Question 1

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

Accepted Answer

Tax basis and selling expenses reduce proceeds for a "casual" sale of property.

Question 2

Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?

Accepted Answer

Taxpayers must include the gross amount of their gambling winnings for the year in gross income.

Question 3

Which of the following is a true statement about the first payment received from a purchased annuity?

Accepted Answer

A portion of the first payment from a purchased annuity will be a return of capital depending upon the amount paid for the investment and the expected number of payments to be received.

Question 4

Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Accepted Answer

Definition of annuity exclusion ratio.

Question 5

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

Accepted Answer

Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $2,400 of deduction produced a tax benefit of $350 so the entire $170 is included in income.

Question 6

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

Accepted Answer

Interest is taxed when credited to the account.

Question 7

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has promised to pay Henry in installment payments over the next few years. Identify the principle that will determine when Henry should be taxed on the gain from the sale:

Accepted Answer

Wherewithal to pay dictates that gains from installment sales are generally recognized over the periods in which payments are received.

Question 8

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?

Accepted Answer

Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $4,000 of deduction produced a tax benefit of $200 if itemized deductions exceeded the standard deduction by $200.

Question 9

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income?

Accepted Answer

The annuity exclusion ratio is ($3,200/100) = $32 return of capital per payment. Hence, $48 of the $80 is included in gross income.

Question 10

Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as:

Accepted Answer

Income from flow-through entities retains its character when reported on individual returns.

Question 11

Charles and Camilla got divorced in 2018. Under the terms of the decree Charles pays Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage). In addition, Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son, Clyde, until he turns 19 years old. What amount (if any) is included in Camilla's gross income this year?

Accepted Answer

Property settlements and child support are not included in gross income, but alimony payments (cash) are includible.

Question 12

Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death or remarriage). What amount (if any) is included in Barney's gross income this year?

Accepted Answer

Alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient.

Question 13

Ophra is a cash basis taxpayer who is employed in the publishing industry. This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise. Ophra asked her employer to issue the cruise tickets to her parents, and he complied with this request. Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets:

Accepted Answer

Ophra cannot assign earned income.

Question 14

This year Ed celebrated his 25^th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

Accepted Answer

Cash bonus payments are includible in gross income but awards of tangible property to employees for length of service or safety achievement are excluded up to $400 of value.

Question 15

Which of the following statements about alimony payments is true for divorce agreements executed before 2019?

Accepted Answer

For divorce agreements executed before 2019, all the statements are true regarding alimony payments. They must be in cash (A), are considered taxable income for the recipient (B), cannot continue after the death of the recipient (C), and must be under a written agreement that does not specify the payments as nonalimony or child support (D).

Question 16

Hal Gore won a $1 million prize for special contributions to environmental research. This prize is awarded for public achievement, and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency. How much of the prize should Hal include in his gross income?

Accepted Answer

Awards for scientific or public achievement are excluded only if the payor of the award transfers the award to a governmental unit (e.g., EPA) or a public charity.

Question 17

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?

Accepted Answer

The annuity exclusion ratio is [($300,000/(4 × 10)] = $7,500 return of capital per payment. Hence, $4,500 of each $12,000 payment is included in gross income.

Question 18

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Ethan include in his gross income?

Accepted Answer

To be excludible, the prize must be associated with scientific, literary, or charitable achievement or received by a Team USA athlete from the U.S. Olympic Committee on account of their competition in the Olympic or Paralympic games.

Question 19

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives. Later this year Harold will recover the remainder of his cost of the annuity. Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

Accepted Answer

The entire annuity payment is included in gross income once the cost of the annuity is recovered.

Question 20

Emily is a cash basis taxpayer, and she was an especially productive salesperson last year. In December of last year her supervisor told Emily she had earned a $5,000 bonus. However, Emily received the bonus check after year-end. Identify the principle that will determine when Emily is taxed on the bonus:

Accepted Answer

Emily is taxed in the year the bonus is made available to her.

Quiz 5: Gross Income and Exclusions

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?

Which of the following is a true statement about the first payment received from a purchased annuity?

Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has promised to pay Henry in installment payments over the next few years. Identify the principle that will determine when Henry should be taxed on the gain from the sale:

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income?

Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as:

Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death or remarriage) . What amount (if any) is included in Barney's gross income this year?

This year Ed celebrated his 25^th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

Which of the following statements about alimony payments is true for divorce agreements executed before 2019?

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Ethan include in his gross income?

Quiz 5: Gross Income and Exclusions

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?

Which of the following is a true statement about the first payment received from a purchased annuity?

Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has promised to pay Henry in installment payments over the next few years. Identify the principle that will determine when Henry should be taxed on the gain from the sale:

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income?

Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as:

Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death or remarriage) . What amount (if any) is included in Barney's gross income this year?

This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

Which of the following statements about alimony payments is true for divorce agreements executed before 2019?

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Ethan include in his gross income?

This year Ed celebrated his 25^th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?