Question 1

In 2013,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?
A)If Boris is self-employed,he may deduct $7,200 as a deduction for AGI.
B)If Boris is self-employed,he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his itemized medical expense deduction.
C)If Boris is an employee,he may deduct $7,200 as a deduction for AGI.
D)If Boris is an employee,he may include $7,200 when calculating his itemized medical expense deduction.
E)None of the above.

Accepted Answer

If Boris is self-employed, he may deduct $7,200 as a deduction for AGI because the premium for high-deductible medical insurance and the contribution to a Health Savings Account are both deductible for self-employed individuals.

Question 2

Early in the year,Marion was in an automobile accident during the course of his employment.As a result of the physical injuries he sustained,he received the following payments during the year:  What is the amount that Marion must include in gross income for the current year?
A)$25,000.
B)$15,000.
C)$12,500.
D)$10,000.
E)$0.

Accepted Answer

The answer of Early in the year,Marion was in an...

Question 3

In 2013,Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company,Rashad's employer,claiming $50,000 for pain and suffering,$90,000 for loss of income,and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages; therefore,Amber has offered to settle the case for $100,000 for pain and suffering,$90,000 for loss of income,and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?
A)Amber's offer is $20,000 less.($50,000 + $90,000 + $70,000 - $100,000 - $90,000).
B)Amber's offer is $7,000 less.[($50,000 + $90,000 + $70,000 - $100,000 - $90,000)´ .35)].
C)Amber's offer is $4,500 more.{$190,000 - ($50,000 + $90,000)+ [$70,000 ´ (1 - .35)]}.
D)Amber's offer is $22,000 more.[($190,000 - $210,000)+ ($120,000 ´ .35)].
E)None of the above.

Accepted Answer

Khalid's original claim includes $70,000 in punitive damages, which are taxable. The after-tax value of punitive damages is $70,000 * (1 - 0.35) = $45,500. Khalid's original claim after tax is $50,000 + $90,000 + $45,500 = $185,500. Amber's offer is $100,000 + $90,000 = $190,000. The after-tax difference is $190,000 - $185,500 = $4,500 more.

Question 4

Thelma and Mitch were divorced.The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000.Under the terms of the divorce agreement,Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years,or until Thelma's death,whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.Mitch paid the $600,000 to Thelma over the six-year period.The divorce agreement did not contain the word "alimony." Then,Mitch sold the stocks for $1,300,000.Mitch's recognized gain from the sale is:
A)$0.
B)$1,000,000 ($1,300,000 - $300,000).
C)$700,000 ($1,300,000 - $600,000).
D)$300,000 ($1,300,000 - $1,000,000).
E)None of the above.

Accepted Answer

When Thelma transferred the stocks to Mitch as part of the divorce agreement, the transfer was not taxable since transfers between spouses incident to divorce are not taxable. Therefore, Mitch's basis in the stocks is the same as Thelma's basis of $600,000. When Mitch sold the stocks for $1,300,000, his recognized gain is $700,000 ($1,300,000 - $600,000). The fact that the payments made by Mitch to Thelma were not labeled as "alimony" is irrelevant to the tax treatment of the transfer and sale of the stocks.

Question 5

Richard,age 50,is employed as an actuary.For calendar year 2013,he had AGI of $130,000 and paid the following medical expenses:  Derrick and Jane would qualify as Richard's dependents except that they file a joint return.Richard's medical insurance policy does not cover them.Richard filed a claim for $4,800 of his own expenses with his insurance company in November 2013 and received the reimbursement in January 2014.What is Richard's maximum allowable medical expense deduction for 2013?
A)$0.
B)$7,090.
C)$13,000.
D)$20,090.
E)None of the above.

Accepted Answer

The answer of Richard,age 50,is employed as an actuary.For calendar...

Question 6

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:
A)Is gross income to the person who purchased the bond in the year the interest is earned.
B)Is gross income to the student in the year the interest is earned.
C)Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses.
D)Is not included in anyone's gross income if the proceeds are used to pay college tuition.
E)None of the above.

Accepted Answer

The interest income on educational savings bonds is not included in anyone's gross income if the proceeds are used to pay college tuition, assuming the taxpayer qualifies for the exclusion treatment. This exclusion is subject to income limitations and other qualifications outlined by the IRS.

Question 7

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:
A)Only tuition.
B)Tuition,books,and supplies.
C)Tuition,books,supplies,meals,and lodging.
D)Meals and lodging.
E)None of the above.

