Question 1

Health Savings Accounts are available only to self-employed individuals or small businesses.

Accepted Answer

Health Savings Accounts (HSAs) are available to individuals who are enrolled in a qualified high-deductible health plan, regardless of their employment status or the size of their employer. However, self-employed individuals may find HSAs particularly beneficial due to the tax advantages and flexibility in managing healthcare expenses.

Question 2

Drew graduated from business school in December 2012.To honor Drew,on January 3,2013,his uncle gives him two tickets to the Super Bowl.The uncle paid $1,200 for each ticket.Because he had to report to work at a brokerage firm in Indianapolis on January 15,2013,he could not use the tickets.Therefore,he sells them for $2,500 each.How much income must Drew recognize in 2013 because of these events?

Accepted Answer

The answer of Drew graduated from business school in December...

Question 3

Ally served as chairperson of the local school board.Upon completion of her term in office,the organization awards her a silver-serving tray in recognition of her outstanding service to the organization.The value of the tray is $200.What are the tax effects of the award?
I.The value of the tray is included in gross income because of services rendered.
II.The tray is a gift because it is from a detached and disinterested generosity.

Accepted Answer

The award is considered a gift because it is given as a recognition of ally's outstanding service and the organization is showing detached and disinterested generosity. Therefore, only statement II is correct. The value of the tray is not included in gross income.

Question 4

Clarance rented office space to an attorney who left town before the lease was completed.The attorney left several bookcases and other improvements to cover the remaining rent.Clarance must include in income the value of the leasehold improvements to the extent of the remaining rent that was due.

Accepted Answer

According to IRS guidelines, if a tenant leaves improvements in lieu of rent payments, the value of those improvements must be included in the landlord's income to the extent of the remaining rent owed.

Question 5

Systech offered its stockholders a choice between stock and cash for their annual dividend.Since Carol has chosen stock,she does not have to include the dividend in income.

Accepted Answer

Choosing stock instead of cash for a dividend does not exempt the individual from including the value of the dividend received in their income. The value of the dividend is still considered taxable income, even if it is in the form of stock.

Question 6

Ward and June are in the 28% tax bracket.Included in their assets is a Dell Computer Corporation bond with a face value of $10,000.The bond pays $1,000 a year in interest.Ward and June gift the bond to their son,Wally (age 19),on January 1,2013.Wally is in the 15% tax bracket.The 2013 net tax savings for the family unit of Ward,June and Wally related to the transfer of the bond is

Accepted Answer

The answer of Ward and June are in the 28%...

Question 7

Ally served as chairperson of the local school board.Upon completion of her term in office,the employees in the school district offices take up a collection and purchase her a silver sterling tray in recognition of her outstanding service to the organization.The value of the tray is $200.What are the tax effects of the award?
I.The value of the tray is included in gross income because of services rendered.
II.The tray is a gift because it is from a detached and disinterested generosity.

Accepted Answer

According to the IRS, a gift is defined as a transfer of property given out of "detached and disinterested generosity." In this case, the silver sterling tray was given to Ally as recognition for her outstanding service as chairperson of the local school board. As such, it can be considered a gift and not included in her gross income for tax purposes. Therefore, only statement II is correct.

Question 8

On her 18th birthday,Patti's grandfather gave her $8,000 of dividends on stock he owned,which she uses to pay college expenses.The cost of Patti's tuition,fees,and books is $6,000.Patti's gross income from this event is:

Accepted Answer

The answer of On her 18th birthday,Patti's grandfather gave her...

Question 9

On her 18th birthday,Anna's grandfather gave her stock worth $100,000.During the current year,Anna receives $5,000 of dividends on the stock,which she uses to pay college expenses.The cost of Anna's tuition,fees,and books is $4,000.Anna's income from this event is:

Accepted Answer

The $5,000 of dividends Anna receives from the stock is considered income for her, regardless of how she chooses to spend it.

Question 10

Patrick ran up a large credit card debt.Since the bank wanted to keep Patrick's account they forgave $5,000 of his balance.Patrick was solvent before and after the forgiveness.He has to include the $5,000 in his income.

Accepted Answer

According to the IRS, cancelled or forgiven debt is considered taxable income and must be included in the recipient's income for that year. Therefore, Patrick must include the $5,000 of forgiven debt in his income.

Question 11

Terri is driving down a road when she sees that Sonny is having trouble changing a tire.Terri stops and helps Sonny.As Sonny is leaving,he gives Terri $50 and thanks her.What are the effects of the $50 receipt?
I.The $50 is a gift because it is from detached and disinterested generosity.
II.The $50 is compensation received for services rendered.

Accepted Answer

The $50 is not a gift, as Sonny gave it to Terri as compensation for her services in helping him change his tire. Therefore, statement II is correct, but statement I is not.

