Question 1

Robert received a tax refund in 2016 from his state,which he deducted on his prior year's return as an itemized deduction.He must report the refund in income in 2016,subject to certain computations to determine the amount that is taxable.

Accepted Answer

When you receive a tax refund, you must report it as income in the year you receive it. However, the amount that is taxable depends on whether or not you deducted the state taxes in the prior year's return and the amount of the refund.

Question 2

A taxpayer can exclude from gross income any interest earned on bonds issued by any state,any possession of the United States,any political subdivision of either of the foregoing,or of the District of Columbia as long as these bonds are not issued for private activities.

Accepted Answer

This statement is true. Interest earned on bonds issued by any state, possession of the United States, political subdivision, or the District of Columbia is generally tax-exempt at the federal level if the bond proceeds are used for public purposes. However, there are some exceptions and limitations, so it's important to consult with a tax professional or financial advisor for specific guidance.

Question 3

Almost all individuals use the cash receipts and disbursements method of accounting.

Accepted Answer

True

Question 4

A stock dividend in which a shareholder has the option to receive cash is not taxable.

Accepted Answer

Whether or not a stock dividend is taxable depends on several factors, including whether the shareholder chooses cash or additional shares, and the amount of the dividend. The cash option may be taxable as ordinary income, while the additional shares may create a taxable event when sold. It is recommended that shareholders consult with a tax professional for guidance on their specific situation.

Question 5

For tax purposes,income is recognized if the transaction meets three conditions: economic benefit,occurrence and completion,and not exempt from tax.

Accepted Answer

To be recognized as income for tax purposes, a transaction must meet the conditions of economic benefit, occurrence and completion, and not be exempt from tax.

Question 6

Income can only be realized in money or services.

Accepted Answer

Income can be realized in various forms including money, services, and goods.

Question 7

The taxability of social security benefits depends on the "provisional income" and filing status of the taxpayer.

Accepted Answer

The taxability of social security benefits is determined by the taxpayer's provisional income and filing status.

Question 8

Jury duty pay is taxable income,but it can be deducted from gross income if the amount must be given to the employer.

Accepted Answer

Jury duty pay is taxable income, but it can be deducted from gross income if the juror's employer requires them to give the amount received for jury duty to the employer. This is known as an "assignment of jury pay" and is allowed in some states. However, it is important to note that the juror must report the full amount received as income on their tax return, and then claim the deduction for the amount given to the employer.

Question 9

Lisa performed bookkeeping services for Donald charging him $650.Donald agreed that he would pay Lisa's credit card bill for the same amount.Lisa has received an economic benefit and must report $650 in income on her tax return.

Accepted Answer

Lisa received an economic benefit of $650, which must be reported as income on her tax return. The fact that Donald agreed to pay her credit card bill for the same amount does not change the fact that Lisa received income for her bookkeeping services.

Question 10

Interest on state bonds is tax-exempt if the bonds were issued for private activities,such as convention centers,industrial parks,or stadiums.

Accepted Answer

Interest on state bonds issued for private activities, such as convention centers, industrial parks, or stadiums, is generally not tax-exempt unless the projects serve a significant public purpose and meet specific criteria set by federal tax laws.

Question 11

For most individuals,interest income comes from interest-earning deposits at banks,savings and loans,or credit unions.

Accepted Answer

Interest income is commonly earned from interest-bearing bank accounts, such as savings accounts or certificates of deposit (CDs), as well as from bonds or other fixed-income securities.

Question 12

If an individual owns Series EE bonds,this person must report interest income,i.e.,the increase in bond value on an annual basis.

Accepted Answer

Interest on Series EE bonds is typically reported when the bonds are redeemed or reach maturity, not on an annual basis, unless the owner elects to report the interest annually.

Question 13

A taxpayer must file a Schedule B Forms 1040A or 1040)if he or she has received taxable interest of $1,550.

Accepted Answer

According to the IRS, a taxpayer must file a Schedule B Forms 1040A or 1040 if they have received taxable interest of $1,500 or more. Therefore, if a taxpayer has received taxable interest of $1,550, they would need to file a Schedule B.

Question 14

Jeff owns 250 shares of Coca Cola common stock that have increased in value by $15 each.He must report the increase in income because a transaction has occurred.

Accepted Answer

The increase in value of Jeff's Coca Cola shares is considered an unrealized gain, which does not require reporting as income since no actual transaction (such as selling the shares) has occurred.

Question 15

If Lucas,an accountant,agrees to provide tax services to a neighbor in exchange for the neighbor agreeing to fix his pool,Lucas but not his neighbor will have to report income on this transaction at fair market value.

Accepted Answer

Both Lucas and his neighbor must report the fair market value of the services they receive as income on their tax returns, as this is considered bartering, which is taxable for both parties involved.

Question 16

If the process of a transaction begins and ends with an economic benefit for the taxpayer,he or she must report it in income even though the income is specifically exempt from tax.

Accepted Answer

Income that is specifically exempt from tax by law does not need to be reported as income on a taxpayer's tax return.

Question 17

Dividends are generally taxed at capital gains rates if they are made from the corporation's current earnings and profits or accumulated earnings and profits.

Accepted Answer

Dividends made from a corporation's current or accumulated earnings and profits are generally taxed at capital gains rates. However, if they are made from other sources such as liquidation or return of capital, they may be taxed at different rates.

Question 18

Constructive receipt means the income is available to or in the control of the taxpayer regardless of whether the taxpayer chooses to utilize the income.

Accepted Answer

Constructive receipt means that the income is considered available to the taxpayer, even if they do not physically take possession of it. This is important for tax purposes because the IRS can tax income that is constructively received, even if the taxpayer does not actually receive the cash or other assets.

Question 19

There are some instances where a cash-basis taxpayer can report income as though he or she is an accrual basis taxpayer.

Accepted Answer

Cash-basis taxpayers can elect to report income as accrual basis for certain types of income, such as qualifying long-term contracts or inventories.

Question 20

All federal and state unemployment compensation benefits are not subject to income tax.

Accepted Answer

While federal unemployment compensation benefits are not subject to Social Security and Medicare taxes, they are subject to federal income tax. State unemployment compensation benefits may also be subject to state income tax.

Quiz 3: Gross Income: Inclusions and Exclusions