Question 1

Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2012 and does not return to the U.S. until March 5, 2015. During her stay in Rome, Jan earned $102,000 in 2014. Jan may exclude

Accepted Answer

Jan has met both the physical presence test (she was present in Italy for more than 330 full days during a 12-month period) and the tax home test (her assignment in Italy was expected to last more than one year). Therefore, she may qualify for the Foreign Earned Income Exclusion (FEIE) on the income earned in 2014, which was $99,200 ($102,000 - $2,800, which is the prorated amount for the two months of 2012 when Jan was not eligible for the exclusion). The remaining income earned in 2012 and 2013 is not eligible for the FEIE, as Jan did not meet the physical presence test for those years.

Question 2

This year, Jason sold some qualified small business stock that he acquired in 2006. His basis in the stock was $95,000 and he sold it for a $30,000 gain. How much of Jason's gain is taxable?

Accepted Answer

The answer of This year, Jason sold some qualified small...

Question 3

Faye is a marketing manager for Healthy Corp. She earns a salary of $100,000 and has received the following benefits:
• Healthy pays 75% of all employees' health and accident insurance coverage. Healthy paid $6,000 towards the cost of Faye's health insurance during the year.
• Faye participates in the cafeteria plan and had elected to have $2,000 withheld from her pay to cover the remaining cost of the health insurance premiums and an additional $1,500 to cover dental and other health care costs not paid by insurance (i.e. funding a flexible spending account). The full $1,500 was used to pay for various qualifying medical costs.
• Healthy pays the cost of disability insurance coverage for all employees. The insurance will pay 75% of salary if employees are out of work for a significant period. The cost of Faye's premiums was $600.
• Healthy pays for the cost of veterinary insurance for all employees. The cost of coverage for Faye's dog was $400.
• Healthy pays for the cost of daycare for its employees' children. The cost for Faye's two children was $8,000.
• All employees receive a 20% discount on Healthy's products. The typical markup on their products is 25%. Faye enjoyed $1,200 of savings through the discount program.
• Faye won the manager of the year award earlier in the year and received an all-expense paid week at a desert spa valued at $3,500.
• Healthy pays Faye's annual membership dues of $500 to the American Marketing Association.
• Healthy paid for the full $2,500 cost of Faye's attendance at the American Marketing Association's annual conference in Orlando.
How much income must Faye recognize from her employment?

Accepted Answer

The answer of Faye is a marketing manager for Healthy...

Question 4

The discharge of certain student loans is excluded from income if all of the following are present except for

Accepted Answer

The discharge of student loans is excluded from income if they meet the three criteria mentioned in choices A, B, and C. Age is not a factor in determining whether the loan discharge is excluded from income.

Question 5

Randy and Sharon are married and have two dependent children. They also fully support Sharon's mother who lives with them and has no income. Their 2014 tax and other related information is as follows:
  Compute Randy and Sharon's taxable income. (Show all calculations in good form.)

Accepted Answer

The answer of Randy and Sharon are married and have...

Question 6

Adam purchased stock in 2006 for $100,000. He is considering selling it in 2014. It is currently worth $2,100,000 so he would realize a $2,000,000 gain. Adam is in the top tax bracket. Determine the taxes due under the following independent situations (ignore any additional Medicare taxes on investment income):
(a)Adam sells the stock, and no special circumstances apply.
(b)The stock is qualified small business corporation stock.
(c)The stock is qualified small business corporation stock. Within 60 days Adam invests $2,500,000 in new qualifying small business corporation stock.
(d)The stock is qualified small business corporation stock. Within 60 days Adam invests $2,000,000 in new qualifying small business corporation stock.

Accepted Answer

The answer of Adam purchased stock in 2006 for $100,000....

Question 7

Melanie, a U.S. citizen living in Paris, France, for the last three years earns a salary of $110,000 in 2014. Melanie's housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income?

Accepted Answer

As a U.S. citizen living abroad, Melanie is eligible for the foreign earned income exclusion. In 2014, this exclusion amount is $99,200. Therefore, Melanie can exclude up to $99,200 of her income from U.S. taxation. However, her housing costs are considered a separate exclusion, and she can also exclude the amount of her reasonable housing costs above a certain threshold. In 2014, this threshold is calculated as 16% of her foreign earned income exclusion, or $15,872. Since Melanie's housing costs are $24,000, she can also exclude an additional $8,128 ($24,000 - $15,872) from her income. Adding these together, Melanie can exclude a total of $107,328 ($99,200 + $8,128) from her income. Therefore, the correct answer is C.

Question 8

Jamal, age 52, is a human resources manager for Triple W Company. His annual salary is $110,000 and he receives the following fringe benefits during the current year:
• Triple W pays for all employees' health and accident insurance. Triple W pays $7,000 for Jamal's health insurance during the year.
• Triple W provides Jamal with group-term life insurance coverage of $200,000 during the year. The monthly inclusion amount per $1,000 of coverage is $.23.
• Triple W has a flexible benefits plan in which employees may participate to pay any qualifying medical costs not reimbursed by their health insurance. Jamal has $1,600 withheld from his salary under the plan. During the year he receives reimbursements of $1,300.
• Triple W pays parking costs for all management employees. Jamal's parking costs $220 month.
• Triple W pays Jamal's annual membership dues of $450 to the Society of Human Resource Management Association. The company also subscribes to several management journals for Jamal costing $650 a year.
• Jamal took a college class on financial accounting and Triple W reimbursed his tuition of $6,000 through its tuition assistance program for all employees.
• Jamal's consumption of coffee provided by Triple W is valued at $250 a year.
How much income must Jamal report from his job?

