Question 1

Susan purchased an annuity for $200,000. She is to receive $18,000 each year and her life expectancy is 13 years. If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.

Accepted Answer

If Susan collects under the annuity for more than her life expectancy (i.e. 13 years), any payments received after that point are fully taxable as income. So, the entire $18,000 received in the 14th year would need to be included in her gross income.

Question 2

Maroon Corporation expects the employees' income tax rates to increase next year. The employees use the cash method. The company presently pays on the last day of each month. The company is considering changing its policy so that the December salaries will be paid on the first day of the following year. What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2018?

Accepted Answer

Under the cash method, income is recognized when it is actually or constructively received. If the salary is paid in January 2019, the employee will recognize the income in 2019.

Question 3

Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest.

Accepted Answer

Freddy must recognize the interest income earned on the certificate of deposit for the tax year in which it is earned. The certificate was purchased on July 1, 2018, and matures on June 30, 2020, which means it is held for one-half of the tax year in 2018 and one-half in 2020. Therefore, Freddy must recognize half of the interest income earned in 2018, which is $300 ($1,218 × 0.5) and the other half, $918 ($1,218 × 0.5), must be recognized in 2020.

Question 4

For purposes of determining gross income, which of the following is true?

Accepted Answer

According to the tax law, the taxpayer must recognize income from all sources, including finding a wallet full of money. The fact that someone may eventually ask for the return of the money does not change the fact that the taxpayer had control over it and could have used it for personal benefit. The other options are false as well. The mechanic must recognize the income when earned, regardless of the outcome of any subsequent suit. Embezzlement proceeds are considered income to the embezzler, regardless of whether or not they have an obligation to repay the owner.

Question 5

The annual increase in the cash surrender value of a life insurance policy:

Accepted Answer

The annual increase in cash surrender value of a life insurance policy is not included in gross income each year due to the substantial restrictions on gaining access to the policy’s value. While the cash surrender value can be borrowed against or withdrawn, doing so can result in a reduction in death benefits and may also result in tax consequences. However, if the policy is surrendered or cancelled, any amount received in excess of the premiums paid is subject to taxation.

Question 6

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

Accepted Answer

According to the IRS, if a person has other income of $25,000 to $34,000 ($32,000 to $44,000 for married couples filing jointly), then 50% of their Social Security benefits received are subject to income tax. If the person has other income above $34,000 ($44,000 for married couples filing jointly), then up to 85% of their Social Security benefits received are subject to income tax, but 15% are excluded from gross income.

Question 7

Terri purchased an annuity for $100,000. She was to receive $10,000 per year and her life expectancy was 20 years.
She died after receiving 8 payments. Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Accepted Answer

Terri received a total of $80,000 ($10,000 x 8 years) before her death, which means she did not receive the full $100,000. Therefore, her final return should reflect a loss of some amount less than $20,000.

Question 8

Lois, who is single, received $9,000 of Social Security benefits. She also received $25,000 from dividends, interest, and her employer's pension plan. If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by more than $1,000.

Accepted Answer

Lois's taxable income before the capital asset sale is $34,000 ($9,000 Social Security + $25,000 dividends/interest/pension). After the sale, her taxable income will be reduced by the $1,000 recognized loss, bringing it down to $33,000. Therefore, her taxable income will decrease by more than $1,000.

Question 9

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Accepted Answer

The IRS allows the first $50,000 of employer-provided group term life insurance to be excluded from gross income. Any coverage over $50,000 is considered taxable income. Therefore, if the insurance coverage is $100,000 (twice the salary), the excess $50,000 is taxable.

Question 10

The tax concept and economic concept of income are in agreement on which of the following:

Accepted Answer

Both the tax concept and economic concept of income agree that rent income should be recognized in the year in which it is received, regardless of when it was earned. Therefore, rent income for 2019 collected in 2018 is income for 2018. However, the fair rental value of an owner-occupied home and the increase in value of assets held for the entire year may not be included in income under the economic concept of income, while they may be included under the tax concept of income. Therefore, choices A and B are not in agreement between the two concepts.

