Question 1

Which of the following statements is/are correct? I. Maria receives a necklace worth $300 from her employer in recognition of her production unit's safety record at the company's annual meeting. Maria is not taxed on the $300. Reggie opens a savings account at Mid Financial Savings and Loan. For opening the II. III. account he receives a microwave worth $200. On December 31, his account is credited for $300 of interest income. Reggie must report $500 of income. Manu receives a salary of $80,000 as CEO of Camp's Cooking Crockery. Manu owns 60% of Camp's, which is organized as an S corporation. Camp's taxable income for the current year is $300,000 and Camp's pays $100,000 of dividends. Manu must recognize $360,000 of income.

Accepted Answer

The answer of Which of the following statements is/are correct?...

Question 2

Nora, a single individual age 60, receives a gold watch worth $700 during her retirement luncheon, based upon her long tenure with the company. How much of the award must Nora recognize in her gross income for the current year?

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Question 3

Teresa won $9,000 playing the Illinois lottery. Which of the following statements is/are correct? I. Teresa must include the $9,000 in gross income. II. The All-inclusive Income Concept applies to this situation. III. Legislative Grace allows Teresa to exclude lottery winnings from recognition.

Accepted Answer

I. Lottery winnings are considered taxable income by the IRS and must be included in gross income. II. The All-inclusive Income Concept suggests that all income from whatever source derived is taxable unless specifically excluded by law. III. Legislative Grace, which allows certain income to be excluded from taxation, does not apply to lottery winnings; they are not exempt from being taxed.

Question 4

Darnel owns 10% of the stock in Allison Company. During the current year, Allison has operating income of $200,000 and distributes $80,000 to its owners. I. If Allison is a corporation, Darnel has $8,000 of income from Allison. II. If Allison is a partnership, Darnel has $20,000 of income from Allison.

Accepted Answer

In a corporation, dividends are distributed to shareholders based on their ownership percentage. Darnel owns 10% of Allison Company, so if the company distributes $80,000, Darnel would receive 10% of that, which is $8,000. This is considered dividend income. In a partnership, income is passed through to the partners based on their ownership percentage, regardless of whether the money is distributed. Therefore, Darnel would report $20,000 of income (10% of $200,000) from Allison if it is a partnership.

Question 5

Which of the following statements concerning prizes and awards is/are correct? I. Most all prizes and awards are exempt from taxation. II. Employee awards of tangible, personal property for length of service are at least partially excludable. III. Any prize or award received can be excluded if it is given to a governmental or charitable organization. IV. Employee awards for safety achievements are always excluded from income.

Accepted Answer

The answer of Which of the following statements concerning prizes...

Question 6

Nellie, a single individual age 77, receives Social Security benefits of $7,000 during the current year. Her only other income consists of $5,000 of interest from bank CDs and $1,000 of tax exempt interest distributed from a trust fund. Nellie's gross income is:

Accepted Answer

Gross income for tax purposes includes all income unless specifically excluded by the tax code. Social Security benefits are partially taxable depending on total income, but in this scenario, given the low total income, it's likely none of the Social Security benefits are taxable. Tax-exempt interest, while needing to be reported, does not count towards gross income. Therefore, only the $5,000 of interest from bank CDs is included in Nellie's gross income.

Question 7

Marvin and Stacy are retired. During the current year, they receive $10,000 in Social Security benefits. They have $45,000 of other taxable gross income and receive $23,000 of municipal bond interest. The taxable portion of the $10,000 Social Security payment is:

Accepted Answer

To determine the taxable portion of Social Security benefits, you need to calculate the couple's "combined income," which is their adjusted gross income (AGI) plus nontaxable interest plus half of their Social Security benefits.

Marvin and Stacy's combined income is calculated as follows:

AGI: $45,000 
Nontaxable interest: $23,000 
Half of Social Security benefits: $5,000 ($10,000/2)

Total combined income: $73,000

Because their combined income is above the threshold for their filing status ($32,000 for married filing jointly), we need to determine the taxable portion of their Social Security benefits using the following formula:

1. If the combined income is below the threshold, there is no taxable portion of Social Security benefits.

2. If the combined income is between $32,000 and $44,000 for a married couple filing jointly, then up to 50% of Social Security benefits may be taxable.

3. If the combined income is over $44,000 for a married couple filing jointly, then up to 85% of Social Security benefits may be taxable.

Marvin and Stacy's combined income puts them in the third category, where up to 85% of Social Security benefits may be taxable.

To calculate the taxable portion of their benefits, we multiply half of their Social Security benefits ($5,000) by 85%, which gives us $4,250.

Therefore, the answer is C: $8,500 (their total Social Security benefits minus the taxable portion, which is $10,000 - $4,250 = $5,750. Therefore, $10,000 - $5,750 = $8,500 is the taxable portion of their Social Security benefits).

Question 8

Todd and Fiona are negotiating a divorce settlement. Todd has offered to pay Fiona $12,000 each year for 10 years, but payments cease upon Fiona's death. What are the tax implications of this proposition? I. Fiona must recognize Gross Income when the money is received. II. Todd has a deduction for Adjusted Gross Income in the year of payment. III. Since the payments are in cash and there is no obligation to pay more after Fiona's death, the payments are classified as alimony. IV. If the payments qualify as child support, Fiona recognizes no gross income and Todd has no deduction from Adjusted Gross Income.

