Question 1

Disability benefits are generally taxable to the individual receiving the amounts.

Accepted Answer

False

Question 2

Child support payments are deductible by the spouse making the payments.

Accepted Answer

Child support payments are not deductible by the spouse making the payments. They are considered a personal expense and are not tax-deductible.

Question 3

Interest income received by a cash basis taxpayer is generally reported in the tax year it is received.

Accepted Answer

This is because cash basis taxpayers recognize income when it is actually received, rather than when it is earned or billed. So, when interest income is received, it is reported in the tax year in which it was received.

Question 4

The receipt of an inheritance is excluded from the taxable income of the recipients.

Accepted Answer

Inheritances are not considered as taxable income and are therefore excluded from income tax. However, any income earned from the inherited property after the date of death of the decedent is taxable. Additionally, if the inherited property appreciates in value, then any gains realized upon its sale may also be subject to capital gains tax.

Question 5

A gift received from a financial institution for opening a bank account is not taxable income to the recipient.

Accepted Answer

The value of a gift or bonus received for opening a bank account is considered taxable income by the IRS and must be reported as interest income.

Question 6

Noncash items received as income must be included in income at their fair market value.

Accepted Answer

Noncash items received as income, such as a gift or prize, are taxable and must be included in income at their fair market value.

Question 7

If an annuitant, whose annuity starting date was January 1, 2001, dies before recovering his or her investment in the annuity, any unrecovered investment is recognized as a loss on the annuitant's tax return for the year of death.

Accepted Answer

This statement is true. If the annuitant dies before recovering their investment in the annuity, any unrecovered investment is recognized as a loss on their tax return for the year of death. This is because the unrecovered investment is considered to be a return of the annuitant's previously taxed contributions to the annuity. Therefore, it is treated as a loss for tax purposes.

Question 8

Under a divorce agreement executed in 2014, periodic payments of either cash or property must be made at regular intervals to be deductible as alimony.

Accepted Answer

Under the tax law changes made by the Tax Cuts and Jobs Act, for divorce agreements executed after December 31, 2018, alimony payments are no longer deductible by the payer nor taxable to the recipient. However, for agreements executed before this date, cash payments (not property) that meet certain criteria can be deductible as alimony.

Question 9

Taxpayers must report interest income on Series EE savings bonds as the interest accrues.

Accepted Answer

Taxpayers have the option to report interest income on Series EE savings bonds either annually as it accrues or all at once in the year the bonds are cashed or reach final maturity, whichever comes first.

Question 10

Payments made to a qualified retirement plan by an employer are considered part of the employee's investment in the contract for calculation of the annuity exclusion ratio.

Accepted Answer

Payments made by an employer to a qualified retirement plan are not considered part of the employee's investment in the contract. The employee's investment typically includes only after-tax contributions made by the employee, not the employer contributions.

Question 11

An auto that is received as a prize should be included in the taxpayer's income at its list price rather than its fair market value.

Accepted Answer

The fair market value of the auto received as a prize should be included in the taxpayer's income, not the list price. This is because the IRS requires taxpayers to report the fair market value of prizes and awards.

Question 12

If a life insurance policy is transferred to the insured's partnership for valuable consideration, the insurance proceeds are taxable when received by the partnership.

Accepted Answer

The answer of If a life insurance policy is transferred...

Question 13

Amounts received as scholarships for books and tuition may be excluded from the recipient's taxable income.

Accepted Answer

According to IRS regulations, amounts received as scholarships for books and tuition may be excluded from the recipient's taxable income. However, any amounts received for room and board or other personal expenses must be reported as taxable income.

Question 14

Interest on U.S. Treasury Bonds is not taxable.

Accepted Answer

Interest on U.S. Treasury Bonds is taxable at the federal level and may also be subject to state and local taxes.

Question 15

When calculating the exclusion ratio for an annuity, the ratio should be revised when there is a significant change in the taxpayer's status or health.

Accepted Answer

The exclusion ratio for an annuity is determined at the start of the annuity payments and remains fixed throughout the payment period; it does not change due to changes in the taxpayer's status or health.

Question 16

Dividend income arising from stock received as a gift is excluded from gross income since the dividends are considered part of the gift.

Accepted Answer

Dividend income received from stock is taxable income regardless of whether it was received as a gift or not. The value of the stock at the time it was gifted may be subject to gift tax rules, but the dividends received on the stock are taxable income to the recipient.

Question 17

Dr. J's outstanding player award is not includible in income, since the award is in recognition of his outstanding performance.

Accepted Answer

While awards for outstanding performance are generally not taxed, the tax treatment of each award depends on the specific facts and circumstances. Without further information, it is not possible to determine whether or not Dr. J's award is taxable.

Question 18

Awards, bonuses, and gifts are all included in gross income.

Accepted Answer

The answer of Awards, bonuses, and gifts are all included...

Question 19

To promote business activity, the tax rules generally are very liberal in treating business gifts as tax-free income to the recipient.

Accepted Answer

While there are certain exceptions and limitations, business gifts are generally not fully tax-free and may be subject to gift taxes or other regulations.

Question 20

If a divorce agreement executed in 2014 specifies that a portion of the amount of an alimony payment is contingent upon the status of a child, that portion is considered to be a child support payment.

Accepted Answer

If a portion of an alimony payment is contingent upon the status of a child, it is considered to be child support under the IRS rules. This is because it is dependent on a factor related to the child, and therefore falls under the definition of child support payments.

Quiz 2: Gross Income and Exclusions