Question 1

Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole.

Accepted Answer

The answer of Members of a research team must include...

Question 2

Sharon's automobile slid into a ditch.A stranger pulled her out.Sharon offered to pay $25,but the stranger refused.Sharon slipped the $25 in the stranger's truck when he was not looking.

Accepted Answer

The answer of Sharon's automobile slid into a ditch.A stranger...

Question 3

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

The employer's payments for parking and the rail pass are considered as qualified transportation fringe benefits and can be excluded from an employee's gross income.

Question 4

Mother participated in a qualified state tuition program for the benefit of her son.She contributed $15,000.When the son entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for her son,Mother must include $5,000 ($20,000 - $15,000)in her gross income.

Accepted Answer

Mother does not need to include any amount in her gross income since the funds were used for qualified educational expenses. Withdrawals from qualified state tuition programs that are used for qualified educational expenses are tax-free.

Question 5

Cash received by an individual:

Accepted Answer

Cash received by an individual may be included in gross income although the payor is not legally obligated to make the payment. This can happen when the payment is made voluntarily or as a gift. However, certain gifts are exempt from taxation, such as gifts to a spouse, qualified charitable organizations, and educational institutions.

Question 6

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

Accepted Answer

If the taxpayer chooses $1.00 of taxable income, they will have to pay $0.25 in taxes, leaving them with only $0.75 of after-tax income. 
If the taxpayer chooses $1.00 of tax-exempt income, they will have the full $1.00 of income without any taxes. 
Therefore, the taxpayer would prefer the tax-exempt income option. 
Option B provides them with $0.80 of tax-exempt income, which is greater than the $0.75 of after-tax income they would receive from $1.00 of taxable income. 
Option A, C, and D would all result in the taxpayer paying taxes and having less after-tax income than the $0.80 of tax-exempt income in option B.

Question 7

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

The employees are actually receiving a fringe benefit from the bakery, which is considered taxable compensation and must be recognized as gross income. The fact that the bakery does not incur any additional cost does not exempt the employees from reporting this benefit as income.

Question 8

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 can exclude the $4,800 housing supplement from gross income because she is required to live in the high cost area.

Accepted Answer

The $4,800 housing supplement is considered additional compensation and is not excludable from gross income, even if the employer requires her to live in a high-cost area.

Question 9

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 answer of Carin,a widow,elected to receive the proceeds of...

Question 10

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 11

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 frequently use the machine.However,the machine is not convenient for use by the lower paid warehouse employees.Because this fringe benefit benefits the higher paid employees but not the lower paid warehouse employees,the plan is discriminatory and thus the benefit is taxable to the executives.

Accepted Answer

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

Question 12

A debtor undergoing a Chapter 11 reorganization under the bankruptcy laws who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income.

Accepted Answer

According to the Internal Revenue Code, debtors who receive a discharge of their liabilities in Chapter 11 bankruptcies can exclude the canceled debt from their gross income, as long as certain criteria are met. This exclusion applies to both individuals and businesses.

Question 13

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 14

Generally,a U.S.citizen is not required to include in gross income the salary and wages earned while working in a foreign country if the foreign country taxes the income.

Accepted Answer

The answer of Generally,a U.S.citizen is not required to include...

Question 15

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 $1,200 contribution to the flexible spending plan 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 plan is $780. Since he only incurred $1,100 in actual expenses, he has $100 of unused funds that he must forfeit. Therefore, his after-tax cost of overfunding the plan is $780 + $100 = $880. The $65 mentioned in the statement does not seem to be accurate.

Question 16

Calvin's property was taken by the State of Louisiana to build a highway overpass.He disputed the amount of the condemnation award he was to receive and ultimately collected an amount for the property plus $15,000 interest on the award.Calvin can exclude from gross income the $15,000 interest he received from the State of Louisiana associated with the condemnation award.

Accepted Answer

The answer of Calvin's property was taken by the State...

Question 17

The taxpayer incorrectly took a $5,000 deduction (e.g.,incorrectly calculated depreciation)in 2011 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2012.The taxpayer must add $5,000 to his 2012 gross income in accordance with the tax benefit rule to correct for the 2011 error.

Accepted Answer

The tax benefit rule requires income inclusion only if a deduction taken in a prior year is later recovered. An incorrect deduction does not result in a recovery, so the taxpayer does not need to add $5,000 to the 2012 gross income. Instead, the taxpayer should amend the 2011 tax return to correct the error.

Question 18

A U.S.citizen who works in France from February 1,2010 until January 31,2011 is not eligible for the foreign earned income exclusion in 2010 but is eligible for it in 2011.

Accepted Answer

The U.S. citizen is eligible for the foreign earned income exclusion in 2010 because they meet the physical presence test by being in a foreign country for 330 full days within a 12-month period that includes part of 2010.

Question 19

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2011.His total itemized deductions in 2011 were $18,000.In 2012,he received a $900 refund of his 2011 state income tax.The taxpayer must include the $900 refund in his 2012 Federal gross income in accordance with the tax benefit rule.

Accepted Answer

According to the tax benefit rule, if a taxpayer receives a refund of a tax deduction that provided a tax benefit in a previous year, the refund must be included as income in the year of receipt. Since the taxpayer received a $900 refund of state income tax paid in 2011, which was deducted on his 2011 tax return, he must include the refund in his 2012 gross income.

Question 20

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.

Quiz 5: Gross Income: Exclusions