Chapter 3 Flashcards
Cate was recently diagnosed with lung cancer and has been certified by her doctor, on June 1st of the current year, as terminally ill. On July 1st of the current year, Cate sold her life insurance policy (with a face value of $500,000) for $340,000. Assuming she paid $50,000 in premiums, how much of the $340,000 proceeds must she include in her gross income for the current year? $0 $34,000 $50,000 $290,000
$0
Becuase proceeds are not included in gross income.
Nick and Kim are married and are trying to calculate their gross income for the current year. Which of the following items should they include in gross income?
- Child support payments in the amount of $15,000 received from Kim’s ex-husband for the support of their minor child.
- $1,200 in dividends received.
- Unemployment benefits received in the amount of $800.
- $3,000 that Kim earned selling homemade soaps.
4 only
1 and 2
2, 3, and 4
All of the above
2,3 and 4
Child Support is excluded form gross income.
Which of the following benefits provided by an employer to its employees is taxable?
Employees of the XYZ Department Store are allowed a 5% discount on store merchandise. XYZ’s normal gross profit percentage is 20%.
Up to $3,000 of undergraduate tuition is waived by ABC University for university employees.
B.J. Airline provides free standby flights to its employees.
Rent-free use of corporate apartment
Rent-free use of corporate apartment
For option A, Module 3 Slide 40 explains to us fringe benefits excluded from gross income. Qualified employee discounts are not taxable. “For property purchased at a discount, the exclusion may not exceed the employer’s gross profit margin.” The discount does not exceed the normal gross profit margin in this case. Therefore, this is not taxable.
For option B, Module 3 Slide 49 tells us that “Payments of up to $5,250 per year paid by an employer to, or on behalf of, an employee for tuition and course-related material may be excluded from employee income.” The amount in this option, $3,000, is less than $5,250. Therefore, this is not taxable.
For option C, Module 3 Slide 39 tells us that no-additional-cost services are generally excluded from gross income. The flight is going to happen whether or not these employees fly standby, so there is no significant additional costs incurred. Also, this service is provided to customers in the ordinary course of the line of business for B.J. Airline. Therefore, this is not taxable.
For option D, this use of a corporate apartment without paying rent is taxable. Employer-provided housing is considered to be a fringe benefit by the IRS, so it is part of taxable income. Fringe benefits are anything of value that an employee receives from an employer, and these benefits are taxable unless an exception applies. I think there may be situations in which employee housing benefits can be non-taxable, but we are not provided with any of that information. Therefore, this is taxable rental income.
Which of the following is excluded from gross income?
Damages received from a wrongful termination lawsuit.
Unemployment compensation.
Lottery winnings.
Workers compensation benefits received for an injury at work.
Workers compensation benefits received for an injury at work.
During this year, Jack was injured on his job. As a result of the injury, he received the following payments during this year:
Workers compensation received for injuries suffered at work: $2,600
Damages for physical injuries: $10,000
Back pay for two missed months of work: $9,000
What is the amount to be included in Jack’s gross income for the current year?
$9,000
$19,000
$11,600
$21,600
$9,000
For question 5, take a look at slides 44 and 45. Basically, any payment received because of a physical injury is not taxable. The only item that is taxable here is the back pay for two months of missed work.
Tom is the manager of a hotel. To be available in emergency situations, Tom’s employer requires that he live in one of the hotel rooms (without charge). The value of the room is $1,500 per month if occupied each night. The hotel is ordinarily 70% occupied. If Tom did not live there, he would live in an apartment that would rent for $900 per month. Tom’s inclusion is monthly gross income from living in the hotel room is: $0 $900 $1,350 $1,500
$0
For question 6, take a look at slide 41. The hotel manager must live on the premises. This is a condition of employment. Therefore, it’s not income to him.
Will sustained a serious injury in the course of his employment. As a result of this injury, he received the following payments:
Workers Compensation $2,500
Compensatory damages for physical injuries $1,000
Punitive damages for physical injuries $6,000
Will’s AGI is:
$2,500
$7,000
$6,000
$9,500
$6,000
Only punitive damages are included in Adjusted Gross income
Harold is covered by a $180,000 group term life insurance policy and his daughter is the beneficiary. Harold’s employer pays the entire cost of the policy for which the uniform annual premium is $8 per $1,000 of coverage. How much of this premium is taxable to Harold? $0 $640 $1,040 $1,440
$1040
See Module 3 Slide 43. It says:
An employee can exclude the cost of group term life insurance provided by an employer as long as the face value of the policy does not exceed $50,000.
If over $50,000 of coverage is provided by an employer, the cost of the premium for the excess coverage must be included in the gross income of the employee.
Harold’s policy is for $180,000, so this exceeds $50,000.
