1.2 & 1.3 - Gross Income

Question 1

What the definition of “Gross Income”?

Answer 1

All income unless specifically excluded

Question 2

Non-cash income is determined by?

Answer 2

Non-cash income - the FMV of the property or services received

Question 3

In order to be taxable, a gain must be:

Answer 3

Realized and recognized

Question 4

Requires the accrual or receipt of cash, property, or services, or a change in the form or nature of the investment

Answer 4

Realization

Question 5

The realized gain must be included on the tax form /recorded

Answer 5

Recognized

Question 6

When is revenue recognized under the accrual method and cash method?

Answer 6

Accrual - revenue is taxable when earned
Cash - taxable when the revenue is actually or constructively received in cash or FMV of property

Question 7

Gross income includes many forms of compensation for services including:

Answer 7

Money
Property
Bargain purchases (employer sells property to an employee at less than FMV, the difference is income to the employee)
Guaranteed payments to a partner (compensation paid to a partner for services rendered)
Taxable fringe benefits
Portion of life insurance premiums (premiums above $50,000 of coverage are taxable income)

Question 8

Non taxable fringe benefits include:

Answer 8

• up to $50,000of life insurance premiums employers pay for on the employees behalf
• accident, medical, and health insurance premiums that the employer paid for
• meals and lodging furnished by the employer
• up to $5,250 of educational expenses an employer paid for
• up to $5,000 of dependent care assistance for children under the age of 13
• tuition reductions if the tuition reduction is in addition to the pay for the teaching/research
• up to $280 of employer provided parking or transit passes
• flexible spending agreements (FSAs)
• Qualified retirement plans (are not taxable until you retire and withdraw the money)

Question 9

Interest income is reported where?

Answer 9

Schedule B

Question 10

What is included in taxable interest income?

Answer 10

Interest from:
- federal bonds
- industrial development bonds
- corporate bonds
- part of the proceeds from an installment sale
- interest paid by the federal or state government for the payment of a tax refund
- gifts to open up a bank account (at FMV)

Question 11

What are considered tax-exempt interest income but still required to be reported on the tax return?

Answer 11

Interest from:
- state and local bonds
- mutual fund dividends for fund invested in tax-free bonds
- bonds of a U.S. possession
- U.S. Series EE savings bonds issued after 1989 when: it is used to pay for higher education and taxpayer is over 24 when bond is issued and meets certain income requirements

Question 12

What are the requirements for the interest on U.S. Series EE Savings Bonds to be tax exempt?

Answer 12

• The taxpayer is over the age of 24 when the bond is issued
• It is used to pay for higher education
• a married taxpayer files a joint return
• if single or head of household, has modified AGI between 85,800 - 100,800
• if married filing jointly, has modified AGI between 128,650 - 158,650

Question 13

What is “Forfeited Interest”?

Answer 13

A penalty for early withdrawal from savings

The interest is received as taxable on the taxpayers income tax return but the amount forfeited is also deductible as an adjustment in the year the penalty occurred. Thus, the taxpayer only pays tax on the amount of interest actually received.

Question 14

Where is dividend income reported?

Answer 14

Schedule B

Question 15

A distribution of property by a C corporation out of the company’s earnings and profits is:

Answer 15

A dividend

Question 16

The taxability of a dividend is determined by the amount of the company’s earnings and profits. What is the taxability of the scenarios below:

Corporate earnings and profits =
No earnings and profits and the taxpayer has basis in stock =
No earnings and profits and no stock basis =

Answer 16

Corporate earnings and profits = taxable dividend
No earnings and profits and the taxpayer has basis in stock = non taxable dividend and reduces basis of stock
No earnings and profits and no stock basis = taxable capital gain income

Question 17

All dividends that represent distributions of a corporations earnings and profits are…

Answer 17

Included in gross income and taxable

Question 18

What is the taxable amount of cash dividends and property dividends?

Answer 18

Cash = amount received
Property = FMV

Question 19

To be a qualified dividend, the stock must:

Answer 19

Be held for more than half the days during the 120 day period that begins 60 days before the ex-dividend date.

Question 20

Qualified dividends are taxed at the same rates as…

Answer 20

Long term capital gains

Question 21

What items are considered “Tax free distributions” and excluded from gross income?

Answer 21

• Return on capital (exists when C corps distributes funds but has no earnings & profits)
• Stock splits
• Stock dividend (at FMV) when there was no choice of cash or property
• Life insurance dividend

Question 22

Return on capital exists when? What does the taxpayer do?

Answer 22

When a C Corp distributes funds but has no earnings or profits
The taxpayer will reduce (but not below 0) his/her basis in common stock held

Question 23

What does the shareholder do when a stock split occurs?

