Question 1

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 for the year. The transfer of the common stock is not a taxable event, and the other payments are not due until future years.

Question 2

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 3

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

Fran should use the exclusion ratio to determine how much of each payment is taxable. The exclusion ratio is calculated by dividing the investment in the annuity by the expected return. In this case, the expected return is $48,000 per year ($12,000 x 4), so over 10 years it would be $480,000. The exclusion ratio is $300,000/$480,000 = 0.625. Therefore, 62.5% of each payment is a return of principal and is not taxable, and 37.5% is taxable income. The first quarterly payment is $12,000, so Fran will include $4,500 ($12,000 x 0.375) in her gross income.

Question 4

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 5

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. According to this principle, income is taxable when it is actually or constructively received. Emily was informed about her bonus in December, which is when she constructively received it, even though she didn't physically have the check yet. Therefore, she must report the bonus as income on her tax return for the year in which she was informed of it.

Question 6

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

Accepted Answer

When receiving payments from an annuity, the portion of the payment that represents a return of the original investment (i.e. return of capital) is not included in gross income and is not taxed. Only the portion of the payment that represents interest earnings is included in gross income and subject to income tax. The first payment received from a purchased annuity typically includes a significant return of capital, so only a small portion of it would be taxable.

Question 7

Which of the following statements about alimony payments is true?

Accepted Answer

All of the statements are true.

A) To qualify as alimony, payments must be made in cash. This means that payments must be made in actual currency or a cash equivalent like a check or money order.

B) Alimony payments are includible in the gross income of the recipient. Alimony payments are considered taxable income for the recipient and must be reported on their tax return.

C) To qualify as alimony, payments cannot continue after the death of the recipient. Alimony payments terminate upon the death of the recipient.

D) To qualify as alimony, payments must be made under a written agreement or divorce decree that does not designate the payments as "nonalimony" or child support. Payments must be designated as alimony in the written agreement or divorce decree to be deductible by the payer and taxable to the recipient.

Therefore, all of the statements are true.

Question 8

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 tax return, since that is the nature of the income received. It is not considered business income, income from a partnership, or dividend income.

Question 9

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 $50,000 cash payment made by Charles to Camilla each year is included in Camilla's gross income. The transfer of the castle and the support payments for their son are not taxable events.

Question 10

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 portion of her state income tax refund that provided a tax benefit in the previous year. Since she only received a benefit of $170 (less than the $350 excess of her itemized deductions over the standard deduction), she does not need to include any of the refund in her gross income. Therefore, the correct answer is (D) $170.

Question 11

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 12

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.

Question 13

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 in his gross income ($1 million prize - $400,000 directed to EPA). The directed donation does not affect Hal's taxable income.

Question 14

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 15

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 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

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 18

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 19

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. This determines the portion of each payment that is considered to be tax-free return of principal.

Question 20

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

To calculate the gain or loss on the sale of an asset, the proceeds from the sale are reduced by both the tax basis of the property (which represents the cost of the asset adjusted for any deductions or depreciation taken in previous years) and the selling expenses (such as commissions and fees paid to brokers or lawyers). Therefore, choice D is the best option as it includes both of these deductions in the calculation.

Quiz 5: Gross Income and Exclusions

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?