Question 1

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Michael entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for Michael,neither Mia nor Michael must include $5,000 ($20,000 - $15,000)in gross income.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 true according to the rules of qualified state tuition programs. Contributions to these programs can be made with after-tax dollars, and when the funds are used to pay for qualified education expenses, neither the contributor nor the beneficiary must include the earnings in their gross income. In this case, Mia contributed $15,000 and the balance in the fund covered the remaining tuition charge, so neither she nor her son Michael must include the $5,000 difference in their gross income.

Question 2

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 3

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 pearl necklace must be included in Sharon's gross income for the tax year it was received by her because it was a gift worth more than $15,000 and therefore subject to gift tax. Additionally, even though the information Sharon passed on was illegal insider information, it does not exempt her from reporting the value of the gift in her gross income.

Question 4

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

Even if the bakery does not incur any additional cost, the value of the unsold donuts received by the employees is still considered income and should be recognized as such for tax purposes.

Question 5

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 6

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

The exclusion ratio is used to determine the taxable portion of each annuity payment received. It is calculated by dividing the investment in the contract (the premiums paid) by the expected return (the total amount to be received). Here, the investment in the contract is $60,000 (premiums paid by her husband), and the expected return is $175,000 (10 installments of $17,500 each). Each installment includes a nontaxable return of the investment in the contract and a taxable portion. The taxable portion of each $17,500 installment is calculated as follows: Total expected return ($175,000) minus investment in the contract ($60,000) equals $115,000 of total taxable amount over the term of the annuity. Since she receives $17,500 annually, the portion of each payment that exceeds the pro-rata investment in the contract is taxable. However, the specific calculation for the taxable portion per year is not directly provided in the options, but the principle that not all of the received amount is taxable is evident. Given the options and the information provided, the closest and most logical choice based on typical tax treatment would be to recognize a portion of each installment as taxable, suggesting that some of the $17,500 received annually exceeds the cost basis proportion and thus would be taxable. Without the exact calculation provided in the options, the principle that guides to the correct answer involves recognizing that part of each installment is a return of the non-taxable premium paid, and part is taxable income.

Question 7

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

The housing supplement provided by Carla's employer is considered income and must be included in her gross income for tax purposes.

Question 8

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

According to the IRS guidelines, employer-provided parking and transportation benefits can be excluded from an employee's gross income up to certain limits. In 2020, the monthly limit for parking is $270, and the monthly limit for transit passes is also $270. Since Nicole's employer pays $150 towards the cost of parking and $75 towards the cost of the rail pass, both of these payments are below the applicable monthly limits and can be excluded from her gross income. Therefore, the statement is true.

Question 9

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 10

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 11

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 12

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

Since Roger is in the 35% marginal tax bracket, his contribution of $1,200 to the flexible spending account reduces his taxable income by $1,200 and saves him $420 in taxes (35% of $1,200). Therefore, his after-tax cost of contributing $1,200 to the flexible spending account is $780 ($1,200 - $420). Since he only incurred $1,100 in actual expenses and must forfeit the $100 unused amount, his after-tax cost of overfunding the plan is $65 ($100 x 35%).

Question 13

Calvin miscalculated his income in 2014 and overpaid his state income tax by $10,000.In 2016,he amended his 2014 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2014,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2016,Calvin must recognize $10,900 of gross income.

Accepted Answer

Calvin received a $10,000 refund and $900 interest on his overpaid state income tax, resulting in a total of $10,900 of gross income that he must recognize in 2016.

Question 14

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

The answer of Mauve Company permits employees to occasionally use...

Question 15

A U.S.citizen who works in France from February 1,2016 until January 31,2017 is eligible for the foreign earned income exclusion in 2016 and 2017.

Accepted Answer

The foreign earned income exclusion allows U.S. citizens and resident aliens who live and work abroad to exclude a certain amount of their foreign earned income from U.S. taxation. To qualify for the exclusion, the taxpayer must meet certain eligibility criteria, one of which is the physical presence test. This test requires that the taxpayer be present in a foreign country for at least 330 full days in a 12-month period. In the scenario given, the taxpayer has worked in France from February 1, 2016, until January 31, 2017, which means they have met the physical presence test for both tax years. Therefore, they are eligible for the foreign earned income exclusion in both 2016 and 2017.

Question 16

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 17

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2016.His total itemized deductions in 2016 were $18,000.In 2017,he received a $900 refund of his 2016 state income tax.The taxpayer must include the $900 refund in his 2017 Federal gross income in accordance with the tax benefit rule.

Accepted Answer

The tax benefit rule requires that if a taxpayer receives a refund of a previously deducted expense, the refund must be included in their gross income, to the extent that the deduction provided a tax benefit in the prior year. Since the taxpayer deducted $5,500 for state income tax paid in 2016 and received $900 back in 2017, he must include the $900 in his 2017 Federal gross income.

Question 18

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 19

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 in exchange for services rendered is considered earned income and is subject to income tax.

Question 20

The taxpayer incorrectly took a $5,000 deduction (e.g. ,incorrectly calculated depreciation)in 2016 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2017.The taxpayer must add $5,000 to his 2017 gross income in accordance with the tax benefit rule to correct for the 2016 error.

Accepted Answer

The tax benefit rule does not require the taxpayer to add the $5,000 to his 2017 gross income. Instead, the taxpayer should amend the 2016 tax return to correct the error.

Quiz 5: Gross Income Exclusions