Chapter 5

True or false: Punitive damages are fully taxable to the recipient.

True Punitive damages are taxable because their purpose is to punish the harm-doer rather than compensate the taxpayer.

For any divorce or separation agreement executed after December 31, 2018, ____________ payments are not included in the gross income of the recipient and are _________________ (deductible/non-deductible) by the person paying it.

alimony; non-deductible

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

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

imputed

Any reimbursement a taxpayer receives from a medical or accident insurance policy for medical expenses paid by the taxpayer during the current year are _________ (taxable/nontaxable) for the taxpayer.

nontaxable

Under the realization principle, income is realized when (1) a taxpayer engages in a(n) ____________ with another party, and (2) the _____________ results in a(n) ______________ change in property rights.

transaction; transaction; measurable

Arnie is single and receives Social Security benefits. His modified AGI is $27,000 and his Social Security benefits are $7,200 per year. $________ of his Social Security benefits are taxable.

$2,800

Mitchell and Midge are married and file a joint return. Mitchell receives $9,600 in Social Security each year. Their modified AGI is $48,000. $__________ of the Social Security benefits is subject to taxation.

$8,160

What are the advantages of the realization principle for defining gross income? (Check all that apply) 1) It provides the taxpayer with the wherewithal to pay when cash is received in the transaction. 2) It provides the taxpayer with the opportunity to shift income to a related taxpayer who is in a lower tax bracket. 3) It provides an objective measure of the value of the transaction. 4) It allows the taxpayer to exclude the transaction from gross income.

1 and 3

Which of the following situations will result in an award being excluded from gross income? (Check all that apply) 1) When the award is given for scientific, literary, or charitable achievement and meets certain other requirements. 2) When the award has a charitable component, such as a television giveaway, where guests are given needed items. 3) 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. 4) When the award is a noncash item valued at less than $400, and given for either safety or years of service by an employee.

1 and 4

Which of the following represents economic benefits received by a taxpayer to have gross income? 1) A computer received in exchange for services rendered 2) Interest income on investments 3) Cash received for completing a job 4) Cash received from a bank loan

1, 2, and 3

Under which of the following circumstances might life insurance proceeds be included in gross income? (Check all that apply) 1) When the beneficiary of a life insurance policy is NOT related to the insured. 2) When a life insurance policy is transferred to another party for valuable consideration. 3) When a life insurance policy is cashed out by the insured before death and if the proceeds exceed the premiums paid. 4) When the proceeds of the policy are paid to the beneficiary in one lump sum.

2 and 3

Which of the following statements are characteristics of alimony for divorce decrees before 1/1/19? (Check all that apply) 1) Alimony can include property divisions between ex-spouses in a divorce agreement. 2) Alimony shifts income from one spouse to another. 3) Alimony is NOT deductible to the person paying it. 4) Alimony is included in the gross income of the person receiving it. 5) Alimony may be paid to a spouse who is still living with the payer as long as there is a separation agreement in place. 6) Alimony must be paid in kind.

2 and 4

In order to exclude the maximum amount of foreign-earned income from U.S. taxation, the following conditions must be met. (Check all that apply) 1) The taxpayer must have lived in the country for at least 6 months in the current year. 2) The taxpayer must be considered a "resident" of the foreign country. 3) The taxpayer must NOT be a U.S. citizen. 4) The taxpayer must be an employee of the U.S. government on a temporary assignment in the foreign country. 5) The taxpayer must have resided in the foreign country for 330 days in a consecutive 12-month period.

2 and 5

Which of the following statements is INCORRECT regarding the receipt of Social Security benefits? (Check all that apply) 1) Social Security benefits are not taxable if the recipient has relatively low taxable income. 2) Up to 85% of Social Security benefits may be taxed to taxpayers with moderate to high taxable income. 3) 50% of Social Security benefits are taxable to all taxpayers because the employer contributed funds that were never taxed to the employee. 4) Social Security benefits are not taxable because the contributions were taxed when the taxpayer was working.

3 and 4

Which of the following statements is NOT correct regarding alimony for divorce decrees before 1/1/19? (Check all that apply) 1) Alimony payments must be made in cash. 2) Alimony is included in gross income for the person receiving it. 3) Alimony is NOT deductible for AGI for the person paying it. 4) Alimony is another term for child support.

3 and 4

In which of the following situations has constructive receipt occurred in the earlier year? (Check all that apply) 1) Ashley's last paycheck of the year was dated Dec. 30. She was unable to cash the check because the employer has insufficient funds. 2) Andrew worked the last two weeks of the year, but he will not be paid for those hours until January 4. 3) Alex was out of town on December 31 and, therefore, unable to pick up his final paycheck. He picked it up on January 2. 4) Amber received a year-end bonus check dated December 28, but she did not cash the check until Jan. 3. 5) Arnold earned interest of $300 on his savings account, but did not withdraw the funds until the following year.

3, 4, and 5

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 as miscellaneous itemized deduction, so she is feeling a little better. How much of Allison's losses will she be able to deduct? A) $3,200 - She can only deduct the losses to the extent of her winnings. B) $0 - Gambling is not a business venture, so she will not deduct any of her losses. C) $5,000 - She can deduct the full amount if she has documentation that verifies the losses.

A) $3,200 - She can only deduct the losses to the extent of her winnings.

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

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) $7,200 B) $44,800 C) $36,200 D) $35,000 E) $14,800 F) $17,000

A) $7,200

Which one of the following is NOT an advantage of the cash method for reporting income? A) Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them. B) Taxpayers recognize income in the period they receive it, giving them the wherewithal to pay the tax. 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.

A) Taxpayers are able to deduct expenses in the period incurred, which may be before they actually pay them. This is an advantage of the accrual method of reporting income.

The ___________ principle for determining when income is generated provides taxpayers with an objective measure for valuing the transaction and with the wherewithal to pay the taxes when cash is involved. A) realization B) wherewithal to pay C) gross income D) recognition

A) realization

Which of the following statements is INCORRECT regarding gambling winnings and losses for recreational gamblers? A) Gambling losses and related expenses are usually deductible as miscellaneous itemized deduction. B) Gambling losses are deductible to the extent of gambling winnings. C) The excess of gambling winnings over gambling losses are included in gross income. D) Gross amount of gambling winnings are included in gross income.

C) The excess of gambling winnings over gambling losses are included in gross income.

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 works out a debt settlement arrangement that lowers his debt, rather than totally discharging it. C) When the taxpayer is insolvent before, but not after the debt forgiveness. D) When the taxpayer is insolvent before and after the debt forgiveness.

D) When the taxpayer is insolvent before and after the debt forgiveness.

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

False Prizes and awards are taxable unless they meet very specific exceptions.

In general, when a taxpayer cashes out a life insurance policy before death, taxable income may result. However, if the taxpayer is ___________ ill, the portion of the income required for long-term care is excluded from gross income. If the taxpayer is __________ ill, the proceeds are NOT taxable.

chronically; terminally

The ________ _____ ________ doctrine states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income.

claim of right

In a(n) ______________ __________ system, the income earned from services by one spouse is treated as though it was earned equally by both spouses.

community property

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 _________ (nontaxable/taxable) to the person receiving the property.

gift; nontaxable

Taxpayers are generally required to recognize all realized income by reporting it as ________ __________ on their tax returns.

gross income

Gross income means all income from ___________ ____________ ____________.

whatever; source; derived