Question 1

Mia participated in a qualified state tuition program for the benefit of her son Michael.She contributed $15,000.When Michael entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for Michael,neither Mia nor Michael must include $5,000 ($20,000 - $15,000) in gross income.

Accepted Answer

This is true according to the rules of a qualified state tuition program. The contributions to the program are not deductible on the taxpayer's federal income tax return, but if the funds in the program are used to pay for qualified education expenses, the earnings are not subject to federal income tax. In this case, the $5,000 earnings used to pay for Michael's tuition are not included in gross income for either Mia or Michael.

Question 2

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2017.His total itemized deductions in 2017 were $18,000.In 2018,he received a $900 refund of his 2017 state income tax.The taxpayer must include the $900 refund in his 2018 Federal gross income in accordance with the tax benefit rule.

Accepted Answer

The tax benefit rule requires taxpayers to include in their income any refunds of state income tax that they received in the prior year, to the extent that the itemized deduction for state income tax reduced their tax liability in the prior year. Since the taxpayer deducted $5,500 for state income tax in 2017, and received a $900 refund in 2018, he must include the $900 in his 2018 gross income.

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

According to the IRS guidelines, employer-provided parking benefits up to $270 per month for 2020 can be excluded from an employee's gross income. Additionally, employer-provided transportation benefits up to $270 per month for 2020 can also be excluded from gross income. Therefore, in this scenario, both payments made by Nicole's employer can be excluded from her gross income.

Question 4

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 exclusion ratio is used to determine the taxable portion of each annuity payment received. It is calculated by dividing the investment in the contract (the premiums paid) by the expected return (the total amount to be received). Here, the investment in the contract is $60,000 (premiums paid by her husband), and the expected return is $175,000 (10 installments of $17,500 each). Each installment includes a nontaxable return of the investment in the contract and a taxable portion. The taxable portion of each $17,500 installment is calculated as follows: Total expected return ($175,000) minus investment in the contract ($60,000) equals $115,000 of total taxable amount over the term of the annuity. Since she receives $17,500 annually, the portion of each payment that exceeds the pro-rata investment in the contract is taxable. However, the specific calculation for the taxable portion per year is not directly provided in the options, but the principle that not all of the received amount is taxable is evident. Given the options and the information provided, the closest and most logical choice based on typical tax treatment would be to recognize a portion of each installment as taxable, suggesting that some of the $17,500 received annually exceeds the cost basis proportion and thus would be taxable. Without the exact calculation provided in the options, the principle that guides to the correct answer involves recognizing that part of each installment is a return of the non-taxable premium paid, and part is taxable income.

Question 5

Sharon had some insider information about a corporate takeover.She unintentionally informed a friend,who immediately bought the stock in the target corporation.The takeover occurred and the friend made a substantial profit from buying and selling the stock.The friend told Sharon about his stock dealings,and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000,but she already owned more jewelry than she desired.

Accepted Answer

The value of the necklace must be included in Sharon's gross income for the tax year it was received by her. As per IRS regulations, any gifts received in excess of $15,000 are subject to taxation. As the value of the necklace is $10,000, it exceeds the taxable limit and must be included in Sharon's gross income. The fact that the friend was not legally required to make the gift is irrelevant in this case.

Question 6

A U.S.citizen who works in France from February 1,2017 until January 31,2018 is eligible for the foreign earned income exclusion in 2017 and 2018.

Accepted Answer

The foreign earned income exclusion allows taxpayers who work and live abroad for a certain period of time to exclude a certain amount of their foreign earned income from their taxable income in the U.S. As long as the U.S. citizen meets the eligibility requirements, they can claim the foreign earned income exclusion for the qualifying tax years. In this case, the individual worked in France from February 1, 2017, until January 31, 2018, which is a period exceeding 330 days in a 12-month period. Therefore, they are eligible for the foreign earned income exclusion in both 2017 and 2018.

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 required to recognize gross income because they are receiving a benefit (the free donuts) from their employer, which is considered a form of compensation or income. The fact that the bakery does not incur any additional cost does not exempt the employees from recognizing the value of the donuts as income.

Question 8

The taxpayer incorrectly took a $5,000 deduction (e.g.,incorrectly calculated depreciation) in 2017 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2018.The taxpayer must add $5,000 to his 2018 gross income in accordance with the tax benefit rule to correct for the 2017 error.

Accepted Answer

The answer of The taxpayer incorrectly took a $5,000 deduction...

Question 9

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

Accepted Answer

The answer of The taxpayer's marginal tax bracket is 25%.Which...

Question 10

A U.S.citizen is always required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

Accepted Answer

The answer of A U.S.citizen is always required to include...

Question 11

Calvin miscalculated his income in 2015 and overpaid his state income tax by $10,000.In 2016,he amended his 2015 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2015,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2016,Calvin must recognize $10,900 of gross income.

Accepted Answer

Since Calvin received both a refund and interest, he must recognize the interest as income in the year he received it. The refund itself is not taxable since he had already paid tax on the overpayment in the prior year. The $10,000 refund cancels out the $10,000 overpayment he made in 2015, and the $900 interest is included as income in 2016. Therefore, Calvin must recognize $10,900 of gross income in 2016 as a result of the amended return.

Question 12

Cash received by an employee from an employer:

Accepted Answer

Cash received by an employee from an employer may be included in gross income although the payor is not legally obligated to make the payment. This is because any payment received for services rendered, whether voluntary or not, is generally taxable income.

Question 13

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.

Question 14

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 occasionally use the machine.However,the machine is not convenient for use by the lower paid warehouse employees and,thus,they never use the copier.The use of the copy machine may not be excluded from gross income because the benefit is discriminatory.

Accepted Answer

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

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, he saved $420 ($1,200 x 35%) on his taxes by contributing to the flexible spending plan. Therefore, his net cost of contributions is $780 ($1,200 - $420). Since he only incurred $1,100 in actual expenses and must forfeit the unused $100, his total reimbursed amount is $1,000. Therefore, his out-of-pocket expense for medical and dental expenses is $100 ($1,100 - $1,000). When taking into account the tax savings, his after-tax cost of overfunding the plan is $65 ($100 x 35%).

Question 16

Employees of a CPA firm located in Maryland may exclude from gross income the meals and lodging provided by the employer while they were on an audit in Delaware.

Accepted Answer

According to the IRS, meals and lodging provided by an employer are only excludable from gross income if they are furnished on the business premises of the employer and for the convenience of the employer. Being on an audit in another state does not meet the criteria for exclusion unless specific conditions are met, which are not detailed in the scenario provided.

Question 17

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 18

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 19

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 must include the housing supplement in her gross income.

Accepted Answer

The housing supplement provided to Carla by her employer is considered taxable income and must be included in her gross income for tax purposes.

Question 20

Zork Corporation was very profitable and had accumulated excess cash.The company decided to repurchase some of its bonds that had been issued for $1,000,000.Because of an increase in market interest rates,Zork was able to retire the bonds for $900,000.The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

Accepted Answer

The company would recognize a gain from the extinguishment of debt of $100,000 because it retired the bonds for less than their face value. This gain is recognized in the income statement, not through a reduction in the basis of its assets.

Quiz 5: Gross Income: Exclusions