Question 1

Sam received a scholarship for room and board.This scholarship is excludible from income.

Accepted Answer

False

Question 2

An individual is considered terminally ill for purposes of the exclusion for accelerated death benefits if a physician certifies that he is reasonably likely to die within 36 months.

Accepted Answer

A terminally ill individual is typically certified by a physician as being reasonably likely to die within 24 months, not 36 months, for purposes of the exclusion for accelerated death benefits.

Question 3

Dividends on life insurance policies are generally excludible income because they are considered a return of premium.

Accepted Answer

Dividends on life insurance policies are generally paid out of the insurer's surplus and are considered a return of premium. As such, they are not taxable income to the policyholder and are generally excluded from gross income.

Question 4

Which of the following items will result in an inclusion in gross income?

Accepted Answer

Winnings from gambling, such as bingo, are considered taxable income and must be included in gross income.

Question 5

Accelerated death benefits from a life insurance policy received by a terminally ill person may be excluded from taxable income.

Accepted Answer

Accelerated death benefits received by a terminally ill person are generally excluded from taxable income under IRS regulations. However, it's important to consult with a tax professional to determine if any specific circumstances may impact the tax treatment of these benefits.

Question 6

While payments received because a person has been physically injured are excluded from gross income,payments on account of non-physical injury must be included in gross income.

Accepted Answer

This statement is true. According to the IRS, payments received for physical injury or sickness are considered to be “exclusions” from gross income and are therefore not taxed. However, payments received for non-physical injuries, such as breach of contract or emotional distress, are not excluded from gross income and must be included when calculating taxes.

Question 7

Each year a taxpayer must include in gross income the rental value of his or her personal residence.

Accepted Answer

This statement is false. Taxpayers do not have to include the rental value of their personal residence in their gross income. However, if they rent out their personal residence for all or part of the year, they may have to report that rental income on their tax return.

Question 8

Loan proceeds are taxable in the year received in cash.

Accepted Answer

Loan proceeds are not taxable because they are not considered income. They are simply borrowed funds that will need to be repaid. However, if the borrower receives loan forgiveness, that amount may be taxable as income.

Question 9

Which of the following items will result in an increase in gross income?

Accepted Answer

Bartering services, such as preparing a tax return in exchange for car repairs, is considered income and must be included in gross income.

Question 10

Amy withdrew $3,000 from her qualified tuition plan to pay for a spring break trip to Cancun.The full $3,000 withdrawal is both included in income and subject to a 10% penalty.

Accepted Answer

The answer of Amy withdrew $3,000 from her qualified tuition...

Question 11

Awards for emotional distress attributable to a physical injury are excluded from gross income.

Accepted Answer

According to IRS guidelines, awards for emotional distress attributable to a physical injury or sickness are not considered taxable income. However, awards for emotional distress not associated with a physical injury or sickness are considered taxable income.

Question 12

Many exclusions exist due to the benevolence of Congress or as a result of the government's attempts to encourage particular social behavior.

Accepted Answer

Many tax exclusions, deductions, and credits exist in the tax code as a result of Congress incentivizing certain behaviors, such as investing in retirement accounts or buying a home. Other exclusions exist to encourage particular social behavior, such as the exclusion of employer-provided health insurance premiums to promote widespread health coverage.

Question 13

Except in the case of qualifying accelerated death benefits,if a life insurance policy is sold or surrendered for a lump sum before the death of the insured,the amount received is taxable to the extent it exceeds the premiums paid.

Accepted Answer

When a life insurance policy is sold or surrendered for a lump sum before the death of the insured, the amount received is taxable to the extent it exceeds the premiums paid, except in the case of qualifying accelerated death benefits.

Question 14

A taxpayer may avoid tax on income by having the payment made to another taxpayer.

Accepted Answer

This statement is false. Income cannot be transferred to another taxpayer to avoid tax liabilities. This would be considered tax evasion and is illegal.

Question 15

Katie,a self-employed CPA,purchased an accident and disability insurance policy.As the result of an auto accident,Katie was unable to work and received $3,000 of disability benefits per month for seven months.The benefits were based on her estimated monthly income and should be reported as gross income.

Accepted Answer

Disability benefits received from a policy purchased by an individual with after-tax dollars are generally not taxable and do not need to be reported as gross income.

Question 16

Amounts collected under accident and health insurance policies purchased by the taxpayer are excludible from income.

Accepted Answer

Amounts collected under accident and health insurance policies are generally excludable from income for tax purposes. However, there are some exceptions and limitations to this rule, such as when the premiums were paid for with pre-tax dollars or if the policy was purchased through a cafeteria plan.

Question 17

Upon the sale of property,a portion of the selling price equal to the basis in the property is considered a return of capital to the seller and is,therefore,not taxable.

Accepted Answer

This is known as the adjusted basis of the property, and it represents the cost of the property plus any improvements made minus any depreciation taken. This portion of the selling price is not taxable and is considered a return of capital. The remaining portion of the selling price may be subject to capital gains tax.

Question 18

Amounts withdrawn from qualified tuition plans are tax-free if the amounts are used for qualified higher education expenses including tuition,fees,books,and room and board for students attending on at least a half-time basis.

Accepted Answer

This is the definition of a qualified tuition plan under the federal tax code.

Question 19

Punitive damages are taxable unless they are awarded for physical injuries.

Accepted Answer

The answer of Punitive damages are taxable unless they are...

Question 20

Sumedha is the beneficiary of her mother's $500,000 life insurance policy.She receives $54,000 per year over ten years in settlement of her mother's policy.Sumedha will exclude the $54,000 proceeds received each year from the life insurance company.

Accepted Answer

Life insurance proceeds are generally tax-free, but if received in installments, the interest portion of each installment is taxable. Sumedha must include the interest portion in her taxable income.

Quiz 20: Gross Income: Exclusions