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Exam 5: Gross Income: Exclusions

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Question 31

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Sam was unemployed for the first two months of 2014.During that time,he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September,he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

A) True
B) False

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Question 32

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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:

A) Albert must recognize $55,000 of gross income,but he has $15,000 of deductible medical expenses.
B) Albert must recognize $65,000 ($80,000 - $15,000) of gross income.
C) Albert must recognize $40,000 ($80,000 - $25,000 - $15,000) of gross income.
D) Albert is not required to recognize any gross income because of his terminal illness.
E) None of these.

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

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Question 33

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Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

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.

The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime,approximately 25 days each year.The supper money received:

Tonya is a cash basis taxpayer.In 2014,she paid state income taxes of $8,000.In early 2015,she filed her 2014 state income tax return and received a $900 refund.

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 $10,000 Insurance policy he purchased Damage settlement to replace his lost salary ^15,000 What is the amount that Marion must include in gross income for the current year?

Doug and Pattie received the following interest income in the current year: Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account.What amount of interest income should they report on their joint income tax return?

Calvin miscalculated his income in 2012 and overpaid his state income tax by $10,000.In 2014,he amended his 2012 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2012,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2014,Calvin must recognize $10,900 of gross income.

Ben was hospitalized for back problems.While he was away from the job,he collected his regular salary from an employer­sponsored income protection insurance policy.Ben's employer­sponsored hospitalization insurance policy also paid for 90% of his medical expenses.Ben also collected on an income protection policy that he purchased.Which of the above sources of income are taxable? Explain the basis for excluding any item or items.

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.

The taxpayer was in the 35% marginal tax bracket in 2013 and deducted $15,000 in state income taxes as an itemized deduction that year.In 2014,he filed his 2013 state income tax return and received a $5,000 refund of state income taxes paid in 2013.His marginal tax rate in 2014 was 15%.What was the taxpayer's Federal tax benefit from the overpayment of his 2013 state income tax?

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000.One year after the transaction,the mortgage had been reduced to $725,000 by principal payments by Amber,but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage.Ted reduced the amount owed by Amber to $600,000.This reduced the monthly payments to a level that Amber could pay.Amber must recognize $125,000 income from the reduction in the debt by Ted.

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:

Juan,was considering purchasing an interest in a tax-exempt bond fund for $100,000,when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%,and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative,Juan can purchase a state bond (a "double­exempt bond")yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work,so they occasionally use the machine.However,the machine is not convenient for use by the lower paid warehouse employees and,thus,they never use the copier.The use of the copy machine may not be excluded from gross income because the benefit is discriminatory.

Peggy is an executive for the Tan Furniture Manufacturing Company.Peggy purchased furniture from the company for $9,500,the price Tan ordinarily would charge a wholesaler for the same items.The retail price of the furniture was $12,500,and Tan's cost was $9,000.The company also paid for Peggy's parking space in a garage near the office.The parking fee was $600 for the year.All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy.However,the company does not pay other employees' parking fees.Peggy's gross income from the above is:

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

The taxpayer incorrectly took a $5,000 deduction (e.g. ,incorrectly calculated depreciation)in 2014 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in2015.The taxpayer must add $5,000 to his 2015 gross income in accordance with the tax benefit rule to correct for the 2014 error.