Deck 5: Gross Income and Exclusions

Question 1

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.

Answer 1

False

Question 2

Gross income includes all income realized during the year.

Answer 2

False
Explanation: Deferred and excluded income is not included in gross income.

Question 3

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

Answer 3

False
Explanation: Realization is similar for both tax and financial accounting.

Question 4

The date on which stock options are given to the employee is called the exercise date.

Question 5

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 6

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

Question 7

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 because he did not deduct state income taxes last year.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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

Question 22

Prizes and awards are generally taxable.

Question 23

The date on which stock options are no longer subject to forfeiture is called the vesting date.

Question 24

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

Question 25

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

Question 26

Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.

Question 27

The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term and long-term gains, (2) net short-term and long-term losses, and (3) net the outcome to yield a final gain or loss to place on the tax return.

Question 28

When stock options are exercised they are converted into actual employer stock.

Question 29

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

Question 30

Dave and Jane file a joint return. They sell a capital asset at a $150,000 loss. Even though they have no capital gains, $6,000 of the loss can still be deducted in the current year.

Question 31

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

Question 32

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

Question 33

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

Question 34

The tax law includes a complex set of restrictions called the anti-frontloading rules to make it difficult for taxpayers to disguise property payments as alimony payments.

Question 35

Rental income generated by a partnership is reported by partners as dividend income.

Question 36

Unemployment benefits are excluded from gross income.

Question 37

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

Question 38

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

Question 39

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

Question 40

Capital loss carryovers for individuals are carried forward indefinitely.

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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 46

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

Question 47

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

Question 48

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.

Question 49

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.

Question 50

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

Question 51

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

Question 52

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 53

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 54

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.

Question 55

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 56

Worker's compensation benefits are excluded from gross income.

Question 57

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

Question 58

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 59

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.

Question 60

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

Question 61

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) All of the above are true.

Question 62

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 above - Barney is not entitled to a loss deduction.

Question 63

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 the above

Question 64

Retired taxpayers over 59½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty.

Question 65

Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k) accounts than employees who are not 50 years old by year end.

Question 66

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) All of the above are true

Question 67

Identify the rule dictating that on a 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 above

Question 68

Heidi retired from GE (her employer) at age 56. At the end of the year, when she was 56 years of age, Heidi received a distribution from her GE sponsored 401(k) account. Because Heidi was not at least 59½ years of age at the time of the distribution, she must pay tax on the full amount of the distribution and a 10 percent penalty on the full amount of the distribution.

Question 69

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 the above

Question 70

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 the above.

Question 71

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. 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 above is true.

Question 72

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 above

Question 73

Jack and Jill are married. This year Jack earned $72,000 and 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-separate from Jill?

A) $72,000 if they reside in a common law state.
B) $76,000 if they reside in a community property law state.
C) $84,000 if they reside in a common law state.
D) $78,000 if they reside in a community property law state.
E) All of the above

Question 74

Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal.

Question 75

When an employer matches an employee's contribution to the employee's 401(k) account, the employee is immediately taxed on the amount of the employer's matching contribution.

Question 76

Kevin provided services to several clients this year who 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 the above are included in gross income

Question 77

Identify which of the items below help 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) All of the above
E) Both A and C above

Question 78

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 the above

Question 79

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 above

Question 80

Both employers and employees may contribute to defined contribution plans. However, the amount that employees may contribute to the plan in a given year is limited by the tax law while the amount that employers may contribute is not.