Income

Question 1

When can interest on Series EE savings bonds be excluded?

Answer 1

1. Taxpayer incurs higher education expenses in year bonds are cashed in;
2. The exclusion is available only for bonds that are issued to individuals who are at least 24 years old.

Question 2

Describe the tax-benefit rule.

Answer 2

Requires a taxpayer to include an expense reimbursement in income if the expense was deducted in a prior period and provided a tax benefit in that period.

Question 3

How does one determine the amount of property dividend that should be included in income?

Answer 3

Value received to extent paid from earnings and profits.

Question 4

Describe the interest-exclusion rule.

Answer 4

Interest on state or local governmental obligations is excluded.

Question 5

What is the tax treatment of proportionate stock dividends and splits?

Answer 5

1. Not a taxable event;
2. Taxpayer must adjust basis per share;
3. Option to receive cash instead triggers dividend income.

Question 6

Describe the claim-of-right rule

Answer 6

Requires the taxpayer to include property in income in the period in which an apparent claim to the property materializes, even if it is possible that this income may have to be returned in the future.

Question 7

Describe the constructive receipt rule.

Answer 7

A cash-basis taxpayer must include property in income in the period in which the right to (or control of) the property is acquired, even if no actual cash receipt.

Question 8

What is the tax treatment of child support?

Answer 8

Never taxable to the recipient, no deduction to payor.

Question 9

What is the tax treatment of alimony?

Answer 9

1. Taxed to the recipient;

2. Allowed as a “for AGI” deduction to payor.

Question 10

Describe the alimony front-loading rules.

Answer 10

Require recapture of deductions and income if alimony payments decline more than $15,000 over the first 3 years after the divorce.

Question 11

Describe the personal injury exclusion rule.

Answer 11

Compensatory damages for physical injuries or sickness only are excluded from income.

Question 12

What are the requirements to qualify for alimony?

Answer 12

1. Payment must be in cash or via expense payment;
2. Must be contingent on recipient still being alive;
3. Required by a written agreement or decree;
4. Not identified as “non-alimony.”

Question 13

What is the tax treatment of gifts?

Answer 13

1. Gifts are excluded from income;

2. Income accrued up to date of gift is taxable to donor; after, to donee.

Question 14

Are prizes and awards subject to taxation?

Answer 14

Generally taxed.

Question 15

Are scholarships taxable?

Answer 15

1. Generally excluded up to amount of tuition and expenses;
2. No services can be required;
3. Student loans forgiven after a public service requirement are excluded from gross income of the student.

Question 16

What is the treatment of life insurance proceeds?

Answer 16

Proceeds of life insurance received due to the death of the insured are excluded from income.

Question 17

What costing methodology is required for the production of goods for sale?

Answer 17

Full absorption costing.

Question 18

Describe the cash method of accounting.

Answer 18

Recognizes income (and expenses) in the year in which payment is received (or paid.)

Question 19

When are leasehold improvements recognized as income?

Answer 19

The fair value of leasehold improvements is income to the landlord if the improvements are made in lieu of rent.

Question 20

What entities are required to use the accrual method for Sales and Cost of Goods Sold?

Answer 20

Taxpayers for whom sales of inventory constitute a substantial source of income.

Question 21

Describe the hybrid method of accounting.

Answer 21

Allows cash basis for all income and expenses except that sales and purchases of inventories must be accounted for under the accrual method.

Question 22

What insurance premiums paid for employees are excludible from the employer’s income?

Answer 22

1. Group term life insurance up to $50,000 of coverage;

2. Health insurance premiums.

Question 23

A tax payer can generally exclude the value of an employee discount that an employer provides an employee from the employee’s wages, up to what limits?

Answer 23

1. 20% of value of services;

2. Average gross profit percentage for goods.

Question 24

What types of fringe benefits are excluded from an employee’s income?

Answer 24

1. Meals and lodging for convenience of employer;
2. Working condition expenses;
3. De minimus fringes;
4. No additional cost fringes;
5. Employee discounts;
6. Employee gifts (under $25) and safety/achievement awards.

Question 25

Under what circumstances are health insurance proceeds excluded from income?

Answer 25

1. Excluded if taxpayer paid premiums;

2. Excluded if employer paid premiums and reimbursement is for qualified medical expenses.

Question 26

Define the “working condition benefit.”

Answer 26

A benefit provided by the employer that would be deductible if the employee had instead paid the expense, excluded from income if reimbursed by employer.

Question 27

What is the maximum contribution that can be made to a 401(k) plan to reduce an employees taxable salary?

Answer 27

Allows voluntary employee contributions to reduce taxable salary up to a maximum of $17,500 for 2013.

Question 28

What is the maximum contribution an individual can make to a Traditional or Roth Individual Retirement Account (IRA)?

Answer 28

Lower of $5,500 or earned income (an additional $1,000 catch-up contribution is allowed for taxpayers over the age of 50).

Question 29

What deductions are allowed for a Roth Individual Retirement Account (IRA)?

Answer 29

Zero. Deductions are never allowed for Roth IRA contributions.

Question 30

What is the tax treatment of contributions of salary to “qualified” pension plans?

Answer 30

Deferred until distributions are made from the pension.