Question 1

Sylvia is a United States citizen who has established legal residency in Japan.She has been teaching school there for several years.Her annual salary is $60,000.Anne's tax situation is

Accepted Answer

As a U.S. citizen, Sylvia is subject to U.S. tax laws, even though she resides and works in Japan. However, she can elect to exclude her foreign earned income up to a certain amount ($107,600 in 2020) from U.S. taxation, or she can take a tax credit for the foreign taxes paid on her income in Japan. So, option C is the correct choice as it provides both options.

Question 2

Rex is a programmer with Monon Electronics Corporation.His annual salary is $50,000.As part of his compensation package,he receives a term-life insurance policy equal to his annual salary.All members of the programming staff receive this benefit.Members of the sales staff have a cafeteria plan from which to select various benefits including life and health insurance coverage.
I.Rex has an excludable amount of income because of the nature of his employment benefit.
II.Rex must include $50,000 in his gross income because that is the value of the insurance benefit.
III.Rex must include the cost of the insurance policy in his gross income.
IV.If the benefit is only available to "key" employees and Rex is a "key" employee,he may exclude the cost of the premiums paid from his gross income.
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Accepted Answer

Statement I is correct because employer-provided group-term life insurance up to $50,000 in coverage is generally excludable from income, according to the IRS. Statements II and III are incorrect because the cost of the first $50,000 of coverage provided to an employee is excludable from income and does not need to be included in gross income. Statement IV is incorrect in this context because the exclusion applies regardless of whether an employee is considered "key" for the first $50,000 of coverage.

Question 3

Donna is a student at Eastern State University.She receives a $4,000 academic scholarship from the Silverman Foundation.She also has a $2,000 assistantship to grade and tutor for the Department of Economics.Tuition,books,fees,and supplies are $5,000.How much gross income must Donna recognize from the scholarship and assistantship?

Accepted Answer

Donna must recognize the full amount of the academic scholarship and assistantship as gross income, which is $4,000 + $2,000 = $6,000. However, she can reduce this amount by the cost of tuition, books, fees, and supplies, which is $5,000. Therefore, the amount of gross income that Donna must recognize is $6,000 - $5,000 = $1,000. The correct answer is B).

Question 4

Nancy teaches school in a Chinese university.She is a U.S.citizen and has been teaching in China for 5 years.In the current year she will earn $100,000.What are some of Nancy's options for reporting U.S.gross income?
I.She may include the foreign earned income in her gross income,calculate her U.S.income tax,and take a tax credit for foreign taxes paid.
II.She may exclude up to $102,100 in foreign earned income for the current year.
III.She may exclude all of her income because it is earned outside of the U.S.
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Accepted Answer

Option I is correct because Nancy can choose to include her foreign earned income in her gross income and calculate her U.S. income tax. She can also take a tax credit for any foreign taxes paid, which can help reduce her U.S. tax liability.
Option II is also correct because Nancy can choose to exclude up to $102,100 of her foreign earned income for the current year. This exclusion is available to U.S. citizens who meet certain requirements, such as living and working in a foreign country for a certain period of time.
Option III is incorrect because even though Nancy's income is earned outside of the U.S., she is still a U.S. citizen and subject to U.S. tax laws. Therefore, she cannot simply exclude all of her income from her U.S. gross income without claiming any tax benefits.

Question 5

Sigma Company provides its employees with $25,000 of group-term life insurance.How much is included in gross income because of the life insurance?

Accepted Answer

Under the IRS rules, the cost of up to $50,000 of employer-provided group-term life insurance is excluded from an employee's gross income. Therefore, if Sigma Company provides $25,000 of group-term life insurance, none of it is included in the employee's gross income.

Question 6

Sanford's employer has a qualified pension plan that allows employees to contribute up to 10% of their gross salaries to the plan.The employer matches the contribution at the rate of 50% of the employee's contribution.Sanford's current annual salary is $80,000.This is his only source of income.If he contributes the maximum amount to the pension plan,what is Sanford's gross income for the current year?

Accepted Answer

The answer of Sanford's employer has a qualified pension plan...

Question 7

Sundown,Inc. ,purchases a term life insurance plan only for its corporate officers.Harold receives $250,000 of insurance at a cost to the company of $3,500.The IRS Table of Premium value indicates that premiums are $1.08 annually per $1,000 of protection.How much gross income does Harold have from the purchase of the life insurance by Sundown,Inc.?

