Question 1

Wilma has a $25,000 certificate of deposit (CD)at the local bank.The interest on this certificate,$1,000,was credited to her account this year,but she must pay an early withdrawal penalty if she cashes in the CD before next year.Which of the following is a true statement?

Accepted Answer

The interest earned on the CD is taxable income in the year it was credited to her account, regardless of whether she withdraws the CD early or not.

Question 2

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives.Later this year Harold will recover the remainder of his cost of the annuity.Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

Accepted Answer

After Harold recovers the cost of the annuity, the entire amount of each annuity payment is included in gross income. This is because the exclusion ratio no longer applies once the investment in the contract (cost of the annuity) has been fully recovered.

Question 3

Rhett made his annual gambling trip to Uwin Casino.On this trip Rhett won $250 at the slots and $1,200 at poker.Also this year,Rhett made several trips to the racetrack,but he lost $700 on his various wagers.What amount must Rhett include in his gross income?

Accepted Answer

All gambling winnings must be included in gross income, regardless of whether or not the taxpayer received any tax forms, such as a W-2G, from the gambling establishment. Therefore, Rhett must include $1,450 ( $250+$1,200-$700) in his gross income.

Question 4

Charles and Camilla got divorced in 2018.Under the terms of the decree Charles pays Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage).In addition,Charles transferred a castle worth $2,000,000 to Camilla in 2018 and will pay $12,000 per year to support their son,Clyde,until he turns 19 years old.What amount (if any)is included in Camilla's gross income in 2019?

Accepted Answer

Only the $50,000 cash payment is included in Camilla's gross income in 2019. The castle transfer and the support payments for their son are not considered taxable income.

Question 5

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year.Mary included a total of $4,000 of state income taxes when she itemized deductions last year.What amount of the refund,if any,should Mary include in her gross income this year?

Accepted Answer

The answer of This year Mary received a $200 refund...

Question 6

Ophra is a cash-basis taxpayer who is employed in the publishing industry.This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise.Ophra asked her employer to issue the cruise tickets to her parents,and he complied with this request.Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets.

Accepted Answer

The principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets is the assignment of income principle. This principle states that income should be taxed to the person who earns it or to whom it is assigned. In this case, Ophra earned the opportunity for the free world cruise because of her outstanding performance at work, and therefore the value of the cruise tickets should be taxed to her, even though she assigned the tickets to her parents.

Question 7

Hal Gore won a $1 million prize for special contributions to environmental research.This prize is awarded for public achievement,and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency.How much of the prize should Hal include in his gross income?

Accepted Answer

Hal should include $600,000 in his gross income ($1 million prize minus the $400,000 directed to the EPA). Not all prizes are excludable from gross income, and this prize was awarded for Hal's public achievement rather than from a charity.

Question 8

Which of the following statements about alimony payments is true for divorce agreements executed before 2019?

Accepted Answer

For divorce agreements executed before 2019, all the statements are true regarding alimony payments. They must be in cash (A), are considered taxable income for the recipient (B), cannot continue after the death of the recipient (C), and must be under a written agreement that does not specify the payments as nonalimony or child support (D).

Question 9

Nate is a partner in a partnership that received $5,000 of interest income this year.Nate's share of the interest is $1,000,and he should report this income on his individual return as:

Accepted Answer

Nate's share of the interest income should be reported as interest income on his individual tax return, as it is not business income and is not classified as income from a partnership. The fact that the partnership intends to organize as a limited liability company next year does not have any relevance to how the income should be reported on Nate's individual tax return.

Question 10

Barney and Betty got divorced in 2018.In the divorce decree Betty agreed to pay Barney $24,000 per year for five years (or until Barney's death or remarriage)and $10,000 per year until their daughter,Pebbles,turns 19 years old.What amount (if any)is included in Barney's gross income in 2019?

Accepted Answer

The $24,000 per year that Betty agreed to pay Barney for five years (or until Barney's death or remarriage) is considered alimony under IRS rules and is included in Barney's gross income. The payments for their daughter Pebbles do not count as alimony and are not included in gross income.

Question 11

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant.Ethan indicated that he would transfer the prize to the local hospital.How much of the prize should Ethan include in his gross income?

