Gross Income and Exclusion

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.)

Section 529 plans Coverdell savings accounts U.S. Series EE bonds

Andrea owed $12,000 on a medical bill to University Hospital. The hospital agreed to discharge the debt due to Andrea's financial situation. Immediately prior to the discharge of the debt, Andrea's debts exceeded her assets by $5,000. How much of the debt forgiveness will Andrea need to include in her gross income? $

By forgiving $12,000 in debt, Andrea will be solvent by $7,000, so she should include $7,000 in gross income.

Your Answer correct 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?

Each shareholder will report $20,000 in taxable income.

Which one of the following types of income is NOT generated from owning property?

Earnings from services rendered

Which of the following tax-advantaged accounts can be used to fund qualified educational expenses from kindergarten through 12th grade and higher education expenses such as tuition, books, fees, supplies, and reasonable room and board.

Section 529 Plans

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?

Tax deduction for foreign-earned income

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.

In order to exclude the maximum amount of foreign-earned income from U.S. taxation, which of the following conditions must be met

The taxpayer must have his or her tax home in a foreign country. The taxpayer must be considered a resident of or have resided in the foreign country for 330 days in a consecutive 12-month period.

Which of the following situations satisfies the ownership test for excluding the gain on a personal residence?

The taxpayer must have owned the residence for two or more years during the past five-year period ending on the date of sale.

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?

The value of the watch is excluded from gross income.( less than $400)

True or false: Income and deductions from a partnership or S corporation are taxed on the owners' tax returns rather than the entity tax return.

True

Which of the following terms is used to refer to income from property?

Unearned income

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

A(n)______is an investment that pays a stream of equal payments over time.

annuity

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

Which one of the following types of taxable income is NOT considered to be service income? Business income Unemployment compensation Salary income Dividend income

dividend income

Income received as a result of services provided by the taxpayer, including business income, is referred to as ______ 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, educational, school, or higher education

True or false: 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

True or false: 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

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.

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

imputed

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

include

Bart sold a parcel of land for $21,000. He paid a real estate agent a commission of $1,500 for assisting with the sale. Bart had purchased the land several years earlier for $20,000. What is the gain or loss on the sale of the land?

loss 500

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

nontaxable

Income from________takes different forms, such as dividends, interest, rents, royalties, and annuities.

property, investments, Property, or investment

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.

realization

The __________ principle states that income is received when a taxpayer completes a transaction with another party that results in a measurable change in the property rights of the two parties.

realized

Under the cash method, taxpayers recognize income in the period they_______it, rather than when they actually________it.

received, earn

When a taxpayer includes an economic benefit in gross income, he is said to have ________ the income.

recognize

Taxpayers who realize an economic benefit must_______the benefit in gross income unless it is specifically________by the tax code.

recognize, exclude

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

revenue, expense

Up to 85% of ________ benefits, in retirement, may be taxable for taxpayers with moderate to high taxable income.

social security

True or false: 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

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

true

Court-ordered cash payments pursuant to a divorce or legal separation which provide financial support to an ex-spouse and do not continue after the death of the ex-spouse are referred to as:

alimony

Choose the types of investments that generate taxable income.

Certificate of Deposits U.S. Savings Bonds Corporate bonds

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

Group life insurance coverage in excess of $50,000

Which of the following fringe benefits are excluded from taxation?

Group-term life insurance up to $50,000 Dependent care benefits up to $5,000 Medical insurance

Which of the following transactions results in realized income during the current year?

Huey receives a set of new tires valued at $400 for his car in exchange for cleaning and painting the mechanic's garage.

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

Income may be in the form of cash, property, or services received in a transaction.

Which of the following choices does NOT describe an annuity?

It is a lump sum payment that is usually received by the beneficiary of a life insurance policy.

What is the typical tax treatment for income from labor, such as salaries, wages, and fees?

It is taxable.

Janice and Jarrod are married and live in a community property state. Janice is NOT employed outside the home, and Jarrod earns a salary of $98,000. During the year, they earned $2,000 on investments that are owned jointly. The investments were made after they were married, with money earned by Jarrod. How is the gross income treated for federal income tax purposes?

Janice is deemed to have earned $50,000 and Jarrod is deemed to have earned $50,000.

Which of the following statements is INCORRECT regarding workers' compensation payments?

The payments are included in gross income because they are a replacement of wages.

