Deck 5: Gross Income and Exclusions

Question 1

Constructive receipt represents the principle that cash-basis taxpayers will be taxed on income when it is made available to them without substantial restrictions.

Answer 1

True

Question 2

Realized income is included in gross income unless a tax provision specifies that it can be deferred or excluded.

Answer 2

True

Question 3

The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

Answer 3

False

Question 4

Jim received a $500 refund of state income taxes this year. Jim will not need to include the $500 in his gross income this year if he did not deduct state income taxes last year.

Question 5

When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.

Question 6

Interest income is taxed in the year in which it is received by the taxpayer or credited to the bank account.

Question 7

When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.

Question 8

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.

Question 9

Excluded income will never be subject to the federal income tax.

Question 10

Claim of right states that income has been realized if a taxpayer receives income and there are substantial restrictions on the taxpayer's use of the income.

Question 11

Gross income includes all income realized during the year.

Question 12

Barter clubs are an effective means of avoiding realization for tax purposes.

Question 13

When an asset is sold, the taxpayer calculates the gain or loss on the sale of the asset by subtracting the tax basis of the asset from the proceeds of the sale.

Question 14

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.

Question 15

Community property laws dictate that income earned by one spouse is treated as though it were earned equally by both spouses.

Question 16

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

Question 17

Recognized income may be in the form of cash or property received (but not services received).

Question 18

The all-inclusive definition of income means that gross income is defined very broadly.

Question 19

A taxpayer who borrows money will include that amount borrowed in their gross income under the all-inclusive definition of income.

Question 20

Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.

Question 21

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

Question 22

Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and not for elementary or secondary education).

Question 23

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

Question 24

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

Question 25

Rental income generated by a partnership is reported by the partners as dividend income on their own individual tax returns.

Question 26

A portion of each payment received from a purchased annuity contract represents income.

Question 27

A taxpayer generally includes in gross income the amount of debt forgiven by a lender.

Question 28

For tax purposes, unearned income is income that has not yet been realized.

Question 29

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.

Question 30

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

Question 31

Regardless of when a divorce agreement is executed, alimony is included in gross income of the recipient and is deductible for AGI by the payer.

Question 32

Gambling winnings are included in gross income only to the extent that the winnings exceed gambling losses incurred during the same period.

Question 33

The assignment of income doctrine requires that in order to shift income from the property producing the income to another person, the taxpayer must transfer only the income to the other person.

Question 34

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

Question 35

Generally, 85 percent of Social Security benefits are included in income of high-income taxpayers.

Question 36

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

Question 37

The tax law defines alimony to include transfers of property (but not cash)between former spouses.

Question 38

Unemployment benefits are excluded from gross income.

Question 39

The receipt of prizes and awards is generally taxable.

Question 40

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

Question 41

Jack and Jill are married. This year Jack earned $72,000, Jill earned $80,000, and they received $4,000 of interest income from a joint savings account. How much gross income would Jack report if he files married filing separately from Jill?

A)$72,000 if they reside in a common law state.
B)$74,000 if they reside in a community property law state.
C)$76,000 if they reside in a common law state.
D)$78,000 if they reside in a community property law state.
E)None of the choices are correct.

Question 42

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.

Question 43

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

Question 44

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount).

A)Claim of right
B)Constructive receipt
C)Return of capital principle
D)Wherewithal to pay
E)None of the choices are correct

Question 45

Gross income includes:

A)all income from whatever source derived unless excluded by law
B)excluded income
C)deferred income
D)all realized income
E)all of these choices are correct.

Question 46

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.

Question 47

Which of the following is not a necessary condition for income to be included in gross income?

A)income must be realized
B)income must be paid in cash
C)income cannot be excluded by law
D)income must be made available to a taxpayer on the cash basis
E)all of these choices are correct.

Question 48

Identify the rule dictating that on sale of an asset a taxpayer need only include the incremental gain in gross income rather than the entire proceeds from the sale.

A)Tax benefit rule
B)Constructive receipt
C)Return of capital principle
D)Wherewithal to pay
E)None of the choices are correct

Question 49

Identify the item below that helps determine which taxpayer must recognize earned income.

A)Residence in a community property law state
B)Assignment of income
C)Residence in a common law state
D)Both residence in a community property law state and residence in a common law state
E)All of these choices are correct.

Question 50

Workers' compensation benefits are excluded from gross income.

Question 51

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

Question 52

This year Kevin provided services to several clients, each of whom paid with different types of property. Which of the following payments is not included in Kevin's gross income?

A)Cash
B)Shares of stock listed on the New York Stock Exchange.
C)A used car
D)Gold coins
E)All of these are included in gross income

Question 53

Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:

A)Tax refund rule
B)Constructive receipt
C)Return of capital principle
D)Tax benefit rule
E)None of the choices are correct

Question 54

Hillary is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services rendered. Which of the following is a true statement?

A)Hillary is taxed on the $5,000 of service income in the year she cashes the check.
B)Hillary is taxed on the $5,000 of service income in the year the check was mailed.
C)Hillary is taxed on the $5,000 of service income in the year she receives the check.
D)Hillary is taxed on the $5,000 of service income in the year she provides the services.
E)None of the choices are correct.

Question 55

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

A)$10,000
B)$9,000
C)$1,000
D)Barney can deduct $10,000 only if he includes $1,000 in his taxable income.
E)None of the choices are correct - Barney is not entitled to a loss deduction.