Accepted Answer

Prizes and awards are generally included in gross income. Ethan must include the $25,000 prize in his gross income even if he plans to donate it to a charity. The tax benefit from such a donation would be realized through deductions, not exclusion from income.

Question 12

This year Ed celebrated his 25^th year as an employee of Designer Jeans Company.In recognition of his long and loyal service,the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus.What amount must Ed include in his gross income?

Accepted Answer

The answer of This year Ed celebrated his 25^th year...

Question 13

Which of the following is a true statement about the first payment received from a purchased annuity?

Accepted Answer

When a payment is received from a purchased annuity, a portion of the payment is typically considered a return of capital and is therefore not included in gross income. The portion that is considered a return of capital is determined based on the exclusion ratio, which is calculated at the time of purchase and takes into account the amount of the original investment and the expected number of payments from the annuity. This exclusion ratio remains the same for each payment received from the annuity.

Question 14

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years.The annuity was purchased at a cost of $300,000.How much of the first quarterly payment will Fran include in her gross income?

Accepted Answer

The first step is to determine the total amount of payments over the 10-year period. Since there are 4 payments per year and a total of 10 years, there will be 40 payments in total. Multiplying the quarterly payment amount ($12,000) by the number of payments (40) gives us a total payout of $480,000.

To determine the taxable portion of the first payment, we divide the initial cost of the annuity ($300,000) by the total payout ($480,000) to get the percentage of the payment that represents a return of Fran's investment. In this case, it's 62.5% ($300,000/$480,000).

Therefore, Fran will include 62.5% of the first quarterly payment of $12,000, or $7,500, in her gross income.

Question 15

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle.The buyer has promised to pay Henry in installment payments over the next few years.Identify the principle that will determine when Henry should be taxed on the gain from the sale.

Accepted Answer

The wherewithal to pay principle is relevant here, as it suggests that taxpayers should be taxed on income when they have the actual financial ability to pay the tax. In the case of installment payments, Henry will be taxed on the gain as he receives the payments, aligning with his ability to pay.

Question 16

Which of the following describes how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Accepted Answer

The annuity exclusion ratio for an annuity paid over a fixed period is calculated by dividing the original investment by the number of payments. This calculation determines the portion of each payment that represents a return of the original investment, and therefore is not subject to tax. The remaining portion of each payment is considered taxable income.

Question 17

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.

Accepted Answer

The constructive receipt principle states that income is taxable when it is made available to the taxpayer, not just when it is actually received. In this case, even though Emily received the bonus check after year-end, she had the right to receive it in December when it was offered by her supervisor. Therefore, according to the constructive receipt principle, Emily must include the bonus in her income for the year in which she was informed of its availability.

Question 18

To calculate a gain or loss on the sale of an asset,the proceeds from the sale are reduced by which of the following?

Accepted Answer

The gain or loss on the sale of an asset is calculated by subtracting the tax basis of the property (which includes any adjustments such as depreciation) and any selling expenses from the amount realized from the sale. Therefore, D is the correct choice as it includes both the tax basis of the property and selling expenses. A, B, and C are not the best choices as they do not include all necessary factors in the calculation.

Question 19

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives.Based on IRS tables,George's life expectancy is 100 months.How much of the first $80 payment will George include in his gross income?

Accepted Answer

The answer of George purchased a life annuity for $3,200...

Question 20

Opal deducted $2,400 of state income taxes on her tax return last year.This year she received a state income tax refund of $170.What amount of the refund,if any,should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

Accepted Answer

Opal should include the $170 state income tax refund in her gross income since she deducted $2,400 of state income taxes on her tax return last year and received a refund this year. However, since her total itemized deductions exceeded the standard deduction by $350, the taxable portion of the refund is reduced by 5.7% ($350/$6,100) and the amount she should include in her gross income is $161 ($170 - $9). Therefore, the best choice is D ($170).

Quiz 5: Gross Income and Exclusions

Wilma has a $25,000 certificate of deposit (CD) at the local bank.The interest on this certificate,$1,000,was credited to her account this year,but she must pay an early withdrawal penalty if she cashes in the CD before next year.Which of the following is a true statement?

