Question 1

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

The statement is false. The exclusion applies to scholarships used to pay for tuition, fees, books, and supplies required for enrollment or attendance at an eligible educational institution, which includes both college and high school. Therefore, Agnes can exclude the $5,000 scholarship from her taxable income.

Question 2

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 statement is true. Brooke received $11,000 from groups of 7 or more customers, which was the 15% charge for her services. She also received $7,000 in voluntary tips from all other customers. If she had only received the customary 15% rate on all customers, her voluntary tips would have been $6,000. Therefore, she must include the total amount of $18,000 in gross income.

Question 3

George and Erin are divorced, 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

According to the IRS, alimony payments made under a divorce or separation agreement are considered taxable income for the recipient and must be reported on their tax return. Therefore, Erin is required to include the $20,000 of alimony payments in her gross income.

Question 4

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

Graduate teaching assistantship payments are typically considered taxable income and must be included in the recipient's gross income.

Question 5

After the divorce, 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

Darlene must include the $12,000 in gross income because it is a reduction in Jeff's obligation and is treated as taxable alimony.

Question 6

A taxpayer's earned income credit is dependent on the number of his or her qualifying children.

Accepted Answer

The more qualifying children a taxpayer has, the greater their earned income credit will be.

Question 7

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

Workers' compensation benefits are not included in gross income, regardless of whether the employer continues to pay the employee while they are recovering from their injury. These benefits are specifically excluded from gross income under the U.S. tax code.

Question 8

In December 2016, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2017. However, she did not use the funds to pay the tuition until January 2017. Emily can exclude the $2,500 from her gross income in 2016.

Accepted Answer

The answer of In December 2016, Emily, a cash basis...

Question 9

An individual generally may claim a credit for adoption expenses in the year in which the expenses are paid.

Accepted Answer

The answer of An individual generally may claim a credit...

Question 10

In 2016, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by Ramon's negligence. In 2017, 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 2016 tax return (the amount in excess of 10% of adjusted gross income). As a result of the above, Theresa's 2017 gross income is increased by $56,000.

Accepted Answer

The amount collected for loss of income, pain and suffering, and punitive damages are not taxable. However, the $6,000 collected for medical expenses which were previously deducted on her tax return are taxable and this amount is included in her gross income, resulting in an increase of $56,000.

Question 11

A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.

Accepted Answer

The answer of A phaseout of certain itemized deductions applies...

Question 12

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

Accepted Answer

If a scholarship does not exceed the qualified education expenses of the recipient (such as tuition, fees, books, and supplies), it is not included in gross income and does not have to be reported on tax return.

Question 13

The earned income credit is available only if the taxpayer has at least one qualifying child in the household.

Accepted Answer

The earned income credit is available for taxpayers with or without qualifying children. However, the amount of the credit is generally higher for taxpayers with qualifying children.

Question 14

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 answer of John told his nephew, Steve, "if you...

Question 15

Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement, 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 16

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 17

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

According to the IRS guidelines, scholarships used for qualified tuition and related expenses are tax-free. Therefore, Ashley does not need to include the $6,000 tuition and $2,000 book and lab supplies in her gross income. However, the $9,000 used for room and board is considered taxable income.

Question 18

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. 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

This statement is true. In the case of alimony payments, the person receiving the alimony (Alice in this case) must pay taxes on the income received, while the person making the alimony payments (Ted in this case) can deduct the payments from their taxable income.

Question 19

The child tax credit is based on the number of the taxpayer's qualifying children under age 17.

Accepted Answer

The child tax credit is indeed based on the number of the taxpayer's qualifying children under age 17.

Question 20

Gambling losses may be deducted to the extent of the taxpayer's gambling winnings. Such losses are subject to the 2%-of-AGI floor for miscellaneous itemized deductions.

Accepted Answer

The answer of Gambling losses may be deducted to the...

Quiz 10: Income, Deductions, and Credits