Jerry receives an annuity payment of $2,500 per month. Jerry purchased the 20-year annuity for $250,000. What is the amount of the annuity that represents a return of capital and is, therefore, nontaxable?

$250,000/(20 x $2,500 x 12 mos.) = 0.4167 = 41.67%

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.)

$10,000 judgment $500 partnership income $2,000 dividend income $65,000 salary

Janice started receiving an annuity payment of $1,500 per month when she turned 68 years old. She purchased the annuity for $225,000 and will continue to draw the monthly payment for the remainder of her life. What is the amount of the annuity that represents a return of capital each year and is, therefore, nontaxable? (Round your calculation of the return of capital percentage to the nearest whole number.)

$225,000/(17.6 x $1,500 x 12 mos.) = 0.7102 = 71%

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?

- $0 Because Allison does not itemize, she will not be able to deduct any of the losses.

Under the realization principle, what must occur for income to be realized?

- A taxpayer must engage in a transaction with another party - The transaction must result in a measurable change in property rights

Which of the following statements are characteristics of alimony in a divorce decree entered into in 2019

- Alimony is NOT included in the gross income of the person receiving it. - Alimony is NOT deductible to the person paying it.

In which of the following situations has constructive receipt occurred in the earlier year?

- Arnold earned interest of $300 on his savings account, but did not withdraw the funds until the following year. - Alex was out of town on December 31 and, therefore, unable to pick up his final paycheck. He picked it up on January 2. - Amber received a year-end bonus check dated December 28, but she did not cash the check until Jan. 3.

Which of the following choices are characteristics of qualified tuition programs, also known as Section 529 plans?

- Distributions made to the beneficiary for purposes other than education will incur taxation and a penalty on the earnings of the plan. - The distributions can be made for tuition expenses for kindergarten through 12th grade. - Earnings on the account are NOT taxable if used for qualified higher education expenses.

Which of the following choices are characteristics of Coverdell Educational Savings Accounts?

- Distributions may be used to pay for qualified educational costs of kindergarten through 12th grade. - Reasonable room and board costs are included in qualified higher education expenses. - Earnings on the account are NOT taxable if used for qualified educational expenses. - The maximum yearly contributions to the account are limited to $2,000 for each beneficiary.

Which of the following types of income are generated from property ownership?

- Gain from the sale of a building - Dividends received on corporate stock - Rental income from lessees - Interest earned on U.S. Treasury bonds

Which of the following represents economic benefits to a taxpayer?

- Interest income on investments - Cash received for completing a job - A computer received in exchange for services rendered

What are the advantages of the realization principle for defining gross income?

- It provides an objective measure of the value of the transaction. - It provides the taxpayer with the wherewithal to pay when cash is received in the transaction.

Which of the following payments to a taxpayer should be included in gross income?

- Punitive damages awarded after an accident at work where the taxpayer sustained a non-physical injury - Emotional distress damages awarded due to slander of the taxpayer's reputation - Compensatory damages for lost wages awarded in a sex discrimination lawsuit

Which of the following statements are INCORRECT regarding the receipt of Social Security benefits? (Check all that apply.)

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

In order to exclude the maximum amount of foreign-earned income from U.S. taxation, which of the following conditions must be met?

- The taxpayer must be an employee of the U.S. government on a temporary assignment in the foreign country. - The taxpayer must have his or her tax home in a foreign country. - The taxpayer must be considered a resident of or have resided in the foreign country for 330 days in a consecutive 12-month period.

Which of the following choices describe exclusions and deferrals for tax purposes?

- These provisions are narrowly defined. - These provisions are often granted in order to subsidize or encourage particular behaviors. - These provisions are the result of specific congressional action.

Under which of the following circumstances might life insurance proceeds be included in gross income? (Check all that apply.)

- When a life insurance policy is transferred to another party for valuable consideration - When a life insurance policy is cashed out by the insured before death and the proceeds exceed the premiums paid

Which of the following statements are correct?

- When taxpayers sell nondepreciable assets, they may exclude the original cost of those assets from gross income. - Taxpayers who exchange or trade goods or services with each other must recognize the increase in value of the goods or services as income. - 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.

Which of the following situations will result in an award being excluded from gross income?

- When the award is a noncash item valued at less than $400, and given for either safety or years of service by an employee - When the award is given for scientific, literary, or charitable achievement and meets certain other requirements

Which of the following statements are CORRECT when describing "Workers' Compensation?"

