Question 1

A U.S.citizen who works in France from February 1,2015 until January 31,2016 is eligible for the foreign earned income exclusion in 2015 and 2016.

Accepted Answer

The foreign earned income exclusion allows qualifying individuals to exclude a certain amount of their foreign earned income from U.S. taxation. To qualify, the individual must meet either the bona fide residence test or the physical presence test. In this scenario, the individual worked in France for the entire calendar year 2015 and for part of 2016, meeting the requirements for both tests. Therefore, they are eligible for the foreign earned income exclusion in both years.

Question 2

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2015.His total itemized deductions in 2015 were $18,000.In 2016,he received a $900 refund of his 2015 state income tax.The taxpayer must include the $900 refund in his 2016 Federal gross income in accordance with the tax benefit rule.

Accepted Answer

According to the tax benefit rule, if a taxpayer itemizes deductions and receives a refund of a previously deducted state income tax, the refund must be included in their gross income for the year they receive it. Since the taxpayer took a $5,500 deduction for state income tax in 2015, and received a $900 refund in 2016, the $900 must be included in his 2016 federal gross income.

Question 3

Calvin miscalculated his income in 2013 and overpaid his state income tax by $10,000.In 2015,he amended his 2013 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2013,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2015,Calvin must recognize $10,900 of gross income.

Accepted Answer

Calvin received a refund of $10,000 and $900 interest, which means he received a total of $10,900 from the state. Since he overpaid his state income tax in 2013, the $10,000 overpayment was not included in his gross income at that time. However, when he received the refund in 2015, he must recognize it as income, which brings his total gross income to $10,900.

Question 4

Zork Corporation was very profitable and had accumulated excess cash.The company decided to repurchase some of its bonds that had been issued for $1,000,000.Because of an increase in market interest rates,Zork was able to retire the bonds for $900,000.The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

Accepted Answer

The company would recognize a gain from the extinguishment of debt of $100,000 because it retired the bonds for less than their face value. This gain is recognized in the income statement, not through a reduction in the basis of its assets.

Question 5

Generally,a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

Accepted Answer

The answer of Generally,a U.S.citizen is required to include in...

Question 6

Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

Accepted Answer

According to IRS regulations, cancellation of debt by a shareholder to a controlled corporation is treated as a contribution to capital and is nontaxable. Therefore, in this scenario, the cancellation of the loan by Benny should be treated as a nontaxable contribution to capital.

Question 7

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

Accepted Answer

The answer of The taxpayer's marginal tax bracket is 25%.Which...

Question 8

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000.One year after the transaction,the mortgage had been reduced to $725,000 by principal payments by Amber,but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage.Ted reduced the amount owed by Amber to $600,000.This reduced the monthly payments to a level that Amber could pay.Amber must recognize $125,000 income from the reduction in the debt by Ted.

Accepted Answer

The answer of Amber Machinery Company purchased a building from...

Question 9

Roger is in the 35% marginal tax bracket.Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However,Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan,he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.

Accepted Answer

Roger's salary was reduced by $1,200 before taxes, so he avoided paying income taxes on that amount. Since he is in the 35% marginal tax bracket, the $1,200 reduction in his taxable income saved him $420 in taxes. Even though he forfeited $100, his after-tax cost was only $65 ($100 forfeited - $35 tax savings).

Question 10

Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work,so they occasionally use the machine.However,the machine is not convenient for use by the lower paid warehouse employees and,thus,they never use the copier.The use of the copy machine may not be excluded from gross income because the benefit is discriminatory.

Accepted Answer

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Question 11

Carin,a widow,elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy.In the first year,Carin collected $17,500 from the insurance company.She must include in gross income:

Accepted Answer

Carin must include in gross income the amount of each installment payment that exceeds the amount of premiums her husband paid on the policy.

In this case, her husband paid $60,000 in premiums for the $150,000 life insurance policy. Therefore, Carin is deemed to have recovered $60,000 of her basis in the policy tax-free (i.e., she already paid taxes on the money used to pay the premiums), so she doesn't have to include that $60,000 in her gross income.

