Gross Income - Review Questions

Question 1

Which concept of income adjusts for inflation?

Choose the best answer.

1) Accounting
2) Economic

Answer 1

2) Economic

The economist adjusts for inflation in measuring income. 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.

Question 2

In which of the following forms may gross income be realized? (Check all that are true.)

1) Money
2) Transactions
3) Property
4) Services

Answer 2

1) Money
2) Transactions
3) Property
4) Services

Gross income is not limited to amounts received in the form of cash. According to Reg. Sec. 1.61-1(a) of the Internal Revenue Code, income may be “realized in any form, whether in money, transactions, property, or services.”

Question 3

Which law taxes the income earner?

1) Common Law
2) Community Property System

Answer 3

1) Common Law

The income is generally taxed to the individual who earns the income, either through labor or through capital.

Question 4

Young parents, whose annual income is currently $45,000, begin a regular program of purchasing Series EE bonds for their 8-year old daughter’s college education. Is there any risk that when the bonds are redeemed the interest income will not be excludable?

Answer 4

Yes, the parents’ income may increase over the years to such an extent that the interest exclusion will not be available.

Question 5

Gambling losses are allowable as what type of deduction?

Choose the best answer.

1) Standard Deduction
2) Itemized Deduction
3) Partial Deduction
4) Full Deduction

Answer 5

2) Itemized Deduction

Gambling losses (up to the amount of the current year’s winnings) are allowable as an itemized deduction.

Question 6

Which of the following are inclusions in Social Security benefits? (Check all that are true.)

1) Basic monthly retirement
2) Disability benefits
3) Retirement benefits
4) Medical benefits

Answer 6

1) Basic monthly retirement
2) Disability benefits
3) Retirement benefits

The term Social Security benefits refers to basic monthly retirement and disability benefits paid under Social Security and also retirement benefits. It does not include supplemental Medicare benefits that cover the cost of doctors’ services and other medical benefits.

Question 7

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

Choose the best answer.

1) Cash-Basis
2) Accrual-Basis
3) Hybrid-Basis

Answer 7

1) Cash-Basis

In general, the amount recovered must be included in the gross income in the year it is recovered. Cash-basis taxpayers encounter this situation more often than accrual-basis taxpayers because their expenses are generally deductible in the year they are paid.

Question 8

Who does not recognize self-help income as income? (Check all that are true.)

1) IRS
2) Economists
3) The Courts

Answer 8

1) IRS
3) The Courts

Although economists consider self-help income as income, it is not recognized as income by the IRS or by the courts.

Question 9

How can a donor avoid paying tax on income?

Choose the best answer.

1) Make a gift of the underlying property to the donee.
2) Transfer the right to income from the underlying property to the donee.
3) Make a gift of income.

Answer 9

1) Make a gift of the underlying property to the donee.

To avoid paying tax on income, a donor must make a gift of the underlying property to the donee.

Question 10

Which of the following are considered qualified adoption expenses? (Select all that are true.)

1) Adoption fees
2) Court Costs
3) Attorney fees
4) Adoption assistance program

Answer 10

1) Adoption fees
2) Court Costs
3) Attorney fees

Qualified adoption expenses include adoption fees, court costs, attorney fees, and other expenses related to an adoption.

Question 11

Jack takes a client out to dinner and a ball game that cost in total $150. Jack can deduct ___ dollars?

Answer 11

Answer: $0.

Assuming conditions for deductibility are met, the tax law only allows 50% of the cost of the meals to be deductible by Jack’s employer, assuming Jack gets reimbursed. The cost of the ball game is no longer deductible even if the employer did reimburse Jack.

Question 12

The following dialog illustrates a conversation regarding dependent care:

Paul: “Hi Sharon! How can I help you today?

Sharon: “May I exclude any of my dependent care costs?”

Paul: “Will you file a separate return?”

Sharon: “No.”

How should Paul answer Sharon’s question?

Answer 12

Pauls Answer to Sharon’s Question

Paul: “Then you can exclude up to $5,000 of assistance each year.”

Sharon: “Great! Thanks for your help.”

Question 13

What are the exceptions where the discharge of an indebtedness is not taxable? (Check all that are true.)

1) The discharge occurs when the taxpayer is solvent.
2) The discharge occurs in bankruptcy.
3) The discharge occurs when the taxpayer is insolvent.
4) The discharge occurs when the taxpayers pay their tax.

Answer 13

2) The discharge occurs in bankruptcy.
3) 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 14

Which of the following is not a situation in which the Government will consider imputed interest income?