Answer 23

The shareholder will allocate the original basis over the total number of shares held after the split

Question 24

What are life insurance dividends?

Answer 24

Dividends caused by ownership of insurance with a mutual company (premium returned)

Question 25

What are capital gain distributions?

Answer 25

Distributions by a corporation that has no earnings and profits and for which the shareholder has recovered his/her entire basis.

Question 26

State and local tax refunds are taxable / not taxable when?

Answer 26

Taxable if itemized in the prior year
Not taxable is took the standard deduction in the prior year

Question 27

Interest income paid by the state on a late tax refund is taxable or not taxable?

Answer 27

Taxable

Question 28

Alimony or spousal support payments made pursuant to a divorce that was executed before what date are included in gross income by the recipient and deductible by the payor?

Answer 28

12/31/2018

Question 29

What is required to be deemed alimony?

Answer 29

Legally required
Cash or its equivalent (cc bills, college tuition, etc.)
Payments cannot extend beyond the death of the payee-spouse
Payments cannot be made to members of the same household
The spouses may not file a joint tax return

Question 30

Is child support paid to the ex-spouse receiving the money taxable or not taxable?

Answer 30

Not taxable

Question 31

If payments are to be made both for alimony and for child support, but he payments made fall short of fulfilling the obligations, what happens?

Answer 31

The payments should be allocated first to child support until the obligation for child support is met, then to alimony

Question 32

If a divorce provides for a lump-sum payment or property settlement by a spouse, are those item taxable?

Answer 32

The spouse who paid gets no deduction for payments made
The payments are not include blue in the gross income of the spouse receiving the payments

Question 33

Where is the net business income or loss from a sole proprietorship calculated and reported?

Answer 33

Calculated on Schedule C
Reported on Form 1040 as a single item

Question 34

Where is the profit or loss from farming calculated and reported?

Answer 34

Calculated on Schedule F
Reported on Form 1040 as a single line item

Question 35

How is the gain or loss on the disposition of property measured?

Answer 35

Measured by the difference between the amount realized and the adjusted basis

Question 36

Taxpayers who sell stock or securities on an established securities market must recognize gains and losses as of the…

Answer 36

Trade date NOT the settlement date

Question 37

The basic formula in determining the gain or loss is:

Answer 37

Amount realized - adjusted basis of asset sold = gain or loss realized

Question 38

Distributions of principal contributions from traditional IRAs are -

Answer 38

Taxable if the taxpayer took a deduction for the contribution when made

Question 39

Distributions of earnings from traditional IRAs are -

Answer 39

Always taxable

Question 40

Distributions from a nondeductible traditional IRA are -

Answer 40

Allocated between principal and earnings at the time of the distribution where the principal is not taxable and the earnings are taxable

Question 41

Taxpayers are required to take required minimum distributions (RMD) from their traditional IRA by what date of the year after the taxpayer reaches what age?

Answer 41

By April 1st of the year after turning 72

Question 42

Distributions from a Roth IRA are -

Answer 42

Never taxable because taxpayer are not allowed to deduct contributions to Roth IRAs

Question 43

Distributions of earnings from a Roth IRA are -

Answer 43

Only taxable if the distribution is a non qualified Roth distribution

Question 44

A qualified distribution is a distribution from a Roth IRA that:

Answer 44

1. Is made at least 5 years after the first day of the year when the first contribution was made
   And
2. Meets one of the following:
   - taxpayer is 59.5 or older
   - taxpayer is disabled
   - taxpayer is fist time home buyer and uses the distribution to buy the home
   - distribution is made to a beneficiary after the taxpayers death

Question 45

Distributions from Roth IRAs are considered to first come from what and then what

Answer 45

Principal (contributions), then earnings

Question 46

Is the principal (contributions) and earnings taxable or not taxable for the following distributions:

1. Nondeductible traditional IRA distribution
2. Deductible traditional IRA distribution
3. Qualified Roth IRA distribution
4. Non qualified Roth IRA distribution

Answer 46

1. Principal (Contributions) = Nontaxable ; Earnings = Taxable
2. Principal (Contributions) = Taxable ; Earnings = Taxable
3. Principal (Contributions) = Nontaxable ; Earnings = Nontaxable
4. Principal (Contributions) = Nontaxable ; Earnings = Taxable

Question 47

Sally opened an IRA when she was 55 years old and contributed $5,000. Several years later, then the account had grown to $8,000, she withdrew $6,000 to pay for a 3 week vacation in Europe. Determine the amount of taxable ordinary income from the IRA distribution had it been a traditional IRA, and a deduction was taken for the contribution.

