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Exam 5: Gross Income: Exclusions

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Question 51

True/False

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The taxpayer incorrectly took a $5,000 deduction

A) True
B) False

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Question 52

Multiple Choice

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Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk. Which of the following is correct:

A) If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she purchased the York County school bond.
B) If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond.
C) If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond.
D) All of these are correct.
E) None of these are correct.

F) None of the above
G) B) and C)

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Question 53

Multiple Choice

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The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500.

Tonya is a cash basis taxpayer. In 2018, she paid state income taxes of $8,000. In early 2019, she filed her 2018 state income tax return and received a $900 refund.

In the case of interest income from state and Federal bonds:

Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical $\begin{array} { lr } \text { insurance policy he purchased } &\$ 10,000 \\\text { Damage settlement to replace his lost salary } &15,000\end{array}$ What is the amount that Marion must include in gross income for the current year?

As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.

George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the company's cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. George purchased a refrigerator for $500. The company's normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $150. During the year, George was required to have his refrigerator serviced once. The cost of the call would have been $75 if he had not had the service contract. Is George required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call?

John told his nephew, Steve, "if you maintain my house when I cannot, I will leave the house to you when I die." Steve maintained the house and when John died Steve inherited the house. The value of the residence can be excluded from Steve's gross income as an inheritance.

The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account.

Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 $30,000 - $12,000) in gross income.

Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income:

Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost.

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.

In December 2018, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2019. However, she did not use the funds to pay the tuition until January 2019. Emily can exclude the $2,500 from her gross income in 2018.

Melody works for a company with only 22 employees. Her employer contributed $2,000 to her health savings account HSA), and the account earned $100 in interest during the year. Melody withdrew only $1,200 to pay medical expenses during the year. Melody is not required to recognize any gross income from the HSA for the year.

A U.S. citizen who works in France from February 1, 2018 until January 31, 2019 is eligible for the foreign earned income exclusion in 2018 and 2019.

Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round.

Cash received by an employee from an employer:

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy: