Bryant - Course 4. Tax Planning. Module 2. Gross Income

Question 1

Which of the following statements is not correct when considering the economic concept of income?

• Under an economist’s definition of income, wealth that flows to the individual and changes in the value of the individual’s store of wealth are considered income.
• An economist includes unrealized gains, gifts, and inheritance as income.
• An economist adjusts for inflation in measuring income.
• An economist believes an individual has no income to the extent that an increase in the measured value of property is caused by a decrease in the value of the measuring unit.

Answer 1

An economist believes an individual has no income to the extent that an increase in the measured value of property is caused by a decrease in the value of the measuring unit.

An economist adjusts income for inflation and believes income includes both the wealth that flows to an individual and changes in the value of the individual’s store of wealth.

An accountant (not economist) believes an individual has no income to the extent that an increase in the measured value of property is caused by a decrease in the value of the measuring unit.

Question 2

In which of the following forms may gross income be realized?

• Property
• Transactions
• Services
• Each of these may be considered income.

Answer 2

Each of these may be considered income.

As well as money, receipt of property, transactions, and services may be considered income.

Question 3

Which of the following statements is NOT correct regarding community property?

• Community income is considered to belong equally to both spouses.
• If one spouse’s salary is used to purchase stock, subsequent dividends from the stock are taxed entirely to that spouse.
• Spouses can have separate property in a community property state.
• In a community property state, the income from the personal efforts of either spouse is considered to belong equally to both spouses.

Answer 3

If one spouse’s salary is used to purchase stock, subsequent dividends from the stock are taxed entirely to that spouse.

Income from community property is considered to be community income. Thus, if one spouse’s salary is used to purchase stock, subsequent dividends are community income.

Question 4

Under which accounting method is all income taxed in the year it is earned?

• Cash method
• Hybrid method
• Accrual method
• Each of these accounting methods require all income to be taxed in the year it is earned.

Answer 4

Accrual method

Under the accrual method of accounting, income is reported in the year it is earned.

Question 5

Each of the following statements regarding recognition of income is correct EXCEPT:

• Gains realized from property transactions are included in gross income unless a non-recognition rule applies.
• Losses offset against gains in computing gross income.
• Net capital losses for individuals are subject to provisions that limit the amount that can be deducted from income other than capital gains to $3,000 per year.
• Losses from the sale or disposition of an asset held for personal use are not deductible.

Answer 5

Losses offset against gains in computing gross income.

Most losses are deductions for adjusted gross income.

Question 6

Series EE Bond Exclusion Ratio = ?

Answer 6

Series EE Bond Exclusion Ratio =

Series EE Interest x Excess modified AGI ÷ Series EE interest + principal

Question 7

Stuart, a single filer, age 55, plans to redeem Series EE bonds, which have $10,000 of interest, this year to help pay college tuition, which is $40,000, for his daughter, Christina, who is age 19. At the time of purchase, Stuart’s AGI was $50,000, but now his AGI is $99,350.

What is the 2023 federal tax treatment of the bond interest?

• Because the bond interest is paying for college tuition, the interest is tax-free.
• The bond interest is fully taxable to Stuart.
• $5,000 of the bond interest is tax-free.
• $7,800 of the bond interest is subject to kiddie tax.

Answer 7

$5,000 of the bond interest is tax-free.

Stuart’s AGI is $7,500 (50%) over the beginning threshold of $91,850. This results in 50% of the interest being taxable.

The 2023 phaseout for tax-exempt interest from Series EE bonds used for education by a single taxpayer is $91,850 to $106,850.

Question 8

What is the tax treatment of gambling losses?

• Deductible as an itemized deduction up to the amount of gambling winnings
• Fully deductible as an itemized deduction.
• Gambling losses are no longer deductible in any amount
• Deductible up to 30% as a deduction for AGI

Answer 8

Deductible as an itemized deduction up to the amount of gambling winnings

Gambling losses are deductible up to the current year’s gambling winnings as an itemized deduction.

Question 9

Which of the following is not included as part of a taxpayer’s Social Security benefits?

• Retirement benefits
• Disability benefits
• Lump-sum death benefit
• Benefits for long-term facility-based custodial care

Answer 9

Benefits for long-term facility-based custodial care

Social Security does not provide for long-term custodial care.

Question 10

Which type of taxpayer encounters the recovery of previously deducted amounts more often?

• Cash-basis
• Accrual-basis
• Hybrid-basis

Answer 10

Cash-basis

Cash-basis taxpayers encounter deduction recovery more often than accrual-basis taxpayers because their expenses are generally deductible in the year that they are paid.

Question 11

Each of the following may be used to shift taxable income from a parent to a child except:

• Giving stock in the family business to a child
• Having the child work in the family business
• Transferring income producing property from the parent to the child
• Directing the parent’s employer to pay wages directly to the child instead of the parent

Answer 11

Directing the parent’s employer to pay wages directly to the child instead of the parent

Assignment of income rules prevents shifting by merely redirecting the payment of wages from a parent to a child.

Question 12

What formula can help determine if someone should invest in tax-exempt bonds or taxable bonds?

Answer 12

Invest in Tax-Exempt Bonds When:

Return on tax-exempt bond ˃ [Return on the taxable bonds × (1 – marginal tax bracket)]

A taxpayer should invest in tax-exempt bonds instead of taxable bonds if the interest on the tax-exempt bonds is greater than the interest on the taxable bonds multiplied by 1 minus the taxpayer’s marginal tax bracket (expressed as a decimal).

Comparison of Bond Yield Example:
Robert’s marginal tax bracket is 24% and he is trying to decide between tax-exempt bonds, which pay 6.4% interest, and taxable bonds paying 8% interest. Robert should invest in tax-exempt bonds because 6.4% is greater than 6.08%. [0.08 x (1 - 0.24)].

Question 13

This concept of income includes both the wealth that flows to the individual and changes in the value of the individual’s store of wealth?

• Accounting
• Cash method
• Economic
• Accrual method

Answer 13

Economic

Economists define income as the amount an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. To the economist, income includes both the wealth that flows to the individual and changes in the value of the individual’s store of wealth. Under the economists’ definition, unrealized gains, as well as gifts and inheritances, are income. Furthermore, the economist adjusts for inflation in measuring income.

Question 14

A retail company had sales of $1,000,000 and the following costs: goods sold, $400,000; salaries, $200,000; and rent and other expenses, $100,000. What is the company’s gross income?

• $400,000
• $600,000
• $200,000
• $300,000

Answer 14

The gross income is $600,000. The sales figure is reduced by the cost of the goods sold.

Question 15

On December 2, 2022, Dan sold land for $100,000 payable on February 2, 2023. During the negotiations, the buyer offered to pay cash in December, but Dan declined this offer. In what year will Dan have to claim the $100,000 as income?

• 2022
• 2023
• 2022 and 2023
• Will not have to claim because he did not take cash offer.

Answer 15

2023

Dan is permitted to defer the recognition of income under the contract until 2023 since the contract is made before the income is earned.

Question 16

Several years ago, Kim purchased a used grandfather clock at an auction for $50. In the current year, she finds $1,500 dollars hidden in the clock. When should Kim report this income?

• She does not have to report the $1,500
• She needs to file an amendment to her taxes in the year she purchased the clock and include the $1,500
• She needs to report the $1,500 in the current year
• She needs to report $1,450 in the current year

Answer 16

She needs to report the $1,500 in the current year

Kim must report the $1,500 as income in the current year and it is taxable because it is considered a treasure find.

Question 17

In 2022, Brenda’s employer withheld $2,000 for state income taxes from her wages. She claimed $2,000 as an itemized deduction on her 2022 federal income tax return. Her itemized deductions totaled $14,000. On her 2022 state income tax return, her state income tax liability was only $1,500. As a result, she received a $500 refund from the state in 2023. What must Brenda now do?

