Question 1

Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.

Accepted Answer

Distributions from defined benefit plans are taxed as ordinary income to beneficiaries, not as long-term capital gains.

Question 2

To provide relief from double taxation, Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.

Accepted Answer

The foreign earned income exclusion applies to income earned from working in a foreign country, not to passive income such as interest and dividends.

Question 3

Interest earned on a Federal Treasury bond is excluded from gross income (for federal tax purposes).

Accepted Answer

The answer of Interest earned on a Federal Treasury bond...

Question 4

Loretta received $6,200 from disability insurance that she purchased directly this year. Loretta must include all $6,200 in her gross income.

Accepted Answer

Disability insurance benefits that Loretta purchased directly (with after-tax dollars) are generally not taxable and do not need to be included in her gross income.

Question 5

Anna received $15,000 from life insurance paid upon the death of her grandmother. Anna can exclude the entire amount of the life insurance from her gross income.

Accepted Answer

Life insurance proceeds paid upon the death of the insured are generally not taxable income to the beneficiary, and can be excluded from gross income.

Question 6

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

Accepted Answer

Interest earned on municipal bonds, such as a bond issued by the city of Denver, is generally exempt from federal income tax.

Question 7

Qualified fringe benefits received by an employee can be excluded from gross income.

Accepted Answer

Qualified fringe benefits such as health insurance, transportation benefits, and educational assistance can be excluded from an employee's gross income.

Question 8

Earnings from 529 plans and Coverdell education savings accounts are excluded from gross income as long as the earnings are used to pay for qualifying educational expenditures.

Accepted Answer

Earnings from 529 plans and Coverdell education savings accounts are indeed excluded from gross income if used for qualifying educational expenses.

Question 9

Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can) contribute to an employee's plan.

Accepted Answer

This statement is true.

Question 10

Qualified retirement plans include defined benefit plans but not defined contribution plans.

Accepted Answer

Qualified retirement plans include both defined benefit plans and defined contribution plans.

Question 11

An employee may exclude up to a 40 percent employer-provided discount on services.

Accepted Answer

An employee may exclude from income a discount of up to 20 percent on services provided by the employer.

Question 12

Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must include $15,000 of this gift in his gross income this year.

Accepted Answer

Gifts are not considered taxable income by the IRS, so Trevor does not need to include any part of the $25,000 gift in his gross income.

Question 13

Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred for the emotional distress he suffered when his neighbor accidentally ran over his dog.

Accepted Answer

According to IRS guidelines, any damages or settlements received for emotional distress are typically considered taxable income. Therefore, Fred must include the $7,500 payment in his gross income.

Question 14

The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee's compensation near retirement.

Accepted Answer

The standard retirement benefit under a defined benefit plan typically depends on both the number of years of service and the amount of the employee's compensation, often considering the employee's earnings near retirement or an average of the employee's earnings over a certain period.

Question 15

A below-market loan (e.g., from an employer to an employee) is a common example of a transaction that generates taxable imputed income.

Accepted Answer

A below-market loan is a loan with an interest rate that is lower than the applicable federal rate (AFR). The difference between the AFR and the actual interest rate is considered imputed interest and is taxable as income to the borrower. Therefore, a below-market loan will generate taxable imputed income.

Question 16

Worker's compensation benefits are excluded from gross income.

Accepted Answer

Worker's compensation benefits are not included in gross income and are therefore not subject to federal income tax.

Question 17

U.S. citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.

Accepted Answer

U.S. citizens are generally subject to tax on all income earned worldwide, regardless of the source of the income. However, there are exceptions for certain types of income and for taxpayers who meet certain criteria.

Question 18

Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of realized gain on the sale of their principal residence.

Accepted Answer

The exclusion is $250,000 ($500,000 if married filing jointly).

Question 19

Brad was disabled for part of the year and he received $11,500 of benefits from a disability plan purchased by Brad's employer as a nontaxable fringe benefit. Brad must include all $11,500 of benefits in his gross income because Brad was not taxed on the disability insurance premiums paid by his employer.

Accepted Answer

According to the IRS, if an employer pays for a disability plan and the premiums are not included in the employee's income, any benefits received from that plan must be included in the employee's income. Therefore, Brad must include the $11,500 of benefits in his gross income.

Question 20

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

Accepted Answer

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition according to the IRS.

Quiz 5: Gross Income and Exclusions