1) Gift loans – made out of love, affection, or generosity
2) Corporate loans made to its shareholder(s)
3) Auto purchase from dealer for 0% interest
4) Compensation related loans from employer to employees

Answer 14

3) Auto purchase from dealer for 0% interest

Auto purchase from dealers for 0% interest is not a situation in which the Government is looking to impute interest income.

Question 15

Mary is involved in several transactions during the current year. No interest is stated on any of the transactions. In what situation would imputed interest apply?

1) Purchases furniture for her residence. Full price is payable within five months.
2) Sells land for $100,000. Payment is due in five years.
3) Sells a boat for $2,200. Payment is due in one year.
4) Purchases a newly issued bond for $650, with a par value of $1,000.

Answer 15

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

Less than 6 months, less than $3,000, and OID are all exceptions to imputed interest income. Only the land sale is not an exception.

Question 16

Dan lent his son $60,000 for the purchase of a new house, with the understanding that in five years, his son would repay the loan at face value. For the current tax year, Dan’s son had net investment income of $2,800. Assume that the Applicable Federal Rate (AFR) for mid-term loans is 6%. Calculate the imputed interest for the first year.

1) $0
2) $2,800
3) $1,500
4) $3,600
5) Does not apply because the loan was made out of love and affection.

Answer 16

2) $2,800

The imputed amount is the lesser of the applicable federal rate times the loan balance ($3,600) or the borrower’s net investment income ($2,800).

Question 17

Which of the following is included in gross income?

1) Self-help income
2) Rental value of personal-use property
3) Gross selling price of property
4) Distributive share of partnership income

Answer 17

4) Distributive share of partnership income

Only the share of partnership income is not an exclusion of gross income.

Question 18

Which of the following is not included in gross income?

1) Gifts received
2) Illegal income
3) Alimony from a divorce settlement prior to 2019
4) Gains from dealings in property

Answer 18

1) Gifts received

Only gifts received are excluded from gross income.

Question 19

What does income NOT include?

Choose the best answer.

1) non-taxable income
2) a return of capital
3) gains in the sale of property

Answer 19

2) a return of capital

Income includes both taxable and non-taxable income. However, it does not include a return of capital.

Question 20

The tax law refers to gross income, yet the term gross income is not found on Form 1040. Explain why.

Answer 20

Gross income is income from taxable sources. Form 1040 combines the results of computations made on several separate schedules. For example, income from a proprietorship is reported on Schedule C where gross income from the business is reduced by related expenses. Only the net income or loss computed on Schedule C is carried to Form 1040. This is procedurally convenient, but means gross income is not shown on Form 1040.

Question 21

If a taxpayer is in the 24% marginal tax bracket, would he or she prefer $100 of tax credits or $300 of tax deductions.

Answer 21

The taxpayer would prefer the $100 of tax credits. The $300 of deductions will result in a tax savings of $72 ($300 × .24), whereas the $100 of credits would result in a tax savings of $100.

Question 22

Many homeowners itemize deductions while many renters claim the standard deduction. Explain why.

Answer 22

Home mortgage interest and real property taxes are itemized deductions. As a result those expenses alone often exceed the standard deduction enabling the homeowner to itemize.

Question 23

A surviving spouse is not required to do which of the following?

Choose the best answer.

1) Be remarried at the end of the year in which surviving spouse status is claimed.
2) Be a U.S. citizen or resident.
3) Be qualified to file a joint return in the year of death.
4) Have at least one dependent child living at home the entire year and pay over half of the expenses of the home.

Answer 23

1) Be remarried at the end of the year in which surviving spouse status is claimed.

A surviving spouse must not remarry as of the year end in which surviving spouse status is claimed to qualify for surviving spouse status.

Question 24

For the current year, David and Julie had a combined AGI of $374,000 and will be filing together as a married couple. They have a son, Mark, who is 12 years old. What is the amount of the child tax credit David and Julie are entitled to on their tax return?

Choose the best answer.

1) $0
2) $800
3) $1,000
4) $2,000

Answer 24

4) $2,000

David and Julie received a full $2,000 tax credit since their AGI is under the phaseout threshold of $400,000.

Question 25

Tax law provides a foreign tax credit to reduce _____ _____.

Answer 25

Double taxation

The tax law provides a foreign tax credit for income taxes paid or accrued to a foreign country or a U.S. possession to reduce double taxation.

Question 26

What is backup withholding? What is its purpose?

Answer 26

Backup withholding was implemented to prevent abusive noncompliance with tax provisions. Backup withholding provides for withholding of taxes from pension income. It also requires withholding on most payments reported in form 1099 such as interest, dividends, and royalties under certain circumstances (e.g., where the taxpayer fails to provide the payor with his tax identification number (Social Security number, for example), or fails to report this type of income on his return).