Question 1

John, an employee of a manufacturing company, suffered a heart attack and was unable to work for six months. He received $1,500 per month of disability benefits as a result of an employer-provided group policy. The benefits are includible in John's gross income.

Accepted Answer

Disability benefits received from an employer-provided group policy are generally taxable and included in the employee's gross income.

Question 2

Punitive damages are taxable unless they are awarded for physical injuries.

Accepted Answer

False

Question 3

Katie, a self-employed CPA, purchased an accident & disability insurance policy. As the result of an auto accident, Katie was unable to work and received $3,000 of disability benefits per month for seven months. The benefits were based on her estimated monthly income and should be reported as gross income.

Accepted Answer

False

Question 4

Loan proceeds are taxable in the year received in cash.

Accepted Answer

Loan proceeds are not taxable as they are not considered income. However, if the loan is forgiven or cancelled, it may be considered taxable income in that year.

Question 5

An individual is considered terminally ill for purposes of the exclusion for accelerated death benefits if a physician certifies that he is reasonably likely to die within 36 months.

Accepted Answer

The answer of An individual is considered terminally ill for...

Question 6

Amounts collected under accident and health insurance policies purchased by the taxpayer are excludable from income.

Accepted Answer

Pursuant to Section 104 of the Internal Revenue Code, amounts received under accident and health insurance policies are not included in the gross income of the taxpayer. This exclusion applies to both premiums paid by the taxpayer and benefits received from the insurer.

Question 7

Many exclusions exist due to the benevolence of Congress or as a result of the government's attempts to encourage particular social behavior.

Accepted Answer

Many tax exclusions exist due to Congress' decision to encourage certain behaviors or provide benefits to specific groups of people.

Question 8

While payments received because a person has been physically injured are excluded from gross income, payments on account of non-physical injury must be included in gross income.

Accepted Answer

This is true according to the tax law. Payments received for physical injuries or sickness are excluded from gross income, while payments received for emotional distress or non-physical injuries are generally taxable. However, there are exceptions and nuances, so it is important to consult with a tax professional for specific situations.

Question 9

Sam received a scholarship for room and board. This scholarship is excludable from income.

Accepted Answer

The answer of Sam received a scholarship for room and...

Question 10

Sumedha is the beneficiary of her mother's $500,000 life insurance policy. She receives $54,000 per year over ten years in settlement of her mother's policy. Sumedha will exclude the $54,000 proceeds received each year from the life insurance company.

Accepted Answer

The answer of Sumedha is the beneficiary of her mother's...

Question 11

Amounts withdrawn from qualified tuition plans are tax-free if the amounts are used for qualified higher education expenses including tuition, fees, books, and room and board for students attending on at least a half-time basis.

Accepted Answer

Amounts withdrawn from qualified tuition plans are indeed tax-free if they are used for qualified higher education expenses as defined by the IRS.

Question 12

Dividends on life insurance policies are generally excludable income because they are considered a return of premium.

Accepted Answer

Dividends on life insurance policies are paid out from the insurer's surplus or profits and are considered a return of premium, which means they are not taxed as income.

Question 13

Any distribution from a qualified tuition plan not used for qualified higher education expenses is both included in income and subject to a 10% penalty.

Accepted Answer

The answer of Any distribution from a qualified tuition plan...

Question 14

Accelerated death benefits from a life insurance policy received by a terminally ill person may be excluded from taxable income.

Accepted Answer

Accelerated death benefits received by a terminally ill person are generally excluded from taxable income under federal law. However, there may be exceptions for certain policies or situations, so it's important to consult with a tax professional for specific guidance.

Question 15

A taxpayer may avoid tax on income by having the payment made to another taxpayer.

Accepted Answer

This is false. A taxpayer cannot avoid tax on income by having the payment made to another taxpayer unless there is a legal and legitimate reason for doing so, such as transferring ownership of property or assets. Any attempt to do so for the purpose of evading taxes is illegal and can result in penalties and legal action.

Question 16

Which of the following items will result in an increase in gross income?

Accepted Answer

C)This is a taxable exchange of services,and both parties will realize income equal to the value of services received.

Question 17

Awards for emotional distress attributable to a physical injury are excluded from gross income.

Accepted Answer

According to the Internal Revenue Service (IRS), awards for emotional distress that are attributable to a physical injury or sickness are excluded from gross income. However, if the emotional distress award is not related to a physical injury or sickness, it may be considered taxable income.

Question 18

Except in the case of qualifying accelerated death benefits, if a life insurance policy is sold or surrendered for a lump sum before the death of the insured, the amount received is taxable to the extent it exceeds the premiums paid.

Accepted Answer

If a life insurance policy is sold or surrendered for a lump sum before the death of the insured, the amount received is taxable to the extent it exceeds the premiums paid. This is known as gain and is subject to income tax. The only exception to this rule is if the policy includes qualifying accelerated death benefits, which may be paid tax-free under certain circumstances.

Question 19

Upon the sale of property, a portion of the selling price equal to the basis in the property is considered a return of capital to the seller and is, therefore, not taxable.

Accepted Answer

This is correct according to the tax laws in the United States. The basis in a property is determined by its purchase price, plus certain adjustments. When the property is sold, the portion of the selling price equal to the basis is considered a return of capital and is not subject to taxation. The remaining amount may be subject to capital gains tax.

Question 20

Each year a taxpayer must include in gross income the rental value of his or her personal residence.

Accepted Answer

This statement is false. Generally, taxpayers do not need to include the rental value of their personal residence in gross income, unless they rent out a portion of their residence or use it for business purposes. However, if the taxpayer rents out their personal residence for more than 14 days in a year, they must report the rental income on their tax return.

Quiz 19: Gross Income: Exclusions