M2 Gross Income: Part 1

Question 1

MCQ-06153
Jensen reported the following items during the current year:
Fair rent value of a condominium owned by Jensen’s employer: $1,400
Cash found in a desk purchased for $30 at a flea market: $400
Inheritance: $11,000

The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement. Based on this information,
what is Jensen’s gross income for the year?

Answer 1

$1,800

(Gross income includes employee achievement awards not in the form of tangible personal property. Tangible personal property does not include lodging. Gross income also includes treasure troves to the extent of its value in United States currency.)

Question 2

MCQ-01840
A cash basis taxpayer should report gross income:

Answer 2

For the year in which income is either actually or constructively received, whether in cash or in property.

(A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.)

Question 3

MCQ-08192
Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. Assume the annual IRS-established uniform cost of insurance is $2.76 per $1,000 of coverage. What amount
must Johnson include in gross income?

Answer 3

$100,414

(The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables. The total group term life insurance here is $200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost given here is $2.76 per $1,000 of insurance. $150,000 / $1,000 = 150; 150 × $2.76 = $414. So the total amount included in gross income is $100,414 ($100,000 + $414)

Question 4

MCQ-08705
A painter and an accountant agree to trade their services. The painter provides services valued at $550, and the accountant provides services worth $500. What amount should the accountant report as income or expense?

Answer 4

$550 income

(In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. Since the accountant received services valued at $550, the account must report income of $550.)

Question 5

MCQ-08968
In Year 2, Carson was hired as an employee of Barton Co. As part of his employment contract, Barton provided a company car for Carson’s spouse, Mary, who is not employed. The value for the use of the automobile in Year 2 was $8,000. Carson does not use the automobile. Carson and Mary file separate individual income tax returns. What amounts, if any, should be reported as a taxable fringe benefit on Carson and Mary’s Year 2 income tax returns for the personal use of the automobile?

Answer 5

D. Carson $8,000; Mary $0

(The value of the use of a company car is a taxable employee fringe benefit. Carson is the employee who received the benefit from his employer, even if his spouse, Mary, used the car. Mary is not an employee of the company, so the use of the company car is not a taxable employee fringe benefit to Mary)

Question 6

MCQ-14635
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 6,000 at a rate of 60 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?

Answer 6

$4,800

(Under a nonaccountable plan, $4,800 ($400 per month x 12 months) must be reported as part of Mel’s gross income for the year (in fact, the $4,800 will be included as part of Mel’s taxable wages on Mel’s W-2). Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the
employer must be reported by the employer as part of wages on the employee’s W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.)

Question 7

MCQ-14689
Mosh, a sole proprietor, uses the cash basis of accounting. At the beginning of the current year, accounts receivable were $25,000. During the year, Mosh collected $100,000 from customers. At the end of the year, accounts receivable were $15,000. What was Mosh’s gross taxable income for the current year?

Answer 7

$100,000

(The facts state that cash collections from customers were $100,000 and as a cash basis taxpayer this is the amount of Mosh’s gross taxable income for the year)

Question 8

MCQ-05279
Which one of the following will result in an accruable expense for an accrual-basis taxpayer?

Answer 8

A repair completed prior to year end but not invoiced.

(RULE: An accruable expense is one is which the services have been received/performed but have not been paid for by the end of the reporting period. The facts indicate that a repair was completed prior to year end but not yet invoiced. If it has not yet been
invoiced, it is assumed that it has also not yet been paid for. Therefore, this is a situation in which the repair expense would be accrued
at year end. Services have been performed, but they have not been paid for, as they have not even been invoiced yet.)

Question 9

MCQ-06680
A taxpayer received $200 in interest from U.S. Treasury bonds and $300 in interest from municipal bonds. What amount of interest
should be included in the taxpayer’s gross income?

Answer 9

$200

(In general, all income from whatever source derived is included in gross income. However, interest from state and local government bonds (i.e., “municipal” bonds) is not included in gross income. It is important to note, however, that the U.S.
government is not a municipality; thus, U.S. obligations such as Treasury bonds are not municipal bonds and therefore interest on such
obligations is included in gross income)

Question 10

MCQ-01568
During the year Kay received interest income as follows:
On U.S. Treasury certificates: $4,000
On refund of prior year’s federal income tax: $500

The total amount of interest subject to tax in Kay’s current year tax return is?

Answer 10

$4,500
(Interest income from U.S. obligations is generally taxable. Interest income on a federal tax refund is taxable, even though the federal refund itself is not taxed.)

Question 11

MCQ-01610
Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows:

$500 interest on federal income tax refund.
$600 interest on state income tax refund.
$800 interest on federal government obligations.
$1,000 interest on state government obligations.

What amount of interest income is taxable on Charles and Marcia’s Year 8 joint income tax return?

Answer 11

$1,900

(The $500 interest on federal income tax refund, the $600 interest on state income tax refund, and the $800 interest on federal government obligations are taxable, for a total of $1,900. The $1,000 interest on state government obligations is normally not taxable. Recall that to determine whether or not a state tax refund is taxable for federal tax purposes, we must know if the taxpayer took the standard deduction in the prior year or itemized deductions. This is not the case for interest on a tax refund. Interest on a federal or state income tax refund is included in taxable income.)

