Question 1

For tax purposes,one of the requirements to recognize income is:

Accepted Answer

For income to be recognized for tax purposes, there must be an economic benefit, meaning that the taxpayer must receive something of value. Option B is incorrect because the transaction must be completed to recognize income. Option C is also incorrect because although some income may be tax-exempt, it still needs to meet the economic benefit requirement to be recognized for tax purposes.

Question 2

A taxpayer can exclude from income interest received from:

Accepted Answer

Municipal bonds issued by the state are tax-exempt, which means the interest earned on them is excluded from income for federal tax purposes. The other options, while they may offer favorable interest rates, do not qualify for tax-exempt status.

Question 3

Tom and Betsy,who are married filing jointly,reported a standard deduction of $12,200 on their 2013 tax return.They paid $500 to the state for income taxes in 2013.In 2014,they received a $125 refund of state taxes paid in 2013.What is the amount that Tom and Betsy need to report on their 2014 tax return?

Accepted Answer

The $125 refund of state taxes paid in 2013 is included in Tom and Betsy's 2014 income. However, they can deduct the $500 state income taxes paid in 2013 on their 2014 tax return. Therefore, the net amount that they need to report on their 2014 tax return is $0.

Question 4

Rose,who files as head of household,reported itemized deductions of $9,050 on her 2013 tax return.Her itemized deductions included $300 of state taxes paid.In 2014,she received a $175 refund of state taxes paid in 2013.What is the amount that Rose needs to report on her 2014 tax return?

Accepted Answer

Since Rose filed as head of household and had itemized deductions of $9,050 on her 2013 tax return, it's likely that she also claimed the $300 state tax deduction. Therefore, when she received a $175 state tax refund in 2014, she must reduce her itemized deductions by this amount in accordance with the tax law. This means she should only report $100 on her 2014 tax return ($300 originally claimed minus $175 refund received equals $125, which then gets further reduced by claiming $25 less due to her income tax bracket as a head of household).

Question 5

What item should not be included in income?

Accepted Answer

Worker's compensation payments are not considered taxable income and therefore should not be included in income. Jury duty pay, prizes and awards, and sick pay are all considered taxable income and should be included in income.

Question 6

Employer-paid premiums on life insurance are not taxable to the employees,unless the coverage is in excess of $_________________.

Accepted Answer

Employer-paid premiums on life insurance are not taxable to the employees if the coverage is $50,000 or less. If the coverage is in excess of $50,000, the excess amount is taxable as income to the employee.

Question 7

Income may be realized in the form of:

Accepted Answer

Income can be realized in the form of property (such as rental income or capital gains from selling property), cash (such as wages or interest payments), or services (such as consulting fees or commissions). Therefore, option D, "All of these," is the best choice.

Question 8

When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%,the tax rate on qualified dividends is:

Accepted Answer

When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%, the tax rate on qualified dividends is 15%. This means that individuals in this tax bracket will pay a lower tax rate on their qualified dividends than their ordinary income. The other options (A, C, D) have incorrect tax rates for qualified dividends in this tax bracket.

Question 9

What is the tax liability for a taxpayer who is married filing jointly with taxable income of $67,500,that includes a taxable qualified dividend of $1,000? All answers should be rounded to the nearest dollar.

Accepted Answer

First, we need to calculate the tax on the regular income of $66,500. Using the 2021 tax brackets for married filing jointly, the tax on $66,500 is $9,071. 
Next, we need to calculate the tax on the qualified dividend of $1,000. Since it is a qualified dividend, it is taxed at a maximum rate of 15%. Therefore, the tax on the dividend is $150. 
Finally, we add the two taxes together ($9,071 + $150) to get the total tax liability of $9,221. Rounded to the nearest dollar, the answer is C) $9,071.