> > First find the excess coverage:
180,000 – 50,000 = 130,000 excess coverage
> > Now find the cost of the premium for the excess coverage:
130 * 8 = $1,040 –> the question tells us that the cost is $8 per $1,000. So since the excess is $130,000, we multiply $8 by (130,000 / 1,000). This gives us the amount of the premium that is taxable to Harold.
During the current year JoAnn collected:
$600 interest on U.S. Treasury bills (federal government interest)
$900 interest on Oregon Highway bonds (state government interest)
$400 in dividends from a U.S. common stock
Her AGI is:
$1,900
$1,500
$1,000
$1,300
$1,000
$600 from the intrest and $400 from the dividends from stock.
Frank, age 70, is single and an employee of Unknown Corporation. His only sources of income this year were $80,000 of wages, $15,100 in life insurance proceeds from the death of his mother, and a $1,000 cash gift from his brother. Based on the above, Frank's AGI for the current year is: $80,000 $81,000 $96,100 $95,100
$80,000
The AGI in this question should only include Frank’s wages.
For the life insurance proceeds and gifts, see module 3 slides 27-29. These are income exclusions.
Slide 28: Life insurance proceeds are not considered income to the beneficiary when the insured dies.
Slide 29: Gifts may be subject to gift tax (which is not an income tax). However, the gift tax is paid by the donor. Gifts are always free of income tax to the recipient.
Sally is 92 years old and single and claimed by her daughter as a dependent. During the tax year she received $1,900 in interest from her savings account, $1,500 in interest from State of New York general obligation bonds, and $8,000 distributions from a Roth IRA. What is her AGI? $1,500 $1,900 $3,400 $11,400
$1,900
Income:
$1,900 from savings account is taxable
$1,500 from State of New York bond is not taxable
$8,000 distribution from a Roth IRA is not taxable
Therefore, total taxable income is $1,900. The question doesn’t tell us anything about deductions. Therefore, the taxable income ($1,900) will also be the AGI ($1,900-0=$1,900).
Lane is single and has two dependents. Financial records show the following items in the current year:
Gift from a friend $12,000
Dividends received on stock $1,200
Prize won in state lottery $1,000
Salary from employer $35,000
Child support received from ex-spouse $6,000
How much is Lane’ AGI for the current year?
$43,200
$37,200
$49,200
$55,200
$37,200
AGI is $35,000 (Salary)+$1,200 (Dividends)+$1,000 (Prize Money)
Hank is a single taxpayer who earned $31,896 in wages and $11,724 of Social Security benefits. How much of Hank’s Social Security benefits are taxable? $31,896 $7,694 $11,724 $9,965
$7,694
> > So we first need to calculate Hank’s provisional income. This is 31,896 + (11,724/2) = 37,758.
Now we need to check the thresholds. From our slides:
2nd threshold base amounts
$34,000 for single
$44,000 for married filing jointly
If a taxpayer’s provisional income exceeds the 2nd threshold, the taxable portion of Social Security is the lesser of:
85% of Social Security benefits OR
85% of the amount that provisional income exceeds the threshold plus $4,500 for unmarried taxpayers or $6,000 for married filing jointly.
»Now we can see that Hank is above the second threshold base amount (34,000) for single. So we make two calculations to find the taxable portion of Social Security. This is [85% of SS benefits = 11,724 * .85 = 9,965.40] OR [85% of excess of provisional income over the base = {(37,758 – 34,000) * .85} + 4500 = 7,694.30]. The (37,758 – 34,000) is the amount that Hank’s provisional income exceeds the threshold of 34,000. We take the lesser of the two calculations, so the correct answer is $7,694.
Mark, a single taxpayer, receives $25,000 in social security benefits and has $90,000 of wages. How much of his social security benefits are taxable? $62,725 $25,000 $21,250 $12,500
$21,250
Jane and John, a married couple, have combined wages of $36,000 and receive combined Social Security benefits of $12,000. How much of their social security benefits is taxable? $6,000 $5,000 $0 $10,200
$5,000
> > We first need to calculate provisional income. This is 36,000 + (12,000/2) = 42,000.
Now we need to check the thresholds. From our slides:
1st threshold base amounts
$25,000 for single
$32,000 for married filing jointly
If a taxpayer’s provisional income exceeds the 1st threshold (but does not exceed the 2nd threshold), the taxable portion of Social Security is the lesser of:
50% of Social Security benefits or
50% of the excess of the taxpayer’s provisional income over the base.
»Now we can see that Jane and John are above the first threshold base amount (32,000) for married filing jointly, but are below the second threshold (44,000). So we use this information to find the taxable portion of Social Security. It will be the lesser of [50% of SS = 12,000 * .5 = 6,000] OR [50% of excess of provisional income over the base = (42,000 – 32,000) * .5 = 5,000]. We take the lesser of the two calculations, so the correct answer is $5,000.
