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Exam 5: Gross Income and Exclusions

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Question 1

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Which of the following is not a necessary condition for income to be included in gross income?

A) income must be realized.
B) income must be paid in cash.
C) income cannot be excluded by law.
D) income must be made available to a taxpayer on the cash basis.
E) All of the choices are correct.

F) A) and E)
G) B) and D)

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B

Question 2

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Terri and Mike are seeking a divorce.Terri and Mike own an art collection worth $357,000 that would belong to Terri.Mike offered to make annual payments of cash to Terri each year for five years if Terry allows Mike to take possession of the art collection.Mike insists however,that the annual payments must cease in the event of Terri's death.What amount of annual payment must Terri demand to make her indifferent after taxes between taking possession of the ($357,000)art versus collecting the cash payments? Assume that Terri has a marginal tax rate of 15 percent and Mike's tax rate is 35 percent and ignore the time value of money.

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$420,000 over 5 years results in annual ...

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Question 3

True/False

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When a carpenter provides $100 of services in exchange for $100 of groceries,the carpenter has realized $100 of income.

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year.Mary included a total of $4,000 of state income taxes when she itemized deductions last year.What amount of the refund,if any,should Mary include in her gross income this year?

Excluded income will never be subject to the federal income tax.

Irene's husband passed away this year.After his death,Irene received $250,000 of proceeds from life insurance on her husband,and she inherited her husband's stock portfolio worth $750,000.What amount must Irene include in her gross income?

Shaun is a student who has received an academic scholarship to State University.The scholarship paid $14,000 for tuition,$2,500 for fees,and $1,000 for books.In addition,Shaun's dormitory fees of $8,500 were paid by the University when he agreed as a condition of receiving the dormitory fees to counsel freshman on campus living.What amount must Shaun include in his gross income?

Recognized income may be in the form of cash or property received (but not services received).

Wendell is an executive with CFO Tires.At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of one percent.Wendell would have paid interest of $2,500 this year if the interest rate on the loan had been set at the prevailing Federal interest rate.Wendell used the funds as a down payment on a vacation home and during the year he paid $500 of interest to CFO.On December 31,CFO forgave the loan and remaining interest.What amount of gross income does Wendell recognize from the loan this year?

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

Hal Gore won a $1 million prize for special contributions to environmental research.This prize is awarded for public achievement,and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency.How much of the prize should Hal include in his gross income?

Unemployment benefits are excluded from gross income.

Charles and Camilla are getting divorced.Under the terms of the decree Charles will pay Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage) .In addition,Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son,Clyde,until he turns 19 years old.What amount (if any) is included in Camilla's gross income this year?

An employee may exclude up to a 40 percent employer-provided discount on services received by the employee.

Jim received a $500 refund of state income taxes this year.Jim will not need to include the $500 in his gross income this year if he did not deduct state income taxes last year.

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle.The buyer has promised to pay Henry in installment payments over the next few years.Identify the principle that will determine when Henry should be taxed on the gain from the sale:

Desai and Lucy divorced this year.Lucy has custody of their child,Andrea,and under the divorce decree Desai pays Lucy $120,000 per year.The payments must be made in cash and will cease if Lucy dies or remarries.The payments drop to $100,000 per year once Andrea reaches the age of 18.How much of the payments should Lucy include in gross income this year?

This year,Barney and Betty sold their home (sales price $750,000; cost $200,000) .All closing costs were paid by the buyer.Barney and Betty owned and lived in their home for 18 months.Assuming no unusual or hardship circumstances apply,how much of the gain is included in gross income?

This year,Fred and Wilma,married filing joint,sold their home (sales price $750,000; cost $200,000) .All closing costs were paid by the buyer.Fred and Wilma owned and lived in their home for 20 years.How much of the gain is included in gross income?