Accepted Answer

The answer of Sundown,Inc. ,purchases a term life insurance plan...

Question 8

Kristine is the controller of Evans Company.Evans provides all management level employees with medical insurance through a self-insured plan.During the current year,Kristine has $2,650 in medical expenses reimbursed by the plan.The income tax effect of the reimbursements Kristine receives is:
I.Kristine excludes the value of the reimbursement.
II.Kristine includes $2,650 in her gross income.
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Accepted Answer

Kristine must include $2,650 in her gross income because the medical expense reimbursements are considered taxable income. Statement I is incorrect because the reimbursement amount cannot be excluded from Kristine's income.

Question 9

Julia spends her summers away from college as a forest ranger in a remote area near Mt.McKinley,Alaska.She lives in a remote dormitory where she also receives free meals.The dormitory's location permits rangers to be on call in case of an emergency.
I.The value of the lodging is excluded from Julia's gross income.
II.The value of the meals is excluded from Julia's gross income.
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Accepted Answer

According to the IRS, "the value of lodging furnished to an employee on the business premises of an employer is excludable from the employee's gross income if it is furnished for the convenience of the employer." In this case, the dormitory's location allows Julia to be on call in case of an emergency, which is for the convenience of the employer. Therefore, statement I is correct. Similarly, the value of meals provided to an employee for the convenience of the employer is also excluded from the employee's gross income. As Julia receives free meals while working in the remote area, this also qualifies as excludable from her gross income. Therefore, statement II is also correct.

Question 10

Moonglow,Inc. ,purchases a group-term life insurance plan for all its employees.Harold receives $250,000 of insurance for the current year at a cost to the company of $2,500.The IRS Table of Premium values indicates that premiums are $1.08 annually per $1,000 of protection.How much gross income does Harold have from the purchase of the life insurance by Moonglow,Inc.?

Accepted Answer

The answer of Moonglow,Inc. ,purchases a group-term life insurance plan...

Question 11

Steve is an employee of Giant Valley Auto City.The company allows all employees to receive a 35% discount on service to their personal vehicles.Steve paid $975 for work done on his truck that normally costs $1,500.How much gross income must Steve recognize because of the discount?

Accepted Answer

Steve must recognize $225 as gross income. The discount allowed is 35% of $1,500, which equals $525. Since Steve paid $975, the discount used is exactly the allowed amount ($1,500 - $975 = $525). Therefore, there's no additional income to recognize beyond the allowed discount.

Question 12

Hector's employer has a qualified pension plan to which it contributes 6% of his gross salary.Hector's current annual salary is $50,000.The pension plan also earns $2,500 during the current year on contributions made to the plan on behalf of Hector.What is Hector's gross income from these transactions for the current year?

Accepted Answer

Employer contributions to a qualified pension plan and the earnings on those contributions are not included in an employee's gross income for the year they are made or earned. Hector's gross income remains his salary of $50,000.

Question 13

David,an employee of Lima Corporation,is a U.S.citizen and the regional sales manager for South America.His office is in Miami and he spends nine months each year on business in South America.Which of the following statements about the treatment of his income from Lima Corporation is correct?

Accepted Answer

The answer of David,an employee of Lima Corporation,is a U.S.citizen...

Question 14

Victor receives a $4,000 per year scholarship from Southern College.The college specifies that $2,500 is for tuition,books,supplies,and equipment for classes.The other $1,500 is for room and board.As part of the conditions of the scholarship,Victor must also work ten hours per week as a grader,for which he is paid $1,700 for the year.Of the total amount received,Victor will include in income:

Accepted Answer

Victor will only include in income the amount he earned as a grader, which is $1,700. The rest of the scholarship is tax-free since it is used for qualified education expenses such as tuition, books, and supplies. Therefore, the correct answer is D ($3,200 = $1,700 (grader income) + $1,500 (room and board) + $2,500 (education expenses)).

Question 15

Angie's employer has a qualified pension plan.The employer makes all payments into the plan;employees do not contribute to the plan.During the current year,the employer pays $5,000 into the plan on Angie's behalf.Which of the following statements is true?
I.Angie is not taxed on the $5,000 in the current year.
II.The $5,000 payment is excluded from her income in the current year,but she will pay tax on the $5,000 as she receives it.
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Accepted Answer

Both statements are correct because employer contributions to a qualified pension plan are not considered taxable income to the employee in the year the contributions are made. Instead, the employee will be taxed on these amounts as they receive distributions from the plan in the future.

Question 16

Denise receives an academic scholarship to Pollytech College.Under the scholarship agreement,she receives tuition ($1,500),books ($400),and room and board ($5,000).How much of the scholarship is included in Denise's gross income?

Accepted Answer

The answer of Denise receives an academic scholarship to Pollytech...

Question 17

Ramon is a waiter at Trucker's Delight Restaurant.He eats two meals each day at the restaurant at no charge.One is eaten just before he begins work;the other is eaten during working hours.The value of meals consumed by Ramon during the current year is $2,500,evenly distributed between the two meals.What are the tax effects of this situation?
I.Ramon will have to recognize $1,250 of income.
II.None are taxable because the meals are for the convenience of the employer.
III.If Ramon has the option of receiving his choice of either a cash payment or the two meals,the $2,500 is taxable.
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Accepted Answer

Statement I is correct because the value of the meals consumed by Ramon is considered as a fringe benefit or compensation, which is taxable income.
Statement II is incorrect because meals provided to an employee at a place of employment for the convenience of the employer are generally only partially taxable, however, in this case, the meals are considered as a form of compensation.
Statement III is correct because if Ramon has the option of receiving cash payment, the value of the meals he received will be taxable income.

Question 18

Ramona's employer pays 100% of the cost of all employees' group-term life insurance.The life insurance plan is not discriminatory.Ramona's annual salary is $100,000.What is the maximum amount of coverage that can be provided tax-free?

Accepted Answer

The maximum amount of coverage that can be provided tax-free is $50,000 under IRS regulations. Any coverage above that amount is considered taxable income. Therefore, option D is the best choice.

Question 19

Harry is a CPA employed as a manager by a regional accounting firm.The firm pays Harry's dues to professional organizations and $175 monthly for his personal parking place at the office.Only managers and partners receive these benefits.
I.Both payments are working condition fringe benefits.
II.These benefits are excludable for Harry even though they discriminate in favor of higher-paid employees.
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Accepted Answer

Statement I is correct because both payments are considered working condition fringe benefits since they are necessary for Harry to perform his duties for the firm. 
Statement II is also correct because there is an exception to the general rule that discriminatory benefits are taxable. Working condition fringe benefits are not subject to the general rule, even if they discriminate in favor of higher-paid employees.

Question 20

Fanny's employer has a qualified pension plan.The employer makes all payments into the plan;employees do not contribute to the plan.During the current year,the employer pays $4,000 into the plan on Fanny's behalf.The plan also earns $3,000 during the year on the balance in Fanny's retirement account.Which of the following statements is true?
I.Fanny is not taxed on the $4,000 in the current year.
II.Fanny is not taxed on the $3,000 in the current year.
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Accepted Answer

Both statements are correct. Employer contributions to qualified pension plans are not included in employees' taxable income. Additionally, the earnings on the balance in Fanny's retirement account are not taxed until she withdraws the funds from the plan.

Quiz 4: Income Exclusions

Sylvia is a United States citizen who has established legal residency in Japan.She has been teaching school there for several years.Her annual salary is $60,000.Anne's tax situation is

Sigma Company provides its employees with $25,000 of group-term life insurance.How much is included in gross income because of the life insurance?

Steve is an employee of Giant Valley Auto City.The company allows all employees to receive a 35% discount on service to their personal vehicles.Steve paid $975 for work done on his truck that normally costs $1,500.How much gross income must Steve recognize because of the discount?

David,an employee of Lima Corporation,is a U.S.citizen and the regional sales manager for South America.His office is in Miami and he spends nine months each year on business in South America.Which of the following statements about the treatment of his income from Lima Corporation is correct?

Denise receives an academic scholarship to Pollytech College.Under the scholarship agreement,she receives tuition ($1,500) ,books ($400) ,and room and board ($5,000) .How much of the scholarship is included in Denise's gross income?

Ramona's employer pays 100% of the cost of all employees' group-term life insurance.The life insurance plan is not discriminatory.Ramona's annual salary is $100,000.What is the maximum amount of coverage that can be provided tax-free?