provides free meals in the hospital cafeteria to employees while on duty in order that they be available for emergency calls. B) The state of California highway patrol organization provides its officers with a daily meal allowance to compensate them for meals eaten at any location while they are on duty. C) IBX Corporation requires its employees to work overtime three evenings each year when the company takes inventory. The corporation pays to provide catered dinners on its premises on these evenings. D) More than one, but not all, of the amounts must be included in income.
Answer: B Explanation: B) The meals provided by ABC Hospital and IBX Corporation are not included in income because they are provided on the employer's premises and for the convenience of the employer. Because the officers regularly receive cash from the state of California instead of meals, the amount must be included in income.
Over the years Rianna paid $65,000 in premiums on a life insurance policy with a face value of $100,000. Upon reaching 65, while still in good health, Rianna surrendered the policy and collected $95,000. In the year of collection, Rianna will report A) no income. B) $30,000 of taxable income. C) $5,000 of tax loss. D) $95,000 of taxable income.
Answer: B Explanation: B) $95,000 $65,000 = $35,000. The basis is recovered tax free.
Miranda is not a key employee of AB Corporation. AB provides Miranda with group term life insurance coverage of $140,000. The premiums attributable to the excess coverage are $1,300. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Miranda include in income? A) $0 B) $1,080 C) $1,300 D) $1,680
Answer: B Explanation: B) ($1 × 90,000/1,000 × 12 = $1,080)
T/F "No additional cost" benefits are excluded from an employee's gross income if the services are the same type that are sold to customers and in the line of business in which the employee works.
Answer: TRUE
John is injured and receives $16,000 of income from a disability policy. John's employer paid 75% of the disability policy premiums and John paid the remainder. In addition, John's employer has paid all the $3,000 of premiums on a health policy that paid John's doctor bills of $10,000. How much of the benefits must John include in income? A) $3,000 B) $10,000 C) $12,000 D) $16,000
Answer: C Explanation: C) $16,000 × .75 = $12,000. The payments are taxable to the extent attributable to employer payment of premiums. The income from the disability policy are taxable to the extent funded by the employer's payment of premiums. Payments from the health insurance are excluded.
Elisa sued her former employer for discrimination. She was awarded $200,000 for lost wages, $30,000 for medical expenses related to emotional distress resulting from the discrimination, and $300,000 in punitive damages. The amount taxable is A) $0. B) $200,000. C) $500,000. D) $530,000.
Answer: C Explanation: C) $200,000 + $300,000 = $500,000. The medical expenses are not taxable.
Liza's employer purchased a disability income policy from an insurance company on behalf of all of its employees. The employer paid for two-thirds of the premiums, and the employees paid for the other one-third. Subsequently, Liza received $3,000 per month for 6 months she was unable to work. Liza will be taxed on A) $0. B) $6,000. C) $12,000. D) $18,000.
Answer: C Explanation: C) $3,000 × 6 × 2/3 = $12,000. The payments are taxable to the extent the employer paid the premiums.
Sarah receives a $15,000 scholarship from City University. The university specifies that $8,000 is for tuition, books, supplies, and equipment for classes. The other $7,000 is for room and board. Sarah works ten hours per week as a grader, for which she is paid $7,500 for the year. Of the total amount received, Sarah must include the following amount in gross income A) $7,000. B) $7,500. C) $14,500. D) $22,500.
Answer: C Explanation: C) $7,000 + $7,500 = $14,500
Melanie, a U.S. citizen living in Paris, France, for the last three years earns a salary of $110,000 in 2013. Melanie's housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income? A) $24,000 B) $97,600 C) $105,984 D) $134,000
Answer: C Explanation: C) $97,600 foreign earned income exclusion + $8,784 housing exclusion ($24,000 $15,616)
Jeremy, an American citizen, earned $200,000 during 2013 while employed in Switzerland. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses? A) $0 B) $19,520 C) $20,480 D) $40,000
Answer: C Explanation: C) ($97,600/$200,000) × $40,000 = $19,520 is attributable to non-taxable income and may not be deducted. Therefore, Jeremy may deduct $40,000 $19,520 = $20,480.
Derrick was in an automobile accident while he was going to work. The doctor advised him to stay home for eight months due to his physical injuries. The resulting lawsuit was settled and Derrick received the following amounts: Compensatory damages for physical injury $80,000 Punitive damages 95,000 How much of the settlement must Derrick include in ordinary income on his tax return? A) $-0- B) $80,000 C) $95,000 D) $175,000
Answer: C Explanation: C) Compensatory damages for physical injuries are not taxable but the punitive damages are taxable.
