Ch.2 Gross Income and Exclusions Quiz

Tim receives $500 of qualified dividends from Exxon in 2014. He is in the 10 percent ordinary tax bracket. Tim's tax on the dividends will be:

$0 Feedback: For taxpayers in the 10% of 15% tax brackets, the qualifying dividend rate is 0%.

Jerry and Sally were divorced under an agreement executed July 1, 2014. The terms of the agreement provide that Jerry will transfer to Sally his interest in a rental house worth $250,000 with a tax basis to Jerry of $80,000. What is the amount of the gain that must be recognized by Jerry on the transfer of the property and what is Sally's tax basis in the property after the transfer, respectively?

$0 and $80,000

Richard, who retired on April 30, 2014, receives a monthly employee annuity benefit of $1,400 payable for life, beginning May 1, 2014. During his years of employment, Richard contributed $29,400 to the company's plan. Richard's age on May 1 is 66. Using the simplified method, how much of the annuity payment amounts received during 2014 ($11,200) may Richard exclude from gross income?

$1,120

Seymore named his wife, Penelope, the beneficiary of a $100,000 insurance policy on his life. The policy provided that, upon his death, the proceeds would be paid at a rate of $4,000 per year plus interest over a 25-year period. Seymore died June 25, 2013, and in 2014 Penelope received a payment of $5,200 from the insurance company. What amount should she include in her gross income for 2014?

$1,200 Feedback: $5,200 - $4,000 (only the portion designated as interest income)​

Sam died on January 15, 2004 and left his wife, Terry, an insurance policy with a face value of $100,000. Terry elected to receive the proceeds over a 10-year period ($10,000 plus interest each year). This year Terry receives $11,500 ($10,000 proceeds plus $1,500 interest) from the insurance company. How much income must Terry report from this payment?

$1,500

In 2014, Uriah received the following interest payments: Interest of $400 on an overpayment of 2013 Federal income taxes Interest of $300 from his bank certificate of deposit. Interest of $1,500 on municipal bonds Interest of $1,000 on United States savings bonds (Series HH) What amount, if any, should Uriah report as taxable interest income on his 2014 individual income tax return?

$1,700 Feedback: ($400 + $300 + $1,000)

Marie had a good year. She received the following prizes and awards: - an iPad from The Oprah Show with a fair market value of $500 - lottery winnings of $1,000 received in cash - a plaque worth $25 plus $100 of Godiva chocolate in recognition for 100 days on the job without an accident - a $10,000 cash prize from American Idol How much of her prizes and awards should Marie report on her tax return?

$11,500; the award from her job is excluded Feedback: ($500 + $1,000 + $10,000)

Elmer received the following distributions from Virginiana Mutual Fund for the calendar year 2014: Ordinary dividends $250 Capital gain distributions $170 Nontaxable distributions $ 80 Elsie, Elmer's wife, did not own any of the Virginiana Mutual Fund shares, but she did receive $175 in interest on a savings account at the Moss National Bank and $1,475 in interest on California Municipal Bonds. Elmer and Elsie filed a joint income tax return for 2014. What amount is reportable as taxable interest income?

$175 Feedback: The dividends are reported as dividend income, not interest. The municipal bond interest is exempt.

Roger is required under a 2004 divorce decree to pay $200 of alimony and $500 of child support per month for 12 years. In addition, Roger makes a voluntary payment of $100 per month. How much of the total monthly payment is deductible by Roger?

$200

Elsie received the following distributions from Virginiana Mutual Fund for the calendar year 2014: Ordinary dividends (nonqualifying) $250 Capital gain distributions $170 Nontaxable distributions $ 80 Elmer, Elsie's husband, did not own any of the Virginiana Mutual Fund shares, but he did receive $1,600 in interest on a savings account at the Moss National Bank. Elmer and Elsie filed a joint income tax return for 2014. What portion of the distributions from Virginiana Mutual Fund is taxable as ordinary income on their 2014 individual income tax return?

$250

To pay for college, Henry received the following: $1,000 scholarship from the Thespian Club to pay for books $5,000 scholarship from the Elks Lodge for tuition $4,000 worth of room and board as a dorm supervisor through a work-study program How much income must Henry report on his tax return?

$4,000

Nicole is a student at USB Law; she receives a $52,000 scholarship for 2014. Of the $52,000, $40,000 is used for tuition, $7,000 is used for books, and $5,000 is used for room and board. How much of the scholarship is excluded from taxable income for Nicole in 2014? A) $5,000

$47,000 Feedback: Scholarship used for room and board is not excludable.

Laura and Leon were granted a divorce in 2005. In accordance with the decree, Leon made the following payments to Laura in 2014: Child support payments contingent on the age of the child $4,000 Annual cash payments, other than child support, specified as alimony in the divorce agreement $6,000 How much should Laura include in her 2014 taxable income as alimony? A) $0

$6,000

Laura and Leon were granted a divorce in 2005. In accordance with the decree, Leon made the following payments to Laura in 2014: Child support payments contingent on the age of the child $4,000 Indefinite periodic payments terminating on Laura's death $6,000 How much of the payments can he deduct as alimony in 2014?