- Workers' compensation benefits are paid to employees who have been injured in a work-related situation. - Workers' compensation benefits are not taxable to the recipient because the payments result from a physical injury.

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?

0

Chester incurred $14,500 in hospital and medical bills during the current year. His health insurance policy reimbursed him $11,600 toward those expenses. What amount should be included in Chester's gross income? $ 0

0

Jamarcus injured his hand playing softball one weekend. The injury prevented him from being able to work. Luckily for Jamarcus, he had purchased a disability policy for himself earlier in the year. Jamarcus received $1,300 in disability benefits while he was away from work. Jamarcus should include______ in gross income.

0

Jamarcus injured his hand playing softball one weekend. The injury prevented him from being able to work. Luckily for Jamarcus, his employer pays the disability insurance premium and provides disability insurance as a nontaxable fringe benefit to all employees. Jamarcus received $1,300 in disability benefits while he was away from work. Jamarcus should include _______in gross income.

1300

Single taxpayers meeting certain home ownership and use requirements can permanently exclude up to ______of the realized gain on the sale of their principal residence.

250,000

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?

300

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

Daniels, Edwards, and Findley are equal partners in DEF Industries. The company generated net income of $180,000 during the year and distributed $20,000 cash each of the partners. Edwards will report _______ in taxable income from the partnership.

80000

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.

9,600*85% = 8160

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 bargain purchase between a father and his son A bargain purchase between family members is generally deemed to be a gift, thus nontaxable to the recipient. **Loans exceeding $10,000 are subject to imputed interest rules. **Employee discounts cannot exceed 20% to be exempt from taxation.

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.

"Earned income" refers to income that is received in which one of the following situations?

Bill received $800 over the summer doing lawn care services for his neighbors.

Income realized when taxpayer receives income & there are no restrictions on use of income

Claim of Right

________ 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.

Constructive Receipts

True or false: Taxpayers who do not meet the resident requirement or live in a foreign country for at least 330 consecutive days in a 12 month period are NOT eligible to receive ANY of the foreign-earned income exclusion on otherwise eligible income. True

False Rationale: The exclusion is computed on a daily basis, so the maximum exclusion is reduced pro rata for each day during the calendar year that the taxpayer is not considered a resident or does not actually live in the foreign country. Therefore, a taxpayer may still receive some level of the foreign-earned income exclusion.

Abby sold a parcel of land for $18,000. She paid a real estate agent a commission of $1,200 for assisting with the sale. Abby had purchased the land several years earlier for $14,500. What is the gain on the sale of the land?

Gain of $2,300

Choose the items that are excluded from gross income

Gain of sale of personal residence Fringe benefits Municipal bond interest

Which of the following types of cash receipts is NOT taxable to the recipient?

Gift from a friend

Which of the following statements is INCORRECT regarding gross income?

Income is only included in gross income when spelled out in specific tax provisions.

What are the tax consequences for a taxpayer who is receiving a life annuity and who has already lived longer than his or her life expectancy?

The entire amount of each additional payment of the annuity is taxable.

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?

Only the gain on the sale is taxable, and life insurance proceeds are not taxable [$55,000 + ($6,000-$3,500) = $57,500].

Which one of the following choices does NOT represent an economic benefit to the taxpayer?

Proceeds from a loan

What are the tax consequences for a taxpayer who dies before recovering his investment in an annuity contract?

The amount of the unrecovered investment is deducted on the taxpayer's final income tax return.

Which of the following statements is INCORRECT regarding gambling winnings and losses for recreational gamblers?

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

How are the proceeds from a life insurance policy treated if the policy is cashed in early for its surrender value when there is no chronic or terminal illness present?

The excess of the cash surrender value over the premiums paid is included in the taxpayer's gross income.

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?

The income will retain its character and be reported as a long-term capital gain.

When is a discharge of indebtedness NOT included in gross income?

When the taxpayer is insolvent before and after the debt forgiveness

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

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.

deduction, credit

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

fringe benefits

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

gift, nontaxable

_____________ is defined in Sec. 61 of the Internal Revenue Code as "all income, from whatever source derived."

gross income

If a taxpayer cashes out a life insurance policy before death due to a chronic illness, she may exclude from income the amount used to pay for her

long term care