Question 1

NeNe is an accountant and U.S. citizen, who has accepted a permanent position in Madrid, Spain for a Spanish financial services company. This year, NeNe spent the entire year working in Madrid. NeNe's employer paid $40,000 of her Madrid housing expenses this year. What amount of the $40,000 housing payments may NeNe exclude?

Accepted Answer

Since NeNe spent the entire year overseas, she may exclude the lesser of (a) $40,000 housing costs − $16,624 ($103,900 × 0.16) = $23,376 or (b) $14,546 ($103,900 × 0.14). Thus, she may exclude $14,546 of the housing costs paid by her employer.

Question 2

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500 were paid by the University when he agreed as a condition of receiving the dormitory fees to counsel freshman on campus living. What amount must Shaun include in his gross income?

Accepted Answer

College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student's courses. Any excess scholarship amounts (such as for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.

Question 3

Bart, a single taxpayer, has recently retired. This year, he received $24,000 in pension payments and $5,000 of social security payments. What amount must Bart include in his gross income for the social security payments?

Accepted Answer

His modified AGI + 50% of Social Security benefits is $24,000 + $2,500 = $26,500, which is greater than $25,000 but less than or equal to $34,000. His taxable Social Security benefits are the lesser of (a) $2,500 (50% of his Social Security benefits or (b) 50 percent of [$24,000 modified AGI + $2,500 (50% of Social Security benefits) − $25,000] = $750. Thus, his taxable Social Security benefits are $750.

Question 4

Graham has accepted an offer to do graduate work in the chemistry department at State University. The chemistry department offered Graham a $5,000 tuition reduction and $3,500 toward the cost of room and meals. Under the terms of the scholarship Graham must work in the chemistry labs during the summer as a research assistant. What amount must Graham include in his gross income?

Accepted Answer

The scholarship exclusion applies to the tuition reduction but not the cost of room and board.

Question 5

Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4%, which of the following is correct?

Accepted Answer

The imputed interest rules do not apply to loans of $10,000 or less.

Question 6

Deb has found it very difficult to repay her loans. Because of these difficulties, the bank decided to forgive one of her most recent loans, an amount of $45,000. After the loan was discharged, Deb had total assets of $232,000 and her remaining loans total $217,000. What amount must Deb include in her gross income?

Accepted Answer

A discharge of indebtedness is not taxable if the taxpayer is insolvent before and after the debt forgiveness. If the discharge of indebtedness makes the taxpayer solvent, the taxpayer recognizes taxable income to the extent of his solvency.

Question 7

This year, Fred and Wilma, married filing joint, sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is included in gross income?

Accepted Answer

Fred and Wilma may exclude $500,000 of their $550,000 gain ($750,000 sales price − $200,000 cost = $550,000 gain) because they meet the ownership and use tests. Thus, they only include $50,000 of the gain in their gross income.

Question 8

Sam, age 45, saved diligently for his college education by putting part of his pay into U.S. Series EE saving bonds. Sam purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200. He has no other income this year. What amount must Sam include in his gross income?

Accepted Answer

Taxpayers using the bond redemption proceeds from Series EE bonds to pay for qualified higher educational expenses of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer may be allowed to exclude the interest from gross income. Qualified higher education expenses include the tuition and fees required for enrollment or attendance at an eligible educational institution.

Question 9

Helen is a U.S. citizen and CPA, who moved to London, England three years ago to work for a British company. This year, she spent the entire year in London and earned a salary of $110,000. How much of her salary will she be allowed to exclude from gross income in the U.S.?

Accepted Answer

Congress allows taxpayers to annually exclude a certain maximum amount, indexed for inflation, of foreign earned income from taxation. In 2018, the maximum exclusion is $103,900.

Question 10

Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)?

Accepted Answer

Interest on bonds issued by state and local governments is excluded from gross income.

Question 11

Hank is a U.S. citizen and is doing a three to six-year assignment as a sales executive in Paris for a French company, which began this year. Hank earned $109,500 working for the French company this year but only lived in France for 180 days (out of 365 days). He will live full-time in France next year. What amount of Hank's $109,500 salary this year will he be allowed to exclude from gross income in the U.S. (rounded to the nearest one-hundred dollars)?

Accepted Answer

$103,900 × [180 ÷ 365] = $51,238.36  rounded to $51,200. Since Hank will have a tax home in a foreign country and spend more than 330 days in the foreign country over 12 months, he is eligible to exclude foreign earned income. The exclusion is computed on a daily basis, the maximum exclusion is reduced pro-rata for each day during the calendar year the taxpayer is not considered to be a resident of the foreign country or does not actually live in the foreign country.

Question 12

Karl works at Moe's grocery. This year Karl was paid $43,000 in salary but he was allowed to purchase his groceries at 10% below Moe's cost. This year Karl spent $3,600 to purchase groceries costing Moe $4,000 and worth $6,000. What amount must Karl include in his gross income?

Accepted Answer

Employees must recognize imputed income to the extent they are allowed to purchase goods from their employer at a price below the employer's cost. [($43,000 + ($4,000 × 0.10)] = $43,400.

Question 13

Frank received the following benefits from his employer this year. What amount must Frank include in his gross income?

Accepted Answer

An employee may exclude from income the cost of medical and dental health insurance premiums and group-term life insurance (face $50,000) premiums an employer pays on the employee's behalf.

Question 14

This year, Barney and Betty sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Barney and Betty owned and lived in their home for 18 months. Assuming no unusual or hardship circumstances apply, how much of the gain is included in gross income?

Accepted Answer

All of the gain is included in gross income because Barney and Betty do not meet the two-year ownership and use tests.

Question 15

Ben's employer offers employees the following benefits. What amount must Ben include in his gross income?

Accepted Answer

If an employer pays disability premiums, and the employee chooses the premium as taxable compensation, it is considered employee-purchased and the benefits paid (if any) are excluded from the employee's gross income. Employer-paid whole life insurance premiums are included in gross income. Only premiums on up to $50,000 of employer-paid group term insurance are excluded from gross income.

Question 16

Brenda has $15,000 in U.S. Series EE saving bonds and she is considering whether to cash in the bonds. Under what conditions can Brenda exclude the interest on the savings bonds from her gross income?

Accepted Answer

Specifically, taxpayers using the bond redemption proceeds from Series EE bonds to pay for qualified higher educational expenses of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer may be allowed to exclude the interest from gross income.

Question 17

Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3%, which of the following is correct?

Accepted Answer

Employees recognize compensation income on below market loans from employers calculated using the federal interest rate.

Question 18

In January of the current year, Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months later in the same year after the gift, a $500 dividend was declared on the stock and paid to Dora's granddaughter. What amount must Dora's granddaughter include in her gross income for the current year?

Accepted Answer

The gift of the stock is excluded but the dividend on the shares is taxable. Hence, the answer is $500.

Question 19

Irene's husband passed away this year. After his death, Irene received $250,000 of proceeds from life insurance on her husband, and she inherited her husband's stock portfolio worth $750,000. What amount must Irene include in her gross income?

Accepted Answer

Taxpayers exclude inheritances and life insurance proceeds from gross income.

Question 20

Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and $10,000 of social security payments. What amount must Bernie include in his gross income?

Accepted Answer

High-income individuals include 85% of their social security benefits in gross income.

Quiz 5: Gross Income and Exclusions