Question 1

Ashley received a scholarship to be used as follows: tuition $6,000;room and board $9,000;and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.

Accepted Answer

The room and board do not qualify for the exclusion under § 117.The amount received for tuition,books,and supplies is excludible.

Question 2

Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness.The premiums for Meg's coverage were $1,800.Meg was absent from work for two months as a result of a kidney infection.Meg's employer's insurance company paid Meg's regular salary of $8,000 while she was away from work.Meg also collected $2,000 on a wage continuation policy she had purchased.Meg must include $11,800 in her gross income.

Accepted Answer

The insurance premiums of $1,800 paid by the employer and the $2,000 Meg collected on the wage continuation policy she purchased are excluded from gross income.The sick pay benefits received of $8,000 must be included in Meg's gross income.

Question 3

For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

Accepted Answer

$1,000 of tax­exempt income is equivalent to $1,538 [($1,000)/(1 - .35)] of income that is subject to taxation.Income before tax of $1,538 yields $1,000 [$1,538 × (1 - .35)] of after­tax income.

Question 4

In December 2014,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2015.However,she did not use the funds to pay the tuition until January 2015.Emily can exclude the $2,500 from her gross income in 2014.

Accepted Answer

Emily can exclude the $2,500 from her 2014 gross income,as the $2,500 is used to pay tuition for the Spring semester of 2015.

Question 5

If an employer pays for the employee's long­term care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.

Accepted Answer

The premiums may be excluded,but only the benefits received in excess of a set daily amount are included in gross income.

Question 6

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000)in gross income.

Accepted Answer

The exclusion for terminal illness applies to policies on the terminally ill insured person.Gary did not have the terminal illness.

Question 7

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

Accepted Answer

The $2,500 interest on United States Government bonds must be included in gross income.The life insurance proceeds of $45,000 are excluded from gross income.

Question 8

John told his nephew,Steve,"if you maintain my house when I cannot,I will leave the house to you when I die." Steve maintained the house and when John died Steve inherited the house.The value of the residence can be excluded from Steve's gross income as an inheritance.

Accepted Answer

The house was received as a payment for services,rather than as a bequest.

Question 9

When Betty was diagnosed as having a terminal illness,she sold her life insurance policy to Insurance Purchase,Inc. ,a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000 and Insurance Purchase,Inc. ,became the beneficiary.She had paid total premiums of $19,000.Betty died 8 months after the sale.Insurance Purchase,Inc. ,collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase,Inc. ,is required to recognize a $14,000 gain from the insurance policy.

Accepted Answer

Betty's gain is excluded from gross income because she was suffering from a terminal illness when she sold the policy.However,Insurance Purchase,Inc. ,purchased the policy and,therefore,is not eligible for the life insurance beneficiary's exclusion.Insurance Purchase,Inc. ,must report a gain of $14,000 ($50,000 - $32,000 - $4,000)because it purchased the policy.

Question 10

If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.

Accepted Answer

Scholarships are excludible under the scholarship provision (§ 117)rather than under the gift exclusion provision (§ 102).

Question 11

Brooke works part-time as a waitress in a restaurant.For groups of 7 or more customers,the customer is charged 15% of the bill for Brooke's services.For parties of less than 7,the tips are voluntary.Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers.Using the customary 15% rate,her voluntary tips would have been only $6,000.Brooke must include $18,000 ($11,000 + $7,000)in gross income.

Accepted Answer

The tips are compensation for income tax purposes because they are received for her services,rather than as a result of the customer's "detached,disinterested generosity" in her gross income.

Question 12

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.

Accepted Answer

Agnes is a degree candidate at an educational institution.There is no requirement that the educational institution must be a college.

Question 13

Sam was unemployed for the first two months of 2014.During that time,he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September,he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000
+ $14,000).

Accepted Answer

Sam must include in gross income $4,000 of unemployment benefits and his earned wages of $14,000.

Question 14

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement.The payments must be included in her gross income.

Accepted Answer

Such payments generally are for services rendered and therefore are not excluded from Betty's gross income as a scholarship.

Question 15

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

Accepted Answer

All of the medical insurance premiums are excluded from Sarah's gross income.The exclusion applies to retired former employees as well as current employees.

Question 16

In 2014,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2015,Theresa collected from his insurance company.She received $15,000 for loss of income,$10,000 for pain and suffering,$50,000 for punitive damages,and $6,000 for medical expenses which she had deducted on her 2014 tax return (the amount in excess of 10% of adjusted gross income).As a result of the above,Theresa's 2015 gross income is increased by $56,000.

Accepted Answer

The punitive damages of $50,000 must be included in Theresa's gross income.Also,the medical expenses of $6,000 deducted in 2014 must be included in 2015 gross income under the tax benefit rule.

Question 17

Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.

Accepted Answer

Benefits received under the workers' compensation laws are excluded from a recipient's gross income.

Question 18

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

Accepted Answer

For an HSA,the employer's contributions,earnings on the account,and withdrawals to pay medical expenses can all be excluded from Melody's gross income.

Question 19

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim,the insurance company paid Zack $53,000,the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his gross income.

Accepted Answer

The interest income of $3,000 is included in gross income because it represents interest income.The life insurance proceeds of $50,000 are excludible from gross income under § 101(a).

Question 20

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees,and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

Accepted Answer

The $6,000 accrued salary Ed had earned must be included in his wife's gross income.The life insurance proceeds of $40,000 are excluded under § 101(a).

Quiz 5: Gross Income: Exclusions

Ashley received a scholarship to be used as follows: tuition $6,000;room and board $9,000;and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.

For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

In December 2014,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2015.However,she did not use the funds to pay the tuition until January 2015.Emily can exclude the $2,500 from her gross income in 2014.

If an employer pays for the employee's longterm care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000)in gross income.

John told his nephew,Steve,"if you maintain my house when I cannot,I will leave the house to you when I die." Steve maintained the house and when John died Steve inherited the house.The value of the residence can be excluded from Steve's gross income as an inheritance.

If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement.The payments must be included in her gross income.

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.

Quiz 5: Gross Income: Exclusions

Ashley received a scholarship to be used as follows: tuition $6,000;room and board $9,000;and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.

For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

In December 2014,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2015.However,she did not use the funds to pay the tuition until January 2015.Emily can exclude the $2,500 from her gross income in 2014.

If an employer pays for the employee's long­term care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000)in gross income.

John told his nephew,Steve,"if you maintain my house when I cannot,I will leave the house to you when I die." Steve maintained the house and when John died Steve inherited the house.The value of the residence can be excluded from Steve's gross income as an inheritance.

If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement.The payments must be included in her gross income.

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.

If an employer pays for the employee's longterm care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.