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Exam 5: Gross Income: Exclusions

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Question 21

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Jena is a full-time undergraduate student at State University and qualifies as a dependent of her parents. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board) . Jena's gross income for the year is:

A) $10,000.
B) $4,000.
C) $3,000.
D) $500.
E) None of these.

F) A) and B)
G) A) and C)

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Question 22

Multiple Choice

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Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

A) Harold must recognize $20,000 ($80,000 - $60,000) of gross income.
B) Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.
C) Harold is not required to recognize gross income, since he paid the debt before it was due.
D) Jewel must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.
E) None of these.

F) A) and E)
G) A) and B)

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Question 23

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Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2018. His total itemized deductions in 2018 were $18,000. In 2019, he received a $900 refund of his 2018 state income tax. Sam must include the $900 refund in his 2019 Federal gross income in accordance with the tax benefit rule.

Louise works in a foreign branch of her employer's business. She earned $5,000 per month throughout the relevant period. Which of the following is correct:

Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband. The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death. The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000. As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest income. Which of these items are subject to income tax for Beverly's spouse?

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings. The copies made during the year would have cost $150 at a local office supply.

Calvin miscalculated his income in 2016 and overpaid his state income tax by $10,000. In 2017, he amended his 2016 state income tax return and received a $10,000 refund and $900 interest. Calvin itemized his deductions in 2016, deducting $12,000 in state income tax and $30,000 total itemized deductions. As a result of the amended return in 2017, Calvin must recognize $10,900 of gross income.

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.

Heather is a full-time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees. Which of the following is correct?

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.

Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest. Zack must include $23,000 in his gross income.

Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return. The interest rate is 5%. His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return. As an alternative, Juan can purchase a state bond (a "double-exempt bond") yielding 4.9% interest that is exempt from both Federal and state income tax. Which investment would yield the greater after-tax return?

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

Evaluate the following statements: I. De minimis fringe benefits are those that are so immaterial that accounting for them is impractical. II. De minimis fringe benefits are subject to strict anti-discrimination requirements. III. Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income.

Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition.

Heather's interest and gains on investments for the current year are as follows: Heather's adjusted gross income from the above is: or? Heather must report gross income in the amount of:

When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts. Betty sold the policy for $32,000 and Insurance Purchase, Inc., became the beneficiary. She had paid total premiums of $19,000. Betty died 8 months after the sale. Insurance Purchase, Inc., collected $50,000 on the policy. The company had paid additional premiums of $4,000 on the policy. Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase, Inc., is required to recognize a $14,000 gain from the insurance policy.

Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk. Which of the following is correct:

James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is James's gross income from the above?