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Exam 5: Gross Income and Exclusions

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Question 41

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Emily is a cash basis taxpayer,and she was an especially productive salesperson last year.In December of last year her supervisor told Emily she had earned a $5,000 bonus.However,Emily received the bonus check after year end.Identify the principle that will determine when Emily is taxed on the bonus:

A) Assignment of income
B) Constructive receipt
C) Return of capital principle
D) Wherewithal to pay
E) All of these

F) A) and C)
G) A) and D)

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Question 42

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Helen is a CPA and will spend this entire year in an overseas office of her firm.Helen's salary of $110,000 is subject to the income tax of the foreign country.How much of her salary will she be allowed to exclude from gross income in the U.S.?

A) $82,000
B) $97,600
C) $99,500
D) $108,000
E) All of her salary is included in gross income

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

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Question 43

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

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?

Barney and Betty got divorced this year.In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death or remarriage) .What amount (if any) is included in Barney's gross income this year?

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

Samantha was ill for four months this year.Samantha missed work during this period,but disability insurance paid $18,000 of disability pay to replace her missed salary.Samantha shares the cost of the insurance with her employer.This year Samantha's employer paid $2,200 in disability premiums for Samantha as a nontaxable fringe benefit and Samantha paid the remaining $1,100 of premiums from her salary.What amount of the disability pay must Samantha include in her gross income (rounded to the nearest whole dollar) ?

Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car.If the federal interest rate was 3%,which of the following is correct?

Gross income includes all income realized during the year.Deferred and excluded income is not included in gross income.

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?

Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:

Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred for the emotional distress he suffered when his neighbor accidentally ran over his dog.

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

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?

Bernie is a former executive who is retired.This year Bernie received $250,000 in pension payments and $10,000 of social security payments.What amount must Bernie include in his gross income?

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?

Ophra is a cash basis taxpayer who is employed in the publishing industry.This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise.Ophra asked her employer to issue the cruise tickets to her parents,and he complied with this request.Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets:

Claim of right states that income has been realized if a taxpayer receives income and there are substantial restrictions on the taxpayer's use of the income.

Opal deducted $2,400 of state income taxes on her tax return last year.This year she received a state income tax refund of $170.What amount of the refund,if any,should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

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