• Brenda can list the $500 refund as a negative itemized deduction on her 2021 federal income tax return.
• Brenda must file an amended 2022 state return.
• Brenda must file an amended 2023 federal return.
• Brenda must report the $500 refund as income on her 2023 federal income tax return.

Answer 17

Brenda must report the $500 refund as income on her 2023 federal income tax return.

Because Brenda deducted the full $2,000 in 2022, she must report the $500 refund as income on her 2023 federal income tax return.

Question 18

Which of the following recognizes self-help income as income?

• IRS
• The courts
• Economists

Answer 18

Economists

Economists recognize self-help income as income.

Question 19

Mitch has hired his son, Tom, age 14, to work in the family business for approximately 10 hours per week. Mitch feels it is important for Tom to work rather than to receive an allowance. Tom performs essential custodial and lawn care duties at the company. For this, he receives a salary of $75 per week from the business. What is the tax treatment of Tom’s salary?

• The salary is reasonable compensation and is deductible by the business and is taxed as earned income to Tom.
• The salary is likely to be classified as a gift from parent to child and will not be deductible by the business nor taxable to Tom.
• Tom is subject to kiddie tax and will pay income tax at his parents’ income tax rate on any amount received in excess of $2,500 in 2023.
• The payments will be considered dividends to Tom and will not be deductible to the business.

Answer 19

The salary is reasonable compensation and is deductible by the business and is taxed as earned income to Tom.

The salary, which is approximately minimum wage given the hours worked, is reasonable compensation for the duties performed and is deductible by the business and is taxed as earned income to Tom.

Question 20

A couple whose AGI is $200,000 in 2023 adopted two children in the U.S. this year. They paid a total of $30,000 in qualified adoption-related expenses. One spouse’s employer has an adoption assistance program. What is the tax treatment of funds received by the employee under the adoption assistance program?

• Assistance received is taxable as an income bonus to the employee.
• Assistance received up to the total qualified adoption-related expenses is tax-free.
• Assistance received is tax-free subject to a per-child adopted maximum.
• Assistance received is taxable up to an annual threshold; excess amounts are tax-free.

Answer 20

Assistance received is tax-free subject to a per-child adopted maximum.

Under an employer adoption assistance program, assistance received is tax-free subject to a per-child adopted maximum. In 2023, the maximum per child tax-free assistance is $15,950.

Question 21

Identify the exception(s) where the discharge of an indebtedness is not taxable. (Select all that apply)

• The discharge occurs when the taxpayer pays their tax.
• The discharge occurs in bankruptcy.
• The discharge occurs when the taxpayer is insolvent.
• The discharge occurs when the taxpayer has more assets than liabilities.

Answer 21

The discharge occurs in bankruptcy.
The discharge occurs when the taxpayer is insolvent.

The discharge of indebtedness is not taxable when the discharge occurs in bankruptcy or when the taxpayer is insolvent.

Question 22

Which of the following are reasons for creating statutory exclusions? (Select all that apply)

• Social policy
• Indebtedness during bankruptcy
• Economic incentive
• Revenue revising

Answer 22

Social policy
Indebtedness during bankruptcy
Economic incentive

Congress has created statutory exclusions for reasons of social policy or reasons of incentive. Other exclusions are created in terms of economic incentive, that is, the government’s desire to encourage or reward a particular type of behavior. In addition, income from the discharge of indebtedness during bankruptcy is excluded from gross income because such taxpayers would be unlikely to have the resources needed to pay the tax.

Question 23

Which of the following conditions qualify for the foreign-earned income exclusion? (Select all that apply)

• Taxpayer must be a bona fide resident of one or more foreign countries for an entire taxable year.
• Taxpayer must be present in one or more foreign countries for 330 days during a period of 12 consecutive months.
• Taxpayer must not be present in, or a resident of, a foreign country or countries for the entire year.
• Taxpayer must be present in one or more foreign countries for 130 days during a period of 12 consecutive months.