Question 12

MCQ-01442
During Year 9, Ash had the following cash receipts:
Wages: $13,000
Interest income from U.S. Treasury bonds: $350
Workers’ compensation following a job-related injury: $8,500

What is the total amount that must be included in gross income on Ash’s Year 9 income tax return?

Answer 12

$13,350

(The total amount that must be included in gross income is $13,350 ($13,000 in wages plus $350 in interest income on U.S. Treasury bonds). Wages and interest on U.S. Treasury bonds are includable in gross income and must be reported as part of gross income on a taxpayer’s income tax return. Damages for personal injury (i.e., workers’ compensation for a job-related injury) are specifically excluded from gross income.)

Question 13

MCQ-15038
During the current year, Adler had the following cash receipts:
Wages: $18000
Interest income from investments in municipal bonds: $400
Unemployment compensation: $3,900

What is the total amount that must be included in gross income on Adler’s current year income tax return?

Answer 13

$21,900

(The wages of $18,000 and unemployment compensation of $3,900 are both includable in gross income on Adler’s current year income tax return.)

Question 14

MCQ-12519
The following Year 1 annual report was received by Clark from the qualified defined contribution plan provided by Clark’s employer:
Beginning balance: $12,700
Employer contribution: $600
Plan earnings: $250

Ending balance $13,550

What income must be included in Clark’s gross income for Year 1?

Answer 14

$0

(Employer contributions to a qualified traditional defined contribution retirement plan and earnings on the amounts contributed are not taxable income to the employee until distributed.)

Question 15

MCQ-04861
Seth Silver had the following items of income during the taxable year:
Interest income from a checking account: $1,000
Interest income from a money market account: $2,050
Interest income from a municipal bond he purchased during the current year: $250
Interest income from federal bonds he purchased 2 years ago: $750

On his current year tax return, what amount is taxable income?

Answer 15

$3,800

(Taxable interest includes amounts received from general investment accounts as well as interest on federal obligations. Interest received from state and municipal bonds is not taxable.)

Question 16

MCQ-01564
In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate
bond proceeds in excess of qualified higher-education expenses. Which of the following is (are) true?

I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer’s spouse, or any person whom the taxpayer may claim as a dependent for the year.

II. “Otherwise qualified higher-education expenses” must be reduced by qualified scholarships not includible in gross income.

Answer 16

Both I and II

(Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).)

Question 17

MCQ-01823
Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the…

Answer 17

Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

(One of the conditions that must be met for tax exemption of accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Other conditions include, for post1989 bonds, the taxpayer is over age 24 when issued and is used to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse, or dependents.)

Question 18

MCQ-01387
Darr, an employee of Sorce C Corporation, is not a shareholder. Which of the following would be included in Darr’s taxable gross income?

Answer 18

The dividend income on shares of stock that the taxpayer received for services rendered.

(An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition.)

Question 19

MCQ-15039
Randolph is a single individual who always claims the standard deduction. Randolph received the following in the current year:
Wages: $22,000
Unemployment compensation: $6,000
Pension distribution (100% taxable): $ 4,000
A state tax refund from the previous year: $425

What is Randolph’s gross income?

Answer 19

$32,000

(Each item listed here is included in gross income except for the state tax refund from a prior year. The taxpayer always claims the standard deduction. This means that the state tax was not deducted in the year it was paid. Under the tax benefit rule, the refund of that tax is not taxable.)

Wages $22,000
Unemployment compensation: $6,000
Pension distribution (100% taxable): $4,000
Total: $32,000

Question 20

MCQ-14627
Which of the following conditions must be present in a divorce agreement executed on or before December 31, 2018, for a payment to qualify as deductible alimony?

I. Payments must be in cash or its equivalent.
II. The payments must end at the recipient’s death.

Answer 20

Both I and II

Among the requirements for payments to be classified as alimony are the following:
1. Payment must be in cash or its equivalent.
2. Payments cannot extend beyond the death of the payee-spouse.
3. Payments must be legally required pursuant to a written divorce (or separation) agreement.
4. Payments cannot be made to members of the same household.
5. Payments must not be designated as anything other than alimony.
6. The spouses may not file a joint tax return.

The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions). Alimony paid is not deductible and alimony received is not considered taxable income for all divorce or separation agreements executed after December 31, 2018.

Question 21

MCQ-14630
Which of the following should be included when determining adjusted gross income?

Answer 21

Alimony received pursuant to a divorce decree executed in 2014.

(Rule: Payments for the support of a spouse (alimony) are income to the spouse receiving the payments and are deductible to arrive at
adjusted gross income (AGI) by the spouse making the payments on any divorce agreement executed on or before December 31,
2018. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor
deductible by the payor.

