Question 1

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...

Question 2

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 3

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 answer of Jena is a full-time undergraduate student at...

Question 4

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 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 a...

Question 5

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

All portions of the damage award received by Jack are taxable, including compensation for damages to his professional and personal reputation and the punitive damages. Therefore, the total amount of the award, which is $270,000, must be included in Jack's gross income.

Question 6

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

Accepted Answer

According to the IRS, a scholarship recipient may exclude scholarship funds from gross income if they are used to pay for tuition and other "qualified education expenses," which include books and supplies required for courses. However, expenses such as meals and lodging are not considered qualified education expenses and therefore cannot be excluded from gross income.

Question 7

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 2011 and 2012,and the account earned $100 interest in 2012.At the end of 2012,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 2012 gross income:

Accepted Answer

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

Question 8

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 9

In 2012,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,$25,000 for loss of income,and $100,000 in punitive damages.Amber's insurance company will not pay punitive damages; therefore,Amber has offered to settle the case for $120,000 for pain and suffering,$25,000 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 In 2012,Khalid was in an automobile accident...

Question 10

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 11

Ron,age 19,is a full-time graduate student at City University.During 2012,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 2012?

Accepted Answer

The answer of Ron,age 19,is a full-time graduate student at...

Question 12

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 can exclude the cash surrender value of his life insurance policy from gross income because it was received due to his terminal illness. This exclusion is allowed under Internal Revenue Code section 101(a). On the other hand, Henry does not have any exclusions available for his life insurance policy cash surrender value because he surrendered the policy for personal reasons. Therefore, Henry must recognize $38,000 ($50,000 - $12,000) of gross income.

Question 13

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 $4,000 from her employer.For the next 60 days,she received $6,000 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 $2,000 on an income replacement policy she had purchased.Of the $12,000 she received,Julie must include in gross income:

Accepted Answer

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

Question 14

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 $10,000 of premiums on the policy.The insurance company has offered to pay him $75,000 to cancel the policy,although its cash surrender value was only $60,000.Albert accepted the $75,000.Albert used $5,000 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 15

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 by the Ph.D. student for teaching two classes is considered taxable compensation. It is not excluded as a scholarship because the student is receiving payment for services rendered, rather than a grant or award for academic achievement.

Question 16

Olaf was injured in an automobile accident and received $25,000 for his physical injury,$10,000 for his loss of income,and $50,000 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 17

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:  What is the amount that Marion must include in gross income for the current year?

Accepted Answer

The answer of Early in the year,Marion was in an...

Question 18

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.

Question 19

Iris collected $100,000 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 $12,500 each.

Accepted Answer

The answer of Iris collected $100,000 on her deceased husband's...

Question 20

Christie sued her former employer for a back injury she suffered on the job in 2011.As a result of the injury,she was partially disabled.In 2012,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 2011 return,reducing her taxable income by $12,000.Christie's 2012 gross income from the above is:

Accepted Answer

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

Quiz 5: Gross Income: Exclusions