Deck 3: Gross Income: Inclusions and Exclusions

Question 1

Interest on state bonds is tax-exempt if the bonds were issued for private activities,such as convention centers,industrial parks,or stadiums.

Answer 1

False

Question 2

There are some instances where a cash-basis taxpayer can report income as though he or she is an accrual basis taxpayer.

Answer 2

True

Question 3

All federal and state unemployment compensation benefits are not subject to income tax.

Answer 3

False

Question 4

Jury duty pay is taxable income,but it can be deducted from gross income if the amount must be given to the employer.

Question 5

A stock dividend in which a shareholder has the option to receive cash is not taxable.

Question 6

If the process of a transaction begins and ends with an economic benefit for the taxpayer,he or she must report it in income even though the income is specifically exempt from tax.

Question 7

Robert received a tax refund in 2017 from his state,which he deducted on his prior year's return as an itemized deduction.He must report the refund in income in 2017,subject to certain computations to determine the amount that is taxable.

Question 8

Almost all individuals use the cash receipts and disbursements method of accounting.

Question 9

A taxpayer must file a Schedule B (Forms 1040A or 1040)if he or she has received taxable interest of $1,550.

Question 10

If an individual owns Series EE bonds,this person must report interest income,i.e. ,the increase in bond value on an annual basis.

Question 11

The taxability of social security benefits depends on the "provisional income" and filing status of the taxpayer.

Question 12

For tax purposes,income is recognized if the transaction meets three conditions: economic benefit,occurrence and completion,and not exempt from tax.

Question 13

Dividends are generally taxed at capital gains rates if they are made from the corporation's current earnings and profits or accumulated earnings and profits.

Question 14

If Lucas,an accountant,agrees to provide tax services to a neighbor in exchange for the neighbor agreeing to fix his pool,Lucas but not his neighbor will have to report income on this transaction at fair market value.

Question 15

A taxpayer can exclude from gross income any interest earned on bonds issued by any state,any possession of the United States,any political subdivision of either of the foregoing,or of the District of Columbia as long as these bonds are not issued for private activities.

Question 16

Constructive receipt means the income is available to or in the control of the taxpayer regardless of whether the taxpayer chooses to utilize the income.

Question 17

For most individuals,interest income comes from interest-earning deposits at banks,savings and loans,or credit unions.

Question 18

Income can only be realized in money or services.

Question 19

Lisa performed bookkeeping services for Donald charging him $650.Donald agreed that he would pay Lisa's credit card bill for the same amount.Lisa has received an economic benefit and must report $650 in income on her tax return.

Question 20

Jeff owns 250 shares of Coca Cola common stock that have increased in value by $15 each.He must report the increase in income because a transaction has occurred.

Question 21

The cost of holiday turkeys distributed to employees is included in the employees' income.

Question 22

A taxpayer does not have to report part of an original issue discount (OID)as income every year.

Question 23

The initial original issue discount (OID)on a bond is equal to the difference between the acquisition price and the maturity value.

Question 24

A de minimis benefit is one whose value is so small that keeping track of which employees received the benefit is administratively impractical.

Question 25

Welfare payments received by a taxpayer must be reported in income.

Question 26

Receipt of property or services will trigger income recognition.

Question 27

Banks and credit unions report interest income to taxpayers on Form 1099-INT.

Question 28

Payments received under workers' compensation acts are taxable to the recipient.

Question 29

If an employee receives a prize or award from his or her employer,the award is included in W-2 income.

Question 30

Taxpayers are not required to "impute interest" on a deferred payment contract for which no interest,or a low rate of interest,is stated.

Question 31

Employer-paid premiums on group-term life insurance in excess of $50,000 coverage are taxable to the employees based on the cost of the excess.

Question 32

Receipt of property or services does not trigger income recognition for tax purposes.

Question 33

A taxpayer must report in income imputed interest on a loan made below market interest rate.

Question 34

If a taxpayer is economically better off because of a transaction,the person must normally record income.

Question 35

If a person sells his or her car to a friend for a note receivable,this person has income that needs to be reported.

Question 36

If Alex,an attorney,agrees to provide legal services to a friend in exchange for the friend agreeing to fix his car,Alex and his friend will have to report income on this transaction at fair market value.

Question 37

When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%,the taxation rate on qualified dividends is 15%.

Question 38

In general,an individual must recognize income on his or her tax return if the transaction has economic benefit,the transaction has reached a conclusion and the income from the transaction is tax-exempt income.

Question 39

Payments received by a taxpayer for unemployment compensation are not taxable.

Question 40

Discounts provided to employees for food by a restaurant owner are not taxable if the discounts do not exceed the gross profit percentage of the business.

Question 41

A taxpayer can exclude from income interest received from:

A)Municipal bonds issued by the state.
B)A credit union.
C)A seller-financed mortgage transaction.
D)A savings account established at a local bank.

Question 42

Ruth,who files as head of household,reported itemized deductions of $9,400 on her 2016 tax return.Her itemized deductions included $300 of state taxes paid.In 2017,she received a $175 refund of state taxes paid in 2016.What is the amount that Ruth needs to report on her 2017 tax return?

A)$300.
B)$175.
C)$100.
D)$0.

Question 43

Under the cash receipts and disbursements method,the taxpayer reports income in the year:

A)Income is received.
B)Income is accrued.
C)Income is earned.
D)Income is negotiated.

Question 44

What is the tax liability for a single individual who has taxable income of $115,500,that includes a taxable qualified dividend of $2,000? All answers should be rounded to the nearest dollar.

A)$24,762.
B)$25,322.
C)$32,411.
D)$25,062.

Question 45

When filing their tax returns,almost all individuals use:

A)The accrual method.
B)The accounting method.
C)The recognition method.
D)The cash receipts and disbursements method.

Question 46

What item should not be included in income?

A)Worker's compensation payments.
B)Jury duty pay.
C)Prizes and awards.
D)Sick pay.

Question 47

Pedro agreed to repair a house for a client and started to work on December 30,2015.On January 2,2017,he completed the job and received payment from the client.Pedro must record the income in:

A)2015.
B)2016.
C)2017.
D)Both 2016 and 2017.

Question 48

Tom and Betsy,who are married filing jointly,reported a standard deduction of $12,600 on their 2016 tax return.They paid $500 to the state for income taxes in 2016.In 2017,they received a $125 refund of state taxes paid in 2016.What is the amount that Tom and Betsy need to report on their 2017 tax return?

A)$0.
B)$125.
C)$375.
D)$500.

Question 49

If Tom,an accountant,agrees to provide accounting services to Fred,a friend,in exchange for Fred fixing Tom's office floor,then:

A)Both of them must report income on their tax returns.
B)Fred must report income on his tax return.
C)Neither Tom nor Fred must report income on their tax returns.
D)Tom must report income on his tax return.

Question 50

Income may be realized in the form of:

A)Property.
B)Cash.
C)Services.
D)All of these.

Question 51

When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%,the tax rate on qualified dividends is:

A)5%.
B)15%.
C)0%.
D)10%.

Question 52

Constructive receipt means the taxpayer has:

A)Earned the income.
B)Accrued the income.
C)Control of the income for his or her use.
D)Earned the income and accrued the income.

Question 53

An individual must complete Schedule B (Forms 1040A or 1040)if the following situation occurs:

A)Received interest income of $1,500.
B)Received dividend income of $1,000.
C)Received interest income of $100.
D)Received tax-exempt interest of $700.

Question 54

For tax purposes,one of the requirements to recognize income is:

A)The income can be tax-exempt.
B)The transaction must occur but it's not necessary to complete it.
C)There must be an economic benefit.
D)All of these.

Question 55

Employer-paid premiums on life insurance are not taxable to the employees,unless the coverage is in excess of ________.

A)$5,000
B)$5,250
C)$51,000
D)$50,000

Question 56

Caroline,who files as head of household,received $9,000 of social security benefits.Her AGI before the social security benefits was $27,000.She also received $200 of tax- exempt interest.What is the amount of taxable social security benefits?

A)$9,000.
B)$7,650.
C)$4,500.
D)$3,350.

Question 57

The following fringe benefit provided by the employer is not taxable to the employee:

A)Vacation pay.
B)Employer-paid premiums on group-term life insurance with coverage of $40,000 per person.
C)Educational assistance for up to $10,000 per person.
D)Sick pay.

Question 58

What is the tax liability for a taxpayer who is married filing jointly with taxable income of $67,500,that includes a taxable qualified dividend of $1,000? All answers should be rounded to the nearest dollar. Use the appropriate Tax Tables or Tax Rate Schedules.

A)$10,125.
B)$9,201.
C)$9,046.
D)$9,196.

Question 59

If an attorney performs some estate tax work for a client and the client agrees to pay $6,000 to him and $5,000 to a local financial institution for a debt the attorney owes,the attorney has income of:

A)$5,000.
B)$11,000.
C)$6,000.
D)None of these.

Question 60

Provisional income is calculated by starting with Adjusted Gross Income (AGI)before social security benefits and adding back specific items.One of these items is:

A)Qualified dividends.
B)Deducted interest on educational loans.
C)Capital gains.
D)Wages.

Question 61

An individual must complete Schedule B (Forms 1040A or 1040)if the following situation occurs:

A)Received interest income of $600.
B)Received interest income of $1,500.
C)Received interest income of $1,300.
D)Received interest income of $1,750.