Cameron is the owner and beneficiary of a $300,000 policy on the life of his mother. Cameron sells the policy to his brother, Parker, for $100,000. Parker subsequently pays premiums of $55,000. Upon his mother's death, how much of the insurance proceeds must Parker include in income? A) $0 B) $55,000 C) $145,000 D) $300,000
Answer: C Explanation: C) If there has been a transfer for valuable consideration, the life insurance proceeds are taxable but may be reduced by the investment in the policy. Thus, $145,000 {$300,000 ($100,000 + 55,000)} is taxable.
Britney is beneficiary of a $150,000 insurance policy on her father's life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one? A) All $32,000 each year is taxable. B) $10,000 interest is taxable in the first year. C) There is no taxable income. D) The lump sum payment is taxable.
Answer: C Explanation: C) Life insurance proceeds paid by reason of death are not taxable.
Benefits covered by Section 132 which may be excluded from an employee's gross income do not include A) employee's use of an employer-owned health club. B) membership fees in professional organizations. C) employer-provided vehicle for personal use. D) hotel employee's use of a vacant hotel room.
Answer: C Explanation: C) Personal use of an employer-provided vehicle is taxable.
T/F "Working condition fringe benefits," such as memberships in professional organizations paid for by the employer, are generally excluded from the employee's gross income.
Answer: TRUE
) Lindsay Corporation made the following payments to the family of Luke Marshall, an employee who died during the year. $5,000 for Luke's final paycheck that he failed to collect $10,000 for accrued vacation days as required by the employment contract $25,000 in admiration of Luke's outstanding service to the community What is the total amount that Luke's family must include in income? A) $0 B) $5,000 C) $15,000 D) $40,000
Answer: C Explanation: C) The employer was legally obligated to pay the $5,000 back wages and the $10,000 for the accrued vacation days. The payment for Luke's community service may be viewed as a gift.
Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2011 and does not return to the U.S. until March 5, 2014. During her stay in Rome, Jan earned $102,000 in 2013. Jan may exclude A) $0. B) $4,400. C) $97,600. D) $102,000.
Answer: C Explanation: C) The exclusion is the lower of $97,600 or $102,000.
Exter Company is experiencing financial difficulties. It has assets worth $2 million, but owes liabilities of $2.1 million. It has a longstanding relationship with the bank. The bank has agreed to forgive $300,000 of debt principal. Because of this debt forgiveness, Exter will recognize income of A) $0. B) $100,000. C) $200,000. D) $300,000.
Answer: C Explanation: C) While debt forgiveness is normally recognized, Exter is insolvent to the extent of $100,000 ($2 million assets $2.1 million liabilities). The remaining $200,000 of debt forgiven must be recognized.
Bret carries a $200,000 insurance policy on his life and has paid premiums of $10,000 over the years. Dividends on the policy have totaled $8,500. Each year Bret has left the dividends with the insurance company. In the current year, the insurance company credited $800 of interest on the accumulated dividends to Bret's account. In addition, $600 of dividends was added by the insurance company. In the current year, Bret must report income of A) $0. B) $600. C) $800. D) $1,400.
Answer: C Explanation: C) Interest earned on accumulated dividends is taxed. The dividends are generally not taxed.
T/F Punitive damages are taxable unless they are awarded for physical injuries.
Answer: FALSE Explanation: Punitive damages are always taxable.
Amanda, who lost her modeling job, sued her employer for age discrimination. She was awarded $75,000 in lost wages, $25,000 for emotional distress, and $150,000 punitive damages. The amount taxable is A) $-0-. B) $150,000. C) $225,000. D) $250,000.
Answer: D Explanation: D) $75,000 + $25,000 + $150,000 = $250,000. Only compensatory damages related to physical injury can be excluded.
The discharge of certain student loans is excluded from income if all of the following are present except for A) the loan must have been made by governmental, educational, or charitable organizations. B) the loan proceeds must have been used to pay the cost of attending an education institution or used to refinance outstanding student loans. C) the loan forgiveness must be contingent upon the individual's working for a specified period of time in certain professions. D) the loan forgiveness is based on age.
Answer: D Explanation: D) Age is not a provision for excluding the forgiveness of a student loan.
Chad and Jaqueline are married and have AGI of $150,000. In 2013 they adopted a child, while taking advantage of their employer's written adoption assistance program. The adoption cost $9,500, all of which was paid by the employer in accordance with the adoption plan. How much of the employer paid adoption costs may be excluded from their income? A) $-0- B) $5,000 C) $5,250 D) $9,500
Answer: D Explanation: D) An employee may exclude from gross income up to $12,970 in 2013 for amounts paid from a written adoption assistance plan. The exclusion starts to phase out when AGI exceeds $194,580.
