Question 1

Mike won $700 in a football pool. This amount is not taxable.

Accepted Answer

Gambling winnings, along with winnings in contests, competitions and quiz shows, must be included in gross income.

Question 2

In December 2015, Max, a cash basis taxpayer, rents an apartment to Kadeem. Max receives both the first and last months' rent totaling $1,800 plus a security deposit of $400. The amount of income reported as taxable in 2015 is

Accepted Answer

A security deposit is not taxable until final disposition. That is, it is not taxable unless nonrefundable or until the tenant moves out and all or part of the deposit is not returned to the tenant. Rent is taxable when received.

Question 3

Which of the following statements is false?

Accepted Answer

Interest on obligations of states, territories, U.S. possessions and their political subdivisions is tax-exempt.

Question 4

A key factor in determining tax treatment of distributions from qualified retirement plans is whether the employee made pre-tax or after-tax contributions.

Accepted Answer

Distributions from pre-tax dollars are taxable, and distribution from after-tax (i.e. Roth plan) dollars are not taxable.

Question 5

Unemployment compensation is exempt from federal income tax.

Accepted Answer

Unemployment compensation is subject to tax.

Question 6

With some exceptions, amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.

Accepted Answer

The tax law imposes a 10% penalty on withdrawals prior to age 591/2 unless certain conditions are satisfied.

Question 7

Hoyt rented office space two years ago to Harris, receiving the first and last months' rent plus a security deposit of $1,000. In early January of this year, Harris moves and Hoyt refunds $250 of the deposit and keeps the remainder to cover $500 which is spent for repairs to the office space and one week of unpaid rent that amounts to $250. How would this information be reflected on Hoyt's tax return this year?

Accepted Answer

The $750 deposit not returned to the tenant is income. However, the $500 repairs may be deducted.

Question 8

In order to be treated as alimony for tax purposes, payments must be made in cash.

Accepted Answer

The tax law specifically requires cash payments in the definition of alimony.

Question 9

Which of the following bonds do not generate tax-exempt Federal income?

Accepted Answer

There is no provision in the Code to exclude from interest income from U.S. Treasury bonds.

Question 10

In December of this year, Jake and Stockard, a married couple, redeemed qualified Series EE U.S. Savings Bonds. The proceeds were used to help pay for their daughter's college tuition. Jake and Stockard received proceeds of $8,000 representing principal of $5,000 and interest of $3,000. The qualified higher educational expenses they paid this year totaled $6,000. Their AGI is below the threshold for phase-out of the exclusion. What is the amount of interest income Jake and Stockard can exclude from their income this year?

Accepted Answer

$3,000 × [$6,000 / ($5,000 + $3,000)] = $2,250 exclusion

Question 11

Social Security benefits are excluded from taxation for all taxpayers.

Accepted Answer

Middle and upper income taxpayers must include a portion of the Social Security benefits in gross income.

Question 12

Amy's employer provides her with several fringe benefits. Which of the following are included in her taxable income?

Accepted Answer

There is no provision in the Code to exclude bonuses from income. The other benefits are specifically excluded under the tax law.

Question 13

Which of the following is not included in gross income when received?

Accepted Answer

A security deposit is not taxable until final disposition. That is, it is not taxable unless nonrefundable or until the tenant moves out and all or part of the deposit is not returned to the tenant.

Question 14

Carla redeemed EE bonds which qualify for the educational exclusion. The redemption consisted of $14,000 principal and $6,000 interest. The net qualifying educational expenses are $10,000. Her AGI is below the threshold for phase-out of the exclusion. The taxable interest is

Accepted Answer

$6,000 × [$10,000 / ($6,000 + $14,000)] = $3,000 exclusion. $6,000 - $3,000 = $3,000 taxable

Question 15

Jacob, who is single, paid educational expenses of $16,000 in 2015. He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000. Jacob has other adjusted gross income of $81,200. The $3,000 exclusion must be reduced by

Accepted Answer

$3,000 × [($81,200 + $3,000 - $77,200)/$15,000] = $1,400

Question 16

Payments from an annuity purchased from an insurance company are not taxable until the taxpayer has recovered the purchase price of the annuity.

Accepted Answer

The recovery of the purchase price is spread over the payment period of the annuity.

Question 17

Property settlements made incident to a divorce have no immediate tax consequences; that is, the transfer from one spouse to another is not taxable.

Accepted Answer

A property settlement is simply a division of property pursuant to a divorce. Neither party recognizes income nor deduction, and the basis carries over to the recipient.

Question 18

Income from illegal activities is taxable.

Accepted Answer

All income is subject to tax unless specifically excluded in the tax law. There is no exclusion for income from illegal activities.

Question 19

Becky wins a car and furniture on a television game show. The fair market value of these items is taxable to Becky.

Accepted Answer

Any prizes or winnings that have a fair market value above a certain threshold set by the IRS are considered taxable income. Therefore, Becky would be required to pay taxes on the fair market value of the car and furniture she won on the game show.

Question 20

Alimony received is taxable to the recipient while child support payments are not.

Accepted Answer

The tax law specifically allows a deduction for alimony to the payor and the recipient reports the alimony received as income. Child support payments and property settlements are not deductible by the payor or taxable to the recipient.

Quiz 3: Gross Income: Inclusions