Rhett made his annual gambling trip to Uwin Casino.On this trip Rhett won $250 at the slots and $1,200 at poker.Also this year,Rhett made several trips to the racetrack,but he lost $700 on his various wagers.What amount must Rhett include in his gross income?

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year.Mary included a total of $4,000 of state income taxes when she itemized deductions last year.What amount of the refund,if any,should Mary include in her gross income this year?

Which of the following statements about alimony payments is true for divorce agreements executed before 2019?

Nate is a partner in a partnership that received $5,000 of interest income this year.Nate's share of the interest is $1,000,and he should report this income on his individual return as:

Barney and Betty got divorced in 2018.In the divorce decree Betty agreed to pay Barney $24,000 per year for five years (or until Barney's death or remarriage) and $10,000 per year until their daughter,Pebbles,turns 19 years old.What amount (if any) is included in Barney's gross income in 2019?

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant.Ethan indicated that he would transfer the prize to the local hospital.How much of the prize should Ethan include in his gross income?

This year Ed celebrated his 25^th year as an employee of Designer Jeans Company.In recognition of his long and loyal service,the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus.What amount must Ed include in his gross income?

Which of the following is a true statement about the first payment received from a purchased annuity?

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years.The annuity was purchased at a cost of $300,000.How much of the first quarterly payment will Fran include in her gross income?

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle.The buyer has promised to pay Henry in installment payments over the next few years.Identify the principle that will determine when Henry should be taxed on the gain from the sale.

Which of the following describes how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

To calculate a gain or loss on the sale of an asset,the proceeds from the sale are reduced by which of the following?

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives.Based on IRS tables,George's life expectancy is 100 months.How much of the first $80 payment will George include in his gross income?

Opal deducted $2,400 of state income taxes on her tax return last year.This year she received a state income tax refund of $170.What amount of the refund,if any,should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

Quiz 5: Gross Income and Exclusions

Wilma has a $25,000 certificate of deposit (CD) at the local bank.The interest on this certificate,$1,000,was credited to her account this year,but she must pay an early withdrawal penalty if she cashes in the CD before next year.Which of the following is a true statement?

Rhett made his annual gambling trip to Uwin Casino.On this trip Rhett won $250 at the slots and $1,200 at poker.Also this year,Rhett made several trips to the racetrack,but he lost $700 on his various wagers.What amount must Rhett include in his gross income?

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year.Mary included a total of $4,000 of state income taxes when she itemized deductions last year.What amount of the refund,if any,should Mary include in her gross income this year?

Which of the following statements about alimony payments is true for divorce agreements executed before 2019?

Nate is a partner in a partnership that received $5,000 of interest income this year.Nate's share of the interest is $1,000,and he should report this income on his individual return as:

Barney and Betty got divorced in 2018.In the divorce decree Betty agreed to pay Barney $24,000 per year for five years (or until Barney's death or remarriage) and $10,000 per year until their daughter,Pebbles,turns 19 years old.What amount (if any) is included in Barney's gross income in 2019?

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant.Ethan indicated that he would transfer the prize to the local hospital.How much of the prize should Ethan include in his gross income?

This year Ed celebrated his 25th year as an employee of Designer Jeans Company.In recognition of his long and loyal service,the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus.What amount must Ed include in his gross income?

Which of the following is a true statement about the first payment received from a purchased annuity?

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years.The annuity was purchased at a cost of $300,000.How much of the first quarterly payment will Fran include in her gross income?

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle.The buyer has promised to pay Henry in installment payments over the next few years.Identify the principle that will determine when Henry should be taxed on the gain from the sale.

Which of the following describes how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

To calculate a gain or loss on the sale of an asset,the proceeds from the sale are reduced by which of the following?

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives.Based on IRS tables,George's life expectancy is 100 months.How much of the first $80 payment will George include in his gross income?

Opal deducted $2,400 of state income taxes on her tax return last year.This year she received a state income tax refund of $170.What amount of the refund,if any,should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

This year Ed celebrated his 25^th year as an employee of Designer Jeans Company.In recognition of his long and loyal service,the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus.What amount must Ed include in his gross income?