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

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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 15

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 16

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

Question 17

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 18

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 19

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

Question 20

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

Question 21

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

Question 22

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 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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 29

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

Question 30

The receipt of prizes and awards is generally taxable.

Question 31

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

Question 32

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 33

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

Question 34

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

Question 35

Unemployment benefits are excluded from gross income.

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

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

Question 39

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 40

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 41

Brad was disabled for part of the year, and he received $11,500 of benefits from a disability insurance policy purchased by his employer. Assume that Brad was not previously taxed on the disability insurance premiums paid 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 42

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 43

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

Question 44

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

Question 45

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 46

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 47

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 48

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 49

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 50

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 51

Workers' compensation benefits are excluded from gross income.

Question 52

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 53

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 $119,250 for Dave's plumbing services. Which of the following is a true statement?

A)Dave is taxed on $119,250 of plumbing income this year.
B)Steve is taxed on $119,250 of plumbing income this year.
C)Steve is taxed on $119,250 of income from gifts received this year.
D)Dave may deduct the $119,250 received by Steve.
E)None of the choices are correct.

Question 54

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 55

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 56

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 57

Jack and Jill are married. This year Jack earned $72,250, Jill earned $82,250, and they received $11,800 of interest income from a joint savings account. How much gross income would Jack report if he files married filing separately from Jill?

A)$72,250 if they reside in a common law state.
B)$77,250 if they reside in a community property law state.
C)$94,050 if they reside in a common law state.
D)$83,150 if they reside in a community property law state.
E)None of the choices are correct.

Question 58

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 59

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 60

This year Barney purchased 640 shares of Bell common stock for $19.20 per share. At year-end the Bell shares were only worth $2.40 per share. What amount can Barney deduct as a loss this year?

A)$12,288
B)$10,752
C)$1,536
D)Barney can deduct $12,288 only if he includes $1,536 in his taxable income
E)None of the choices are correct - Barney is not entitled to a loss deduction

Question 61

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 62

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 63

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 64

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 65

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.

Question 66

Fran purchased an annuity that provides $13,800 quarterly payments for the next 10 years. The annuity was purchased at a cost of $345,000. How much of the first quarterly payment will Fran include in her gross income?

A)$8,625
B)$5,175
C)$13,800
D)$36,900
E)None of the choices are correct

Question 67

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 68

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 69

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 70

George purchased a life annuity for $4,200 that will provide him $105 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $105 payment will George include in his gross income?

A)$105
B)$95
C)$63
D)$42
E)None of the choices are correct.

Question 71

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 72

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 73

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 74

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 75

Wilma has a $45,000 certificate of deposit (CD)at the local bank. The interest on this certificate, $2,700, 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 $2,700 of interest in her income this year.
B)Wilma must include the $2,700 of interest in her income when she cashes the CD.
C)Wilma must include the $2,700 of interest in her income this year only if the bank waives the early withdrawal penalty.
D)Wilma must include the $2,700 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

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 incomein 2020?

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

Question 77

This year Mary received a $575 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $7,250 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)$575 is included because Mary itemized her deductions last year.
B)$575 is included if itemized deductions exceeded the standard deduction by $575.
C)$575 is included because itemized deductions exceeded the standard deduction.
D)$575 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 78

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 79

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 80

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.