Question 56

Sally is a cash-basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a true statement?

A)Sally need not recognize any gross income unless she sells the football tickets.
B)Sally's exchange does not result in taxable income.
C)Sally is taxed on the value of the football tickets even if she cannot attend the game.
D)Sally is taxed on the value of her sewing services only if she is a professional seamstress.
E)None of the choices are correct.

Question 57

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

Question 58

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.

Question 59

Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clients make their checks payable to his son, Steve. This year Steve received checks in the amount of $62,000 for Dave's plumbing services. Which of the following is a true statement?

A)Dave is taxed on $62,000 of plumbing income this year.
B)Steve is taxed on $62,000 of plumbing income this year.
C)Steve is taxed on $62,000 of income from gifts received this year.
D)Dave may deduct the $62,000 received by Steve.
E)None of the choices are correct.

Question 60

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

Question 61

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?

A)$400,000
B)$600,000
C)$1,000,000
D)None of the choices are correct because all prizes are excludable
E)None of the choices are correct because prizes from charities are excludable

Question 62

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

A)The payment is included in gross income.
B)A portion of the payment is a return of capital.
C)The payment can only be taxed in the year after the annuity was purchased.
D)The payment is not taxed until the annuity payments cease altogether.
E)None of these are true statements.

Question 63

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?

A)$2,250
B)$2,000
C)$250
D)$0 if Ed offers to contribute his watch and bonus to a qualified charity
E)$0-all employee awards are excluded from gross income

Question 64

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?

A)$2,050
B)$350
C)$180
D)$170
E)None of these - refunds of state income taxes are not included in gross income

Question 65

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 transferred a castle worth $2,000,000 to Camilla in 2018 and will 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 in 2019?

A)$2,062,000
B)$12,000
C)$50,000
D)$2,050,000
E)None of the payments are included in gross income

Question 66

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

A)To qualify as alimony, payments must be made in cash.
B)Alimony payments are includible in the gross income of the recipient.
C)To qualify as alimony, payments cannot continue after the death of the recipient.
D)To qualify as alimony, payments must be made under a written agreement or divorce decree that does not designate the payments as "nonalimony" or child support.
E)All of the choices are correct.

Question 67

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.

A)Assignment of income
B)Constructive receipt
C)Return of capital principle
D)Wherewithal to pay
E)All of these choices are true.

Question 68

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?

A)$200 is included because Mary itemized her deductions last year.
B)$200 is included if itemized deductions exceeded the standard deduction by $200.
C)$200 is included because itemized deductions exceeded the standard deduction.
D)$200 is included even if Mary claimed the standard deduction.
E)None of the choices are correct - refunds of state income taxes are not included in gross income.

Question 69

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?

A)$7,500
B)$4,500
C)$12,000
D)$32,400
E)None of the choices are correct.

Question 70

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:

A)business income
B)income from a partnership
C)interest income
D)dividend income because the partnership intends to organize next year as a limited liability company
E)None of the choices are correct

Question 71

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?

A)$25,000
B)$25,000 because all prizes are taxable
C)$0 because prizes transferred to charities are excludable
D)$0 because all prizes are excludable
E)$0 because prizes from charities are excludable

Question 72

Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to pay Barney $24,000 per year for five years (or until Barney's death or remarriage)and $10,000 per year until their daughter, Pebbles, turns 19 years old. What amount (if any)is included in Barney's gross income in 2019?

A)$10,000
B)$24,000
C)$34,000
D)$39,000
E)None of the payments are included in gross income

Question 73

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

A)The expected return is divided by the number of payments.
B)The original investment is divided by the prevailing interest rate.
C)The original investment is divided by the number of payments.
D)The expected return is divided by the prevailing interest rate.
E)None of the choices are correct.

Question 74

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.

A)Assignment of income
B)Constructive receipt
C)Return of capital principle
D)Wherewithal to pay
E)All of these choices are correct.

Question 75

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?

A)Wilma must include the $1,000 of interest in her income this year.
B)Wilma must include the $1,000 of interest in her income when she cashes the CD.
C)Wilma must include the $1,000 of interest in her income this year only if the bank waives the early withdrawal penalty.
D)Wilma must include the $1,000 of interest in her income next year if she does not pay the early withdrawal penalty.
E)All of the choices are correct.

Question 76

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?

A)$80
B)$72
C)$48
D)$32
E)None of the choices are correct.

Question 77

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?

A)Harold will continue to apply the annuity exclusion ratio to determine the amount of each annuity payment includible in gross income.
B)Harold will include the entire amount of each annuity payment in gross income after he recovers the cost of the annuity.
C)The entire amount of each annuity payment is excluded from gross income after Harold recovers his cost of the annuity.
D)Harold must request that the IRS calculate his exclusion ratio based upon a revised life expectancy.
E)All of these choices are correct.

Question 78

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?

A)$1,450
B)$1,200
C)$750
D)$250
E)$0-gambling winnings are not included in gross income

Question 79

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

A)Tax basis of the property
B)Selling expenses
C)Amount realized
D)Tax basis of the property and selling expenses
E)All of these choices are correct

Question 80

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.

A)Assignment of income
B)Constructive receipt
C)Return of capital principle
D)Wherewithal to pay
E)All of these choices are correct.