Income Tax Preparation Chapter 3 Gross Income: Inclusions and Exclusions

Frank, who is single, received $8,000 of social security benefits. His AGI before the social security benefits was $15,000. He also had $100 of tax-exempt interest. What is the amount of taxable social security benefits?

$0 (The provisional income of $19,100 ($15,000 + $100 + $4,000) does not exceed the threshold of $25,000.)

In 2016, Anna borrowed $13,000. In 2021, the debt was forgiven. Anna does not believe she should report the forgiveness of debt as income because she received nothing at the time the debt was forgiven in 2021. What amount of income should Anna record in her tax return in relation to debt forgone?

$13,000 (The debt forgiveness must be reported in income in the year it was forgiven. Although it is true that Anna did not receive any cash or property in 2021, she was relieved of the obligation to repay the debt. As a result, she received an economic benefit in 2021 and must report income.)

Bruce is single and had itemized deductions of $20,000 on his 2020 tax return. He included $2,000 of state taxes in his itemized deductions. In 2021, he received a $200 refund of state taxes paid in 2020. How much of the refund (if any) should Bruce include in his taxable income for the current year (2021)?

$200 (The taxable amount is the lesser of (a) the amount received [$200], (b) the amount deducted on Schedule A [$20,000], or (c) the amount by which the itemized deduction exceeded the standard deduction [$20,000 - $12,950 2010 standard deduction amount = $7,050)

During the current year, Sam received interest income from the following investments: $250 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?

$300 (The State of Wyoming and City of Laramie bonds are not taxable.)

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?

$4,000

Graciela, who is single, reported itemized deductions of $12,800 on her 2020 tax return. Her itemized deductions included $410 of state taxes paid. In 2021, she received a $420 refund of state taxes paid in 2020. What is the amount that Graciela needs to report on her 2021 tax return? Use the Internet (www.irs.gov) to find out how much the standard deduction was for 2020.

$400 (Itemized deductions of $12,800 less the standard deduction of $12,400 for 2020.)

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 salary and interest are the only amounts included in gross income.)

Carl and Karina file a joint return. Karina earned a salary of $40,750 and received dividends of $3,220, taxable interest income of $2,110, and nontaxable interest of $1,055. Carl received $9,440 of social security benefits and a gift of $6,110 from his brother. What amount of social security benefits is taxable to Carl and Karina?

$8,024 Salary $ 40,750 Dividend income 3,220 Taxable interest income + 2,110 Tax-exempt interest income 1,055 One-half social security benefits 4,720 ________ Provisional income $ 51,855 Note that the gift does not enter into the calculations since it is tax-free to Carl and Karina and it is not an item that is required to be added back to provisional income. The amount of taxable social security benefits is equal to the lesser of (a) 85% of the benefits or (b) 85% of the excess of provisional income over $44,000 plus the lesser of (1) $6,000 or (2) 50% of benefits. Item (a) above is equal to $8,024 (9,440 x 85%). Item (b) above is equal to $6,676.75 (the excess over $44,000 times 85%) plus $4,720 (the lesser of $6,000 or 50% of benefits) for a total of $11,396.75. Thus, the taxable amount of social security benefits for Carl and Karina is $8,024.

Assume the taxpayer does NOT wish to contribute to the Presidential Election Fund, unless otherwise stated in the problem. In addition, the taxpayers did NOT receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency during the year. Hiroshi and Mizuki Sakamoto are married filing jointly. They are 68 and 66 years old, respectively. Their address is 1001 N.W. 93rd Street, Miami, FL 33168. Additional information about Mr. and Mrs. Sakamoto, who are retired, is as follows: Social security number: Hiroshi: 412-34-5670 Date of birth: 10/9/1953 SSA-1099 for Hiroshi shows this amount: Box 5 = $21,600.00 Form 1099-INT for Hiroshi shows this amount: Box 1 = $9,100.00 from CD Bank. Social security number: Mizuki: 412-34-5671 Date of birth: 11/9/1955 SSA-1099 for Mizuki shows this amount: Box 5 = $15,600.00 Form 1099-INT for Mizuki shows this amount: Box 1 = $7,500.00 from CD Bank. Required: Prepare Form 1040 plus all the appropriate schedules and worksheets for Mr. and Mrs. Sakamoto for 2021. They want to contribute to the presidential election campaign. Use the appropriate Tax Tables. Note: List the names of the taxpayers and any income they receive in the order in which they appear in the problem starting from the first line. Input all the values as positive numbers. Do not skip rows while entering in Interest section of Schedule B.