Healthwise Ambulance requires its employees to be on 24-hour call and consequently gives them $800 per month housing allowance and a $200 per month food allowance. Ron, an employee of Healthwise, receives a salary of $40,000 per year (this does not include the allowances). Ron will be taxed each year on A) $40,000. B) $42,400. C) $49,600. D) $52,000.
Answer: D Explanation: D) Cash payments are taxable. [($800 + $200) × 12] + $40,000 = $52,000
Richard is a key employee of Winn Corporation. The corporation provides Richard with $120,000 of group-term life insurance coverage. Only company executives receive life insurance coverage. The premium attributable to the coverage is $1,600. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Richard include in income due to the policy? A) $0 B) $840 C) $1,440 D) $1,600
Answer: D Explanation: D) If group term insurance coverage discriminates in favor of key employees, each key employee must include in gross income the greater of the premiums paid on his or her behalf or the amount determined by using the tables with no exclusion for the first $50,000 of coverage. Thus, the amount included is the greater of $1,600 or ($1 × 120,000/1,000 × 12 = $1,440).
Which one of the following fringe benefits allows for discrimination between highly compensated employees and other employees to be present? A) no-additional cost B) qualified employee discounts C) recreation and athletic facilities D) working condition
Answer: D Explanation: D) See Additional Comment in text. Working condition fringes are not subject to the discrimination rules.
In 2012 Betty loaned her son, Juan, $10,000 to help him buy a car. In 2013, before he repaid the $10,000, Betty told Juan that she was "tearing up" the $10,000 note as a graduation present. How should Juan treat the amount forgiven? A) taxable income in year of loan B) taxable income in year of forgiveness C) excludable gift in year of loan D) excludable gift in year of forgiveness
Answer: D Explanation: D) The amount forgiven is an excludable gift in the year of forgiveness.
For 2013, the maximum foreign-earned income exclusion is A) $91,500. B) $92,900. C) $95,100. D) $97,600.
Answer: D Explanation: D) The amount is established annually.
All of the following are requirements for excluding employee achievement awards except for A) tangible personal property other than cash. B) based on safety records or length of service. C) part of a meaningful presentation. D) if paid in cash, must be less than $400.
Answer: D Explanation: D) The awards must not be cash.
) Mae Li is beneficiary of a $70,000 insurance policy on her father's life. Upon his death, she elects to receive the proceeds in installments from the insurance company that carries the policy. She will receive $16,000 per year for five years. What are the tax consequences each year? A) All $16,000 each year is taxable. B) $10,000 interest is taxable in the first year. C) There is no taxable income. D) $2,000 of the $16,000 payment is taxable each year.
Answer: D Explanation: D) The proceeds of $70,000 are not taxable. Therefore, $14,000 ($70,000/5 yrs) of the $16,000 is return of capital; the remaining $2,000 is taxable interest.
All of the following items are excluded from gross income except A) working condition benefits. B) de minimis benefits. C) no additional cost benefits for employees. D) disability income from an employer-financed policy.
Answer: D Explanation: D) To the extent of employer-paid premiums, benefits paid under a disability policy are taxable.
T/F The exclusion for employee discounts on services is limited to 30% of the price charged regular customers.
Answer: FALSE Explanation: The discount on services is limited to 20%.
T/F Kelly was sent by her employer to work on a special assignment in Paris for six months. Kelly will be able to exclude some of her income earned in Paris.
Answer: FALSE
T/F Payments received from a workers' compensation plan are taxable.
Answer: FALSE Explanation: A statutory exclusion applies.
T/F Each year a taxpayer must include in gross income the rental value of his or her personal residence.
Answer: FALSE Explanation: No income is realized under income tax concepts of income until the home is sold.
T/F All payments made by an employer to the family of a deceased employee are excluded from the recipient's gross income regardless of the reason for payment.
Answer: FALSE Explanation: Only life insurance proceeds and gifts can be excluded. Funds paid directly by the employer are normally taxable as compensation unless based the facts and circumstances, the amount can be classified as a gift.
T/F Any distribution from a Qualified Tuition Plan not used for qualified higher education expenses is both included in income and subject to a 10% penalty.
Answer: FALSE Explanation: Only the income component of the distribution is subject to tax and penalties.
T/F Sam received a scholarship for room and board. This scholarship is excludable from income.
Answer: FALSE Explanation: Scholarship proceeds are excludable only to the extent used for tuition and fees, books, supplies, and equipment.
