Question 1

Accelerated death benefits from a life insurance policy received by a terminally ill person may be excluded from taxable income.

Accepted Answer

Accelerated life insurance payments made to a terminally ill person,as certified by a physician,are excluded.

Question 2

Katie,a self-employed CPA,purchased an accident & disability insurance policy.As the result of an auto accident,Katie was unable to work and received $3,000 of disability benefits per month for seven months.The benefits were based on her estimated monthly income and should be reported as gross income.

Accepted Answer

The amounts received are not taxable even though the payments are a substitute for wages lost due to illness.The insurance policy was purchased by the taxpayer.

Question 3

An individual is considered terminally ill for purposes of the exclusion for accelerated death benefits if a physician certifies that he is reasonably likely to die within 36 months.

Accepted Answer

The time period is 24 months.

Question 4

Except in the case of qualifying accelerated death benefits,if a life insurance policy is sold or surrendered for a lump sum before the death of the insured,the amount received is taxable to the extent it exceeds the premiums paid.

Accepted Answer

Sale or surrender of a life insurance policy is generally taxable to the extent the proceeds exceed premiums paid.

Question 5

John,an employee of a manufacturing company,suffered a heart attack and was unable to work for six months.He received $1,500 per month of disability benefits as a result of an employer-provided group policy.The benefits are includible in John's gross income.

Accepted Answer

Employer-funded disability benefits are taxable.

Question 6

Sumedha is the beneficiary of her mother's $500,000 life insurance policy.She receives $54,000 per year over ten years in settlement of her mother's policy.Sumedha will exclude the $54,000 proceeds received each year from the life insurance company.

Accepted Answer

Only $50,000 of each payment is excluded.The $4,000 balance is taxable as interest income.

Question 7

Each year a taxpayer must include in gross income the rental value of his or her personal residence.

Accepted Answer

No income is realized under income tax concepts of income until the home is sold.

Question 8

Awards for emotional distress attributable to a physical injury are excluded from gross income.

Accepted Answer

Damage payments are excluded if due to physical injury and are not punitive damages.

Question 9

A taxpayer may avoid tax on income by having the payment made to another taxpayer.

Accepted Answer

The assignment of income doctrine prevents shifting of income.The underlying property must be gifted before the income is earned in order to shift taxation of future income.

Question 10

Amounts collected under accident and health insurance policies purchased by the taxpayer are excludible from income.

Accepted Answer

Amounts collected under accident and health policies purchased by the taxpayer are excluded,but if the premiums are paid by the employer,the amounts collected are taxable.

Question 11

Loan proceeds are taxable in the year received in cash.

Accepted Answer

Since there is a binding obligation to repay a loan,no income is realized.

Question 12

Punitive damages are taxable unless they are awarded for physical injuries.

Accepted Answer

Punitive damages are always taxable.

Question 13

Which of the following items will result in an increase in gross income?

Accepted Answer

C)This is a taxable exchange of services,and both parties will realize income equal to the value of services received.

Question 14

Dividends on life insurance policies are generally excludible income because they are considered a return of premium.

Accepted Answer

Dividends on life insurance policies are only taxable when total dividends have exceeded total premiums paid.

Question 15

Sam received a scholarship for room and board.This scholarship is excludible from income.

Accepted Answer

Scholarship proceeds are excludible only to the extent used for tuition and fees,books,supplies,and equipment.

Question 16

While payments received because a person has been physically injured are excluded from gross income,payments on account of non-physical injury must be included in gross income.

Accepted Answer

Damage payments are excluded if due to physical injury and are not punitive damages.

Question 17

Amounts withdrawn from qualified tuition plans are tax-free if the amounts are used for qualified higher education expenses including tuition,fees,books,and room and board for students attending on at least a half-time basis.

Accepted Answer

Distributions from qualified tuition plans are excluded to the extent they support qualifying educational expenses,including tuition,fees,books and room and board.

Question 18

Many exclusions exist due to the benevolence of Congress or as a result of the government's attempts to encourage particular social behavior.

Accepted Answer

Most exclusions have been enacted for reasons of social policy or reasons of incentive.

Question 19

Any distribution from a qualified tuition plan not used for qualified higher education expenses is both included in income and subject to a 10% penalty.

Accepted Answer

Only the income component of the distribution is subject to tax and penalties.

Question 20

Upon the sale of property,a portion of the selling price equal to the basis in the property is considered a return of capital to the seller and is,therefore,not taxable.

Accepted Answer

Only net gains or losses on property transactions are taken in account,not gross proceeds.

Quiz 20: Gross Income: Exclusions