$6,000

Mary received the following items during 2014: Christmas bonus from her employer $500 Christmas gift from her father $ 35 Prize won in a radio show contest $100 What is the total amount of the above items that must be included in Mary's 2014 gross income?

$600

As a Christmas thank you for being a good employee, Ed's TV Repair gave 62-year-old Edwina three shares of its stock worth $20 per share. Edwina then received dividends of $1 per share related to the stock. How much should be included in Edwina's gross income?

$63 Feedback: Gifts from an employer are almost always taxable income unless a service award meeting certain requirements.

Arthur, age 19, is a full-time student at Gordon College and is a candidate for a bachelor's degree. During 2014, he received the following amounts: Tuition scholarship $2,400 Loan from college financial aid office $1,000 Cash support from parents $2,000 Ordinary cash dividend $ 500 Cash prize awarded in contest $ 300 What is his adjusted gross income for 2014?

$800

Richard and Alice are divorced and under the terms of their written divorce agreement signed on December 30, 2007, Richard was required to pay Alice $1,500 per month of which $700 was designated as child support. He made 12 such payments in 2014. Additionally, Richard voluntarily paid Alice $1,200 per month for 12 months of 2014, no portion of which was designated as child support. Assuming that Alice has no other income, her tax return for 2014 should show gross income of:

$9,600 Feedback: [12 x ($1,500 - $700)]

For 2014, the maximum percentage of Social Security benefits which must be included in a taxpayer's gross income is?

85%

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

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

In which of the following cases may the employee exclude the meals and/or lodging:

A headmaster at a boarding school is required to be on campus all night.

Which of the following would result in life insurance proceeds that are taxable to the recipient?

A life insurance policy transferred to a creditor in payment of a debt

Which of the following gifts or prizes would be considered taxable income to the person receiving the gift?

A ski boat won by the taxpayer on the Price is Right

Which taxpayer would benefit the most from a tax-free municipal bond compared to a taxable bond?

A taxpayer who won a mega-million-dollar lottery Feedback: Higher income generally leads to higher tax rates which lowers the after-tax return on a taxable bond.

All of the following amounts must be included in gross income, except

Accident insurance proceeds

In the tax law, the definition of gross income is:

All income from whatever source derived

Which of the following may be excluded from income?

All of the above are excluded from gross income

Susie received unemployment benefits in the current year.

All of the unemployment benefits are taxable.

Employer-provided spending accounts:

Allow qualifying expenses to be treated as tax-free reductions in the employees' salaries

Which of the following is generally excluded from gross income?

Disability benefits

For divorces after 1984, which of the following statements about alimony payments is not correct?

Divorced or legally separated parties can be members of the same household at the time the payments are made

Which of the following is correct?

Employee discounts are not tax-free if they exceed the employer's gross markup for merchandise.

Dr. J's outstanding player award is not includible in income, since the award is in recognition of his outstanding performance.

False, Awards are taxable income to the recipient unless they meet qualifications for certain employee length of service or safety awards.

Disability benefits are generally taxable to the individual receiving the amounts.

False, Disability benefits are generally excluded from gross income

Dividend income arising from stock received as a gift is excluded from gross income since the dividends are considered part of the gift.

False, Dividend income arising from stock received as a gift is taxable.

Awards, bonuses, and gifts are all included in gross income.

False, Gifts are excluded from gross income.

To promote business activity, the tax rules generally are very liberal in treating business gifts as tax-free income to the recipient.

False, Gifts made in a business setting are generally considered disguised income. The courts are likely to rule that business gifts are taxable income.

Group term life insurance premiums paid by an employer for insurance amounts less than $50,000 must be included in the employee's income.

False, Group term life insurance premiums paid by an employer for insurance amounts less than $50,000 are excluded from gross income.

Payments made by an employer for health insurance on behalf of an employee are considered income to the employee at the time the payments are made.

False, Health insurance premiums paid by a taxpayer's employer are excluded from the taxpayer's income.

If a life insurance policy is transferred to the insured's partnership for valuable consideration, the insurance proceeds are taxable when received by the partnership.

False, If a life insurance policy is transferred to the insured's partnership for valuable consideration, the insurance proceeds are not taxable when received by the partnership.

An auto that is received as a prize should be included in the taxpayer's income at its list price rather than its fair market value.

False, If a prize or award is received in property instead of cash, the fair market value of the property is included in the taxpayer's income.

Interest earned on bonds issued by a state government is fully taxable.

False, Interest earned on bonds issued by a state government is excluded from gross income.

Interest on U.S. Treasury Bonds is not taxable.

False, Interest on U.S. Treasury Bonds is taxable.

When calculating the exclusion ratio for an annuity, the ratio should be revised when there is a significant change in the taxpayer's status or health.

False, Once calculated, the exclusion ratio for an annuity remains constant even if the annuitant's situation changes.