*Fill out basic info Line 2b. 16,600 (9,100 + 7,500) 6a. 37,200 (21,600 + 15,600) 6b. 1,600 (9,100 - 7,500, income doesn't reach threshold) 9. 18,200 (16,600 + 1,600) 11. 18,200 12a. 27,800 (Married Filing Jointly amount of 25,100 + 1,350 + 1,350, each $1,350 is because both are over 65 years old) 12c. 27,800 14. 27,800 Schedule B: 1. CD Bank - 9,100 CD Bank - 7,500 2. 16,600 4. 16,600 7a. No 8. No *Everything else left blank or zero

Which of the following statements is incorrect regarding the receipt of Social Security benefits?

-50% of Social Security benefits are taxable to all taxpayers because the employers contributed funds that were never taxed to the employee. -Social Security benefits are not taxable because the contributions were taxed when the taxpayer was working.

Which of the following fringe benefits are excluded from taxation?

-Life insurance under $50,000 -Qualified educational assistance -Medical insurance -Dependent care benefits

Which of the following cash receipts are taxable to the recipient?

-Prizes -Awards -Gambling winnings

Which of the following choices describes the marginal tax treatment for qualified dividends?

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

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 _ to the person receiving the property.

-gift -nontaxable

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

-receive -earns

When an individual, who is single, has taxable income of $86,000, the tax rate on qualified dividends is:

15% (Dividends are taxed at rates of either 15%, 20%, or 0%. For married filing jointly with taxable income of less than $80,800, head of household with taxable income of less than $54,100, and married filing separately or single with taxable income of less than $40,400, the dividends are taxed at 0%. Dividends are taxed at 15% for income up to $501,600 for married filing jointly, $250,800 for married filing separately, $473,750 for head of household, and $445,850 for single taxpayers. A 20% tax rate on dividends applies for taxable income above those amounts.)

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

85

Which of the following statements is correct concerning a gift?

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?

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

True or false: Gross income only includes income received in cash because cash is a measurable change in wealth.

False

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

False

Which of the following statements is false regarding the recognition of income?

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

Which of the following fringe benefits provided by an employer is not excluded from gross income?

Life insurance coverage in excess of $50,000

Which of the following types of interest income is excluded from federal taxation?

Municipal bonds

Bruce is single and had itemized deductions of $11,800 on his 2020 tax return when the standard deduction was $12,950. He included $1,000 of state taxes in his itemized deductions. In 2021, he received a $200 refund of state taxes paid in 2020. How much of the refund (if any) should Bruce include in his taxable income for the current year (2021)?

None

Regarding portfolio investments, which types of income are taxed at a rate lower than the taxpayer's marginal tax rate?

Qualified dividends

Which one of the following is not an advantage of the cash method for reporting income?

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

Nancy, who is 59 years old, is the beneficiary of a $260,000 life insurance policy. What amount of the insurance proceeds is taxable under each of the following scenarios? a. She receives the $260,000 proceeds as a lump-sum payment. b. She receives the proceeds at the rate of $4,900 a month for five years. c. She receives the proceeds in monthly payments of $1,420 over her remaining life expectancy (assume she will live 25 years). d. Use the information from (c). If Nancy lives beyond her 25-year life expectancy, what amount of each monthly payment will be taxable in the 26th year?

a. $0 (Nancy would have no taxable income to report.) b. $567 (Nancy would receive $294,000 over the five year payment term ($4,900 × 5 years × 12 months). Of this amount, $260,000 is not taxable. She would report interest income of $34,000 over the five year period at the rate of $567 per month ($34,000/(5 × 12)). c. $553 (Based on her life expectancy, Nancy would receive $426,000 on the insurance contract. Of this amount, $260,000 is not taxable, so $166,000 would be taxable interest income. She would report income of $553 per month ($166,000/(25 × 12)). d. $1,420 (The entire $1,420 monthly payment would be reported as taxable income.)

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

fringe benefits

Interest on _ bonds is excluded from federal income taxation.

municipal

Gross income means all income from ___.

whatever source derived