Accepted Answer

The answer of Jamal, age 52, is a human resources...

Question 9

After he was denied a promotion, Daniel sued his employer claiming sex discrimination. He was awarded $20,000 to cover medical bills he incurred because of the related emotional distress, $80,000 to punish his employer for discrimination, and $50,000 to compensate him for lost wages. What is the amount that must be included in Daniel's gross income for the year?

Accepted Answer

The answer of After he was denied a promotion, Daniel...

Question 10

In 2006, Gita contributed property with a basis of $500,000 and a fair market value of $3,000,000 to a qualified small business corporation for all of its common stock. She sells the stock in 2014 for $4,000,000. What is the amount of taxable gain on the transaction?

Accepted Answer

The answer of In 2006, Gita contributed property with a...

Question 11

In September of 2014, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. What is the basis in the new stock she purchased?

Accepted Answer

To qualify for the small business stock exclusion, a taxpayer must hold the stock for at least five years. Since Michelle only held the original stock for seven months, she cannot take advantage of the exclusion. However, she can defer the gain under Section 1045 by purchasing other qualified small business stock within 60 days of the sale. The basis in the new stock is equal to the basis of the stock sold minus the gain deferred, which is $1,000,000 - $200,000 = $800,000. Therefore, the basis in the new stock is $1,100,000 - $800,000 = $300,000.

Question 12

Mark, a cash basis taxpayer, died on September 30, 2014. His wife, Charlotte, provides you with the following information.
From January 1, 2014 until his death, Mark received a salary of $35,000. Charlotte received a salary of $68,000 during 2014. Mark had earned commissions of $20,000 which Charlotte received after his death. Charlotte was the beneficiary of a $100,000 whole life policy purchased by Mark and a $50,000 group term life insurance policy purchased by Mark's employer. The employer had paid premiums of $250 on Mark's behalf. In addition, the corporation paid Charlotte a $10,000 employee death benefit in Mark's name. All employees' families received similar benefits regardless of financial need. Mark and Charlotte had itemized deductions of $15,600. They have no children but provide 100% support for Mark's widowed mother who lives with them and has no income. What is the amount of their taxable income on their 2014 tax return?

Accepted Answer

The answer of Mark, a cash basis taxpayer, died on...

Question 13

Jeremy, an American citizen, earned $200,000 during 2014 while employed in Switzerland. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses?

Accepted Answer

The foreign-earned income exclusion for 2014 is $99,200. Since Jeremy earned $200,000, he is entitled to exclude $99,200 of his earnings from US taxation. Therefore, his taxable income is $100,800 ($200,000 - $99,200). Deductible expenses are applied against taxable income, not against foreign-earned income. Therefore, Jeremy may deduct up to $100,800 of his $40,000 of deductible expenses, which equals $20,160. However, the question asks for how much he may deduct in expenses, so the answer is $20,150 (the highest option that is less than $20,160).

Question 14

In September of 2014, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?

Accepted Answer

The answer of In September of 2014, Michelle sold shares...

Question 15

For a taxpayer who is not insolvent nor under bankruptcy proceedings, the discharge of debt is generally

Accepted Answer

Generally, the discharge of debt is considered taxable income. However, there are some exceptions such as if the discharge of debt is due to insolvency or bankruptcy. Since the taxpayer in the question is neither insolvent nor under bankruptcy proceedings, the discharge of their debt would be taxable.

Question 16

In 2013 Betty loaned her son, Juan, $10,000 to help him buy a car. In 2014, before he repaid the $10,000, Betty told Juan that she was "tearing up" the $10,000 note as a graduation present. How should Juan treat the amount forgiven?

Accepted Answer

The amount forgiven by Betty should be treated as an excludable gift in the year of forgiveness. Since Betty forgave the loan as a graduation present, it should be considered a gift, and gifts are generally not taxable income. Therefore, choice D is the correct answer.

Question 17

Tim earns a salary of $40,000. This year, Tim's employer establishes a cafeteria plan under which Tim signed a salary reduction of $2,500 for which $1,500 is to cover his health insurance premiums and $1,000 is available to reimburse medical expenses. During the year, he is reimbursed $900 for medical expenses. What is the total taxable to Tim this year?

Accepted Answer

The answer of Tim earns a salary of $40,000. This...

Question 18

Exter Company is experiencing financial difficulties. It has assets worth $2 million, but owes liabilities of $2.1 million. It has a longstanding relationship with the bank. The bank has agreed to forgive $300,000 of debt principal. Because of this debt forgiveness, Exter will recognize income of

Accepted Answer

Exter will recognize income of $200,000 because the bank has forgiven $300,000 of debt principal, which reduces the liability to $1.8 million. As a result, Exter will report a gain of $200,000 ($2 million assets - $1.8 million liabilities).

Question 19

Bob, an employee of Modern Corp., receives a fringe benefit (in lieu of a salary increase)of $1,000. Bob is in a 33% tax bracket. The fringe benefit is nontaxable to Bob and is not deductible as an itemized deduction. Bob's after-tax savings from receiving the tax-free benefit is

Accepted Answer

The answer of Bob, an employee of Modern Corp., receives...

Question 20

Connor owes $4 million and has assets of only $1 million. He declares and files personal and business bankruptcy and his creditors approve a payment plan of $.25 per dollar. Connor has a net operating loss carryover of $2 million. The remaining 75 percent of his debt will be canceled. Connor must recognize income of

Accepted Answer

The answer of Connor owes $4 million and has assets...

Quiz 4: Gross Income: Exclusions