Question 62

Payments under written dependent care assistance plans are tax-free,except that the exclusion for a single person cannot exceed his or her earned income and cannot exceed ________.

A)$5,000
B)$2,500
C)$5,150
D)$5,250

Question 63

Marie is a graduate student at a state university.In 2017,she received a scholarship of $10,500 ($7,000 for tuition and fees and $3,500 for campus housing)and a graduate assistantship that pays $6,000.What is the amount that she must report on her tax return?

A)$3,500.
B)$9,500.
C)$6,000.
D)$7,000.

Question 64

If a student must perform certain services for the educational institution (e.g. ,graduate assistantships),the amount paid for services is considered:

A)A scholarship.
B)A fellowship.
C)Wages.
D)All of these.

Question 65

Employers can reimburse employees for up to ________ per year of educational assistance,whether or not job-related.

A)$5,250
B)$5,150
C)$5,000
D)$5,520

Question 66

Under the cash method,an individual reports income when:

A)income is received or constructively received.
B)income is accrued.
C)income is earned.
D)income is received or earned.

Question 67

Imputed interest rules do not apply to the following:

A)Sale of property for $3,000 or less.
B)Sale of a personal residence.
C)Sale of a farm for $1 million or less.
D)Both sale of property for $3,000 or less and sale of a personal residence.

Question 68

Taxable income includes:

A)Sick pay.
B)Child support payments.
C)Welfare payments.
D)Workers' compensation payments.

Question 69

An individual with an original issue discount (OID)instrument must report annually a portion of the OID as:

A)Interest income.
B)Qualified dividend income.
C)Capital gains.
D)Miscellaneous income.

Question 70

Martin redeemed $3,000 (principal of $2,000 and interest of $1,000)of Series I Savings Bonds to pay qualified higher education expenses.His qualified expenses for the year totaled $2,500 and AGI consists of wages of $20,000.What is the amount of interest that Martin must include in income? (Round interim calculations to three decimal places)

A)$0.
B)$833.
C)$167.
D)$1,000.

Question 71

Income may be realized in the form of:

A)Services.
B)Money.
C)Property.
D)All of these.

Question 72

Life insurance proceeds because of the death of the insured are fully excludable from the gross income of the recipient if the payment is made:

A)It does not matter how these payments are made.
B)Over time.
C)As a lump sum.
D)It does not matter how these payments are made and over time.

Question 73

Taxable income does not include:

A)Alimony payments.
B)Qualified dividend payments.
C)Interest payments.
D)Child support payments.

Question 74

Morris redeemed $6,000 (principal of $4,500 and interest of $1,500)of Series I Savings Bonds to pay qualified higher education expenses.His qualified expenses for the year totaled $6,500 and AGI consists of wages of $32,000.What is the amount of interest that Morris can exclude from income?

A)$0.
B)$500.
C)$1,000.
D)$1,500.

Question 75

Interest income on Series EE and Series E U.S.Savings Bonds can be reported:

A)only at the maturity date of the bond issue.
B)only on an annual basis.
C)either at the maturity date or on an annual basis.
D)No need to report;this type of interest income is always tax-exempt income.

Question 76

On December 30,2017,Robert agreed to repair a damaged house wall and started to work on that date.He will finish and get paid for the job in January of 2018.Robert needs to record the income received from his work in the year:

A)2017.
B)Half in 2017 and the other half in 2018.
C)2018.
D)He does not have to report the income at all.

Question 77

Joel purchased $125,000 of A and D Corporation's newly issued bonds for $114,500.The bonds carry an interest rate of 8% and mature in 5 years.What is the initial OID on these bonds?

A)$2,000.
B)$2,100.
C)$10,500.
D)$10,000.

Question 78

The original issue discount (OID)rules apply to all debt instruments with OID,except:

A)Non-business loans of $10,000 or less between natural persons.
B)Tax-exempt debt.
C)U)S.savings bonds.
D)All of these.

Question 79

Which one of the following items is not exempt under the umbrella of compensation for injuries or sickness?

A)Payments received for damages as a result of personal physical injuries.
B)Employer-provided adoption assistance.
C)Payments received under workers' compensation acts.
D)Disability income received from a terrorist attack in a foreign country while employed by the U.S.government.

Question 80

Imputed interest rules apply to term loans or demand loans in which the interest rate is less than the Applicable Federal Rate (AFR).Which of the following transaction does not fall under these rules? Assume in all situations that interest is below the AFR.

A)Gift loans of $14,000 in which interest foregone is in the form of a gift.
B)Loans in which a principal purpose is to avoid tax.
C)Loans in which the below-market or interest-free loan would have a significant effect on the tax liability of the borrower or lender.
D)Both gift loans of $14,000 in which interest foregone is in the form of a gift and loans in which a principal purpose is to avoid tax.