Accepted Answer

According to IRS Publication 970, scholarship proceeds used to pay for tuition, fees, books, and supplies may be excluded from gross income. However, amounts used to pay for room and board, travel, and research are generally taxable. Therefore, option B is the best choice as it includes tuition, books, and supplies, which are eligible for exclusion.

Question 8

Under the terms of a divorce agreement,Ron is to pay his former wife Jill $10,000 per month.The payments are to be reduced to $7,000 per month when their 15 year-old child reaches age 18.During the current year,Ron paid $120,000 under the agreement.Assuming all of the other conditions for alimony are satisfied,Ron can deduct from gross income (and Jill must include in gross income)as alimony:
A)$120,000.
B)$84,000.
C)$36,000.
D)$0.
E)None of the above is correct.

Accepted Answer

Ron paid $120,000 under the agreement during the current year. However, since the payments are to be reduced to $7,000 per month when their child reaches age 18, only $84,000 ($10,000 per month for the first 8 months of the year and $7,000 per month for the last 4 months) qualifies as alimony for tax purposes. Therefore, Ron can deduct $84,000 from gross income and Jill must include $84,000 in her gross income.

Question 9

Theresa sued her former employer for age,race,and gender discrimination.She claimed $200,000 in damages for loss of income,$300,000 for emotional harm,and $500,000 in punitive damages.She settled the claim for $700,000.As a result of the settlement,Theresa must include in gross income:
A)$700,000.
B)$500,000.
C)$490,000 [($700,000/$1,000,000)´ $700,000].
D)$0.
E)None of the above.

Accepted Answer

The answer of Theresa sued her former employer for age,race,and...

Question 10

Under the terms of a divorce agreement,Kim was to pay her husband Tom $7,000 per month in alimony.Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21.The husband has custody of their son.For a twelve-month period,Kim can deduct from gross income (and Tom must include in gross income):
A)$60,000.
B)$48,000.
C)$36,000.
D)$0.
E)None of the above.

Accepted Answer

The answer of Under the terms of a divorce agreement,Kim...

Question 11

Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:
A)$10,000.
B)$50,000.
C)$60,000.
D)$85,000.
E)None of the above.

Accepted Answer

The answer of Olaf was injured in an automobile accident...

Question 12

Fred and Lucy are married,ages 33 and 32,and together have AGI of $120,000 in 2013.They have four dependents and file a joint return.They pay $5,000 for a high deductible health insurance policy and contribute $2,600 to a qualified Health Savings Account.During the year,they paid the following amounts for medical care: $9,200 in doctor and dentist bills and hospital expenses,and $3,000 for prescribed medicine and drugs.In October 2013,they received an insurance reimbursement of $4,400 for the hospitalization.They expect to receive an additional reimbursement of $1,000 in January 2014.Determine the maximum deduction allowable for medical expenses in 2013.
A)$800.
B)$3,400.
C)$9,200.
D)$12,800.
E)None of the above.

Accepted Answer

The answer of Fred and Lucy are married,ages 33 and...

Question 13

As an executive of Cherry,Inc.,Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children.The scholarships are paid by the company directly to each child's educational institution and are payable only if the student maintains a B average.
A)The tuition payments of $30,000 may be excluded from Ollie's gross income as a scholarship.
B)The tuition payments of $10,000 each must be included in the child's gross income.
C)The tuition payments of $30,000 may be excluded from Ollie's gross income because the payments are for the academic achievements of the children.
D)The tuition payments of $30,000 must be included in Ollie's gross income.
E)None of the above.

Accepted Answer

The answer of As an executive of Cherry,Inc.,Ollie receives a...

Question 14

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent.Her only source of income is a $10,000 athletic scholarship ($1,000 for books,$5,500 tuition,$500 student activity fee,and $3,000 room and board).Jena's gross income for the year is:
A)$10,000.
B)$4,000.
C)$3,000.
D)$500.
E)None of the above.

Accepted Answer

Only the portion of Jena's scholarship that was used for tuition and fees (which totaled $6,000) is exempt from income tax. The remaining $4,000 used for room and board is considered taxable income. Therefore, Jena's gross income for the year is $4,000.

Question 15

Brad,who would otherwise qualify as Faye's dependent,had gross income of $9,000 during the year.Faye,who had AGI of $120,000,paid the following medical expenses in 2013:  Assuming Faye is age 45,she has a medical expense deduction of:
A)$3,150.
B)$4,950.
C)$10,350.
D)$13,350.
E)None of the above.

