Question 1

Iris collected $150,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $18,000 each.

Accepted Answer

Since the policy was purchased by the husband's employer under a group policy, the $5,000 included in gross income by the husband represents the imputed income from the policy. Therefore, the amount received by Iris is not taxable. As Iris elected to receive the policy in 10 equal annual payments, she can exclude $15,000 from gross income for each $18,000 payment received, which is calculated by dividing the death benefit by the total payout amount ($150,000/$180,000) and multiplying that fraction by the annual payment amount ($18,000). Therefore, option D is the correct choice.

Question 2

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 for punitive damages.As a result of the award, the amount Olaf must include in gross income is:

Accepted Answer

The $10,000 for punitive damages must be included in gross income. Amounts received for physical injury and loss of income due to physical injury are generally not taxable and do not need to be included in gross income.

Question 3

Early in the year, Marlon 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: Reimbursement of medical expenses Marlon paid by a medical$\begin{array}{lr}
\text { insurance policy he purchased } & \$ 10,000 \
\text { Damage settlement to replace his lost salary } & 15,000
\end{array}$ What is the amount that Marlon must include in gross income for the current year?

Accepted Answer

The reimbursement of medical expenses ($10,000) by a medical insurance policy that Marlon purchased is generally not taxable. The damage settlement to replace his lost salary ($15,000) is also not taxable as it is a compensation for physical injuries. Therefore, Marlon must include $0 in his gross income for the current year.

Question 4

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:

Accepted Answer

Settlement amounts for discrimination claims are generally included in gross income unless they are specifically for physical injuries or sickness.

Question 5

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

Accepted Answer

Jena's gross income for the year is $3,000, which represents the portion of her athletic scholarship allocated for room and board. Scholarships used for tuition, books, and fees related to enrollment or attendance are not taxable, but amounts used for room and board are considered taxable income.

Question 6

Matilda works for a company with 1,000 employees.The company has a hospitalization insurance plan that covers all employees.However, the employee must pay the first $3,000 of his or her medical expenses each year.Each year, the employer contributes $1,500 to each employee's health savings account (HSA).Matilda's employer made the contributions in 2018 and 2019, and the account earned $100 interest in 2019.At the end of 2019, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy.As a result, Matilda must include in her 2019 gross income:

Accepted Answer

Withdrawals from a Health Savings Account (HSA) used for qualified medical expenses, including deductibles, are not taxable. The interest earned in the HSA is also not taxable if used for qualified medical expenses.

Question 7

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe.After the company had paid $400,000 in premiums, Joe died, and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.

Accepted Answer

Life insurance proceeds received upon the death of the insured are generally excludable from gross income for both businesses and individuals. Turquoise Company can exclude the $1.5 million proceeds from the life insurance policy on Joe, and Rebecca can exclude the $100,000 proceeds from the group term life insurance policy.

Question 8

Albert had a terminal illness that would require almost constant nursing care for the remaining two years of his estimated life, according to his doctor.Albert had a life insurance policy with a face amount of $100,000.He had paid $25,000 of premiums on the policy.The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000.He accepted the $80,000.Albert used $15,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

Accepted Answer

The payment Albert received is considered an accelerated death benefit due to his terminal illness, which is generally excluded from gross income under tax laws.

Question 9

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:

Accepted Answer

Jack must include all of the damages he received in his gross income. Therefore, he must include $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages, for a total of $270,000.

Question 10

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy, and he collected
$50,000, the cash surrender value of the policy.Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

Accepted Answer

Under U.S. tax law, the proceeds from cashing in a life insurance policy are generally taxable to the extent they exceed the premiums paid. However, there is an exception for terminally or chronically ill individuals who sell their life insurance policy under a viatical settlement. In Ben's case, because he is terminally ill, he would not recognize any gross income from cashing in his life insurance policy. Henry, being in excellent health and cashing in his policy for personal reasons, must recognize the $38,000 as gross income.

Question 11

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

Accepted Answer

According to IRS Publication 970, a scholarship recipient may exclude from gross income the scholarship proceeds used to pay for tuition, fees, books, and supplies required for enrollment or attendance at an eligible educational institution. Meals and lodging are not considered qualified expenses and would not be eligible for exclusion.

Question 12

Ron, age 19, is a full-time graduate student at City University.During 2019, he received the following payments: $$\begin{array} { l r } 
\text { Cash award for being the outstanding resident adviser } & \$ 1,500 \
\text { Resident adviser housing } & 2,500 \
\text { State scholarship for ten months (tuition and books) } & 6,000 \
\text { State scholarship (meals allowance) } & 2,400 \
\text { Loan from college financial aid office } & 3,000 \
\text { Cash support from parents } & \underline { 2,000 } \
&\underline { \underline { \$ 17,400 }}
\end{array}$$ Ron served as a resident adviser in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied.What is Ron's adjusted gross income for 2019?

Accepted Answer

The answer of Ron, age 19, is a full-time graduate...

Question 13

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance.If a customer dies, the company receives from the insurance company the balance due on the customer's loan.Ali, a customer, died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company, Swan:

Accepted Answer

Swan does not recognize income from the life insurance because the entire amount is a recovery of capital.

Question 14

Christie sued her former employer for a back injury she suffered on the job in 2019.As a result of the injury, she was partially disabled.In 2020, 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 2019 return, reducing her taxable income by $12,000.Christie's 2020 gross income from the above is:

Accepted Answer

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

Question 15

Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence, she received her regular salary of $8,000 from her employer.For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased.Of the $26,000 she received, Julie must include in gross income:

Accepted Answer

The answer of Julie was suffering from a viral infection...

Question 16

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 on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.

Accepted Answer

The tuition payments are considered a fringe benefit for Ollie, and since they are provided as a benefit for being a key employee, they must be included in his gross income.

Question 17

During the current year, 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?

Accepted Answer

Amber's offer is $4,500 more.{$190,000 - ($50,000 + $90,000) + [$70,000 × (1.00 - 0.35)]}.

Question 18

The taxpayer is a Ph.D.student in accounting at City University.The student is paid $1,500 per month for teaching two classes.The total amount received for the year is $13,500.

Accepted Answer

The $13,500 received as compensation for teaching is taxable income and should be reported on the taxpayer's tax return. Option A is incorrect because the exclusion for tuition and books only applies to qualified scholarships, which have specific eligibility requirements. Option C is incorrect because this payment is not considered a scholarship but rather compensation for services rendered. Option D is incorrect because the standard deduction and personal exemption are not relevant to determining the taxability of this income.

Question 19

The exclusion for health insurance premiums paid by an employer applies to:

Accepted Answer

The exclusion for health insurance premiums paid by an employer applies to current employees, retired former employees, and their spouses and dependents.

Question 20

Barney is a full-time graduate student at State University.He serves as a teaching assistant for which he is paid $700 per month for nine months and his $5,000 tuition is waived.The university waives tuition for all of its employees.In addition, Barney receives a $1,500 research grant to pursue his own research and studies.Barney's gross income from the above is:

Accepted Answer

The $6,300 Barney earns as a teaching assistant is considered taxable income. The tuition waiver is not taxable because the university waives tuition for all its employees, making it a non-taxable benefit. The $1,500 research grant is also not taxable if it is used for qualified education expenses. Therefore, Barney's gross income from the above is $6,300.

Quiz 5: Gross Income: Exclusions