Chapter 5

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

A

Action Sport is an S corporation owned equally by three shareholders. During the current year, Action Sport generated taxable income of $60,000. What is the tax treatment, if any, of the $60,000 income? a. Action Sports will report and pay tax on $60,000. b. Each shareholder will report $20,000 in taxable income. c. Each shareholder will report the portion of income that he or she receives in cash, and Action Sport will pay tax on the remaining income. d. S corporations are tax-exempt entities, so there is no tax liability resulting from Action Sport's operations.

B

Allison won $3,200 betting on a long-shot in the Kentucky Derby. Unfortunately, she lost her lucky streak and ended up losing $5,000 on her next (and last) trip to the racetrack. Allison heard that she will be able to deduct her gambling losses, so she is feeling a little better. Assuming that Allison is not a professional gambler and does not itemize deductions, how much of the $5,000 loss will she be able to deduct? a. $5,000 b. $0 c. $3,200

B

What is the tax treatment for a taxpayer receiving a gold watch valued at $350 in recognition of his 25th year of working for the same company? a. The value of the watch is included from gross income. b. The value of the watch is excluded from gross income. c. The value of the watch is only excluded from gross income if the taxpayer donates it to a charitable organization. d. One-half of the value of the watch must be included in gross income.

B

Which of the following statements is CORRECT regarding the recognition of income? a. Income is realized for the return of the capital received in a sales transaction. b. Income may be in the form of cash, property, or services received in a transaction. c. Income is realized when a taxpayer receives a refund of an amount that was not deducted in a prior period.

B

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, $100 from U.S. Treasury bonds. How much of the interest received will be included in gross income? a. $700 b. $600 c. $300 d. $200

C

Which of the following types of imputed income are NOT included in the gross income and are not taxable to the person receiving the benefit? a. 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

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

C

Mary has received the following income and fringe benefits during the current year: a $73,000 salary; $600 premiums paid by the employer in employer-provided disability insurance; $5,000 in workers' compensation; $1,200 in corporate bond interest; a $23,000 car won on a game show; and a $1,200 health insurance reimbursement for medical expenses paid during the year. Which of these amounts should Mary include in her gross income? a. $5,000 workers' compensation b. $600 disability premiums c. $73,000 salary d. $1,200 corporate bond interest e. $1,200 health insurance reimbursement

C, D

_____ _______ is deemed to occur when the income has been credited to the taxpayer's account or when the income is unconditionally available to the taxpayer, the taxpayer is aware of the availability and there are no restrictions on the income. (Note; please use only one word per blank.)

Constructive Receipt

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

D

Andrew earned $5,000 in wages while working a part-time job during the current year. He also received a scholarship for $12,000. He used $9,000 for tuition and $800 for books. The remaining $2,200 went to help cover the cost of housing. During the summer, Andrew's uncle died and Andrew inherited $30,000. What is the amount of Andrew's gross income for the current year? a. $44,800 b. $35,000 c. $14,800 d. $36,200 e. $7,200 f. $17,000

E

Income from _______ takes different forms, such as dividends, interest, rents, royalties, and annuities.

Property

Nonrecognition provisions refer to specific types of income that taxpayers realize but are allowed to permanently _________ from gross income or temporarily ____________ until a later period.

exclude, defer

T/F: Income and deductions from a partnership or S corporation are taxed on the owners' tax returns rather than the entity tax return.

True

T/F: Punitive damages are fully taxable to the recipient.

True

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

alimony

For all divorce agreements executed after December 31, 2018, _________ payments are excluded from gross income of the recipient and ___________ (deductible/nondeductible) for the spouse making the payment.

alimony, nondeductible

Arnie was the beneficiary of his wife's life insurance policy. He received $100,000 in June from the policy after his wife's death. He also sold some land that he had purchased a couple of years earlier. He sold the land for $6,000. He only paid $3,500 for the land when he bought it. Arnie is self-employed and earned a profit in his business of $55,000 (ignoring the self-employment tax deduction). What is the amount of Arnie's gross income for the current year? a. $61,000 b. $157,500 c. $57,500 d. $161,000

$57,500

T/F: Darlene owns stock in several different companies. When she received a dividend check from her Avatar stock, she endorsed the checks and deposited the money in her daughter's checking account. Consequently, her daughter will be assessed the tax on the dividends.