Question 11

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

Accepted Answer

According to the IRS, if the gift loan is less than $100,000 and the donee (recipient) has a net investment income of over $1,000, the imputed interest rules will apply. This means that the IRS will assume the loan was made with interest, and taxes may need to be paid on the interest income that was not actually received.

Question 12

The annual increase in the cash surrender value of a life insurance policy:

Accepted Answer

The annual increase in the cash surrender value of a life insurance policy is not included in gross income because the policy must be surrendered to receive the cash surrender value.

Question 13

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization, then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

Accepted Answer

The exclusion from the winner's gross income for transferring a prize to a qualified government unit or nonprofit organization does not depend on the prize amount being less than 30% of the winner's AGI. The tax treatment of such a transfer is based on specific IRS rules and charitable contribution guidelines, not a percentage of the winner's AGI.

Question 14

Norma's income for 2018 is $27,000 from part-time work and $9,000 of Social Security benefits. Norma is not married. A portion of her Social Security benefits must be included in her gross income.

Accepted Answer

Social Security benefits must be included in gross income if Norma's combined income (defined as her adjusted gross income + nontaxable interest + half of her Social Security benefits) exceeds certain thresholds. For 2018, the threshold is $25,000 for individuals who are not married. Since Norma's combined income is $27,000 + 0.5($9,000) = $31,500, a portion of her Social Security benefits must be included in her gross income.

Question 15

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Accepted Answer

Under the original issue discount (OID) rules, the interest income recognized increases each year because it is calculated on a compounding basis. This means that in a three-year certificate of deposit, the interest income recognized in the third year will be greater than in the first year.

Question 16

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

Accepted Answer

The $2,000 payment is not considered income to Sue because it is not for a specific service but for the right to use her property in the future. However, Sue must reduce her cost basis in the property by $2,000 because she has received compensation for the use of her property. This will impact the calculation of any potential gain or loss in the future if she sells the property.

Question 17

In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

Accepted Answer

Even if no interest is charged and collected, the lender is still deemed to have received interest income under the imputed interest rules for a below-market gift loan.

Question 18

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill. Detroit had created its goodwill through providing high-quality services to its customers. Thus, no basis for the goodwill appeared on Detroit's balance sheet. The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

Accepted Answer

The answer of Detroit Corporation sued Chicago Corporation for intentional...

Question 19

Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

Accepted Answer

If the employer accepts Turner's counteroffer, he will receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years. Therefore, he will recognize $40,000 income each month for the year and $180,000 in year 5. Choice A is incorrect because $660,000 is not a valid amount of income that Turner will receive. Choice B is incorrect because the $180,000 bonus in year 5 is not part of the monthly salary calculation. Choice D is incorrect because there is no imputed interest income to be recognized since the bonus payment is not a loan or investment.

Question 20

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tom to have a positive cash flow from working and hiring the painter:

Accepted Answer

To have a positive cash flow, Tom must earn more than the cost of hiring the painter after taxes. In the 24% tax bracket, if Tom earns X, he takes home 76% of X (100% - 24%). To cover the $120 for the painter, the equation is 0.76X = $120. Solving for X gives X = $120 / 0.76 = $157.89. Therefore, Tom must earn more than $157.89, and the closest option that reflects this is earning more than $158 in the 24% marginal tax bracket.

Quiz 4: Gross Income: Concepts and Inclusions

Susan purchased an annuity for $200,000. She is to receive $18,000 each year and her life expectancy is 13 years. If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest.

For purposes of determining gross income, which of the following is true?

The annual increase in the cash surrender value of a life insurance policy:

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

Terri purchased an annuity for $100,000. She was to receive $10,000 per year and her life expectancy was 20 years. She died after receiving 8 payments. Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Lois, who is single, received $9,000 of Social Security benefits. She also received $25,000 from dividends, interest, and her employer's pension plan. If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by more than $1,000.

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

The tax concept and economic concept of income are in agreement on which of the following:

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

The annual increase in the cash surrender value of a life insurance policy:

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization, then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

Norma's income for 2018 is $27,000 from part-time work and $9,000 of Social Security benefits. Norma is not married. A portion of her Social Security benefits must be included in her gross income.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tom to have a positive cash flow from working and hiring the painter: