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Exam 5: Gross Income and Exclusions

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Question 1

True/False

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The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee's compensation near retirement.

A) True
B) False

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Question 2

True/False

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Heidi retired from GE (her employer)at age 56.At the end of the year, when she was 56 years of age, Heidi received a distribution from her GE-sponsored 401(k)account.Because Heidi was not at least 59½ years of age at the time of the distribution, she must pay tax on the full amount of the distribution and a 10 percent penalty on the full amount of the distribution.

A) True
B) False

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Question 3

Multiple Choice

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Bart, a single taxpayer, has recently retired.This year, he received $24,000 in pension payments and $5,000 of Social Security payments.What amount must Bart include in his gross income for the Social Security payments?

Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.

Aubrey and Justin file married filing separately.This year, Aubrey earned salary of $130,000, and Justin earned salary of $88,000.Aubrey and Justin live in a common-law state.How much income earned will Justin report on his tax return for this year?

Which of the following is true regarding stock options?

Shauna received a distribution from her 401(k) account this year.In which of the following situations will Shauna be subject to an early distribution penalty?

Riley participates in his employer's 401(k) plan.He turns 70 years of age on February 15, 2019, and he plans on retiring on July 1, 2021.When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

Interest income is earned in the year in which it is received by the taxpayer or credited to the bank account.

Teresa was married on November 1 of this year and on that day received numerous gifts from her extended family.Her grandfather presented Teresa with a check for $15,000; her uncle gave Teresa 1,000 shares of Ford stock worth $10 per share (the uncle purchased the shares for $25 each); and her aunt presented Teresa with $50,000 of corporate bonds (Teresa received $1,500 of semiannual interest from the bonds on December 31 of this year).Finally, Teresa's parents paid off $50,000 of her student loan debt including $2,000 of accrued interest.What amount, if any, must Teresa include in gross income this year?

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange for property.This year Juan provided lawn-mowing services in exchange for $1,275 of car repair services, $3,570 of groceries, and a certificate of deposit (CD)for $4,050.The (CD)matures next year with interest.Finally, Juan received a gift card that can only be applied for $850 of clothing at a local mall.Juan has only applied the gift card to purchase $100 of clothing.Compute Juan's gross income assuming that he uses the cash basis of accounting.

Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Generally, 85 percent of Social Security benefits are included in income of high-income taxpayers.

This year Ann has the following stock transactions.What amount is included in her gross income if Ann paid a $200 selling commission for each sale? $\begin{array}{c}\text { Total Purchase }\\\begin{array}{lll}\\\text { Shares}\\100 \\200 \\500\end{array}\begin{array}{lll}\\\text { Firm}\\\text { IBM}\\\text { ATT}\\\text { Dell}\end{array}\begin{array}{l}\\\text { Price }\\\$ 5,000 \\7,500 \\12,500 \end{array}\begin{array}{lll}\\\text {Sales price}\\\\9,500 \\13,000\end{array}\begin{array}{lll}\\\text {Value at year-end}\\\$ 7,00\\\\\\\end{array}\end{array}$

Bobby and Sissy got married two and a half years ago.Since that time, they have lived in Bobby's home.Sissy sold her previous home three years ago and excluded her entire gain ($80,000)at that time.Bobby and Sissy decided to move to a bigger home this year.As a result, they sold Bobby's home for $500,000 (original cost $150,000).How much of the gain from the sale is taxable?

U.S.citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.

Anna received $15,000 from life insurance paid upon the death of her grandmother.Anna can exclude the entire amount of the life insurance from her gross income.

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

Barney and Betty got divorced in 2018.In the divorce decree Betty agreed to pay Barney $24,000 per year for five years (or until Barney's death or remarriage) and $10,000 per year until their daughter, Pebbles, turns 19 years old.What amount (if any) is included in Barney's gross income in 2019?