Answer 23

Taxpayer must be a bona fide resident of one or more foreign countries for an entire taxable year.
Taxpayer must be present in one or more foreign countries for 330 days during a period of 12 consecutive months.

To qualify for the foreign-earned income exclusion, the taxpayer must either be a bona fide resident of one or more foreign countries for an entire taxable year, or be present in one or more foreign countries for 330 days during a period of 12 consecutive months.

Question 24

Which of the following item(s) is not considered income and is not subject to income tax? (Select all that apply)

• Borrowed funds
• Scholarships
• Interest
• Self-help income
• Rental value of personal-use property

Answer 24

Borrowed funds
Scholarships
Self-help income
Rental value of personal-use property

Borrowed funds, scholarships, unrealized income, self-help, rental value of personal-use property and gross selling price of property are all considered items that are not income and therefore are not subject to income taxes.

Question 25

Which types of benefits are covered by section 132 fringe benefits?

• Employer paid insurance
• Working condition benefits (i.e. outplacement services)
• De minimis benefits (i.e. professional membership fees)
• Employee awards

Answer 25

Working condition benefits (i.e. outplacement services)
De minimis benefits (i.e. professional membership fees)

Section 132 lists six types of benefits that may be excluded from an employee’s gross income: no additional cost (i.e. telephone), qualified employee discounts, working condition (i.e. outplacement services), De minimis (i.e. professional membership fees), qualified transportation and parking, and recreation and athletic facilities.

Question 26

Stan owns stock in a corporation and orders the corporation to pay dividends on the stock to his daughter. Who must include the dividends as gross income on their federal income taxes?

• Stan
• Stan’s Daughter
• Stan and his Daughter
• Neither, you do not have to pay taxes on dividends

Answer 26

Stan

Even though his daughter received the dividends, Stan must include the dividends on his gross income. Stan could avoid being taxed on future dividends by making a gift of the stock to his daughter.

Question 27

Joan is involved in several transactions during the current year. No interest is stated on any of the transactions. In which situations would imputed interest apply?

• Purchases furniture for her residence. Full price is payable within four months.
• Sells a boat for $2,000. Payment is due in one year.
• Sells land for $100,000. Payment is due in five years.
• Purchases a newly issued bond for $650, with a par value of $1,000.

Answer 27

Sells land for $100,000. Payment is due in five years.

Interest must be imputed on the land sale because no exception applies. The furniture purchase was due in less than six months. The boat sale was for less than $3,000, and the bond purchase is subject to the original discount provisions.

Question 28

John lent his son $50,000 for the purchase of a new house, with the understanding that in five years, his son would re-pay the loan at face value. For the current tax year, John’s son had net investment income of $2,700. Assume that the Applicable Federal Rate for mid-term loans is 6%. Calculate the imputed interest for the first year.

• $0
• $2,700
• $3,000
• Does not apply; loan made out of love and affection.

Answer 28

$2,700

The net investment income amount of $2,700 is what the lender must impute, because the loan was $100,000 or less and net investment income (which was greater than $1,000) is less than what would have been imputed ($3,000) had the AFP been used.

Question 29

A closely-held corporation loaned an employee/shareholder $25,000 with the understanding that the loan would be repaid in three years time when the employee is eligible to receive a bonus. The loaned funds will not be used for investing by the employee. Currently, the AFR rate for mid-term loans is 5%. Calculate the imputed interest the corporation must include in income for the first year of the loan.

• $0, the loan is less than $100,000.
• $0, since the loan is between $10,000 & $100,000 and no investment income was generated.
• $1,250, the loan amount times the AFR.

Answer 29

$0, since the loan is between $10,000 & $100,000 and no investment income was generated.

