Exclusions Flashcards
Fred specified in his will that his nephew John should serve as executor of Fred’s estate. John received $10,000 for serving as executor. John inherited $100,000 of cash from his uncle as well. He also borrowed $5,000 when he bought a new car this year. Classify each of the amounts received by John using terminology covered in this chapter. Explain the rationale for each classification.
The $ 10000 that John received is Compensation for Services and, therefore, must be included in his Gross income. The $100000 that John inherited is Non-Taxable. Finally, the $ 5000 that John borrowed is not Income because he has an offsetting Liability to repay this money so there is no accession to wealth.
Leonard’s home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard’s employer paid Leonard his regular salary, $2,500, while he was absent from work. In Leonard’s pay envelope was the following note from the employer: To help you in your time of need. Leonard’s fellow employees also took up a collection and gave him $900. Leonard spent over $4,000 repairing the fire damage.
Based on the above information, how much is Leonard required to include in his gross income?
$2,500
Megan is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Megan abided by the customer’s request. The customer’s bill was $8, but the customer left a $100 bill on the table and did not ask for a receipt. Megan gave the cashier $8 and pocketed the $100 bill (so Megan ends up with $92). Megan concludes that the customer thought that he had left a $10 bill, although the customer did not return to correct the apparent mistake. The customer had commented about how much he appreciated Megan’s prompt service. Megan thinks that a $2 tip would be sufficient and that the excess is like “found money.” How much should Megan include in her gross income?
Megan should include $92 ($100 received from customer minus $8 given to cashier) in her gross income.
Wilbur has been offered a job at a salary that would put him in the 24% marginal tax bracket. In addition to his salary, he would receive health insurance coverage. Another potential employer does not offer health insurance but has agreed to match the first offer on an after-tax and insurance basis. The cost of health insurance comparable to that provided by the other potential employer is $9,000 per year. How much more in salary must the second potential employer pay so that Wilbur’s financial status will be the same under both offers?
$11,842 is the amount that should be required to purchase health insurance for $9,000 when the marginal tax rate is 24%
Andrea entered into a § 529 qualified tuition program for the benefit of her daughter, Joanna. Andrea contributed $15,000 to the fund. The fund balance had accumulated to $25,000 by the time Joanna was ready to enter college. However, Joanna received a scholarship that paid for her tuition, fees, books, supplies, and room and board. So Andrea withdrew the funds from the § 529 plan and bought Joanna a new car.
What are the tax consequences to Andrea of withdrawing the funds?
Assume instead that Joanna’s scholarship did not cover her room and board, which cost $7,500 per academic year. During the current year, $7,500 of the fund balance was used to pay for Joanna’s room and board. The remaining amount was left in the § 529 plan to cover her room and board for future academic years. What are the tax consequences to Andrea and to Joanna of using the $7,500 to pay for the room and board?
A must comprise $10,000 in her gross revenue that is the fund incomes.
Both Andrea and Joanna can eliminate the $7,500 from gross revenue since this sum was used to pay for higher education expenditures.
Ellie purchases an insurance policy on her life and names her brother, Jason, as the beneficiary. Ellie pays $32,000 in premiums for the policy during her life. When she dies, Jason collects the insurance proceeds of $500,000.
As a result, how much gross income does Jason report?
Jason will not report any gross income as a result of receiving the insurance proceeds.
Leland pays premiums of $5,000 for an insurance policy in the face amount of $25,000 upon the life of Caleb and subsequently transfers the policy to Tyler for $7,500. Over the years, Tyler pays subsequent premiums of $1,500 on the policy. Upon Caleb’s death, Tyler receives the proceeds of $25,000.
As a result, what amount is Tyler required to include in his gross income?
Upon Caleb’s death Tyler gets a life insurance payout of $73,750
In his gross income, he includes only $46,271.24, which is the portion of the proceeds that are due to premiums paid by Leland.
This translation is correct, but the $27,478.76 remaining amount ($73,750-$46,271.24) is not income to Tyler in that same year.
Donald was killed in an accident while he was on the job. Darlene, Donald’s wife, received several payments as a result of Donald’s death. What is Darlene’s gross income from the items listed below?
Donald’s employer paid Darlene an amount equal to Donald’s three months’ salary ($60,000), which is what the employer does for all widows and widowers of deceased employees.
Donald had $20,000 in accrued salary that was paid to Darlene.
Donald’s employer had provided Donald with group term life insurance of $480,000 (twice his annual salary), which was payable to his widow in a lump sum. Premiums on this policy totaling $12,500 had been included in Donald’s gross income under § 79.
