Question 1

Loretta received $6,200 from disability insurance that she purchased directly this year.Loretta must include all $6,200 in her gross income.

Accepted Answer

Disability insurance benefits that Loretta purchased directly (with after-tax dollars) are generally not taxable and do not need to be included in her gross income.

Question 2

Anna received $15,000 from life insurance paid upon the death of her grandmother.Anna can exclude the entire amount of the life insurance from her gross income.

Accepted Answer

According to the IRS, life insurance proceeds paid to the beneficiary upon the death of the insured are generally not taxable and can be excluded from the beneficiary's gross income. Therefore, Anna can exclude the entire amount of $15,000 from her gross income.

Question 3

Trevor received a gift of $25,000 in cash from his rich uncle.Trevor must include $15,000 of this gift in his gross income this year.

Accepted Answer

Gifts are not considered taxable income by the IRS, so Trevor does not need to include any part of the $25,000 gift in his gross income.

Question 4

U.S.citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.

Accepted Answer

U.S. citizens are generally subject to worldwide taxation, meaning they must pay taxes on all income regardless of where it is earned.

Question 5

A below-market loan (e.g.,from an employer to an employee)is a common example of a transaction that generates taxable imputed income.

Accepted Answer

When someone receives a loan that is below the market interest rate, the difference between the market rate and the actual rate charged is considered imputed income and is subject to taxation. This is because the borrower has effectively received a benefit (i.e. the lower interest rate) that they would not have received in an arms-length transaction. The same principle applies when an employer loans money to an employee at a below-market rate.

Question 6

Worker's compensation benefits are excluded from gross income.

Accepted Answer

According to the Internal Revenue Service (IRS), worker's compensation benefits are not taxable and therefore excluded from gross income.

Question 7

Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of realized gain on the sale of their principal residence.

Accepted Answer

Taxpayers meeting certain home ownership and use requirements can exclude up to $250,000 of realized gain ($500,000 for married couples filing jointly) on the sale of their principal residence, not $1,000,000.

Question 8

Interest earned on a Federal Treasury bond is excluded from gross income (for federal tax purposes).

Accepted Answer

Interest earned on a Federal Treasury bond is subject to federal income tax and must be included in gross income for federal tax purposes. However, it is exempt from state and local taxes.

Question 9

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

Accepted Answer

Interest earned on bonds issued by state or local government entities, such as the City of Denver, is generally exempt from federal income tax. This is known as the "municipal bond tax exemption."

Question 10

The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides,but does not consider the amount of the employee's compensation near retirement.

Accepted Answer

The standard retirement benefit under a defined benefit plan typically depends on both the number of years of service and the amount of the employee's compensation, often considering the employee's earnings near retirement or an average of the employee's earnings over a certain period.

Question 11

Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can)contribute to an employee's plan.

Accepted Answer

This statement is true.

Question 12

Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred for the emotional distress he suffered when his neighbor accidentally ran over his dog.

Accepted Answer

Compensation received for emotional distress is generally considered taxable income.

Question 13

An employee may exclude up to a 40 percent employer-provided discount on services.

Accepted Answer

An employee may exclude from income a discount of up to 20 percent on services provided by the employer.

Question 14

Brad was disabled for part of the year and he received $11,500 of benefits from a disability plan purchased by Brad's employer as a nontaxable fringe benefit.Brad must include all $11,500 of benefits in his gross income because Brad was not taxed on the disability insurance premiums paid by his employer.

Accepted Answer

Since the disability plan was purchased by Brad's employer as a nontaxable fringe benefit, and Brad did not pay the premiums with after-tax dollars, the benefits received from such a plan are generally taxable and must be included in Brad's gross income.

Question 15

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

Accepted Answer

According to the Internal Revenue Service (IRS), scholarships that are used for qualified education expenses (i.e. tuition, fees, books, and supplies required for courses) are generally tax-free. Therefore, scholarships that pay for required fees and books in addition to tuition are still considered tax-free for degree candidates.

Question 16

To provide relief from double taxation,Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.

Accepted Answer

The foreign earned income exclusion applies to income earned from working in a foreign country, not to passive income such as interest and dividends.

Question 17

Qualified retirement plans include defined benefit plans but not defined contribution plans.

Accepted Answer

Qualified retirement plans include both defined benefit plans and defined contribution plans.

Question 18

Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.

Accepted Answer

Distributions from defined benefit plans are generally taxed as ordinary income to beneficiaries, not as long-term capital gains.

Question 19

Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and not for elementary or secondary education).

Accepted Answer

Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if used for qualifying educational expenditures, and this includes expenses for both college students and K-12 (elementary or secondary education) students.

Question 20

Qualified fringe benefits received by an employee can be excluded from gross income.

Accepted Answer

Qualified fringe benefits, such as health insurance premiums, can be excluded from an employee's gross income under certain conditions.

Quiz 5: Gross Income and Exclusions