Since the loan is between $10,000 & $100,000 and no investment income was generated, the imputed interest is the lesser of the AFR applied to the loan amount OR the investment income. Here, $0 of investment income was generated, so there would be $0 of imputed income.

Question 30

What is imputed income?

Answer 30

Under certain circumstances, if a taxpayer charges less than an adequate rate of interest, the IRS is authorized to impute an interest charge. This may cause the lender to have additional interest income and the borrower to have additional interest expenses. The deductibility of this imputed interest expense also depends on how the expense is classified (for example personal expense, investment expense, etc).

In order to avoid the imputation of interest, the stated interest rate must be at least equal to 100% of the applicable federal rate (110% of the applicable federal rate in the case of sale-lease-back arrangements).

The applicable federal rate is determined monthly and is based on the rate paid by the federal government on borrowed funds. The rate varies with the term of the loan.

Loans are divided into short-term (not over three years), mid-term (over three years but not over nine), and long-term (over nine years).

Question 31

List transactions that are exempt from the imputed interest rules

Answer 31

Imputed interest loans do not apply to individual loans with an aggregate outstanding amount of less than $10,000.

The following transactions are exempt from the imputed interest rules:
* Debt subject to original issue discount provisions.
* Sales of property for $3,000 or less.
* Any sales where all of the payments are due within six months.
* Sales of patents to the extent the payment is contingent on the use or disposition of the patent.
* Certain carrying charges for personal property or educational services covered by Section 163(b), when the interest charge cannot be ascertained.
* Charges for the purchase of personal-use property. (purchaser only)

Question 32

There are several important exceptions intended to limit the application of imputed interest in situations where tax avoidance may be immaterial.

List 3 exceptions

Answer 32

• Interest is not imputed on gift loans between individuals totaling $10,000 or less, except when the borrowed funds are used to purchase the income-producing property.
• Interest is not imputed on corporate loans and compensation-related loans totaling $10,000 or less.
• For loans between individuals that range between $10,001 and $100,000 inclusive, the imputed interest is limited to the borrower’s net investment income. If the net investment income is $1,000 or less, imputed interest will not apply. In cases when the borrower’s net investment income exceeds what would otherwise be imputed based on the Applicable Federal Rate (AFR), the AFR will apply.

Question 33

Table that shows a comprehensive example of the final exception of imputed interest:

Answer 33

Assume that the Applicable Federal Rate (AFR) = 7%, and the term of the loan is one year.

Loan Amount. Net Investment Income. Lender Imputes
* $10,000 Non-applicable Lender imputes $0. The loan was for $10,000 or less.

• $100,000 $1,000 Lender imputes $0. The Borrower’s net investment income was $1,000 or less.
• $100,000 $1,800 Lender imputes $1,800 since this would be less than the AFR amount.
• $100,000 $7,300 Lender imputes the AFR amount of $7,000 since it is less than net investment income.
• $101,000 Non-applicable Lender imputes $7,070 (the AFR amount) and the net investment income does not matter.

Question 34

Test Questions

Question 35

In general, the forgiveness of debt is _ _____??_______.

• tax-free
• tax-deferred
• a taxable event
• discharged if the debtor is solvent
• In general, the forgiveness of debt is a taxable event.

Answer 35

a taxable event

The person who owed the money must report the amount forgiven as income unless one of several exceptions found in the tax law applies.

Question 36

Each of the following statements about the ‘assignment of income doctrine’ is correct EXCEPT:

• Income from property is taxed to the owner of the property.
• An agreement to assign income does not permit a person to avoid being taxed on the income.
• To transfer the income from property, the taxpayer must transfer ownership of the property itself.
• Assignment of income is not an issue for married couples, regardless of filing status.

Answer 36

Assignment of income is not an issue for married couples, regardless of filing status.

Assignment of income is an issue today when individuals such as parents and children are involved, and it can also be an issue with married couples if they file separate returns.

