Question 1

Which of the following gifts or prizes would be considered taxable income to the person receiving the gift?

Accepted Answer

Gifts from friends or family members, such as those described in options A, B, and D, are generally not considered taxable income for the recipient under U.S. tax law. However, prizes won in contests or game shows, like the ski boat in option C, are considered taxable income and must be reported to the IRS.

Question 2

Martin retired in May 2015. His pension is $1,000 per month from a qualified retirement plan to which he contributed $42,000, and to which his employer contributed $12,000. Martin was 67 when the plan payments started. During 2015, he received 8 months of payment for a total of $8,000 from the plan.
a.Using the simplified method, calculate Martin's taxable income for 2015 from the retirement plan distributions.
b.​
If Martin's contributions to the plan had been $25,200, instead of $42,000, using the simplified method, how much taxable income would he have to report in 2015 from the plan distributions?

Accepted Answer

The answer of Martin retired in May 2015. His pension...

Question 3

State whether each of the following is taxable or nontaxable.
a.Susan won a jackpot of $50,000 gambling at a casino.
b.Sarah received a Christmas ham from her employer.
c.Jonathan won a car in a supermarket raffle valued at $25,000.
d.Gary received a scholarship for tuition of $5,000 a year.
e.Eric is given lodging valued at $1,000 a month on the oil rig where he is employed since it is impossible for Eric to go home during the period of time he is assigned to work on the rig.

Accepted Answer

The answer of State whether each of the following is...

Question 4

Under the terms of a property settlement executed during the current year, Cindy transferred a house worth $350,000 to her ex-husband, Carl. The property has a tax basis to Cindy of $300,000.
a.How much taxable gain or loss must be recognized by Cindy at the time of the transfer?
b.What is Carl's tax basis in the property he received from Cindy?

Accepted Answer

The answer of Under the terms of a property settlement...

Question 5

For divorces after 1984, which of the following statements about alimony payments is not correct?

Accepted Answer

Divorced or legally separated parties cannot be members of the same household at the time the payments are made. This is because alimony payments are meant to provide separate support to the spouse receiving them, and if the parties live together, it can blur the lines between support and sharing living expenses.

Question 6

When calculating the exclusion ratio for an annuity, the ratio should be revised when there is a significant change in the taxpayer's status or health.

Accepted Answer

The exclusion ratio for an annuity is determined at the start of the annuity payments and remains fixed throughout the payment period; it does not change due to changes in the taxpayer's status or health.

Question 7

An auto that is received as a prize should be included in the taxpayer's income at its list price rather than its fair market value.

Accepted Answer

The fair market value of the auto received as a prize should be included in the taxpayer's income, not the list price. This is because the IRS requires taxpayers to report the fair market value of prizes and awards.

Question 8

As part of the property settlement related to their divorce, Stella must give Peter the house that they have been living in, while she gets 100 percent of their savings accounts. The house was purchased in Texas 15 years ago for $100,000 and is now worth $110,000. How much gain must Stella recognize on the transfer of the house to Peter? What is Peter's tax basis in the house for calculating any future sale of the house?

Accepted Answer

The answer of As part of the property settlement related...

Question 9

Sam died on January 15, 2005 and left his wife, Terry, an insurance policy with a face value of $100,000. Terry elected to receive the proceeds over a 10-year period ($10,000 plus interest each year). This year Terry receives $11,500 ($10,000 proceeds plus $1,500 interest) from the insurance company. How much income must Terry report from this payment?

Accepted Answer

Terry must report the amount of interest she received, which is $1,500. The $10,000 portion is not taxable because it is a return of principal.

Question 10

Rob is 8 years old and won a sports car valued at $30,000 in a drawing at Disneyland. How much income, if any, must Rob report on his 2015 tax return? Why?

Accepted Answer

The answer of Rob is 8 years old and won...

Question 11

Richard, who retired on April 30, 2015, receives a monthly employee annuity benefit of $1,400 payable for life, beginning May 1, 2015. During his years of employment, Richard contributed $29,400 to the company's plan. Richard's age on May 1 is 66. Using the simplified method, how much of the annuity payment amounts received during 2015 ($11,200) may Richard exclude from gross income?
a.$427
b.$1,120
c.$1,680
d.$11,200
e.None of the above

Accepted Answer

The answer of Richard, who retired on April 30, 2015,...

