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Exam 5: Gross Income and Exclusions

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Question 21

True/False

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Earnings from Internal Revenue Code Section 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.

A) True
B) False

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Question 22

Multiple Choice

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Graham has accepted an offer to do graduate work in the chemistry department at State University.The chemistry department offered Graham a $5,000 tuition reduction and $3,500 toward the cost of room and meals.Under the terms of the scholarship Graham must work in the chemistry labs during the summer as a research assistant.What amount must Graham include in his gross income?

A) $8,500
B) $5,000
C) $3,500
D) $2,500
E) Zero - none of the benefits are included in gross income.

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

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Question 23

Multiple Choice

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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?

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

Lisa and Collin are married.Lisa works as an engineer and earns a salary of $116,000.Collin works at a beauty salon and reported wages of $45,000.Lisa received $500 of interest from corporate bonds and $250 of interest from a municipal bond.Lisa acquired these bonds prior to her marriage to Collin.Collin's father passed away on April 14.He inherited cash of $50,000 and his baseball card collection,valued at $2,000.As beneficiary of his father's life insurance policy,Collin also received $150,000.The couple spent a weekend in Atlantic City in November and came home with gambling winnings of $1,200.Collin was injured in an accident at the salon.He was unable to work for a month,but during this time he received $5,000 from disability insurance he purchased several years ago.Collin also received $2,000 in workman's compensation,and $1,500 from the salon for the emotional trauma he suffered from the accident.Calculate Lisa and Collin's gross income for this year assuming they will file married joint.

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? (Round your answer to the nearest whole dollar)

Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of realized gain on the sale of their principal residence.

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g.,no obligation to repay the amount) :

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?

Which of the following statements about alimony payments is true?

Acme published a story about Paul and as a result Paul sued Acme for damage to his reputation,emotional distress,and punitive damages.Paul won an award of $20,000 for damages,$5,500 for emotional distress,and $50,000 for punitive damages.What amount must Paul include in his gross income?

The assignment of income doctrine requires that in order to shift income from the property producing the income to another person,the taxpayer must transfer only the income to the other person.

Pam recently was sickened by eating spoiled peanut butter.She successfully sued the manufacturer for her medical bills ($3,700) ,her emotional distress ($6,000 − she now fears peanut butter) ,and punitive damages ($44,000) .What amount must Pam include in her gross income?

The tax law includes a complex set of restrictions called the anti-frontloading rules to make it difficult for taxpayers to disguise and reclassify property payments as alimony payments.

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?

For tax purposes,unearned income means income that has not yet been realized.

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant.Ethan indicated that he would transfer the prize to the local hospital.How much of the prize should Hal include in his gross income?

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

Nate is a partner in a partnership that received $5,000 of interest income this year.Nate's share of the interest is $1,000,and he should report this income on his individual return as:

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