Question 1

A stock dividend in which a shareholder has the option to receive cash is not taxable.

Accepted Answer

A stock dividend where a shareholder has the option to receive cash is still considered income and is therefore taxable. The shareholder will need to report the cash received as dividend income on their tax return.

Question 2

Dividends are generally taxed at capital gains rates if they are made from the corporation's current earnings and profits or accumulated earnings and profits.

Accepted Answer

Dividends made from a corporation's current earnings and profits or accumulated earnings and profits are generally taxed at capital gains rates, which are typically lower than ordinary income tax rates. However, dividends made from other sources, such as return of capital or liquidation, may be taxed differently.

Question 3

For tax purposes,income is recognized if the transaction meets three conditions: economic benefit,occurrence and completion,and not exempt from tax.

Accepted Answer

This statement accurately reflects the criteria for recognizing income for tax purposes.

Question 4

A taxpayer can exclude from gross income any interest earned on bonds issued by any state,any possession of the United States,any political subdivision of either of the foregoing,or of the District of Columbia as long as these bonds are not issued for private activities.

Accepted Answer

This statement is true according to Section 103 of the Internal Revenue Code. However, if the bonds are issued for private activities, such as a sports stadium or certain types of housing projects, then the interest earned may be subject to taxation.

Question 5

There are some instances where a cash-basis taxpayer can report income as though he or she is an accrual basis taxpayer.

Accepted Answer

Cash-basis taxpayers can choose to report income using the accrual method for certain types of income, such as prepaid service contracts or subscription fees that are received in advance. This allows them to match the income with the expenses incurred in earning that income, which can provide a more accurate picture of the taxpayer's financial performance.

Question 6

Almost all individuals use the cash receipts and disbursements method of accounting.

Accepted Answer

The answer of Almost all individuals use the cash receipts...

Question 7

Jury duty pay is taxable income but it can be deducted from gross income if the amount must be given to the employer.

Accepted Answer

Jury duty pay is considered taxable income, but if the employee is required to give the amount to their employer (for example, if the employer pays for the time off), then it can be deducted from the employee's gross income for tax purposes.

Question 8

If the process of a transaction begins and ends with an economic benefit for the taxpayer,he or she must report it in income even though the income is specifically exempt from tax.

Accepted Answer

Income that is specifically exempt from tax by law does not need to be reported as income on a taxpayer's tax return.

Question 9

Income can only be realized in money or services.

Accepted Answer

Income can be realized in various forms including money, services, and goods.

Question 10

Betty performed bookkeeping services for Donald charging him $550.Donald agreed that he would pay Betty's credit card bill for the same amount.Betty has received an economic benefit and must report $550 in income on her tax return.

Accepted Answer

Payment made by Donald for Betty's credit card bill equals the amount charged by Betty for her bookkeeping services, thus resulting in an economic benefit for Betty. As per the IRS, any economic benefit received by an individual is considered income and must be reported on their tax return. Therefore, Betty must report $550 in income on her tax return.

Question 11

If an individual owns Series EE bonds,this person must report interest income,i.e.,the increase in bond value on an annual basis.

Accepted Answer

Interest on Series EE bonds is typically reported when the bonds are redeemed or reach maturity, not on an annual basis, unless the owner elects to report the interest annually.

Question 12

Robert received a tax refund in 2014 from his state,which he deducted on his prior year's return as an itemized deduction.He must report the refund in income in 2014,subject to certain computations to determine the amount that is taxable.

Accepted Answer

Tax refunds received in the previous year that were deducted as itemized deductions must be included in income in the current year. However, the amount that is taxable depends on whether the taxpayer received any tax benefit from the deduction in the prior year. This is calculated using the "tax benefit rule." Therefore, the statement in option A is correct.

Question 13

A taxpayer must file a Schedule B (Forms 1040A or 1040)if he or she has received taxable interest of $1,550.

Accepted Answer

According to the IRS, a taxpayer must file a Schedule B if they received more than $1,500 in taxable interest. Therefore, if they received $1,550 or more in taxable interest, they must file a Schedule B with their tax return.

Question 14

If Elliot,an accountant,agrees to provide tax services to a neighbor in exchange for the neighbor agreeing to fix his pool,Elliot but not his neighbor will have to report income on this transaction at fair market value.

Accepted Answer

Both Elliot and his neighbor must report income at fair market value for the services exchanged, as bartering is considered taxable income for both parties involved.

Question 15

The taxability of social security benefits depends on the "provisional income" and filing status of the taxpayer.

Accepted Answer

The taxability of social security benefits is determined by the provisional income and filing status of the taxpayer.

Question 16

For most individuals,interest income comes from interest-earning deposits at banks,savings and loans,or credit unions.

Accepted Answer

Interest income typically comes from interest-earning deposits at banks, savings and loans, or credit unions.

Question 17

Interest on state bonds is tax-exempt if the bonds were issued for private activities,such as convention centers,industrial parks,or stadiums.

Accepted Answer

Interest on state bonds issued for private activities, such as convention centers, industrial parks, or stadiums, is generally not tax-exempt unless the projects serve a significant public purpose and meet specific criteria set by federal tax laws.

Question 18

All federal and state unemployment compensation benefits are not subject to income tax.

Accepted Answer

While federal unemployment compensation benefits are subject to federal income tax, states have varying rules regarding the taxation of unemployment compensation. Some states do not tax unemployment compensation at all, while others partially or fully tax it. It is important to check state-specific rules regarding taxation of unemployment compensation.

Question 19

Constructive receipt means the income is available to or in the control of the taxpayer regardless of whether the taxpayer chooses to utilize the income.

Accepted Answer

Constructive receipt refers to income that is available to or under the control of the taxpayer, even if they don't actually receive or use it.

Question 20

Jeff owns 200 shares of Coca Cola common stock that have increased in value by $14 each.He must report the increase in income because a transaction has occurred.

Accepted Answer

An increase in the value of shares is considered an unrealized gain and is not taxable until the shares are sold or otherwise disposed of, at which point it becomes a realized gain.

Quiz 3: Gross Income: Inclusions and Exclusions