Question 12

Under a divorce agreement executed in 2013, Bob is required to pay his ex-wife, Carol, $3,000 a month until their youngest daughter is 21 years of age. At that time, the required payments are reduced to $2,000 per month.
a.How much of each $3,000 payment may be deducted as alimony by Bob?
b.How much of each $3,000 payment must be included in Carol's taxable income?

Accepted Answer

The answer of Under a divorce agreement executed in 2013,...

Question 13

Marie had a good year. She received the following prizes and awards: - an iPad from The Oprah Show with a fair market value of $500
- lottery winnings of $1,000 received in cash
- a plaque worth $25 plus $100 of Godiva chocolate in recognition for 100 days on the job without an accident
- a $10,000 cash prize from American Idol
How much of her prizes and awards should Marie report on her tax return?

Accepted Answer

The answer of Marie had a good year. She received...

Question 14

Cynthia, age 64, retired in June. Starting in July, Cynthia received $2,000 per month from an annuity. She has contributed $260,000 to the annuity. Her life expectancy is 20 years. How much is excluded from income using the simplified method? Use 260 as the factor to divide by.
​1. Enter total amount received this year
2. Enter cost in plan at the annuity starting date
3. Factor at annuity starting date 260
4. Divide line 2 by line 3
5. Multiply line 4 by the number of monthly payments this year
6. Amount, if any, recovered tax free in prior years
7. Subtract line 6 from line 2
8. Enter the smaller of line 5 or 7
9. Taxable amount this year. Subtract line 8 from line 1

Accepted Answer

The answer of Cynthia, age 64, retired in June. Starting...

Question 15

Payments made to a qualified retirement plan by an employer are considered part of the employee's investment in the contract for calculation of the annuity exclusion ratio.

Accepted Answer

Payments made by an employer to a qualified retirement plan are not considered part of the employee's investment in the contract. The employee's investment typically includes only after-tax contributions made by the employee, not the employer contributions.

Question 16

Dr. J's outstanding player award is not includible in income, since the award is in recognition of his outstanding performance.

Accepted Answer

Awards for outstanding performance are generally includible in income and are subject to taxation.

Question 17

If a life insurance policy is transferred to the insured's partnership for valuable consideration, the insurance proceeds are taxable when received by the partnership.

Accepted Answer

The answer of If a life insurance policy is transferred...

Question 18

If an annuitant, whose annuity starting date was January 1, 2001, dies before recovering his or her investment in the annuity, any unrecovered investment is recognized as a loss on the annuitant's tax return for the year of death.

Accepted Answer

This statement is true according to IRS rules for the taxation of annuities. Any unrecovered investment in an annuity is recognized as a loss on the annuitant's tax return for the year of death, and can be used to reduce the annuitant's taxable income for that year.

Question 19

Peter is required by his divorce agreement to pay alimony of $4,000 a month and child support of $6,000 a month to his ex-wife Stella. What is the tax treatment of these two payments?
To Peter?
To Stella?

Accepted Answer

The answer of Peter is required by his divorce agreement...

Question 20

Laura and Leon were granted a divorce in 2006. In accordance with the decree, Leon made the following payments to Laura in 2015: How much should Laura include in her 2015 taxable income as alimony?

Accepted Answer

According to the IRS, in order for a payment to be considered alimony, it must meet four requirements:
1. The spouses must not file a joint tax return with each other.
2. The payment must be in cash (or equivalent).
3. The payment must be made to or on behalf of a spouse or former spouse under a divorce or separation instrument.
4. The divorce or separation instrument must not designate the payment as not alimony.

In this case, since the payments were made in accordance with the divorce decree, they meet the third requirement for alimony. However, to be considered alimony for tax purposes, the payments must also meet the second requirement of being made in cash or its equivalent. Of the three payments made by Leon, only the second payment of $4,000 was made in cash. Therefore, Laura should include $4,000 as alimony in her 2015 taxable income.

Quiz 2: Gross Income and Exclusions