Accepted Answer

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Question 9

Binney is a retired auto mechanic. He and his wife, Jennie, receive taxable pensions totaling $35,000, $8,000 of tax- exempt interest income and $6,000 of Social Security benefits during the current year. Assuming that they had no other items of income or deductions for adjusted gross income, Binney and Jennie's adjusted gross income is:

Accepted Answer

Adjusted Gross Income (AGI) = Taxable Pension + Tax-exempt Interest Income + 50% of Social Security Benefits
AGI = $35,000 + $8,000 + ($6,000/2)
AGI = $35,000 + $8,000 + $3,000
AGI = $46,000
However, Social Security Benefits are only partially taxable. To calculate the taxable portion of Social Security Benefits, we need to use a formula:
Taxable Social Security Benefits = (Provisional Income - Base Amount) x 50%
where Provisional Income = AGI + Tax-exempt Interest Income + 50% of Social Security Benefits
and Base Amount = $32,000 (for married filing jointly)
Provisional Income = $46,000 + $8,000 + ($6,000/2) = $50,000
Taxable Social Security Benefits = ($50,000 - $32,000) x 50% = $9,000
Therefore, AGI = $35,000 + $8,000 + $3,000 - $9,000 = $37,000
But we also have to add back the non-taxable portion of Social Security Benefits ($6,000/2 = $3,000) to arrive at their AGI:
AGI = $37,000 + $3,000 = $39,700

Question 10

Hector and Nicole are retired. During the current year, they receive $11,000 from a qualified pension plan, $3,000 of dividends on common stock holdings, $6,000 of tax-exempt interest, and $10,000 of Social Security benefits. Hector and Nicole's adjusted gross income is:

Accepted Answer

The answer of Hector and Nicole are retired. During the...

Question 11

Waldo and Fern are negotiating a divorce settlement. Waldo has offered to pay Fern $12,000 each year for a guaranteed 10 years. What are the tax implications of this proposition? I. Since the payments are periodic and in cash, the payments qualify as alimony. II. If the payments qualify as child support, Fern recognizes gross income and Waldo has a deduction from Adjusted Gross Income.

Accepted Answer

The answer of Waldo and Fern are negotiating a divorce...

Question 12

Rae is a retired corporate executive. He and his wife, Pat, receive pensions totaling $82,000 and $8,000 of Social Security benefits during the current year. Rae and Pat's adjusted gross income is

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The answer of Rae is a retired corporate executive. He...

Question 13

Marvin and Simone are a retired couple living on income from their investments and Social Security benefits. During the current year, they receive the following:  Marvin and Simone's adjusted gross income is:

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The answer of Marvin and Simone are a retired couple...

Question 14

Lyle and Louise are retired living on income from their investments and Social Security benefits. During the current year, they receive the following:  Lyle and Louise's adjusted gross income is:

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Question 15

Frank and Lilly are negotiating a divorce settlement. Frank has offered to pay Lilly $12,000 each year for 10 years, but payments cease upon Lilly's death. What are the tax implications of this proposition? I. Lilly must recognize Gross Income when the money is received. II. Frank has a deduction for Adjusted Gross Income in the year of payment.

Accepted Answer

Statement I is correct because Lilly must recognize the $12,000 payments as Gross Income when she receives them. 
Statement II is correct because Frank can deduct the $12,000 payments as an expense in the year of payment, as long as it qualifies as alimony for tax purposes. However, it is important to note that the payments must meet certain requirements to be classified as alimony, such as being made under a divorce or separation agreement and being intended for the support of the recipient spouse.

Question 16

Ona is a retired schoolteacher who receives a pension of $800 per month Ona made no payments into the pension plan) and $2,000 of Social Security benefits per month. Ona's adjusted gross income is:

Accepted Answer

The answer of Ona is a retired schoolteacher who receives...

Question 17

Paul won the Nobel Prize for Literature. He is awarded $1,000,000. His tax situation is I. In general, the award must be included in gross income. II. The award may be excluded if he gives it to a qualified charity. III. The award may be excluded if he gives it to the U.S. Government. IV. Awards for literary achievement are not taxable.

Accepted Answer

Statements I, II, and III are correct. Generally, prizes and awards are included in gross income (I), but there are exceptions allowing for exclusion if the prize or award is donated to a qualified charity (II) or to the U.S. Government for exclusively public purposes (III). Statement IV is incorrect because awards for literary achievement, like the Nobel Prize, are taxable unless the conditions of II or III are met.

Question 18

Janelle receives a sterling silver tea set valued at $500 from her employer during her retirement dinner for her long years of service. The employer has a tradition of giving awards to some retiring employees, but has no qualified plan. I. $400 is excludable from Janelle's Gross Income. II. The $500 is excludable even if her employer only gives awards to its top executives.

Accepted Answer

Statement I is correct because an employee can exclude up to $400 per year of the value of a tangible personal property fringe benefit, such as the sterling silver tea set, from their gross income.

Statement II is incorrect because the tax code does not allow discrimination among employees for fringe benefits based on whether they are top executives or not. All employees must receive equal treatment under the law for fringe benefits to be excludable from their gross income.

Question 19

Gary won the Nobel Prize in Economics. He receives $1.2 million from the Royal Academy of Sciences in Stockholm. Does he have taxable income from this award? I. If he keeps the prize money, he must include the award in his gross income. II. If he tells the Academy to contribute the award to a charitable organization, the amount of the award is excludable from gross income.

Accepted Answer

Both statements are correct. According to the U.S. tax code, Nobel Prize money is considered taxable income if the recipient keeps the money. However, if the recipient directs the prize money to be given directly to a government unit or a tax-exempt charitable organization without taking possession of the funds, the money is not considered taxable income for the recipient.

Question 20

In what circumstances would some portion of the Social Security benefits received by a single taxpayer be subject to taxation? Assume that all sources of income are listed.

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The answer of In what circumstances would some portion of...

Quiz 3: Income Sources