Chapter 5 Flashcards
Gross Income and Exclusions
Sally is a cash-basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a true statement?
Sally is taxed on the value of the football tickets even if she cannot attend the game.
Gross income includes the value of property received in exchange for services.
Bashira is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services rendered. Which of the following is a true statement?
Bashira is taxed on the $5,000 of service income in the year she receives the check.
Under constructive receipt Bashira is taxed on income when property is received or made available to her.
This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?
$200 is included if itemized deductions exceeded the standard deduction by $200.
Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $4,000 of deduction produced a tax benefit of $200 if itemized deductions exceeded the standard deduction by $200.
Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?
Wilma must include the $1,000 of interest in her income this year.
Interest is taxed when credited to the account.
Jorge purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, Jorge’s life expectancy is 100 months. How much of the first $80 payment will Jorge include in his gross income?
$48
The annuity exclusion ratio is ($3,200 ÷ 100) = $32 return of capital per payment. Hence, $48 of the $80 is included in gross income.
Barney and Betty got divorced in 2018. In the divorce decree, Betty agreed to pay Barney $24,000 per year for five years (or until Barney’s death or remarriage) and $10,000 per year until their daughter, Pebbles, turns 19 years old. What amount (if any) is included in Barney’s gross income in 2023?
$24,000
Alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient. For divorce agreements executed before 2019, alimony payments are included in the gross income of the recipient.
Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Ethan include in his gross income?
$25,000
To be excludable, the prize must be associated with scientific, literary, or charitable achievement or received by a Team USA athlete from the U.S. Olympic Committee on account of their competition in the Olympic or Paralympic games.
Rhett made his annual gambling trip to Uwin Casino. On this trip, Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?
$1,450
Taxpayers must include the gross amount of their gambling winnings for the year in gross income.
Bart, a single taxpayer, has recently retired. This year, he received $24,000 in pension payments and $5,000 of Social Security payments. What amount must Bart include in his gross income for the Social Security payments?
$750
His modified AGI + 50 percent of Social Security benefits is $24,000 + $2,500 = $26,500, which is greater than $25,000 but less than or equal to $34,000. His taxable Social Security benefits are the lesser of
a) $2,500 (50 percent of his Social Security benefits) or
b) 50 percent of [$24,000 modified AGI + $2,500 (50% of Social Security benefits) − $25,000] = $750.
Thus, his taxable Social Security benefits are $750.
Joyce’s employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3 percent, which of the following is correct?
a) joyce recognizes $1,500 of taxable interest income.
b) joyce’s employer recognizes $1,500 of deductible interest expense
c) joyce recognizes $1,500 of imputed compensation income
d) joyce recognizes $1,500 of imuted dividend income
e) none of these are correct
Joyce recognizes $1,500 of imputed compensation income.
Employees recognize compensation income on below-market loans from employers calculated using the federal interest rate.
Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)?
Bond Interest
General Motors $ 1,450
City of New York 900
State of New Jersey 1,200
U.S. Treasury 850
$2,300
Interest on bonds issued by state and local governments is excluded from gross income.
Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun’s dormitory fees of $8,500 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?
$8,500
College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student’s courses. Any excess scholarship amounts (such as for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.
Graham has accepted an offer to do graduate work in the chemistry department at State University. The chemistry department offered Graham a $5,000 tuition reduction and $3,500 toward the cost of room and meals. Under the terms of the scholarship Graham must work in the chemistry labs during the summer as a research assistant. What amount must Graham include in his gross income?
$3,500
The scholarship exclusion applies to the tuition reduction but not the cost of room and board.
In January of the current year, Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months later in the same year after the gift, a $500 dividend was declared on the stock and paid to Dora’s granddaughter. What amount must Dora’s granddaughter include in her gross income for the current year?
The gift of the stock is excluded but the dividend on the shares is taxable. Hence, the answer is $500.
Sabina recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($3,700), her emotional distress ($6,000—she now fears peanut butter), and punitive damages ($44,000). What amount must Sabina include in her gross income?
44,000
