Chapter 6 T/F

Question 1

One essential element of a gift is that the donor be competent to make it

Answer 1

True

Question 2

A gift of property must be in a form sufficient to vest legal title to the property in the donee

Answer 2

True

Question 3

If a gift of property is excludible from taxation, the income generated by the gift will also be treated as a gift and received tax free by the donee.

Answer 3

False. Income received from a gift is not subject to exclusion as a gift. If the income is otherwise taxable, it must be included in the donee’s gross income.

Question 4

A bequest of a specific sum paid in three or fewer installments is generally not taxable as income.

Answer 4

True

Question 5

If the yield for a tax-exempt investment is 7 percent, the equivalent yield for a taxable investment is 10.77 percent if a taxpayer has a marginal income tax rate of 35 percent.

Answer 5

True

Question 6

Income received from nongovernmental purpose bonds is subject to the alternative minimum tax.

Answer 6

True

Question 7

Income from public purpose municipal bonds is exempt from federal income taxation

Answer 7

True

Question 8

Interest on all U.S. Treasury obligations is tax exempt.

Answer 8

False. Interest earned on United States obligations is generally fully taxable as ordinary income unless the bond qualifies for the exclusion for Series EE bonds used to pay educational expenses.

Question 9

Any gain realized on the sale of a tax-exempt municipal obligation is also tax exempt.

Answer 9

False. A tax exempt municipal obligation means that the interest received may be excluded from gross income. If a gain is made on the sale of the municipal obligation, then the gain realized is currently taxable.

Question 10

Modified adjusted gross income, for purposes of determining the taxation of Social Security benefits, is generally defined as adjusted gross income plus tax-exempt interest income and the amount of deductible higher education expenses claimed by the taxpayer in determining AGI.

Answer 10

True

Question 11

The first-tier base amount for a married couple filing a joint return is $25,000 for purposes of determining the taxability of their Social Security benefits.

Answer 11

False. This base amount is $32,000.

Question 12

Amounts received under workers’ compensation acts are excludible from gross income.

Answer 12

True

Question 13

A taxpayer who personally purchases an individual disability income policy or major medical policy will not have to include the value of any benefits in income.

Answer 13

True

Question 14

A taxpayer who receives a jury award in a lawsuit for personal injuries of a physical nature can exclude the award from his or her gross income if no portion of the award is for punitive damages.

Answer 14

True

Question 15

If damages paid pursuant to a lawsuit represent lost wages, they will generally be excludible from the recipient-taxpayer’s gross income.

Answer 15

False. Damages that are paid for lost wages are not excludible from gross income. Rather, damages paid for physical injuries are excludible under IRC Sec. 104, subject to special rules for punitive damages and damages for emotional distress.

Question 16

Benefits received from an employer-financed medical expense plan are generally included in an employee’s gross income to the extent they provide reimbursement for the medical expenses of the employee’s dependents.

Answer 16

False. Employer financed medical expense benefits are generally tax exempt if they provide reimbursement for the medical expenses of an employee or the employee’s spouse or dependents.

Question 17

Employer-paid benefits for the loss of an arm, leg, or other bodily function are excludible from the gross income of the employee who receives the benefit.

Answer 17

True

Question 18

Benefits paid from qualified long-term care insurance contracts are excludible from gross income subject to certain limitations.

Answer 18

True

Question 19

Employer contributions to an accident and health plan are included in the gross income of the covered employees.

Answer 19

False. Employer contributions to an accident and health plan are not included in the gross income of employees.

Question 20

Under the rules for a self-funded medical-reimbursement plan, the plan will be discriminatory in favor of highly compensated employees if it reimburses those employees for a larger portion of their medical expenses than other employees are reimbursed.

Answer 20

True

Question 21

Benefits received by a single parent under a qualified dependent-care assistance program are included in the taxpayer’s gross income to the extent they exceed $2,500.

Answer 21

False. A single parent can exclude up to $5,000 of benefits under a qualified dependent-care assistance program.