Question 12

Ward and June are in the 28% tax bracket.Included in their assets is a Dell Corporation bond with a face value of $10,000.The bond pays $1,000 a year in interest.Ward and June make a gift to their son,Wally (age 19)of the $1,000 in interest income.Wally is in the 10% tax bracket.What is Ward and June's tax liability related to the bond and the bond interest for the current year?

Accepted Answer

Ward and June's tax liability related to the bond and the bond interest is the amount they would owe in taxes on the $1,000 in interest income if they had kept it. Since they are in the 28% tax bracket, their tax liability would be 28% of $1,000, which is $280. Giving the interest income to Wally does not affect their tax liability.

Question 13

For the past seven years Karen,an attorney,has directed litigation clients to Rebecca,a CPA,for accounting investigatory work.Because of the amount of litigation work Karen directed to Rebecca,Rebecca's business is now comprised solely of litigation support work.Karen began taking tennis lessons this year.Rebecca gives Karen a new tennis racquet so they could share afternoons by playing tennis together.
I.The "gift" appears to be a form of compensation.
II.Substance-over-form applies to this situation.
III.The tennis racquet meets the income tax definition of a gift.
IV.Karen recognizes no gross income from the receipt of the tennis racquet.

Accepted Answer

Statement I is correct because the tennis racquet could be seen as a form of compensation for the amount of litigation work Karen had directed to Rebecca over the past seven years.
Statement II is correct because substance-over-form is a principle used to ensure that the economic reality of a transaction is reflected in its accounting treatment, which means that the form of a transaction must match its substance.
Statement III is incorrect because the tennis racquet does not meet the income tax definition of a gift since it was given as a form of compensation.
Statement IV is correct because Karen does not recognize any gross income from the receipt of the tennis racquet, as there was no intention for it to be seen as income.

Question 14

On April 1,Sally is given $20,000 worth of City of Boise bonds for her 18^th birthday.On June 30,Sally receives the $800 annual interest payment on the bonds.How much income should Sally recognize due to these two events?

Accepted Answer

The answer of On April 1,Sally is given $20,000 worth...

Question 15

On April 1,Sally is given $20,000 worth of General Motors bonds for her 18^th birthday.On June 30,Sally receives the $800 annual interest payment on the bonds.How much income should Sally recognize due to these two events?

Accepted Answer

The answer of On April 1,Sally is given $20,000 worth...

Question 16

Melvin was in an accident which was the other driver's fault.Melvin received $15,000 for pain and suffering,emotional distress,and lost wages.Melvin may exclude the entire $15,000.

Accepted Answer

The $15,000 received by Melvin for pain and suffering, emotional distress, and lost wages is considered compensation for a physical injury or sickness and is therefore excludable from gross income.

Question 17

Ward and June are in the 28% tax bracket.Included in their assets is a Dell Corporation bond with a face value of $10,000.The bond pays $1,000 per year in interest.Ward and June gift the bond to their son,Wally (age 19),on January 1,2013.Wally is in the 10% tax bracket.Wally's taxable income from the receipt of the bond and the bond interest in 2013 is

Accepted Answer

When the bond is gifted, there is no immediate tax consequence for Ward and June. However, Wally will be responsible for any taxes on the bond interest he receives in 2013. Since Wally is in the 10% tax bracket, his taxable income from the bond interest will be $1,000 x 10% = $100. He will not be taxed on the face value of the bond, only on the annual interest payment. Therefore, the correct answer is B, $1,000.

Question 18

When Rick found out that Ryan's liabilities exceeded his assets by $15,000,he forgave Ryan the $1,000 he owed Rick in hoping that Ryan might get back on his feet.Ryan is allowed to exclude the $1,000 from income.

Accepted Answer

Rick forgiving Ryan's debt counts as cancellation of debt income, but since it is under $15,000 and Ryan is insolvent, he is allowed to exclude the $1,000 from his income.

Question 19

The interest from Guam Water Authority bonds is excluded from income as "Municipal Bond Interest."

Accepted Answer

Municipal bond interest is tax-exempt at the federal level, and Guam Water Authority bonds are considered municipal bonds. Therefore, the interest from these bonds is excluded from income.

Question 20

Cornell is a building contractor who builds 25-30 homes a year.Charlotte is a real estate broker who sells all of Cornell's homes.Charlotte has recently referred a couple to Cornell who wanted him to build a $400,000 home for them.Knowing that Charlotte and her husband enjoy skiing,he bought her a nice pair of skis and boots.
I.The "gift" appears to be a form of compensation.
II.The skis are considered a gift for income tax purposes.
III.Substance-over-form applies to this situation.
IV.Charlotte recognizes gross income from the receipt of the skis.

Accepted Answer

The skis and boots given to Charlotte by Cornell can be seen as a form of compensation for referring the couple to him, which means it's not merely a gift in the casual sense. The principle of substance-over-form applies here, indicating that the nature of the transaction is more important than its formal description. Therefore, Charlotte would need to recognize the value of the skis and boots as gross income, as they are considered compensation for her services.

Quiz 4: Income Exclusions