Question 1

Systech offered its stockholders a choice between stock and cash for their annual dividend.Since Carol has chosen stock,she does not have to include the dividend in income.

Accepted Answer

Regardless of whether Carol chooses stock or cash for the dividend, it is still considered income and must be included on her tax return. The only difference is how the dividend is valued for tax purposes. If she chooses stock, she will receive additional shares that will have a cost basis equal to the fair market value of the stock on the date of the dividend. If she chooses cash, she will receive a cash payment that will be taxable as ordinary income.

Question 2

To keep the employees on the premises in case an emergency arises,the Riverview Hotel provides meals to its employees in a room adjacent to their restaurant.Since the meals are provided as a convenience to the employer and on their premises,the value of the meals is excluded in the income of the employees.

Accepted Answer

This statement is true as the value of meals provided by an employer on their premises as a convenience to employees is excluded from the employees' income.

Question 3

Robert's employer provides all of its employees a $40,000 group term life insurance policy.The cost of this policy must be included in Robert's income.

Accepted Answer

The cost of group term life insurance policies up to $50,000 is excluded from an employee's income, so Robert does not need to include the cost of the policy in his income.

Question 4

Melvin was in an accident which was the other driver's fault.Melvin received $15,000 for pain and suffering,emotional distress,and lost wages.Melvin may exclude the entire $15,000.

Accepted Answer

Compensation received for personal physical injuries or illnesses, including pain and suffering and emotional distress, are generally excluded from income under IRS rules. Lost wages due to personal injury are also generally excluded. Therefore, Melvin may exclude the entire $15,000.

Question 5

Health Savings Accounts are available only to self-employed individuals or small businesses.

Accepted Answer

Health Savings Accounts are available to any individual or family covered by a high-deductible health plan, regardless of employment status or business size.

Question 6

On her 18th birthday,Anna's grandfather gave her stock worth $100,000.During the current year,Anna receives $5,000 of dividends on the stock,which she uses to pay college expenses.The cost of Anna's tuition,fees,and books is $4,000.Anna's income from this event is:

Accepted Answer

The $5,000 of dividends Anna receives from the stock is considered income for her, regardless of how she chooses to spend it.

Question 7

The interest from Guam Water Authority bonds is excluded from income as "Municipal Bond Interest."

Accepted Answer

Municipal bond interest is generally exempt from federal income tax, and Guam Water Authority bonds are considered municipal bonds.

Question 8

On her 18th birthday,Patti's grandfather gave her $8,000 of dividends on stock he owned,which she uses to pay college expenses.The cost of Patti's tuition,fees,and books is $6,000.Patti's gross income from this event is:

Accepted Answer

The answer of On her 18th birthday,Patti's grandfather gave her...

Question 9

Any income earned subsequent to the death of the decedent from inherited property is excludable from the heir's taxable income.

Accepted Answer

Income earned from inherited property, also known as income in respect of a decedent (IRD), is taxable to the heir. The heir is responsible for reporting such income on their tax return and paying any applicable taxes on it.

Question 10

Connie received a $1,000 scholarship to attend State University from a local civic group based on her grades and community activities.The $1,000 is included in income.

Accepted Answer

Scholarships received for tuition and fees required for enrollment or attendance at an educational institution, or for books, supplies, and equipment required for courses at the educational institution, are not taxable and therefore not included in income.

Question 11

Patrick ran up a large credit card debt.Since the bank wanted to keep Patrick's account they forgave $5,000 of his balance.Patrick was solvent before and after the forgiveness.He has to include the $5,000 in his income.

Accepted Answer

According to the IRS, any forgiven debt that exceeds $600 must be reported as income on your tax return. Therefore, Patrick would have to include the $5,000 forgiven debt as part of his taxable income.

Question 12

When Rick found out that Ryan's liabilities exceeded his assets by $15,000,he forgave Ryan the $1,000 he owed Rick in hoping that Ryan might get back on his feet.Ryan is allowed to exclude the $1,000 from income.

Accepted Answer

When a debt is forgiven, it is generally considered income and must be included in one's taxable income. However, there is an exception for debt forgiven when the debtor is insolvent (i.e. liabilities exceed assets). In this case, the forgiven debt can be excluded from income up to the amount of insolvency. Since Ryan's liabilities exceeded his assets by $15,000 and Rick forgave a debt of only $1,000, Ryan is allowed to exclude that $1,000 from income.

Question 13

Gifts received are not subject to income taxation;however the donor is subject to the gift tax rules on the making of a gift.

Accepted Answer

Gifts received are generally not considered as taxable income for the recipient. However, the donor may be subject to gift tax for making a gift over a certain amount.

Question 14

On April 1,Sally is given $20,000 worth of General Motors bonds for her 18^th birthday.On June 30,Sally receives the $800 annual interest payment on the bonds.How much income should Sally recognize due to these two events?

Accepted Answer

The answer of On April 1,Sally is given $20,000 worth...

Question 15

Myra's employer paid her health and accident insurance premium of $5,600.Since she had the option to take the cash and purchase her own insurance,the $5,600 must be included in income.

Accepted Answer

The payment by an employer for an employee's health and accident insurance premiums is generally excluded from the employee's income, even if the employee had the option to receive cash instead.

Question 16

On April 1,Sally is given $20,000 worth of City of Boise bonds for her 18^th birthday.On June 30,Sally receives the $800 annual interest payment on the bonds.How much income should Sally recognize due to these two events?

Accepted Answer

The answer of On April 1,Sally is given $20,000 worth...

Question 17

Clarance rented office space to an attorney who left town before the lease was completed.The attorney left several bookcases and other improvements to cover the remaining rent.Clarance must include in income the value of the leasehold improvements to the extent of the remaining rent that was due.

Accepted Answer

According to IRS guidelines, if a tenant leaves behind leasehold improvements to cover unpaid rent, the landlord must include the fair market value of those improvements in their income to the extent of the remaining rent owed.

Question 18

No-additional-cost services and employee discounts must be made available to employees on a nondiscriminatory basis and must also be in the same line of business in which the employee works to be excluded from the employee's income.

Accepted Answer

This is a requirement under IRS regulations. No-additional-cost services and employee discounts must be offered to all employees on a nondiscriminatory basis and must be in the same line of business in which the employee works to qualify for exclusion from the employee's income.

Question 19

Cornell is a building contractor who builds 25-30 homes a year.Charlotte is a real estate broker who sells all of Cornell's homes.Charlotte has recently referred a couple to Cornell who wanted him to build a $400,000 home for them.Knowing that Charlotte and her husband enjoy skiing,he bought her a nice pair of skis and boots.
I.The "gift" appears to be a form of compensation.
II.The skis are considered a gift for income tax purposes.
III.Substance-over-form applies to this situation.
IV.Charlotte recognizes gross income from the receipt of the skis.
​

Accepted Answer

The skis and boots given to Charlotte by Cornell can be seen as a form of compensation for referring the couple to him, which means it's not merely a gift in the casual sense. The principle of substance-over-form applies here, indicating that the nature of the transaction is more important than its formal description. Therefore, Charlotte would need to recognize the value of the skis and boots as gross income, as they are considered compensation for her services.

Question 20

Matt,a U.S.citizen,can exclude all of his $120,000 salary he earned as a bullfighter in Spain where he lived all year,from his U.S.tax return.

Accepted Answer

While there is a foreign earned income exclusion, it has certain requirements such as a minimum time spent abroad and is limited to a certain amount. In addition, being a bullfighter may not meet the requirements for the exclusion since it is not considered a legitimate occupation by the IRS.

Quiz 4: Income Exclusions