False

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

True

Gross income means all income from _____ ______ ______

whatever source derived

The earnings on a Section ______ plan are NOT taxable to the beneficiary if the distributions from the account are used to pay qualified higher education expenses.

529

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

85

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

A

Which of the following statements is FALSE? a. Gross income includes only those sources of income that are specifically listed in IRC Sec. 61. b. Gross income includes all income from whatever source derived, unless excluded by law. c. The definition of gross income is all-inclusive, since Section 61 of the IRC states that all income is potentially taxable. d. Gross income includes income realized in any form, whether in money, property, or services.

A

Which of the following statements is INCORRECT regarding gambling winnings and losses for recreational gamblers? a. The excess of gambling winnings over gambling losses are included in gross income. b. Gambling losses in excess of gambling winnings are not deductible. c. Gambling winnings are included in gross income. d. Gambling losses must be deducted as an itemized deduction.

A

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

A

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

A

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

A, B

Chad has received the following income and benefits during the current year: $65,000 salary, $4,800 employer-provided health insurance, $1,500 municipal bond interest, $2,000 dividend income, $500 from a partnership, and a $10,000 judgment for lost wages due to an age discrimination lawsuit. What amounts should Chad include in his gross income? (Check all that apply.) a. $500 partnership income b. $2,000 dividend income c. $4,800 health insurance d. $65,000 salary e. $1,500 municipal bond interest f. $10,000 judgment

A, B, D, F

Which of the following choices are characteristics of Coverdell Educational Savings Accounts? (Check all that apply.) a. Earnings on the account are NOT taxable if used for qualified educational expenses. b. Distributions may be used to pay for qualified educational costs of kindergarten through 12th grade. c. The contribution limit is NOT subject to any phase out for higher levels of AGI. d. Expenses for higher education, such as tuition and books, are NOT qualified educational expenses for this type of account. e. The maximum yearly contributions to the account are limited to $2,000 for each beneficiary. f. Reasonable room and board costs are included in qualified higher education expenses.

A, B, E, F

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

A, C, D

Which of the following choices are characteristics of qualified tuition programs, also known as Section 529 plans? (Check all that apply.) a. Earnings on the account are NOT taxable if used for qualified higher education expenses. b. The maximum yearly contributions to the account are limited to $2,000 for each beneficiary. c. Distributions to contributors are NOT subject to income tax, but they do incur a 10% penalty. d. The distributions can be made for tuition expenses for kindergarten through 12th grade. e. Distributions made to the beneficiary for purposes other than education will incur taxation and a penalty on the earnings of the plan.

A, E

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

B

Which of the following statements is INCORRECT regarding gambling winnings and losses for recreational gamblers? a. Gambling losses in excess of gambling winnings are not deductible. b. The excess of gambling winnings over gambling losses are included in gross income. c. Gambling winnings are included in gross income. d. Gambling losses must be deducted as an itemized deduction.

B

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. $3,500 b. $500 c. $3,000 d. $0

D

Which of the following cash receipts are taxable to the recipient? (Check all that apply.) a. Loan proceeds b. Prizes c. Gambling winnings d. Awards e. Child support

B, C, D

Which of the following choices describe exclusions and deferrals for tax purposes? (Choose all that apply.) a. These provisions are generally deducted from AGI and reduce taxable income. b. These provisions are often granted in order to subsidize or encourage particular behaviors. c. These provisions are narrowly defined. d. These provisions reduce the tax liability dollar for dollar. e. These provisions are the result of specific congressional action.