Answer 47

$6,000 is taxable ordinary income

Question 48

Sally opened an IRA when she was 55 years old and contributed $5,000. Several years later, then the account had frown to $8,000, she withdrew $6,000 to pay for a 3 week vacation in Europe. Determine the amount of taxable ordinary income from the IRA distribution had it been a traditional IRA, and a deduction was not taken for the contribution.

Answer 48

6,000 / 8,000 = .75
.75 X 3,000 = $2,250 taxable income

Question 49

Sally opened an IRA when she was 55 years old and contributed $5,000. Several years later, then the account had frown to $8,000, she withdrew $6,000 to pay for a 3 week vacation in Europe. Determine the amount of taxable ordinary income from the IRA distribution had it been a Roth IRA, and the amount was withdrawn 4 years after the contribution.

Answer 49

6,000 - 5,000 = 1,000 taxable income

Question 50

Sally opened an IRA when she was 55 years old and contributed $5,000. Several years later, then the account had frown to $8,000, she withdrew $6,000 to pay for a 3 week vacation in Europe. Determine the amount of taxable ordinary income from the IRA distribution had it been a traditional IRA, and the amount was withdrawn 6 years after the contribution.

Answer 50

0 amount is taxable income

Question 51

What happens if there is a premature IRA distribution before the age of 59 and a half

Answer 51

It is subject to a 10% penalty tax in addition to regular income tax

Question 52

What is an exception to the premature distribution penalty?
(HIMDEAD)

Answer 52

• if the distribution was used toward the purchase of a first home within 120 days of distribution
• if the individual is unemployed with 12 consecutive weeks of unemployment compensation
• if the individual has medical expenses in excess of percentage of their AGI floor
• if it was used to pay for college tuition, books, fees, etc.
• if the individual adopted or birthed a child within one year
• death

Question 53

What is a contract between a taxpayer and an insurance company in which the taxpayer contributes a lump-sum payment (or series of payments) and in return receives regular payments over time?

Answer 53

Annuity

Question 54

What are the two types of annuities

Answer 54

1. Fixed period annuities
2. Life annuities

Question 55

Each annuity payment received by the taxpayer consists of return on investment (contributions)) and earnings. Which are taxable and which are not?

Answer 55

Contributions are Nontaxable
Earnings are taxable ordinary income

Question 56

Zoe purchased an annuity for $600,000 that would pay her $750 per month for 120 months. Calculate the amount of the taxable portion of each annuity payment received.

Answer 56

750 X 120 = 90,000 (expected value of the annuity)

60,000 / 90,000 = 66.7% (portion non-taxable)

100-66.7 = 33.3% taxable X 750 = $249.75 taxable portion of cash monthly payment

Question 57

If a taxpayer lives longer than the IRS estimated life expectancy, the entire amount of any additional payments received are ____?

If the taxpayer dies before receiving the expected number of payments, the remaining unrecoverable investment is ____?

Answer 57

Taxable

Deducted on the taxpayer’s final income tax return

Question 58

John purchased an annuity for $60,000 that old pay him $600 per month for the rest of his life. John is 64 at the annuity start date, so the IRS expectancy factor is 260 months. Calculate the amount of the taxable portion of each annuity payment received.

Answer 58

60,000 / 260 = 230.77 (Nontaxable return on capital)
600 - 230.77 = 369.23 taxable portion of each payment

Question 59

Where is net rental income or loss calculated and reported?

Answer 59

Calculated on schedule E and reported as a single line item on form 1040

Question 60

How is social security income taxed?

Answer 60

Based on income level
Lower income - non taxable
Middle income - 50% taxable
Upper income - 85% taxable

Question 61

Modified adjusted gross income includes:

Answer 61

• income excluded because of foreign earned income exclusions
• exclusions or deduction claimed for foreign housing
• interest income from series EE bonds that was able to be excluded because of qualified higher education expenses
• any deduction claimed for student loan interest or qualified tuition expenses
• any employer-paid adoption expenses that was excluded
• any deduction claimed for an annual contribution to a traditional IRA

Question 62

Whats the exception to prizes and awards being taxable

Answer 62

When he winner is selected for the aware without entering into a contest, etc. and assigns the award directly to a governmental unit or charitable organization.

Question 63

How are gambling winnings and losses taxed?

Answer 63

Winnings are taxed
Losses are deducted to the extent of winnings.

Question 64

Mary owes the bank $80,000 on an unsecured recourse note. She satisfies the note in full with a payment of $30,000 and the bank forgives the remaining $50,000 debt. Determine Mary’s taxable income.

