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Exam 5: Gross Income and Exclusions

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Question 21

True/False

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A taxpayer who borrows money will include the amount borrowed in their gross income under the all-inclusive definition of income.

A) True
B) False

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Question 22

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Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months after the gift, a $500 dividend was declared on the stock and paid to Dora's granddaughter. What amount must Dora's granddaughter include in her gross income?

A) $2,000
B) $15,000
C) $15,500
D) $2,500
E) None of the above

F) A) and B)
G) A) and C)

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Question 23

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

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?

Brenda has $15,000 in U.S. Series EE saving bonds and she is considering whether to cash the bonds. Under what conditions can Brenda exclude the interest on the savings bonds from her gross income?

This year Joseph joined the board of directors. Besides his director's fees, Joseph received the following employee benefits: $\begin{array} { | l | r | } \hline \text { Salary } & \$ 204,000 \\\hline \text { Contributions to qualified pension plan } & 25,000 \\\hline \text { Qualified health insurance premiums } & 8,000 \\\hline \text { Stock bonus } & 20,000 \\\hline \text { Annual director's Fee } & 15,000 \\\hline \text { Group-term life insurance premiums (face } = \$ 40,000 \text { ) } & 1,800 \\\hline\end{array}$ The stock bonus consisted of 5,000 shares of Bell stock given to Joseph as compensation. At the time of the transfer the stock was listed at $4 per share. What amounts, if any, should Joseph include in gross income this year?

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. How much gain will Maren recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?

Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can) contribute to an employee's plan.

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

Henry works part-time on auto repairs and restoration projects. This year Henry was paid $5,400 for repairs he made to his neighbor's auto. Henry's neighbor promised to pay Henry another $2,200 in cash next year. Henry's brother borrowed $4,100 in cash in December of this year and gave him a negotiable promissory note for $4,300 due in three months with interest. Henry sold the note in January for $3,500. Finally, Henry restored a car for the football coach. The coach paid him with a pass to next year's football games. The pass is worth $750. Compute Henry's gross income assuming that he uses the cash basis of accounting.

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

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:

Which of the following statements regarding contributions to defined contribution plans is true?

Vincent is a writer and U.S. citizen. After being out of work for the 1^st half of the year, Vincent moved permanently to Ireland on July 4. He worked for an Irish magazine and earned $110,000 in salary from July 4^th - December 31^st. Earlier in April of this year Vincent received a $1,500 refund of the $3,600 in state income taxes his previous employer withheld from his pay last year. Vincent claimed $7,100 in itemized deductions last year (the standard deduction for a single filer was 6,300). Vincent wants to elect to use the foreign-earned income exclusion to the extent he is eligible. Calculate Vincent's gross income for this year. (Round your final answer to the nearest whole dollar amount and assume there are 365 days in the year.)

Gross income includes all income realized during the year.

Qualified retirement plans include defined benefit plans but not defined contribution plans.

Earnings from 529 plans and Coverdell education savings accounts are excluded from gross income as long as the earnings are used to pay for qualifying educational expenditures.

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?

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

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?