Accepted Answer

To determine Faye's medical expense deduction, we first need to calculate her adjusted gross income (AGI) limitation. The limitation is 10% of Faye's AGI because she is under the age of 65. 
10% x $120,000 = $12,000 
Next, we have to subtract the total medical expenses that exceeds the AGI limitation. 
$21,500 - $12,000 = $9,500 
Therefore, Faye's medical expense deduction is $9,500. 
Note that Brad's gross income has no impact on Faye's medical expense deduction.

Question 16

Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation,$100,000 for damages to his personal reputation,and $50,000 in punitive damages.Jack must include in his gross income as a damage award:
A)$0.
B)$100,000.
C)$120,000.
D)$270,000.
E)None of the above.

Accepted Answer

According to the tax law, any amount received in a legal settlement or court award for damages to reputation is taxable and must be included in gross income. Therefore, Jack must include all three amounts in his gross income, for a total of $270,000. Option D is the correct answer.

Question 17

Under the terms of a divorce agreement,Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support.For a twelve-month period,Lanny can deduct from gross income (and Joyce must include in gross income):
A)$0.
B)$6,000.
C)$24,000.
D)$30,000.
E)None of the above.

Accepted Answer

Lanny can deduct the alimony payments of $2,000 per month, which total $24,000 for the year, from his gross income. Joyce must include these $24,000 in her gross income. However, the child support payments of $500 per month cannot be deducted from gross income or included in gross income. Therefore, the only deductible payments are the alimony payments, totaling $24,000 for the year.

Question 18

Edna had an accident while competing in a rodeo.She sustained facial injuries that required cosmetic surgery.While having the surgery done to restore her appearance,she had additional surgery done to reshape her chin,which was not injured in the accident.The surgery to restore her appearance cost $9,000 and the surgery to reshape her chin cost $6,000.How much of Edna's surgical fees will qualify as a deductible medical expense (before application of the AGI limitation)?
A)$0.
B)$6,000.
C)$9,000.
D)$15,000.
E)None of the above.

Accepted Answer

The answer of Edna had an accident while competing in...

Question 19

Christie sued her former employer for a back injury she suffered on the job in 2013.As a result of the injury,she was partially disabled.In 2014,she received $240,000 for her loss of future income,$160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety,and $15,000 for medical expenses.The medical expenses were deducted on her 2013 return,reducing her taxable income by $12,000.Christie's 2014 gross income from the above is:
A)$415,000.
B)$412,000.
C)$255,000.
D)$175,000.
E)$172,000.

Accepted Answer

The answer of Christie sued her former employer for a...

Question 20

The exclusion of interest on educational savings bonds:
A)Applies only to savings bonds owned by the child.
B)Applies to parents who purchase bonds for which the proceeds are used for their child's education.
C)Means that the child must include the interest in income if the bond is owned by the parent.
D)Does apply even if used to pay for room and board.
E)None of the above.

Accepted Answer

The exclusion of interest on educational savings bonds applies to parents who purchase the bonds for which the proceeds are used for their child's education.

Quiz 16: Introduction to the Taxation of Individuals

In 2013,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?

Early in the year,Marion was in an automobile accident during the course of his employment.As a result of the physical injuries he sustained,he received the following payments during the year: What is the amount that Marion must include in gross income for the current year?

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

Theresa sued her former employer for age,race,and gender discrimination.She claimed $200,000 in damages for loss of income,$300,000 for emotional harm,and $500,000 in punitive damages.She settled the claim for $700,000.As a result of the settlement,Theresa must include in gross income:

Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:

As an executive of Cherry,Inc.,Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children.The scholarships are paid by the company directly to each child's educational institution and are payable only if the student maintains a B average.

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent.Her only source of income is a $10,000 athletic scholarship ($1,000 for books,$5,500 tuition,$500 student activity fee,and $3,000 room and board) .Jena's gross income for the year is:

Brad,who would otherwise qualify as Faye's dependent,had gross income of $9,000 during the year.Faye,who had AGI of $120,000,paid the following medical expenses in 2013: Assuming Faye is age 45,she has a medical expense deduction of:

Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation,$100,000 for damages to his personal reputation,and $50,000 in punitive damages.Jack must include in his gross income as a damage award:

Under the terms of a divorce agreement,Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support.For a twelve-month period,Lanny can deduct from gross income (and Joyce must include in gross income) :

The exclusion of interest on educational savings bonds: