Chapter 4 Study

George is awarded $55,000 in compensatory damages for harm to his reputation and $30,000 in compensatory damages for bodily injury. In addition, George is awarded $275,000 in punitive damages. How much of these awards must George recognize in taxable income?

$330,000 275k + 55k 30k in compensatory damages not included because it is for bodily injury, otherwise it would be

Brian had the following items of income this year. Salary - $22,000 Child support received - $6,000 Alimony received (divorce finalized June 1, 2017)- $10,000 Rent income of $2,000 and Royalty income of $3,000 Calculate Brian's gross income for the current year.

$37,000 22000+10000+2000+3000= 37000 child support not included in gross income

Which of the following can be excluded from Ellen's gross income? 1. The value of a diamond ring that Ellen received as a gift from David. 2. The value of a mansion that Ellen inherited from her parents. 3. The value of concert tickets that Ellen won in a radio contest. 4. The value of a scholarship for room and board that Ellen received to her state university.

1 & 2. 3 is a prize and must be included 4 is for room & board which must be included

Which of the following must be included in Pete's income? 1. Short-term capital gains of $10,000 from the sale of stock. 2. Long-term capital gains of $80,000 from the sale of rental real property. 3. Interest income from Pete's savings account. 4. Distribution of $30,000 from Traditional IRA.

1,2,3 & 4

imputed interest

A payment deemed to be made by the borrower to the lender when the interest rate on a loan is less than the applicable federal rate.

endowment contract

A type of insurance contract that pays a specified death benefit to a beneficiary upon the death of the insured owner, but also pays a specified benefit (in lieu of the death benefit) to the owner of the policy if the insured person lives to a specified age or date.

Addison pays $15,000 for an annuity that will pay $1,000 a year, starting this year. If the annuity is for a term of 20 years, how much taxable income will Addison have from the annuity each year?

Addison will have $250 of taxable income from the annuity each year. (15000/20= 750) so 1000-750= 250 that will be taxable. The $750 is not taxable as that is the amount that comes from her 15k basis

qualified tuition programs

Also known as 529 Plans, they permit taxpayers to save for post secondary education of family members in a tax favored manner through either a prepaid tuition program or a college savings plan .

accrual method

An accounting method under which income is reported when it is earned rather than when it is received in cash, and expenses are reported when they are incurred rather than when they are paid.

cash receipts and disbursements method

An accounting method under which income items are reported for the tax year in which they are received in cash and expenses are deducted in the year in which they are paid with cash.

qualified education expenses

Educational expenses that receive favorable tax treatment. Such expenses may vary depending on the type of program or tax benefit.

interest income

Gross income generated by a variety of debt instruments, including bank accounts, money market instruments and bonds.

Loki loans $12,000 to his brother, Thor, and does not charge him interest. Which of the following statements describes the income tax consequences of this transaction? a. Interest would be imputed if Thor has unearned income of $1,200. b. Interest would not be imputed because loans of $100,000 or less are always exempt from both income tax and gift tax consequences. c. Interest would not be imputed because the loan is less than the amount of the gift tax annual exclusion. d. Interest would not be imputed if Thor's earned income is less than $1,000.

The correct answer is a. Answer c is incorrect because gift loans do not qualify for the gift tax annual exclusion. Answer b is incorrect; loans of less than $10,000 are exempt from both income tax and gift tax consequences. Answer d is incorrect because whether interest is imputed on this loan is based on Thor's level of unearned income, not earned income. Answer c is correct; because the loan was for more than $10,000 and Thor has unearned income of more than $1,000, interest should be imputed on the loan.

original issue discount

The difference between the redemption price at maturity and the purchase price for debt instruments issued at discount. OID = Maturity value- purchase price

Which of the following is not excluded from an individual taxpayer's Gross Income? a. Trust income distributed to taxpayer b. Roth IRA distribution before age 59 1/2 up to basis amount contributed in Roth IRA c. Debt forgiven to the extent the taxpayer is insolvent d. Distribution from Coverdell ESA or 529 plan used for qualified higher education purposes

a. trust income

gross income

all income from whatever source derived unless it is specifically excluded by some provision of the IRC

Sean owns stock in the McNamara Corporation. Sean has a basis (original cost) in his stock of $100. Which of the following would not be included in Sean's income? a. Qualified dividends received from McNamara Corporation. b. Dividends paid by the McNamara Corporation, assuming that it is not a U.S. Corporation. c. A distribution by McNamara Corporation to its shareholders in excess of earnings and profits, of which Sean's share of the distribution is $50. d. Dividends paid by the McNamara Corporation of less than $10.

c

Which of the following statements concerning the proceeds of a life insurance policy is correct? b. When the owner of a life insurance policy surrenders a life insurance policy to the issuing insurance company in exchange for the cash surrender value of the policy, the owner of the policy is not required to recognize any gross income. a. Proceeds paid by reason of the death of the insured are always included in the income of the recipient. c. Life insurance proceeds are not included in gross income of the new owner if the life insurance policy is sold ("transferred for value") by the original owner of the policy. d. Accelerated death benefits paid by an insurance company under a life insurance policy before the death of the insured are excluded from gross income if the insured person is terminally ill.

d.

dividends and how they are taxed

dividends are a distribution of earnings by a corporation. They are taxable to shareholders to the extent of earnings--if distributions exceed earnings, it is taxed first, as a return of basis, and second, as capital gain.

qualified dividends

dividends subject to favorable tax rates

compensatory damages

monetary award intended to compensate for damage to property, for recovery of expenses incurred, for income lost, or for personal injury

realization

occurs when income is received or when a gain on a property transaction becomes fixed

recognition

occurs when income is reported on the tax return

punitive damages

payments intended to punish the offending party

Coverdell Education Savings Account

plan similar to a college savings plan that allows taxpayers to contribute up to $2000 per beneficiary per year

Karl would like to invest in bonds and is considering either a taxable corporate bond with an interest rate of 8% or a tax-exempt municipal bond of comparable risk and credi quality with an interest rate of 5%. Karl's marginal tax rate is 35%. After computing the equivalent after-rate for the taxable bond, you should recommend the corporate bond. true or false?

true The after-tax rate for the taxable bond is 5.2%=8%*(1-35%). Therefore you would prefer the corporate taxable bond over the municipal bond of 5%.

annuitized

when regular periodic payments on an annuity contract begin for life or for a specified period of time in excess of one year