Question 1

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

The redemption of the policy by Ben qualifies as an accelerated death benefit paid to a terminally ill policy holder.The exclusion applies regardless of how the insurance proceeds are used.Thus,the realized gain of $38,000 is excluded from Ben's gross income.

Question 2

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

Albert's realized gain is $55,000 ($80,000 - $25,000).However,Albert was chronically ill and,therefore,can qualify for the accelerated death benefit exclusion for his life insurance policy.

Question 3

Christie sued her former employer for a back injury she suffered on the job in 2014.As a result of the injury,she was partially disabled.In 2015,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 2014 return,reducing her taxable income by $12,000.Christie's 2015gross income from the above is:

Accepted Answer

Christie must include in gross income the $160,000 of punitive damages received and the $12,000 for the previously deducted medical expenses.The medical expense recovery is included in gross income under the tax benefit rule.

Question 4

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

None of the damages received were the result of a physical personal injury or sickness and therefore the total amount received must be included in gross income.Even if the damages were the result of physical personal injury,the punitive damages would be included in his gross income.

Question 5

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

Accepted Answer

According to IRS rules, scholarship proceeds used to pay for tuition, books, and supplies are generally tax-free. However, payments for room and board, travel, research, and other expenses are usually taxable. Therefore, option A and C are incorrect, while option D and E are not appropriate because they indicate items that are typically taxable.

Question 6

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

Punitive damages are never excluded from gross income.

Question 7

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

The portion included in gross income is $3,000 for room and board.The books ($1,000),tuition ($5,500),and student activity fee ($500)qualify for exclusion.The fact that the scholarship is received for athletic,rather than academic,achievement is irrelevant,because the payments are to further the student's education.

Question 8

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 2014 and 2015,and the account earned $100 interest in 2015.At the end of 2015,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 2015 gross income:

Accepted Answer

With a health savings account (HSA),the employee is not taxed when the money is contributed,as income is earned in the account,or when amounts are withdrawn to pay for medical expenses.

Question 9

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 $6,000 received under the accident and income replacement policy Julie purchased is excluded from her gross income.

Question 10

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 not only current employees, but also retired former employees and their family members are eligible for the exclusion.

Question 11

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 tuition payments of $30,000 are compensation to Ollie since the awards are only to children of key employees.

Question 12

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 $10,000 Insurance policy he purchased 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 medical expenses of $10,000 that were reimbursed by Marion's medical insurance policy can be excluded from gross income.The $15,000 Marion received for the physical personal injury damage settlement can be excluded from gross income even though the payment replaces his salary.

Question 13

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 monthly stipend of $700 (for 9 months = $6,300)for research is taxable compensation.The research grant of $1,500 is to assist him in his education and is not in exchange for services;therefore,the grant is a nontaxable scholarship.The tuition waiver is excluded as a qualified tuition reduction program.

Question 14

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 represents compensation for services rendered and must be included in the student's gross income.

Question 15

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 after­tax difference to Khalid between Khalid's original claim and Amber's offer?

Accepted Answer

Only the punitive damages are taxable.The tax on the amount of punitive damages claimed, (1 - .35)× $70,000 = $45,500.

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 damages did not arise out of a physical personal injury;therefore,none of the amount received can be excluded from gross income.

Question 17

Ron,age 19,is a full-time graduate student at City University.During 2014,he received the following payments:  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 2014?

Accepted Answer

The $1,500 award for being the outstanding resident adviser is included in Ron's gross income.The $2,400 meal allowance must also be included in Ron's gross income.The $2,500 waiver for housing is not included in Ron's gross income because the housing is provided for the convenience of his employer.The $6,000 scholarship for tuition and books is excluded from his gross income.The loan of $3,000 is not income.

Question 18

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

The life insurance proceeds of $150,000 are excluded from Iris's gross income.The income portion of each annuity payment is $3,000 ($18,000 - $15,000 recovery of capital).The recovery of capital of each annuity payment is $15,000 [($150,000/$180,000)× $18,000].

Question 19

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

All of the proceeds qualify for the life insurance exclusion because the payments were received as a result of the death of the insured.

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

Swan has a basis in the receivable of $1,500,since it is an accrual method taxpayer.

Quiz 5: Gross Income: Exclusions