Donald had purchased a life insurance policy (premiums totaled $250,000) that paid $600,000 in the event of accidental death. The proceeds were payable to Darlene, who elected to receive installment payments as an annuity of $30,000 each year for a 25-year period. She received her first installment this year.
a. amount received $60,000
amount taxable $60,000
b. amount received $20,000
amount taxable $20,000
c. amount received $480,000
amount taxable $0
d. amount received $30,000
amount taxable $6,000*
What is the taxpayer’s gross income in each of the following situations?
Darrin received a salary of $50,000 from his employer, Green Construction.
In July, Green gave Darrin an all-expenses-paid trip to Las Vegas (value of $3,000) for exceeding his sales quota.
a. Darrin’s gross income is $50,000.
b. Transfers from an employer to an employee cannot be excluded as a gift. So it cannot be exclude from his income and will include the value ($3,000) on his gross income statement.
Sparrow Corporation would like you to review its employee fringe benefits program with regard to the tax consequences of the plan for the company’s president (Polly), who is also the majority shareholder.
The company has a qualified retirement plan. The company pays the cost of employees attending a retirement planning seminar. The employee must be within 10 years of retirement, and the cost of the seminar is $1,500 per attendee.
The company owns a parking garage that is used by customers, employees, and the general public but primarily by the employees. Only the general public is required to pay for parking. The charge to the general public for Polly’s parking for the year would have been $4,200 (a $350 monthly rate).
All employees are allowed to use the company’s fixed charge long-distance telephone services, as long as the privilege is not abused. Although no one has kept track of the actual calls, Polly’s use of the telephone had a value (what she would have paid on her personal telephone) of approximately $600.
The company owns a condominium at the beach, which it uses to entertain customers. Employees are allowed to use the facility without charge when the company has no scheduled events. Polly used the facility 10 days during the year. Her use had a rental value of $1,000.
The company is in the household moving business. Employees are allowed to ship goods without charge whenever there is excess space on a truck. Polly purchased a dining room suite for her daughter. Company trucks delivered the furniture to the daughter. Normal freight charges would have been $750.
The company has a storage facility for household goods. Officers are allowed a 20% discount on charges for storing their goods. All other employees are allowed a 10% discount. Polly’s discounts for the year totaled $900.
a. The company pays $1,500 for employees attending a retirement planning seminar within 10 years of retirement.
b. The company provides Polly with parking valued at $4,200 for the year.
c. Polly uses the company’s long-distance telephone services, which had a value of approximately $600.
d. Polly’s use of the company’s beach condominium for 10 days had a rental value of $1,000.
e. The company delivered a dining room suite for Polly’s daughter, saving her $750 in freight charges.
f. Polly received a 20% discount on storage charges, totaling $900 for the year
Tax policy of exclusion
the taxpayer isnt wealthier
encourage social and economic behavior
politics
Tonya, who lives in California, inherited a $100,000 State of California bond in 2023. Her marginal Federal tax rate is 35%, she itemizes deductions on her Federal tax return, and her marginal state tax rate is 5%. The California bond pays 3.3% interest, which is not subject to California income tax. She can purchase a corporate bond of comparable risk that will yield 5.2% or a U.S. government bond that pays 4.6% interest. Which investment will provide the greatest after-tax yield?
How do you qualify for exclusions?
Need a specific statute from Congress in order to qualify for an exclusion
Are birthday and holiday presents taxable?
No
General rule for gifts and inheritance exclusions?
Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance
If there is not a donative intent between employer and employee, is the income taxable?
yes
Does the IRS consider employee death benefits as compensation?
yes
True or False: if all of the following are true, then the payment is presumed to have been made as an act of affection or charity -
the payments were made to the surviving spouse and children rather than to the EE’s estate
the employer derived no benefit from the payments
the surviving spouse and children performed no services for the employer
the decedent had been fully compensated for services rendered.
payments were made pursuant to a board of directors’ resolution that followed a general company policy of providing payments for families of deceased employees.
True
General Rule for Taxation of life insurance proceeds paid by reason of death
exclude from income
general rule for taxation of life insurance proceeds paid for some other reason than death
gain is taxable
True or False: If the owner of a life insurance policy cancels the policy and receives the cash surrender value, the taxpayer must recognize gain equal to the excess of the amount received over premiums paid on the policy.
True
Exception to the general rule that gain is taxable on life insurance proceeds that are paid for some other reason than death -
terminally ill or chronically ill
True of False: The exclusions for the terminally ill and the chronically ill are available to persons other than the insured.
False
