Question 1

Mable is a wealthy widow who has come to you for tax advice. She is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 3.5 percent or a high-quality corporate bond paying 7 percent. From a tax standpoint, which investment would you advise her to make and why?

Accepted Answer

The answer of Mable is a wealthy widow who has...

Question 2

As a new benefit to employees, the Acme Company is providing a dining allowance every Tuesday for use in one of the twenty restaurants that they own around town. Should this benefit be included in the wages of the employees?

Accepted Answer

The answer of As a new benefit to employees, the...

Question 3

Unemployment compensation is fully taxable to the individual receiving the compensation.

Accepted Answer

Unemployment compensation is considered taxable income by the IRS and must be reported on the recipient's tax return.

Question 4

Which taxpayer would benefit the most from a tax-free municipal bond compared to a taxable bond?

Accepted Answer

The answer of Which taxpayer would benefit the most from...

Question 5

Group term life insurance premiums paid by an employer for insurance amounts less than $50,000 must be included in the employee's income.

Accepted Answer

Premiums paid by an employer for term life insurance coverage up to $50,000 are generally not taxable to the employee, according to the IRS.

Question 6

A "no-additional-cost" service includes only those services in the major line of business in which the employee is employed.

Accepted Answer

A "no-additional-cost" service is a service provided by an employer to an employee free of charge or at a reduced cost, but it only includes services that are within the major line of business of the employer. This means that the service must be closely related to the employer's main business activities and typically offered to customers or clients. For example, a car rental company could offer free car rentals to its employees, but it would not extend to other services such as hotel accommodations or airfare bookings.

Question 7

A taxpayer in the 33 percent tax bracket invests in a New York City Bond paying 5 percent interest. What taxable interest rate would provide the same after-tax return?

Accepted Answer

The answer of A taxpayer in the 33 percent tax...

Question 8

In which of the following cases may the employee exclude the meals and/or lodging:

Accepted Answer

For lodging, the employee may exclude it only if it is provided on the employer's business premises and is required as a condition of employment. In this case, the headmaster is required to be on campus all night, which satisfies that requirement. Meals, on the other hand, may be excluded if they are provided on the employer's business premises for the convenience of the employer. Option D does not meet that requirement because the employee has the option to dine out of the office, so meals cannot be excluded in that case. Option A does not meet the lodging requirement because the employee is living on the property as a personal choice, not as a requirement of the job. Option C does not meet either requirement because the cash allowance is not considered lodging, and it is not provided on the employer's business premises.

Question 9

Indicate which of the following statements is true.

Accepted Answer

Medical flexible spending accounts can be used to cover dental fees in addition to other medical expenses. Dependent care plans can be used for a dependent child or adult, including day care and preschool. Employer-provided spending accounts may cover both public transportation and parking expenses.

Question 10

Jim, a single individual, was unemployed for a few months during the current year. During the year, he received $3,600 in unemployment compensation payments. How much of his unemployment compensation payments must be included in gross income?

Accepted Answer

The answer of Jim, a single individual, was unemployed for...

Question 11

Steve worked as a tech supervisor for a computer company. In September of 2016, he was laid off. He was paid unemployment compensation for the rest of the year totaling $7,000. Which of the following is true?

Accepted Answer

Unemployment compensation is taxable income.

Question 12

Interest earned on bonds issued by a state government is fully taxable.

Accepted Answer

Interest earned on bonds issued by a state government is generally exempt from federal income taxes, and may also be exempt from state and local taxes if the bondholder resides in the issuing state.

Question 13

Bob is a machinist in a remote Alaskan crab-freezing plant. The plant is accessible only by boat or airplane and has no available lodging for rent. Bob's employer provides him with lodging at the plant and pays for all of his electricity, gas, and other utilities, valued at $700 per month. Is the value of the lodging taxable to Bob? Explain.

Accepted Answer

The answer of Bob is a machinist in a remote...

Question 14

Susie received unemployment benefits in the current year.

Accepted Answer

Unemployment benefits are considered taxable income by the IRS, so all of the unemployment benefits received by Susie are taxable.

Question 15

The value of lodging provided to a professor to enable him to live near the campus is excluded from gross income.

Accepted Answer

The answer of The value of lodging provided to a...

Question 16

Employer-provided spending accounts:

Accepted Answer

Employer-provided spending accounts allow qualifying expenses to be treated as tax-free reductions in the employees' salaries. Option A is not correct as these accounts are not typically set up for tax-free vacation savings. Option B is not correct as employer-provided spending accounts can also be set up for dependent care. Option C is not correct as the employee will generally need to provide receipts for expenses incurred in order to receive reimbursement from the spending account.

Question 17

Anthony is a marine biologist who spends months living on a boat in the ocean studying the impact of runoff water a hundred miles off the coast as a part of his job. Which of the following sentences is the most accurate?

Accepted Answer

Option A is incorrect because lodging is not considered a qualified work expense that can be excluded from income. However, options B and C are correct. According to the IRS Publication 463, “Travel, Gift and Car Expenses,” Anthony can exclude the cost of meals if they are incurred while he is away on a temporary work assignment. Also, the fuel used to power the boat is considered a qualified work expense that can be excluded from income. Therefore, option D (b & c are correct, not a) is the most accurate statement.

Question 18

An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a municipal bond which pays an interest rate of 7.9 percent per year. The investor is in the 15 percent tax bracket. Which bond will give the investor a higher after-tax interest rate and for which reason?

Accepted Answer

The municipal bond is tax-exempt, so its after-tax rate is 7.9%. The ABC bond's after-tax rate is 9% * (1 - 0.15) = 7.65%. Therefore, the municipal bond offers a higher after-tax interest rate.

Question 19

Cash allowances for meals or lodging generally must be included in the employee's income.

Accepted Answer

Cash allowances for meals or lodging are considered taxable income and must be included when calculating an employee's taxable wages. Exceptions may apply in certain circumstances, such as when the employer provides the meals or lodging directly rather than giving a cash allowance.

Question 20

A taxpayer in the 28 percent tax bracket invests in a City of San Diego bond paying 8 percent interest. What taxable interest rate would provide the same after-tax return?

Accepted Answer

The answer of A taxpayer in the 28 percent tax...

Quiz 2: Gross Income and Exclusions