Question 1

Ted earned $150,000 during the current year.He paid Alice, his former wife, $75,000 in alimony.Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

Accepted Answer

Alimony payments are deductible for the payer and taxable for the recipient, so Alice would pay taxes on the $75,000 she received. Ted would pay taxes on the remaining $75,000 of his income.

Question 2

If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.

Accepted Answer

Scholarships that are used for qualified tuition and related expenses are excluded from gross income. However, scholarships used for other expenses, such as room and board, are included in gross income.

Question 3

Excess charitable contributions that come under the 30%-of-AGI ceiling are always subject to the 30%-of-AGI ceiling in the carryover year.

Accepted Answer

Excess charitable contributions that exceed the 30%-of-AGI ceiling in the current year are generally carried forward for up to five years and subject to the 30%-of-AGI ceiling in each of those years.

Question 4

Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.

Accepted Answer

The scholarship is tax-free for Ashley because it is used to pay for qualified education expenses, which include tuition, fees, books, supplies, and required equipment. Therefore, Ashley can exclude the full $17,000 from her gross income.

Question 5

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.

Accepted Answer

The answer of John told his nephew, Steve, "if you...

Question 6

Capital assets donated to a public charity that would result in long-term capital gain if sold, are subject to the 30%-of-AGI ceiling limitation on charitable contributions for individuals.

Accepted Answer

When donating capital assets, the donor's deduction is limited to 30% of their AGI. If the fair market value of the asset exceeds the donor's basis in the asset, donating the asset will result in a long-term capital gain. Thus, the 30%-of-AGI ceiling limitation applies.

Question 7

A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.

Accepted Answer

The phaseout of certain itemized deductions, known as the Pease limitations, only applies to taxpayers exceeding specific income thresholds, not to all taxpayers who itemize.

Question 8

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement, Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Accepted Answer

The answer of Jacob and Emily were co-owners of a...

Question 9

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 $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers.Using the customary 15% rate, her voluntary tips would have been only $6,000.Brooke must include $18,000 ($11,000 + $7,000) in gross income.

Accepted Answer

The question provides enough information to determine that Brooke received $11,000 from groups of 7 or more customers, which were charged the 15% fee, and $7,000 in voluntary tips from all other customers. The question also states that if Brooke had only received tips at the customary 15% rate, her voluntary tips would have been $6,000. Therefore, her total tips were higher than they would have been if she had only received 15% from all customers. Brooke must include the total amount of tips she received in her gross income, which is $18,000.

Question 10

Paula transfers stock to her former spouse, Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

Accepted Answer

Fred's recognized gain from the sale of the stock is $25,000 because his basis in the stock is considered to be the same as Paula's original cost basis ($75,000), making the gain calculated from the sale price ($100,000) minus the original cost basis ($75,000).

Question 11

Contributions to public charities in excess of 50% of AGI may be carried back 3 years or forward for up to 5 years.

Accepted Answer

Contributions to public charities cannot be carried back but can be carried forward for up to 5 years in excess of 50% of AGI.

Question 12

In order to dissuade his pastor from resigning and taking a position with a larger church, Michael, an ardent leader of the congregation, gives the pastor a new car.The cost of the car is deductible by Michael as a charitable contribution.

Accepted Answer

Giving a gift to a specific individual, such as a pastor, does not qualify as a charitable contribution under the tax code. Therefore, the cost of the car cannot be deducted as a charitable contribution by Michael.

Question 13

Employee business expenses for travel qualify as itemized deductions subject to the 2%-of-AGI floor if they are not reimbursed.

Accepted Answer

Employee business expenses for travel are considered miscellaneous itemized deductions subject to the 2%-of-AGI floor, and are only deductible if they are not reimbursed by the employer.

Question 14

Ronaldo contributed stock worth $12,000 to the Children's Protective Agency, a qualified charity.He acquired the stock 20 months ago for $7,000.He may deduct $7,000 as a charitable contribution deduction (subject to percentage limitations).

Accepted Answer

Ronaldo may deduct the fair market value of the stock at the time of the contribution, which is $12,000, not the cost basis of $7,000, assuming the stock was a long-term capital asset (held for more than one year).

Question 15

Gambling losses may be deducted to the extent of the taxpayer's gambling winnings.Such losses are subject to the 2%-of-AGI floor for miscellaneous itemized deductions.

Accepted Answer

Gambling losses may indeed be deducted to the extent of gambling winnings, but they are not subject to the 2%-of-AGI floor because they are not considered miscellaneous itemized deductions.

Question 16

Dan contributed stock worth $16,000 to his college alma mater, a qualified charity.He acquired the stock 11 months ago for $4,000.He may deduct $16,000 as a charitable contribution deduction (subject to percentage limitations).

Accepted Answer

The answer of Dan contributed stock worth $16,000 to his...

Question 17

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.

Accepted Answer

The statement is false. The exclusion for scholarships applies to both college and non-college educational institutions, including primary and secondary schools like Parochial High School. Therefore, Agnes may exclude the $5,000 from her taxable income.

Question 18

After the divorce, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year, Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Accepted Answer

Darlene must include the $12,000 in her gross income because it is considered alimony. However, the fact that Jeff paid $18,000 during the year is irrelevant to this requirement.

Question 19

Charitable contributions that exceed the percentage limitations for the current year can be carried over for up to three years.

Accepted Answer

Charitable contributions that exceed the percentage limitations can actually be carried over for up to five years, not three.

Question 20

George and Erin are divorced, and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

Accepted Answer

According to IRS rules, alimony payments are included in the recipient's gross income and taxed as their own income, even though it is paid by the former spouse. Therefore, Erin is required to include the alimony payments in her gross income.

Quiz 10: Income, Deductions and Credits