Child support payments are deductible by the spouse making the payments

False, Payments made for child support are not deducitble

If an employer claims a business deduction for group health insurance premiums paid on behalf of his employees, the amount must be included in the employees' gross income.

False, Premiums for group health insurance paid on the behalf of an employee are excluded from the employee's income and may be deducted by the employer.

The value of lodging provided to a professor to enable him to live near the campus is excluded from gross income.

False, Since a professor is not required to live on campus, the value of lodging is included in gross income.

Payments made to a qualified retirement plan by an employer are considered part of the employee's investment in the contract for calculation of the annuity exclusion ratio.

False, Since payments made to a qualified retirement plan by an employer are not taxable when made, they are not part of the investment in the contract.

Taxpayers must report interest income on Series EE savings bonds as the interest accrues.

False, Taxpayers report the interest in the year the bonds are cashed or mature, whichever is earlier, or taxpayers may elect to report the increase in the redemption value each year.

A gift received from a financial institution for opening a bank account is not taxable income to the recipient.

False, The fair market value of gifts or services a taxpayer receives for opening a bank account is taxable income.

Under a divorce agreement executed in 2014, periodic payments of either cash or property must be made at regular intervals to be deductible as alimony.

False, To be deductible, alimony payments must be made in cash.

All of the following amounts are taxable income to the recipient except

Gifts

Indicate whether each of the items listed below would be (a) included in gross income or (b) excluded from gross income for the 2014 tax year. A. Included B. Excluded

Included :Wages , Included :Farm income , Excluded :Scholarships for tuition and books , Excluded :Child support payments , Excluded :Municipal bond interest , Excluded :Reimbursement of hospital expenses from a health insurance plan , Included :Alimony , Excluded :Inheritances , Included :Unemployment compensation , Included :Lottery winnings , Excluded :Life insurance proceeds received upon the death of a family member

Which of the following is nontaxable income to the recipient for tax purposes?

Inheritances

Indicate which of the following statements is true.

Medical flexible spending accounts can be used to cover dentist fees.

Steve and Laura were divorced in 2008. Laura pays Steve alimony of $1,200 a month. The payment amount was agreed upon in the decree of divorce. To save money, Steve and Laura still live together. Are the alimony payments that Steve receives in 2014 includable in his income? Can Laura take a deduction for alimony paid?

No, since Steve and Laura still live together, the payments are not considered alimony.

Robert works for American Motors. American Motors pays a $1,200 premium on Robert's health insurance in 2014. Robert has an operation on his big toe in 2014 that cost $7,200. The insurance company paid for $6,800 of it. Which one of the following is true for 2014?

None of these events are taxable on his 2014 return.

Which of the following amounts must be included in the gross income of the recipient?

Royalties

Which of the following is excluded from gross income?

Scholarships for tuition

Steve worked as a tech supervisor for a computer company. In September of 2014, he was laid off. He was paid unemployment compensation for the rest of the year totaling $7,000. Which of the following is true?

Steve will have to report all $7,000 of the unemployment compensation as income.

In regards to Social Security benefits:

Tax-free interest income must be included in the formula used to determine if Social Security is included in taxable income.

Which of the following is not taxable income?

Welfare benefits

Which of the following is classified as nontaxable income?

Welfare payments

An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a municipal bond which pays an interest rate of 7.9 percent per year. The investor is in the 15 percent tax bracket. Which bond will give the investor a higher after-tax interest rate and for which reason?

The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an equivalent after-tax rate of 7.65 percent. Feedback: The after tax rate (7.9 percent) on the municipal bond is the pre-tax rate​ since interest on this bond is tax-exempt.

All of the following amounts are excluded from gross income, except

Tips and gratuities

A "no-additional-cost" service includes only those services in the major line of business in which the employee is employed.

True

A scholarship for room and board granted in 2014 is fully taxable to the recipient.

True

Amounts received as scholarships for books and tuition may be excluded from the recipient's taxable income.

True

Amounts received by an employee as reimbursement for medical expenses under a policy provided by the taxpayer's employer are excluded from gross income.

True

Cash allowances for meals or lodging generally must be included in the employee's income.

True

If a divorce agreement executed in 2014 specifies that a portion of the amount of an alimony payment is contingent upon the status of a child, that portion is considered to be a child support payment.

True

If an annuitant, whose annuity starting date was January 1, 2001, dies before recovering his or her investment in the annuity, any unrecovered investment is recognized as a loss on the annuitant's tax return for the year of death.

True

In some cases, Social Security benefits may be partially taxable

True

Interest income received by a cash basis taxpayer is generally reported in the tax year it is received.

True

Noncash items received as income must be included in income at their fair market value

True

The receipt of an inheritance is excluded from the taxable income of the recipients

True

Unemployment compensation is fully taxable to the individual receiving the compensation

True

Anthony is a marine biologist who spends months living on a boat in the ocean studying the impact of runoff water a hundred miles off the coast as a part of his job. Which of the following sentences is the most accurate?

b & c are correct, not a. Feedback: Meals and lodging were provided at the convenience of the employer. Additionally, Anthony could not reasonably return home each night.