T/F Mattie has group term life insurance coverage of $120,000 provided by her employer on a nondiscriminatory basis. She must include premiums for $120,000 coverage in gross income using IRS tables.
Answer: FALSE Explanation: She will have income imputed for the portion of the coverage in excess of $50,000.
T/F Katie, a self-employed CPA, purchased an accident & disability insurance policy. As the result of an auto accident, Katie was unable to work and received $3,000 of disability benefits per month for seven months. The benefits were based on her estimated monthly income and should be reported as gross income.
Answer: FALSE Explanation: The amounts received are not taxable even though the payments are a substitute for wages lost due to illness. The insurance policy was purchased by the taxpayer.
T/F A taxpayer may avoid tax on income by having the payment made to another taxpayer.
Answer: FALSE Explanation: The assignment of income doctrine prevents shifting of income. The underlying property must be gifted before the income is earned in order to shift taxation of future income.
T/F A business provides $45,000 of group-term life insurance to all workers, including the partners who work in the business. All of the workers can exclude the value of this fringe benefits from their gross income.
Answer: FALSE Explanation: The exclusion is only available to the workers who are not partners or sole proprietors of a
T/F An individual is considered terminally ill for tax purposes if a physician certifies that he is reasonably likely to die within 36 months.
Answer: FALSE Explanation: The time period is 24 months.
T/F Martina, who has been employed by the Smythe Corporation for ten years, receives a $400 watch as a length of service award in a meaningful presentation. The fair value of the watch is taxable.
Answer: FALSE Explanation: The watch is a tangible award for length of service and not in excess of $400
T/F Loan proceeds are taxable in the year received in cash.
Answer: FALSE Explanation: There is a binding obligation to repay a loan. No income is realized.
T/F Accelerated death benefits received by a terminally ill person may be excluded from taxable income.
Answer: TRUE
T/F Amounts withdrawn from Qualified Tuition Plans are tax-free if the amounts are used for qualified higher education expenses including tuition, fees, books, and room and board for students attending on at least a half-time basis.
Answer: TRUE
T/F Awards for emotional distress attributable to a physical injury are excluded from gross income.
Answer: TRUE
T/F Dividends on life insurance policies are generally excludable income because they are considered a return of premium.
Answer: TRUE
T/F In general, if a life insurance policy is sold or surrendered for a lump sum before the death of the insured, the amount received is taxable to the extent it exceeds the premiums paid.
Answer: TRUE
T/F In the case of foreign-earned income, U.S. citizens may avoid double taxation of income by both the U.S. and the host country by utilizing a foreign tax credit or by electing the foreign earned income exclusion.
Answer: TRUE
T/F Meals may be excluded from an employee's gross income provided they are furnished on the employer's business premises and are for the convenience of the employer.
Answer: TRUE
T/F Nondiscrimination requirements do not apply to working condition fringe benefits.
Answer: TRUE
T/F Premiums paid by an employer for employee disability coverage are excluded from the employee's gross income.
Answer: TRUE
T/F The amount of cash fringe benefits received under a cafeteria plan is taxable to an employee.
Answer: TRUE
T/F The fair value of lodging cannot be excluded from gross income unless the employee is required to accept the lodging as a condition of employment.
Answer: TRUE
T/F The value of health, accident, and disability insurance premiums paid by an employer are generally not included in an employee's gross income.
Answer: TRUE
T/F Upon the sale of property, a portion of the selling price equal to the basis in the property is considered a return of capital to the seller and is therefore not taxable.
Answer: TRUE
T/F While payments received because a person has been physically injured are excluded from gross income, payments on account of non-physical injury must be included in gross income.
Answer: TRUE
T/F Jeff, who has been employed by the Peach Corporation for twelve years, receives $400 cash for his years of hard work. The cash award is taxable.
Answer: TRUE Explanation: Employee awards in the form of cash do not qualify for the employee achievement or qualified plan awards.
T/F A nursing home maintains a cafeteria that is used by employees, patients, and visitors. The value of free meals provided to employees while on duty so that they may be available for emergency calls is not taxable
Answer: TRUE Explanation: The meals are provided on the premises for the convenience of the employer.
T/F John, an employee of a manufacturing company, suffered a heart attack and was unable to work for six months. He received $1,500 per month of disability benefits as a result of an employer-provided group policy. The benefits are includible in John's gross income.
Answer: TRUE Explanation: Employer-funded disability benefits are taxable.
T/F Many exclusions exist due to the benevolence of Congress or as a result of the government's attempts to encourage particular social behavior.
TRUE
