Question 1

Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as:

Accepted Answer

Nate's share of the interest income should be reported as interest income on his individual return since that was the nature of the income received from the partnership. It was not business income or income from the partnership itself. The options listed in D and E are irrelevant and not applicable to this scenario.

Question 2

Barney and Betty got divorced this year. In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death or remarriage). What amount (if any) is included in Barney's gross income this year?

Accepted Answer

Only the $24,000 payment is included in Barney's gross income. The transfer of the common stock is a property settlement and not considered taxable income.

Question 3

Emily is a cash basis taxpayer, and she was an especially productive salesperson last year. In December of last year her supervisor told Emily she had earned a $5,000 bonus. However, Emily received the bonus check after year end. Identify the principle that will determine when Emily is taxed on the bonus:

Accepted Answer

The principle that will determine when Emily is taxed on the bonus is constructive receipt. Under the constructive receipt doctrine, income is taxable when it is made available to the taxpayer, regardless of whether the taxpayer physically takes possession of it. In this case, Emily was informed that she had earned a bonus and it was made available to her before year end, even though she did not receive the check until after year end. Therefore, Emily must recognize the bonus as income in the year it was constructively received, which is the year she was informed of its availability.

Question 4

Ophra is a cash basis taxpayer who is employed in the publishing industry. This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise. Ophra asked her employer to issue the cruise tickets to her parents, and he complied with this request. Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets:

Accepted Answer

The answer of Ophra is a cash basis taxpayer who...

Question 5

Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Accepted Answer

The annuity exclusion ratio for an annuity paid over a fixed period is calculated by dividing the original investment by the number of payments.

Question 6

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

Accepted Answer

Opal only needs to include the amount of her state income tax refund that gave her a tax benefit, which is the amount that would have reduced her taxable income had she not deducted the $2,400 on her previous year's tax return. Since her itemized deductions exceeded the standard deduction by $350, only the portion of the refund that reduces her itemized deductions should be included in her gross income. In this case, the $170 refund does not exceed the $350 excess, so Opal should include the full $170 in her gross income for the current year. Therefore, the correct answer is D.

Question 7

Charles and Camilla are getting divorced. Under the terms of the decree Charles will pay Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage). In addition, Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son, Clyde, until he turns 19 years old. What amount (if any) is included in Camilla's gross income this year?

Accepted Answer

Only the cash payment of $50,000 is included in Camilla's gross income. The castle transfer and child support payments are not taxable income.

Question 8

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income?

Accepted Answer

The answer of George purchased a life annuity for $3,200...

Question 9

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has promised to pay Henry in installment payments over the next few years. Identify the principle that will determine when Henry should be taxed on the gain from the sale:

Accepted Answer

The answer of This year Henry realized a gain on...

Question 10

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives. Later this year Harold will recover the remainder of his cost of the annuity. Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

Accepted Answer

The answer of Harold receives a life annuity from his...

Question 11

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?

Accepted Answer

The answer of This year Mary received a $200 refund...

Question 12

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Hal include in his gross income?

Accepted Answer

The answer of Ethan competed in the annual Austin Marathon...

Question 13

Which of the following statements about alimony payments is true?

Accepted Answer

All of these statements are true. To qualify as alimony, payments must be made in cash, are includible in the gross income of the recipient, cannot continue after the death of the recipient, and must be made under a written agreement or divorce decree that does not designate the payments as "nonalimony" or child support.

Question 14

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?

Accepted Answer

The first thing to calculate is the total amount of payments over the 10 years, which is 4 payments per year times 10 years times $12,000 per payment, or $480,000. To find the taxable portion of each payment, divide the cost of the annuity by the total amount of payments and multiply that by the payment amount. In this case, $300,000 ÷ $480,000 = 0.625, so the taxable portion of each payment is $12,000 × 0.625 = $7,500. Therefore, Fran will include $7,500 of the first quarterly payment in her gross income.

Question 15

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

Accepted Answer

The gain or loss on the sale of an asset is calculated by subtracting the tax basis of the property (the original cost basis adjusted for any improvements and depreciation) and the selling expenses (such as broker fees and closing costs) from the amount realized (the total amount received from the sale). Therefore, choice D - both the tax basis of the property and the selling expenses - is the best option.

Question 16

This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

Accepted Answer

The answer of This year Ed celebrated his 25th year...

Question 17

Which of the following is a true statement about the first payment received from a purchased annuity?

Accepted Answer

A portion of the payment is a return of capital, meaning it represents a return of the purchaser's initial investment and is not included in gross income. The remaining portion of the payment is included in gross income and subject to taxation in the year received.

Question 18

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

Accepted Answer

The answer of Wilma has a $25,000 certificate of deposit...

Question 19

Hal Gore won a $1 million prize for special contributions to environmental research. This prize is awarded for public achievement, and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency. How much of the prize should Hal include in his gross income?

Accepted Answer

Hal should include $600,000 of the prize in his gross income, as he directed $400,000 to be transferred to the EPA. The $400,000 that was transferred to the EPA is not taxable to Hal, but the remaining $600,000 that he directly received as the prize is taxable.

Question 20

Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the race track, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?

Accepted Answer

Gambling winnings are included in gross income and Rhett won $1,450 ($250 + $1,200) minus his losses of $700, resulting in a net gambling gain of $750 that must be included in his gross income.

Quiz 5: Gross Income and Exclusions