Question 1

George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is not required to include the alimony payments in gross income because George earned the income and therefore he should pay the tax on the income.

Accepted Answer

Alimony payments are considered taxable income for the recipient and must be included in their gross income. It does not matter who earned the income, the recipient must pay taxes on it.

Question 2

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.Her share of the profits for 2012 was $90,000.She withdrew $40,000 from the partnership in 2012.In January 2013,after her share of the profits for 2012 had been computed,she withdrew her remaining $50,000 share of 2012 profits.As a result,Rhonda must recognize $40,000 of gross income in 2012 and $50,000 in 2013.

Accepted Answer

The answer of Rhonda has a 30% interest in the...

Question 3

If the alimony recapture rules apply,the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Accepted Answer

This is true. The alimony recapture rules require the recipient of alimony to decrease their AGI by a portion of the amount previously included in gross income as alimony. This recapture is triggered if the alimony payments decrease significantly in the third year or if they end altogether in the second or third year.

Question 4

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2012,Linda made several deliveries and collected $400 from customers.However,Linda forgot to turn in the proceeds for the day to her employer until the following Friday,January 2,2013.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2013.

Accepted Answer

The answer of Linda delivers pizzas for a pizza shop.On...

Question 5

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2012 is $90,000.Only $40,000 was distributed to him in January 2012,and this was his share of the 2011 partnership profits.None of the 2012 profits were distributed although Mark's share of the 2012 profits was $90,000.Mark's gross income from the partnership for 2012 is $40,000.

Accepted Answer

The answer of Mark is a cash basis taxpayer.He is...

Question 6

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily received sole ownership of their personal residence.This property transfer is classified as a property settlement rather than as alimony as the transfer was a result of a divorce.

Accepted Answer

According to the information given, the transfer of ownership of the personal residence from Jacob to Emily was a property settlement, not alimony, as it was part of their divorce agreement.

Question 7

April,a calendar year taxpayer,is a 40% partner in Pale Partnership,whose fiscal year ends on September 30th.For the fiscal year ending September 30,2012,the partnership had $400,000 net income and for fiscal year ending September 30,2013,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2012 is $160,000 ($400,000 ´ 40%).

Accepted Answer

April's gross income from the partnership for 2012 is indeed $160,000, calculated as $400,000 (partnership net income) x 40% (April's ownership percentage).

Question 8

After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Accepted Answer

Jeff paid the full $18,000 required under the divorce agreement for that year, so Darlene must include that amount in her gross income. However, if the child were to die or reach age 21, Jeff's payments would be reduced to $12,000 per year, and Darlene would still be required to include that amount in her gross income.

Question 9

Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.

Accepted Answer

This is true. The person who benefits from the income, in this case Ted, is responsible for paying the taxes on that income even if it is money paid to someone else, like alimony to a former spouse.

Question 10

Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2012,the accrued interest on the bond was $100.On December 31,2012,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

Accepted Answer

As a cash basis taxpayer, Brent must report income when it is actually or constructively received. Since he received $400 interest on the bond on December 31, 2012, he must include that amount in his gross income. However, the $100 interest that accrued before the gift was made on March 31, 2012, is not taxable to Brent because he did not own the bond at that time. Therefore, the $300 interest earned after the date of the gift must be included in Brent's gross income.

Question 11

Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

Accepted Answer

Since the transfer was pursuant to a divorce agreement, it qualifies for a special tax treatment under the IRS code known as a "transfer incident to divorce." This means that the transfer of the stock is not a taxable event, and Fred's cost basis for the stock is carried over from Paula's original cost basis of $75,000. Therefore, Fred's recognized gain from the sale of the stock is actually $25,000 ($100,000 sale price - $75,000 cost basis), not $5,000.

Question 12

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2012 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2012.

Accepted Answer

The answer of Alvin is the sole shareholder of an...

Question 13

In some community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Accepted Answer

In some community property states, income from property that was inherited by a spouse after the marriage is considered separate property and not subject to the community property laws. Therefore, any income earned from that property would be considered solely earned by the spouse who inherited it.

Question 14

When a business is operated as an S corporation,a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Accepted Answer

This statement is true. As a pass-through entity, the S corporation's income is not subject to corporate income tax, but instead flows through to the shareholders' individual tax returns. Shareholders must pay taxes on their share of the S corporation's income, regardless of whether or not the income was distributed to them. This is known as "phantom income" or "passive income."

Question 15

When stock is sold after the record date for a dividend that has been declared,the seller must recognize as income the dividend received.

Accepted Answer

The answer of When stock is sold after the record...

Question 16

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Accepted Answer

Alimony recapture rules apply if the alimony payments made in the second and third calendar year decrease significantly from the amount paid in the first year.

Question 17

The B & W partnership earned taxable income of $100,000 for the year.Bryan is entitled to 50% of the profits,but Bryan withdrew only $40,000 during the year.Bryan must include in gross income his $50,000 share of the profits from the partnership.

Accepted Answer

Bryan's share of the profits from the partnership is $50,000, regardless of how much he withdrew during the year. Therefore, he must include this amount in his gross income for tax purposes.

Question 18

Tom,a cash basis taxpayer,purchased a bond on March 31 for $10,000,plus $100 accrued interest.In December,Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Accepted Answer

The answer of Tom,a cash basis taxpayer,purchased a bond on...

Question 19

Jake is the sole shareholder of an S corporation that earned $50,000 in 2012.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2012.Jake is required to recognize $15,000 of income from the S corporation in 2012.

Accepted Answer

The answer of Jake is the sole shareholder of an...

Question 20

ABC Corporation mails out its annual Christmas bonuses to employees on December 24th.Ed,a cash basis taxpayer,is an employee who is on a ski trip until January 7th of the new year,but is aware that his annual Christmas bonus arrives on the 28th of December.Ed cannot delay reporting the income from the bonus until the new year.

Accepted Answer

As a cash basis taxpayer, Ed must report income in the year it is received or made available to him, regardless of whether he is able to physically access the funds. Even though he is on a ski trip and cannot physically receive the bonus until after December 31st, he is still considered to have constructively received the bonus on December 28th, the date it arrived in the mail. Therefore, he must report the income on his tax return for the current year.

Quiz 4: Gross Income: Concepts and Inclusions