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Exam 5: Gross Income and Exclusions

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Question 51

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

A) True
B) False

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Question 52

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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 because he did not deduct state income taxes last year.

A) True
B) False

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Question 53

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Sally is a cash basis taxpayer and a member of the Valley Barter club.This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets.Which of the following is a true statement?

Gross income includes all income realized during the year.

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

Shauna received a $100,000 distribution from her 401(k) account this year.Assuming Shauna's marginal tax rate is 25%,what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59ᵗʰ birthday and she has not yet retired?

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?

Deb has found it very difficult to repay her loans.Because of these difficulties,the bank decided to forgive one of her most recent loans,an amount of $45,000.After the loan was discharged,Deb had total assets of $232,000 and her remaining loans total $217,000.What amount must Deb include in her gross income?

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.

Realized income is included in gross income unless a tax provision specifies that it can be deferred or excluded.

Interest earned on a Federal Treasury bond is excluded from gross income (for federal tax purposes).

When an asset is sold,the taxpayer calculates the gain or loss by subtracting the tax basis of the asset from the proceeds of the sale.

Trevor received a gift of $25,000 in cash from his rich uncle.Trevor must include $15,000 of this gift in his gross income this year. 

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives.Later this year Harold will recover the remainder of his cost of the annuity.Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

A below-market loan (e.g.,from an employer to an employee)is a common example of a transaction that generates taxable imputed income.

Andres has received the following benefits this year.   $\begin{array}{l}\begin{array}{lll}\text { Salary } \\\text { Contribution to qualified pension plan } \\\text { Qualified health insurance premiums } \\\text { Year-end bonus } \\\text { Group-term life insurance premiums (face }=\$ 40,000 \text { ) } \\\text { Whole life insurance premiums (face }=\$ 100,000 \text { ) } \\\text { Disability insurance premiums }\\\end{array}\begin{array}{lll}\$92,000 \\10,200 \\8,400 \\15,000 \\1,750 \\2,420 \\1,800\end{array}\end{array}$ Besides these benefits Andres missed work for two months due to an illness.During his illness Andres received $6,500 in sick pay from a disability insurance policy.Assume Andres has disability insurance provided by his employer as a nontaxable fringe benefit.What amount,if any,must Andres include in gross income this year?

Brad was disabled for part of the year and he received $11,500 of benefits from a disability plan purchased by Brad's employer as a nontaxable fringe benefit.Brad must include all $11,500 of benefits in his gross income because Brad was not taxed on the disability insurance premiums paid by his employer.

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years.The annuity was purchased at a cost of $300,000.How much of the first quarterly payment will Fran include in her gross income?

NeNe is an accountant and U.S.citizen,who has accepted a permanent position in Madrid,Spain for a Spanish financial services company.This year,NeNe spent the entire year working in Madrid.NeNe's employer paid $40,000 of her Madrid housing expenses this year.What amount of the $40,000 housing payments may NeNe exclude?

Constructive receipt represents the principle that cash basis taxpayers should be taxed on income when it is made available to them without substantial restrictions.