Question 1

George and Erin divorced in 2019, and George is required to pay Erin $20,000 of alimony each year. George earns $75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.

Accepted Answer

The answer of George and Erin divorced in 2019, and...

Question 2

Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000. Fred later sells the stock for $100,000. Fred's recognized gain from the sale of the stock is $5,000.

Accepted Answer

Fred's basis in the stock is the same as Paula's basis, which is $75,000. When he sells the stock for $100,000, his recognized gain would be $25,000.

Question 3

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest. In December, Tom collected $500 interest from the bond. Tom's interest income from the bond for the year is $500.

Accepted Answer

Tom's interest income for the year is $400 because he can deduct the $100 accrued interest he paid when purchasing the bond from the $500 interest he received.

Question 4

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2018 is $90,000. Only $40,000 was distributed to him in January 2018, and this was his share of the 2017 partnership profits. None of the 2018 profits were distributed. Mark's gross income from the partnership for 2018 is $40,000.

Accepted Answer

As a cash basis taxpayer, Mark only recognizes income when it is received. Therefore, only the $40,000 that was distributed to him in January 2018, which was his share of the 2017 partnership profits, should be included in his gross income for 2018. The remaining $50,000 of his share of 2018 partnership profits will not be recognized until it is actually distributed to him.

Question 5

The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.

Accepted Answer

Bryan's gross income from the partnership is based on his share of the profits, not the amount withdrawn. Therefore, his gross income is $70,000 (50% of $140,000).

Question 6

Jake is the sole shareholder of an S corporation that earned $60,000 in 2018. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2018. Jake is required to recognize $60,000 of income from the S corporation in 2018.

Accepted Answer

As the sole shareholder of the S corporation, Jake is required to report his share of the corporation's income on his personal tax return, regardless of whether the income was actually distributed to him as cash. Therefore, Jake must recognize $60,000 of income from the S corporation on his personal tax return for 2018, even though he only received $15,000 in cash distributions.

Question 7

After the divorce in 2015, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child. Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21. During the year, Jeff paid the $18,000 required under the divorce agreement. Darlene must include the $12,000 in gross income.

Accepted Answer

Jeff paid the full amount required under the divorce agreement, which was $18,000. However, if the child dies or reaches age 21, his payments will be reduced to $12,000 per year. Darlene must include this reduced amount in her gross income as it is considered taxable alimony.

Question 8

Samantha and her son, Brent, are cash basis taxpayers. Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000. On the date of the gift, March 31, 2018, the accrued interest on the bond was $100. On December 31, 2018, Brent collected $400 interest on the bond. Brent must include in gross income the $300 interest earned after the date of the gift.

Accepted Answer

As cash basis taxpayers, Samantha and Brent only report income when it is actually received. Since Brent received $400 interest on the bond after the date of the gift, he must include that amount in his gross income. However, the $100 accrued interest that was already earned on the bond at the time of the gift belongs to Samantha and is not included in Brent's gross income. Therefore, Brent must include the $300 interest earned after the date of the gift in his gross income.

Question 9

Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement entered into in 2016, Emily paid Jacob cash for his interest in the personal residence. This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Accepted Answer

The answer of Jacob and Emily were co-owners of a...

Question 10

In all community property states, the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Accepted Answer

The answer of In all community property states, the income...

Question 11

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2018, Linda made several deliveries and collected $400 from customers. However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2019. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2019.

Accepted Answer

The income should be recognized when it is earned, which is when the deliveries were made on December 31, 2018, not when the cash is received in 2019.

Question 12

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. The couple divorced in 2016. Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

Accepted Answer

According to the IRS, alimony payments are taxable to the recipient and deductible by the payer. Therefore, Alice would include the $75,000 in her income and pay taxes on it, while Ted would deduct the $75,000 from his income when calculating his taxes.

Question 13

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2018, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2019, before Rhonda filed her 2018 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2019. Things were going well in 2019 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2018 earnings. The partnership's income for 2019 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2018 and $18,000 in 2019.

Accepted Answer

Rhonda must recognize her share of the partnership's income in the year it is earned, not when it is distributed. Therefore, she should recognize $45,000 (30% of $150,000) in 2018 and $18,000 (30% of $60,000) in 2019.

Question 14

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2018 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2018.

Accepted Answer

Alvin must recognize the entire $200,000 as income from the S corporation in 2018, not just the $75,000 distributed to him. S corporation income is passed through to shareholders regardless of distributions.

Question 15

April, a calendar year taxpayer, is a 40% partner in Pale Partnership, whose fiscal year ends on September 30th. For the fiscal year ending September 30, 2018, the partnership had $400,000 net income and for fiscal year ending September 30, 2019, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2018 is $160,000 ($400,000 × 40%).

Accepted Answer

April's share of the partnership's net income for fiscal year ending September 30, 2018 is $160,000 ($400,000 × 40%). Since April withdrew $100,000 in December 2018, her gross income from the partnership for 2018 is $60,000 ($160,000 - $100,000).

Question 16

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Accepted Answer

This is true. S corporations are pass-through entities, where the income and losses of the business are passed through to the individual shareholders. Even if the S corporation does not distribute the income to the shareholder, the shareholder must still pay tax on their share of the income.

Question 17

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Accepted Answer

Alimony recapture rule applies to situations where the alimony payments decrease significantly in the third year or later years. However, it also applies to situations where there is a substantial decrease in the amount of the alimony payments in the second year, but only if the decrease is attributable to the front-loading of alimony payments in the first year. This rule is intended to prevent taxpayers from using front-loaded alimony payments as a way to avoid paying taxes on property settlements.

Question 18

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Accepted Answer

The answer of When stock is sold after the date...

Question 19

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is not required to impute interest income.

Accepted Answer

The answer of Father made an interest-free loan of $25,000...

Question 20

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Accepted Answer

The alimony recapture rules require the recipient of alimony to decrease their AGI by a portion of the amount included in gross income as alimony in a prior year or years. This is to prevent a front-loading of alimony payments that are disguised as property settlements.

Quiz 4: Gross Income: Concepts and Inclusions