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Exam 5: Gross Income: Exclusions

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Question 41

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George,an unmarried cash basis taxpayer,received the following amounts during 2010: What amount should George report as gross income from dividends and interest for 2010?

A) $4,700.
B) $4,100.
C) $3,800.
D) $3,600.
E) None of the above.

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

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Question 42

True/False

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Brooke works part-time as a waitress in a restaurant.For groups of 7 or more customers,the customer is charged 15% of the bill for Brooke's services.For parties of less than 7,the tips are voluntary.Brooke received $12,000 from the groups of 7 or more and $6,000 in voluntary tips from all other customers.Brooke must include $18,000 ($12,000 + $6,000)in gross income.

A) True
B) False

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Question 43

Multiple Choice

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Christie sued her former employer for a back injury she suffered on the job in 2009.As a result of the injury,she was partially disabled.In 2010,she received $250,000 for her loss of future income,$150,000 in punitive damages because of the employer's flagrant disregard for the employee's safety,and $10,000 for medical expenses.Christie took the standard deduction in 2009 and 2010.Christie's 2010 gross income from the above is:

All employees of United Company are covered by a group hospitalization insurance plan,but the employees must pay the premiums ($8,000 for each employee) .None of the employees has sufficient medical expenses to deduct the premiums.Instead of giving raises next year,United is considering paying the employee's hospitalization insurance premiums.If the change is made,the employee's after-tax and insurance pay will:

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.

If an employer pays for the employee's long-term care insurance premiums,the employee can exclude from gross income the premiums and all of the benefits collected.

The taxpayer's marginal tax bracket is 35%.Which would the taxpayer prefer?

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim,the insurance company paid Zack $52,000,the face amount of the policy plus $2,000 interest.Zack is not required to recognize any income from the above transactions.

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 frequently use the machine.However,the machine is not convenient for use by the lower paid warehouse employees.Because this fringe benefit benefits the higher paid employees but not the lower paid warehouse employees,the plan is discriminatory and thus the benefit is taxable to the executives.

What Federal income tax benefits are provided for college students?

Sonja is a United States citizen who has worked in Spain for the past 9 months.She received $6,000 a month as compensation.Her employer has offered to extend Sonja's contract to work in Spain for another 6 months at the same rate of pay.If she rejects the offer,she can return to the United States and receive the same salary.While working in Spain,she is subject to the Spain income tax,which is approximately 11% of her gross pay.The marginal tax rate on her income taxed in the United States is 33%.Compare Sonja's after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States.

If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?

Carin,a widow,elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased husband in 10 installments of $15,000 each.Her husband had paid premiums of $75,000 on the policy.In the first year,Carin collected $15,000 from the insurance company.She must include in gross income:

In 2010,Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company,Rashad's employer,claiming $50,000 for pain and suffering,$25,000 for loss of income,and $100,000 in punitive damages.Amber's insurance company will not pay punitive damages;therefore,Amber has offered to settle the case for $120,000 for pain and suffering,$25,000 for loss of income,and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

Marvin was the beneficiary of a $50,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Marvin used the life insurance proceeds to purchase a United States Government bond,which paid him $2,000 interest during the current year.Marvin's Federal gross income from the above is $2,000.

Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis.They each were able to convince the mortgage holder to reduce the principal amount on the mortgage.Sally's mortgage is on her personal residence and Ed's mortgage is on rental property he owns.

For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to over $1,500 of income that is subject to tax.

In December 2010,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2011.However,she did not use the funds to pay the tuition until January 2011.Emily can exclude the $2,500 from her gross income in 2010...........

Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60.She was practically penniless at the time of her death,owed a $10,000 hospital bill,and had a disabled spouse.The company was very concerned about its public image,and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means,the Board of Directors agreed to pay Carmen's hospital bill and to give her spouse $5,000 per year for the rest of his life.Discuss both sides of the question whether Carmen (or her estate)and her spouse realize any taxable income from the above.

Evaluate the following statements: