Question 1

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 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

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

Regardless of the form in which a dividend is received (stock, cash, property), it is generally considered taxable income and must be reported as such on the recipient's tax return. Choosing to receive the dividend in stock instead of cash does not exempt it from being included in income.

Question 4

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 5

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 amount received as compensation for personal physical injuries or sickness is excludable from gross income. Pain and suffering, emotional distress, and lost wages are all examples of compensation for personal physical injuries or sickness. Therefore, Melvin may exclude the entire $15,000 from his gross income.

Question 6

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 taxable income from the bond interest is $1,000. Since they are in the 28% tax bracket, their tax liability related to the bond interest is $1,000 x 0.28 = $280. By gifting the interest income to Wally, Ward and June no longer have to pay taxes on that income, reducing their tax liability by $280. The gift to Wally has no tax implications for him, as his income is below the taxable threshold.

Question 7

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 regulations, if a tenant leaves leasehold improvements behind as collateral for unpaid rent, the landlord must include the fair market value of those improvements in their income to the extent of the remaining rent owed.

Question 8

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, canceled debt is generally included in a taxpayer's gross income unless the taxpayer qualifies for an exclusion or exception. In this case, since Patrick's debt was forgiven by the bank, he will need to report the $5,000 as income on his tax return.

Question 9

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

Accepted Answer

Health Savings Accounts (HSAs) are available to anyone who is covered by a High Deductible Health Plan (HDHP), regardless of whether they are self-employed or work for a small business. However, not all employers offer HDHPs or HSAs as an option in their employee benefits package.

Question 10

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 11

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 tray is considered a gift because it is from a detached and disinterested generosity. Although Ally rendered services, the tray was not compensation for those services but rather a token of appreciation. Therefore, the value of the tray is not included in gross income.

Question 12

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

Accepted Answer

Municipal bond interest is exempt from federal income tax and typically state and local taxes as well. This includes Guam Water Authority bonds.

Question 13

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, the value of the tray would be considered taxable income because it was received as a result of services rendered. However, there is an exception for gifts made from detached and disinterested generosity. Since the tray was purchased by her employees as a recognition of her service, it would be considered a gift and not taxable income. Therefore, statement II is correct and statement I is incorrect.

Question 14

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 correct answer is B because the net tax savings for the family unit is $130. The parents are in the 28% tax bracket, so they would have paid $280 in taxes on the $1,000 of interest income. The son is in the 15% tax bracket, so he will pay $150 in taxes on the interest income. The net tax savings for the family unit is $280 - $150 = $130.

Question 15

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 compensation received for services rendered, as Terri helped Sonny change a tire. It is not a gift from detached and disinterested generosity.

Question 16

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.

Question 17

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 18

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 19

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

Forgiveness of debt is generally considered income, but in this case, Rick forgave Ryan's debt as an act of kindness and did not receive anything in return. Therefore, Ryan may exclude the $1,000 from income under the gift exclusion rules.

Question 20

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

Wally receives $1,000 in interest from the bond, which is taxable at his 10% tax bracket. The face value of the bond itself is not considered taxable income.

Quiz 4: Income Exclusions

On April 1,Sally is given $20,000 worth of City of Boise bonds for her 18th 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?