Question 1

The exclusion for health insurance premiums paid by the employer applies to:

Accepted Answer

The exclusion for health insurance premiums paid by the employer applies to present employees, retired former employees, and their spouses and dependents. This means that those who are currently employed, those who have retired from the company, and their eligible family members are covered by this exclusion.

Question 2

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months.After he received the doctor's diagnosis,Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy,and he collected $50,000,the cash surrender value of the policy.Henry enjoys excellent health,but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

Accepted Answer

Ben does not have to recognize any gross income because the cash received from the life insurance policy is an exclusion from gross income under IRC Section 101(a)(1). However, Henry must recognize $38,000 ($50,000 - $12,000) of gross income because he cashed in his policy voluntarily and did not meet any of the exceptions to the exclusion.

Question 3

Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation,$100,000 for damages to his personal reputation,and $50,000 in punitive damages.Jack must include in his gross income as a damage award:

Accepted Answer

The entire amount of the court award, which is $270,000, must be included in Jack's gross income as a damage award. While damages to personal and professional reputations are generally non-taxable, punitive damages are always taxable. Therefore, Jack must report the entire award as taxable income on his tax return.

Question 4

Ron,age 19,is a full-time graduate student at City University.During 2016,he received the following payments:
Cash award for being the outstanding resident adviser
$ 1,500
Resident adviser housing
2,500
State scholarship for ten months (tuition and books)
6,000
State scholarship (meals allowance)
2,400
Loan from college financial aid office
3,000
Cash support from parents
2,000
$17,400
​
Ron served as a resident advisor in a dormitory and,therefore,the university waived the $2,500 charge for the room he occupied.What is Ron's adjusted gross income for 2016?

Accepted Answer

Ron's adjusted gross income includes the cash award ($1,500) and the meals allowance from the scholarship ($2,400), totaling $3,900. The housing waiver, state scholarship for tuition and books, loan, and cash support from parents are not included in taxable income.

Question 5

Early in the year,Marion was in an automobile accident during the course of his employment.As a result of the physical injuries he sustained,he received the following payments during the year:
Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased
$10,000
Damage settlement to replace his lost salary
15,000
​
What is the amount that Marion must include in gross income for the current year?

Accepted Answer

The reimbursement of medical expenses is not taxable because it is a reimbursement of expenses that were already deducted on a prior tax return. The damage settlement is not taxable because it is a payment for lost wages, which are not taxable.

Question 6

As an executive of Cherry,Inc. ,Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children.The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.

Accepted Answer

The answer of As an executive of Cherry,Inc. ,Ollie receives...

Question 7

Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:

Accepted Answer

The answer of Olaf was injured in an automobile accident...

Question 8

Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence,she received her regular salary of $8,000 from her employer.For the next 60 days,she received $12,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days,Julie received $6,000 on an income replacement policy she had purchased.Of the $26,000 she received,Julie must include in gross income:

Accepted Answer

The answer of Julie was suffering from a viral infection...

Question 9

The taxpayer is a Ph.D.student in accounting at City University.The student is paid $1,500 per month for teaching two classes.The total amount received for the year is $13,500.

Accepted Answer

The $13,500 received for teaching is considered taxable compensation and is subject to income tax. It is not considered a scholarship or excludible if used for tuition and books. The standard deduction and personal exemption do not apply to earned income.

Question 10

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life,according to his doctor.Albert had a life insurance policy with a face amount of $100,000.Albert had paid $25,000 of premiums on the policy.The insurance company has offered to pay him $80,000 to cancel the policy,although its cash surrender value was only $55,000.Albert accepted the $80,000.Albert used $15,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

Accepted Answer

The answer of Albert had a terminal illness which required...

Question 11

Iris collected $150,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $18,000 each.

Accepted Answer

According to the rules of group term life insurance, if the premiums are paid by the employer, then the first $50,000 of the benefit is tax-free. However, since Iris's husband included $5,000 in gross income from the premiums, the exclusion is reduced by the same amount. Therefore, the exclusion for the first year is $45,000 ($50,000 - $5,000). Since Iris elected to receive the benefit in 10 annual payments, each payment will have a portion of the tax-free exclusion. The calculation for the exclusion for each payment is $15,000 ($150,000/$180,000 x $18,000). Therefore, for each $18,000 payment that Iris receives, she can exclude $15,000 from gross income.

Question 12

Barney is a full-time graduate student at State University.He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived.The university waives tuition for all of its employees.In addition,he receives a $1,500 research grant to pursue his own research and studies.Barney's gross income from the above is:

Accepted Answer

The answer of Barney is a full-time graduate student at...

Question 13

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

Accepted Answer

According to IRS Publication 970, "qualified education expenses" include tuition, fees, books, and supplies required for enrollment or attendance at an eligible educational institution. Therefore, a scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for tuition, books, and supplies. Meals and lodging are not considered qualified education expenses and must be included in the recipient's gross income.

Question 14

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent.Her only source of income is a $10,000 athletic scholarship ($1,000 for books,$5,500 tuition,$500 student activity fee,and $3,000 room and board).Jena's gross income for the year is:

Accepted Answer

Jena's gross income for the year is only the amount of her athletic scholarship that is not used for qualified education expenses. According to the question, $1,000 is used for books, $5,500 for tuition, and $500 for student activity fees, leaving only $3,000 for room and board that is not a qualified education expense. Therefore, Jena's gross income for the year is $3,000.

Question 15

Turquoise Company purchased a life insurance policy on the company's chief executive officer,Joe.After the company had paid $400,000 in premiums,Joe died and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow,Rebecca,received the $100,000 proceeds from the group term life insurance policy.

Accepted Answer

The answer of Turquoise Company purchased a life insurance policy...

Question 16

Theresa sued her former employer for age,race,and gender discrimination.She claimed $200,000 in damages for loss of income,$300,000 for emotional harm,and $500,000 in punitive damages.She settled the claim for $700,000.As a result of the settlement,Theresa must include in gross income:

Accepted Answer

The answer of Theresa sued her former employer for age,race,and...

Question 17

Christie sued her former employer for a back injury she suffered on the job in 2016.As a result of the injury,she was partially disabled.In 2017,she received $240,000 for her loss of future income,$160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety,and $15,000 for medical expenses.The medical expenses were deducted on her 2016 return,reducing her taxable income by $12,000.Christie's 2017 gross income from the above is:

Accepted Answer

The answer of Christie sued her former employer for a...

Question 18

During the current year,Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company,Rashad's employer,claiming $50,000 for pain and suffering,$90,000 for loss of income,and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages;therefore,Amber has offered to settle the case for $100,000 for pain and suffering,$90,000 for loss of income,and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

Accepted Answer

The answer of During the current year,Khalid was in an...

Question 19

Matilda works for a company with 1,000 employees.The company has a hospitalization insurance plan that covers all employees.However,the employee must pay the first $3,000 of his or her medical expenses each year.Each year,the employer contributes $1,500 to each employee's health savings account (HSA).Matilda's employer made the contributions in 2016 and 2017,and the account earned $100 interest in 2017.At the end of 2017,Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy.As a result,Matilda must include in her 2017 gross income:

Accepted Answer

The answer of Matilda works for a company with 1,000...

Question 20

Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company,Swan:

Accepted Answer

The answer of Swan Finance Company,an accrual method taxpayer,requires all...

Quiz 5: Gross Income Exclusions