Question 10

The following fringe benefit provided by the employer is not taxable to the employee:

Accepted Answer

Employer-paid premiums on group-term life insurance with coverage of $40,000 per person is not taxable to the employee. Vacation pay, educational assistance, and sick pay are all taxable fringe benefits.

Question 11

If Tom,an accountant,agrees to provide accounting services to Fred,a friend,in exchange for Fred fixing Tom's office floor,then:

Accepted Answer

In the United States, the Internal Revenue Service (IRS) requires individuals to report bartered services as income. Both Tom and Fred are providing services to each other, which have a fair market value, and thus both must report this value as income on their tax returns.

Question 12

What is the tax liability for a single individual who has taxable income of $115,500,that includes a taxable qualified dividend of $2,000? All answers should be rounded to the nearest dollar.

Accepted Answer

The tax liability is calculated by applying the tax rates for ordinary income and qualified dividends separately. For 2023, the tax on $113,500 of ordinary income and $2,000 of qualified dividends results in a total tax liability of $25,256.

Question 13

If an attorney performs some estate tax work for a client and the client agrees to pay $4,000 to him and $3,000 to a local financial institution for a debt the attorney owes,the attorney has income of:

Accepted Answer

The attorney will have income of $7,000, which includes the $4,000 fee for the estate tax work and the $3,000 paid to the financial institution on behalf of the attorney. Both of these payments are considered income to the attorney.

Question 14

Constructive receipt means the taxpayer has:

Accepted Answer

Constructive receipt occurs when income is credited to the taxpayer's account or otherwise made available to them, even if they do not physically possess the income yet. In other words, the taxpayer has control over the income and can use it as they wish. This is distinct from earned income (A) and accrued income (B), which may not necessarily be immediately available to the taxpayer. Therefore, the correct answer is (C) Control of the income for his or her use.

Question 15

Provisional income is calculated by starting with Adjusted Gross Income (AGI)before social security benefits and adding back specific items.One of these items is:

Accepted Answer

Deducted interest on educational loans is one of the specific items added back to AGI to calculate provisional income. Qualified dividends, capital gains, and wages are not added back to AGI for this calculation.

Question 16

When filing their tax returns,almost all individuals use:

Accepted Answer

The cash receipts and disbursements method is the most commonly used method for filing personal income tax returns. It involves reporting income when it is actually received and deducting expenses when they are actually paid. This method is simple and straightforward, and does not require knowledge of accounting principles or complicated record-keeping.

Question 17

Caroline,who files as head of household,received $9,000 of social security benefits.Her AGI before the social security benefits was $27,000.She also received $200 of tax-exempt interest.What is the amount of taxable social security benefits?

Accepted Answer

First, we need to calculate Caroline's provisional income by adding one-half of her social security benefits ($4,500) to her AGI ($27,000) and tax-exempt interest ($200). This gives us a provisional income of $31,700. 
Since Caroline files as head of household and her provisional income falls between $25,000 and $34,000, up to 50% of her social security benefits are taxable. Therefore, the amount of taxable social security benefits is 50% of $9,000, or $4,500. 
Therefore, the correct answer is D: $3,350.

Question 18

An individual must complete Schedule B (Forms 1040A or 1040)if the following situation occurs:

Accepted Answer

Schedule B (Forms 1040A or 1040) must be completed if an individual received tax-exempt interest of $700 or more.

Question 19

Pedro agreed to repair a house for a client and started to work on December 30,2012.On January 2,2014,he completed the job and received payment from the client.Pedro must record the income in:

Accepted Answer

Pedro completed the job and received payment in 2014, so he must record the income in that year.

Question 20

Under the cash receipts and disbursements method,the taxpayer reports income in the year:

Accepted Answer

The cash receipts and disbursements method recognizes income in the year it is received, regardless of when it was earned or accrued. Similarly, deductions are recognized in the year they are paid, regardless of when they were incurred or accrued. This method is also known as the cash basis of accounting.

Quiz 3: Gross Income: Inclusions and Exclusions