Answer 64

$50,000

Question 65

Scholarships and fellowship grants are excludable from taxable income only up to the amounts spent on tuition, books, fees, and supplies but NOT room and board provided the degree seeking student does not…

Answer 65

Perform services as a condition to receiving the grant

Question 66

Graduate teaching assistants and research assistants who receive tuition reductions are…

Answer 66

Taxed on the reduction if it is their only compensation but not if the reduction is in addition o other taxable compensation.

Question 67

What is the only taxable portion of Life insurance proceed?

Answer 67

The interest income element on deferred payout arrangements

Question 68

Taxable or non-taxable:
1. Gifts and inheritance received
2. Medicare benefits
3. Workers compensation
4. Personal injury or illness award
5. Accident insurance premiums paid by the taxpayer

Answer 68

All nontaxable

Question 69

Taxpayers working abroad may exclude what amount of foreign earned income?

Answer 69

Up to 112,000 as long as they spend 330 full days out of any 12 consecutive months in that country

Question 70

Where is self employment computed and reported?

Answer 70

Computed on schedule C and reported on form 1040

Question 71

What three items are included in gross income on schedule C?

Answer 71

Cash (amount received)
Property (at FMV)
Debt cancellation

Question 72

What business expenses are deductible from business income for all businesses?

Answer 72

Cost of goods
Salaries and commissions paid to others
State and local business taxes paid
Office expenses
Automobile expenses
50% of Business meal expenses
Deprecation of business assets

Question 73

What business expenses are deductible from business expenses only if they have income higher than 27M?

Answer 73

-interest expenses on business loans (must be incurred and paid) and is limited to 30% of business income
- employee benefits
- legal and professional services
- bad debts actually written off for an accrual basis taxpayer only

Question 74

What are non-deductible expenses noted on schedule C for businesses?

Answer 74

• salaries paid to the sole proprietor
• federal income tax
• bad debt expense of a cash basis taxpayer
• charitable contributions
• entertainment expenses

Question 75

What are the two federal taxes on net business income?

Answer 75

Income tax
Self employment tax

Question 76

Tyler earns $20,000 from his consulting business which he runs as a sole proprietorship. This is the only income he had during the year. What is Tylers self employment tax?

Answer 76

20,000 X 92.35% = 18,470
18,470 X 15.3% = 2,836 self employment tax

92.25% = SE Tax
12.4% SS Tax + 2.9% Medicare Tax = 15.3%

Question 77

A combined excess business loss of over 540,000 for MFJ and 270,000 for all other taxpayers is not allowed and must be ____

Answer 77

Carried forward as a net operating loss

Question 78

Who is exempt from the uniform capitalization rules?

Answer 78

Any business that has average gross receipts of $27M or less for the previous 3 years

Question 79

What costs require capitalization under the uniform capitalization rule?

Answer 79

Direct materials
Direct labor
Indirect costs such as factory overhead

Question 80

What costs are not required to be capitalized under the uniform capitalization rule?

Answer 80

Selling, advertising, marketing, research, officer compensation, and certain general and administrative expenses

Question 81

Everyone must use the percentage of completion method for long-term contracts, except:

Answer 81

Small contractors (projects that are expected to last less than 2 years and performed by a taxpayer with less than $27M in gross receipts for 3 years prior)
And
Home construction contractors (other than hotels)

Question 82

The total percent complete amount for the percentage of completion method is calculated by :

Answer 82

Total cumulative costs incurred to date / total expected costs to be incurred

Question 83

Bob is a cash basis sole proprietor farmer. During the year, Bon spends $2,100 on feed for the livestock. How much can Bob deduct?

Answer 83

All $2,100 because he is not required to consider it inventory

Question 84

Evan is required to use the accrual method. During the year, Evan had sales of $75,000. Inventory at the beginning of the year was $15,600. Inventory at the end of the year was $14,200 and inventory purchased during the year amounted to $60,000. What was Evan’s gross profit?

Answer 84

15,600 + 60,000 = 75,600 - 14,200 = 61,400

75,000 - 61,400 = 13,600 gross profit

Question 85

What is the formula used to determine the net rental income or loss?

Answer 85

Gross rental income
+ prepaid rental income
+ rent cancellation payment
+ improvement-in-lieu of rent
- rental expense
= Net rental income or loss

Question 86

How is the rental residence treated if it was rented fewer than 15 days a year?

Answer 86

It is treated as a personal residence.
Rental income is excluded from income.
Depreciation, utilities, and repairs are not deductible

Question 87

How is the rental residence treated if it was rented 15 days or more in a year?

Answer 87

Treated as a personal/rental residence. Expenses are prorated between personal and rental use and rental expenses are deductible only to the extent of rental income.