Question 37

Identify the items that are excluded from gross income. (Select all that apply)

• Life insurance proceeds
• Interest Income
• Qualified adoption expenses
• Payments for personal physical sickness and injury
• Public assistance programs
• Gifts and inheritances
• Pass-through proceeds

Answer 37

Life insurance proceeds
Qualified adoption expenses
Payments for personal physical sickness and injury
Public assistance programs
Gifts and inheritances

Examples of excluded items are:
* Gifts and inheritances
* Life insurance proceeds
* Public assistance programs
* Qualified adoption expenses
* Payments for personal physical sickness and injury
* Discharge of indebtedness during bankruptcy or insolvency
* Gain on sale of a personal residence
* Partial exclusions for Social Security benefits
* Alimony for divorce agreements initiated after December 31, 2018

Question 38

Which of the following is taxable?

• Payments for punitive damages.
• Payments for compensatory damages.
• Payments collected under an accident and health insurance policy purchased by the taxpayer.
• Worker’s compensation payments received.

Answer 38

Payments for punitive damages.

Sometimes, victims are awarded amounts that are intended to punish the guilty party. These so-called “punitive damages” are taxable even when they are awarded for physical injuries.

Question 39

Archie is the beneficiary of a $200,000 insurance policy on his father’s life. Upon his father’s death, Archie elects to receive $10,000 per year for 25 years instead of the lump sum.

Calculate the amount that will be taxable to Archie on an annual basis throughout the payment period.

• $0
• $2,000
• $10,000
• $8,000

Answer 39

$2,000

Of the $10,000 received annually, Archie receives $8,000 tax-free ($200,000 ÷ 25), but the remaining $2,000 per year is taxable as interest.

Question 40

To qualify for the foreign-earned income exclusion, the taxpayer must either be a bona fide resident of one or more foreign countries for an entire taxable year or be present in one or more foreign countries for ________ during a period of 12 consecutive months.

• 183 days
• 330 days
• 274 days
• 307 days

Answer 40

330 days

To qualify for the foreign-earned income exclusion, the taxpayer must either be a bona fide resident of one or more foreign countries for an entire taxable year or be present in one or more foreign countries for 330 days during a period of 12 consecutive months.

The exclusion limitation for a year must be prorated if the taxpayer is not present in, or a resident of, a foreign country or countries for the entire year.

Question 41

According to the Internal Revenue Code, gross income includes each of the following EXCEPT:

• Pensions
• Income in respect of a decedent
• Compensation for services
• Alimony payments received for post-December 31, 2018, separation agreements

Answer 41

Alimony payments received for post-December 31, 2018, separation agreements

As a result of the Tax Cuts and Jobs Act (TCJA), alimony payments received for post-December 31, 2018, separation agreements are NOT considered gross income received.

Question 42

Under the _ ______??_______ method of accounting, income is reported in the year the taxpayer actually or constructively receives the income.

• hybrid
• gross receipts
• accrual
• cash

Answer 42

cash

With the cash method of accounting, income is reported in the year the taxpayer actually or constructively receives the income rather than in the year the income is earned.

With the accrual method of accounting, income is reported in the year it is earned.

With the hybrid method of accounting, some items of income or expense are reported under the cash basis and others are reported under the accrual method.

Question 43

Under the _ ______??_______ doctrine, if property is sold at a gain, only the gain and not the entire sales price is taxable.

• constructive receipt
• substance over form
• assignment of income
• recovery of capital

Answer 43

recovery of capital

If a property is sold at a gain, only the gain and not the entire sales price is taxable.

The primary reason for this principle (often referred to as the “recovery of capital” principle) is that a portion of the selling price represents a return of capital to the seller.

Question 44

Once an accounting method has been adopted, it can be changed without the permission of the IRS.

• False
• True

Answer 44

FALSE.

Once an accounting method has been adopted, it cannot be changed without the permission of the IRS.