The remaining $90,000 ($150,000 - $60,000) is the excess of the policy over the amount of premiums paid. Since she received the policy proceeds in 10 installments of $17,500 each, each installment should be allocated as follows:

$6,000 of each installment ($60,000 ÷ 10) should be excluded from gross income as a tax-free recovery of her basis in the policy. The remaining $11,500 of each installment ($17,500 - $6,000) is includible in gross income.

Therefore, Carin should include $11,500 in gross income for the first year's installment payment.

Question 12

Cash received by an employee from an employer:

Accepted Answer

Cash received by an employee from an employer may be included in gross income although the payor is not legally obligated to make the payment. This is because any payment received for services rendered, whether voluntary or not, is generally taxable income.

Question 13

Sharon had some insider information about a corporate takeover.She unintentionally informed a friend,who immediately bought the stock in the target corporation.The takeover occurred and the friend made a substantial profit from buying and selling the stock.The friend told Sharon about his stock dealings,and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000,but she already owned more jewelry than she desired.

Accepted Answer

The value of the necklace must be included in Sharon's gross income for the tax year it was received by her. Any gift with a value over $15,000 must be reported as taxable income. The fact that Sharon received insider information illegally does not exempt her from reporting the value of the gift.

Question 14

The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses.At that time,the amount taken from the fund must be included in the gross income of the person who contributed to the account.

Accepted Answer

The earnings from a qualified state tuition program, also known as a 529 plan, are not taxed when they are withdrawn for qualified higher education expenses. The distributions are tax-free if they are used for eligible expenses, and they do not have to be included in the gross income of the contributor or the beneficiary.

Question 15

Employees of a CPA firm located in Maryland may exclude from gross income the meals and lodging provided by the employer while they were on an audit in Delaware.

Accepted Answer

According to the IRS, meals and lodging provided by an employer are only excludable from gross income if they are furnished on the business premises of the employer and for the convenience of the employer. Being on an audit in another state does not meet the criteria for exclusion unless specific conditions are met, which are not detailed in the scenario provided.

Question 16

Nicole's employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass,$75 per month.Nicole can exclude both of these payments from her gross income.

Accepted Answer

Both the payment towards parking and the cost of the rail pass can be excluded from Nicole's gross income.

Question 17

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

Accepted Answer

The employees are still receiving a benefit (the unsold donuts) from their employment, even if it has no additional cost to the bakery. Therefore, they should recognize the fair market value of the donuts as gross income.

Question 18

The taxpayer incorrectly took a $5,000 deduction (e.g. ,incorrectly calculated depreciation) in 2015 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2016.The taxpayer must add $5,000 to his 2016 gross income in accordance with the tax benefit rule to correct for the 2015 error.

Accepted Answer

The tax benefit rule does not require the taxpayer to add the $5,000 to his 2016 gross income. Instead, the taxpayer should amend the 2015 tax return to correct the error.

Question 19

Mia participated in a qualified state tuition program for the benefit of her son Michael.She contributed $15,000.When Michael entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for Michael,neither Mia nor Michael must include $5,000 ($20,000 - $15,000) in gross income.

Accepted Answer

This is because the qualified state tuition program allows for tax-free withdrawals for qualified education expenses such as tuition. Since the balance in the fund exceeded the tuition charge and the contributions made by Mia were not taxed, the $5,000 excess amount does not need to be included in gross income for either Mia or Michael.

Question 20

Carla is a deputy sheriff.Her employer requires that she live in the county where she is employed.Housing is very expensive;so the county agreed to pay her $4,800 per year to cover the higher cost of housing.Carla must include the housing supplement in her gross income.

Accepted Answer

Carla must include the $4,800 housing supplement in her gross income, as it is considered taxable income.

Quiz 5: Gross Income: Exclusions