Question 1

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

Accepted Answer

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

Question 2

In December 2017,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 by Max as taxable in 2017 is

Accepted Answer

C) 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

Unemployment compensation is exempt from federal income tax.

Accepted Answer

Unemployment compensation is subject to tax.

Question 4

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 5

Jing,who is single,paid educational expenses of $16,000 in 2017.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jing has other adjusted gross income of $82,150.With respect to the $3,000 of bond interest,Jing must include in taxable income

Accepted Answer

C) $3,000 × [($82,150 + $3,000 - $78,150)/$15,000] = $1,400 reduction in exclusion; $3,000 - $1,600

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With some exceptions,amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.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 59 1/2 unless certain conditions are satisfied.

Question 7

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

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

Question 8

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 9

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 10

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

Accepted Answer

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

Question 11

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 12

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

Accepted Answer

In general, prizes, awards, gambling winnings and treasure finds are taxable.

Question 13

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

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

Question 14

Which of the following statements is false?

Accepted Answer

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

Question 15

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.

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

Jacob,who is single,paid educational expenses of $16,000 in 2017.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jacob has other adjusted gross income of $82,150.The $3,000 exclusion must be reduced by

Accepted Answer

B) $3,000 × [($82,150 + $3,000 - $78,150)/$15,000] = $1,400

Question 18

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 19

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 20

The recipient of a taxable stock dividend includes the value of the stock received in gross income and that amount becomes the basis for the stock received.

Accepted Answer

The taxpayer of a taxable stock dividend is treated as if a cash dividend was paid to the shareholder, and the shareholder used the funds to purchase additional shares of stock.

Quiz 3: Gross Income: Inclusions