B, C, E

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

B, C, E

Under which of the following circumstances might life insurance proceeds be included in gross income? (Check all that apply.) a. When the proceeds of the policy are paid to the beneficiary in one lump sum b. When a life insurance policy is transferred to another party for valuable consideration c. When the beneficiary of a life insurance policy is NOT related to the insured d. When a life insurance policy is cashed out by the insured before death and the proceeds exceed the premiums paid

B, D

Which of the following choices are characteristics of qualified tuition programs, also known as Section 529 plans? (Check all that apply.) a. Distributions to contributors are NOT subject to income tax, but they do incur a 10% penalty. b. Earnings on the account are NOT taxable if used for qualified higher education expenses. c. The distributions can be made for tuition expenses for kindergarten through 12th grade. d. Distributions made to the beneficiary for purposes other than education will incur taxation and a penalty on the earnings of the plan. e. The maximum yearly contributions to the account are limited to $2,000 for each beneficiary.

B, D

Which of the following statements are INCORRECT regarding the receipt of Social Security benefits? (Check all that apply.) a. Social Security benefits are not taxable if the recipient has relatively low taxable income. b. Social Security benefits are not taxable because the contributions were taxed when the taxpayer was working. c. Up to 85% of Social Security benefits may be taxed to taxpayers with moderate to high taxable income. d. 50% of Social Security benefits are taxable to all taxpayers because the employer contributed funds that were never taxed to the employee.

B, D

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? (Check all that apply.) a. $4,000 housing b. $60 lab fees c. $1,070 meals d. $9,000 tuition e. $750 books f. $120 parking fees

B, D, E

Certain types of investment earnings are nontaxable if the proceeds are used to pay for qualifying educational expenditures. Which of the following types of investments qualify for this treatment? (Check all that apply.) a. Municipal bonds b. Coverdell savings accounts c. Roth IRA plans d. Section 529 plans e. U.S. Series EE bonds

B, D, E

Which of the following choices are characteristics of Coverdell Educational Savings Accounts? (Check all that apply.) a. The contribution limit is NOT subject to any phase out for higher levels of AGI. b. Reasonable room and board costs are included in qualified higher education expenses. c. Expenses for higher education, such as tuition and books, are NOT qualified educational expenses for this type of account. d. Earnings on the account are NOT taxable if used for qualified educational expenses. e. Distributions may be used to pay for qualified educational costs of kindergarten through 12th grade. f. The maximum yearly contributions to the account are limited to $2,000 for each beneficiary.

B, D, E, F

Which of the following options is NOT available to taxpayers who have worked outside the United States and meet the requirements necessary to receive tax relief on their foreign earnings? a. Tax credit for foreign taxes paid b. Tax deduction for foreign taxes paid c. Income exclusion for foreign-earned income d. Tax deduction for foreign-earned income

D

T/F: Scholarships received by college students qualify as gifts and are, therefore, nontaxable. The actual use of the money (tuition, fees, housing, meals, and any other expenses) does not affect the taxable status of the scholarship.

False

The _______ _________ _______ doctrine holds that the taxpayer who earns income from services must recognize the income, and the income from property is taxed to the person who owns the property.

assignment of income

Rather than claiming the foreign-earned income exclusion, taxpayers may claim a foreign tax _____ or a foreign tax ______ for income taxes paid to other countries.

credit, deduction

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

earned

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

When an individual transfers property to another taxpayer during their life, without receiving or expecting to receive value in return, the property transferred is a(n) ______ and is _______ (taxable/nontaxable) to the person receiving the property.

gift, nontaxable

In general, when a taxpayer's debt is discharged by a lender, the taxpayer's gross income will ________ (include / exclude) the amount forgiven.

include

For below-market-loans, the discounted interest rate is treated as interest _________ to the lender and interest _______ to the borrower.

income, expense

Interest on __________ bonds is excluded from federal income taxation.

municipal

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

nontaxable

In personal injury cases, any damages awarded due to ________ injury are exempt from taxation.

physical

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

receive, earn