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Exam 5: Gross Income and Exclusions

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Question 51

True/False

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Brad was disabled for part of the year and he received $11,500 of benefits from a disability plan purchased by Brad's employer. 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.

A) True
B) False

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Question 52

Multiple Choice

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

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Question 53

Multiple Choice

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Which of the following statements about alimony payments is true?

Caroline is retired and receives income from a number of sources. The interest payments are from bonds that Caroline purchased over past years and a disability insurance policy that Caroline purchased after her retirement. Calculate Caroline's gross income. $\begin{array} { l r } \text { Distributions from qualified pension plan } & \$ 5,400 \\\text { Interest on bonds issued by City of Austin, Texas } & 2,500 \\\text { Social Security benefits } & 8,200 \\\text { Interest on U.S. Treasury Bills } & 2,300 \\\text { Interest on bonds issued by Ford Motor Company } & 1,900 \\\text { Interest on bonds issued by City of Quebec, Canada } & 2,750 \\\text { Disability insurance benefits } & 9,500\end{array}$

Karl works at Moe's grocery. This year Karl was paid $43,000 in salary but he was allowed to purchase his groceries at 10% below Moe's cost. This year Karl spent $3,600 to purchase groceries costing Moe $4,000 and worth $6,000. What amount must Karl include in his 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?

J.Z. (single taxpayer) is retired and received $10,000 of Social Security benefits this year. How much of the $10,000 Social Security benefits is taxable if his only other income was $28,000 of pension income?

Andres has received the following benefits this year. $\begin{array} { l r } \text { Salary } & \$ 92,000 \\\text { Contribution to qualified pension plan } & 10,200 \\\text { Qualified health insurance premiums } & 8,400 \\\text { Year-end bonus } & 15,000 \\\text { Group-term life insurance premiums (face } = \$ 40,000 ) & 1,750 \\\text { Whole life insurance premiums (face } = \$ 100,000 ) & 2,420 \\\text { Disability insurance premiums } & 1,800\end{array}$ 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?

Cyrus is a cash method taxpayer who reports on a calendar-year. Last year Cyrus received salary of $88,000 and at year-end his employer announced that Cyrus would receive an additional year-end bonus of $10,000 in cash and a new TV worth $2,000. Cyrus didn't receive his bonus check until January of this year and the TV didn't arrive until March of this year. Determine the amount Cyrus should include in his gross income for last 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.

This year Larry received the first payment from an annuity that promises to pay him $3,000 per month for the rest of his life. The IRS tables indicate that given Larry's age, he should expect to receive 310 monthly payments. The cost of the annuity to Larry was $620,000. How much of the first $3,000 payment should Larry include in gross income?

The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

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

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.

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. How much of the gain is included in gross income?

Gross income includes all income realized during the year.

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.

Vincent is a writer and U.S. citizen. After being out of work for the 1st 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 4th - December 31st. 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 $6,900 in itemized deductions last year (the standard deduction for a single filer was 6,100). 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.)

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?

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?