To be alimony:
1. Payments must be legally required pursuant to a written divorce or separation agreement
2. Payments must be in cash or its equivalent.
3. Payments cannot extend beyond the death of the payee-spouse,
4. Payments cannot be made to members of the same household.
5. Payments must not be designated as anything other than alimony, and
6. The spouses may not file a joint tax return.

Alimony received is considered part of income and adjusted gross income

Question 22

MCQ-08785
Which of the following is taxable as gross income?

Answer 22

Alimony received based on a divorce agreement executed in 2015

(Alimony received based on a divorce agreement executed on or before December 31, 2018, is taxable as gross income to the recipient.)

Question 23

MCQ-04125
In a 2017 divorce settlement, the ex-husband was required by court order to pay his ex-wife $36,000 in alimony. She received $25,000 in cash, a painting valued at $10,000, and the use of his beach house, valued at $3,000. What amount of gross income should she
report as alimony?

Answer 23

$25,000

(Alimony includes only payments received in cash or its equivalent (e.g., the payment of bills on behalf of the ex-spouse). Alimony received pursuant to a divorce executed on or before December 31, 2018, is included in gross income of the recipient.)

Question 24

MCQ-14628
In the current year Jensen had the following items:
Salary: $50,000
Inheritance: $25,000
Alimony from ex-spouse (divorce agreement finalized in 2015): $12,000
Child support from ex-spouse: $9,000
Capital loss on investment stock sale: $(6,000)

What is Jensen’s adjusted gross income (AGI) for the current year?

Answer 24

$59,000

The question asks for AGI, but all of the items in the list are items of potential gross income. There are no adjustments included in the list; therefore, in this case, AGI is the same as gross income. The calculation is as follows:
Salary: $50,000
Inheritance: 0 [not taxable]
Alimony from ex-spouse: $12,000
Child support from ex-spouse: 0 [not taxable]
Capital loss on investment stock sale: ($3,000) [maximum deductible]

Total AGI $59,000

Question 25

MCQ-14629
An individual received $50,000 during the current year pursuant to a divorce decree executed in 2015. A check for $25,000 was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for $15,000 as a property settlement.

What amount should be included in the individual’s gross income?

Answer 25

$25,000

(Rules: Payments for the support of a spouse, pursuant to a divorce agreement executed on or before December 31, 2018, are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income by the payor spouse. Child support is not taxable. Property settlements are not taxable. Only the $25,000 in alimony is included in the gross income of the receiving spouse.)

Question 26

MCQ-14631
Merrill and Joe’s divorce was finalized in June of 2012. As part of the settlement, Joe received the following:
Alimony: $3,000/per month
Child support: $1,000/per month
Lump-sum property settlement payment: $125,000

Payments began in July, 2012; however, Merrill only paid a total of $15,000 during the year. For the current year, what amount must Joe include in gross income on his individual income tax return?

Answer 26

$9,000

(Alimony received pursuant to a divorce agreement executed on or before December 31, 2018 is included in taxable gross income; child support is not. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. Because this divorce was finalized in 2012, the alimony is included in gross income. Joe was to receive $3,000 per month in alimony for the remaining six months of the year (July - December), for a total of $18,000. Child support is non-taxable as are lump-sum property settlements made pursuant to a divorce. When total payments received do not equal the total due, the amounts are first allocated to child support. Thus, of the $15,000 paid by Merrill, $6,000 is first allocated to child support. The remaining $9,000 would constitute alimony and would be taxable income to Joe.)

Question 27

MCQ-14633
Hall, a divorced person and custodian of her 12-year-old child, filed her current year federal income tax return as head of a household. The divorce agreement, executed in 2017, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the current year, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in the current year in a suit to collect the alimony owed.

What amount should be reported in Hall’s current year tax return as alimony income?

Answer 27

$0

None of the payments received should be considered alimony income. Hall would only claim alimony income if total receipts from her former spouse exceeded $7,200 (the required child support). In the event of payments consisting of both child support and alimony, child support obligations will be satisfied first. Note also that if
the divorce was finalized after December 31, 2018, the alimony payments would not be considered income in any situation.

Amount designated as monthly child support: $600
Number of months × 12
Total Amount of required child support = $7,200

Payments actually received ($5,000)
Amount of payments considered alimony: $0

Question 28

MCQ-14634
Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,550, which included $5,500 of state income taxes paid last year. Robbe’s itemized deduction amount exceeded the standard
deduction available to single taxpayers for last year by $1,150. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?

Answer 28

Include $1,150 in income in the current year.

(Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this situation, the taxpayer only received a tax benefit of $1,150, the amount by which total itemized deductions exceeded the standard deduction in the prior year. Therefore only $1,150 of the $1,500 state tax refund is included in taxable income for the current year.)

Question 29

MCQ-01620
John and Mary were divorced in 2017. The divorce decree (executed June 30, 2017) provides that John pay alimony of $10,000 per year, to be reduced by 20 percent on their child’s 18th birthday. During the current year, the $10,000 was paid in the following way: John paid $7,000 directly to Mary and $3,000 to Spring College for Mary’s tuition.

What amount of these payments should be reported as income in Mary’s current year income tax return?

Answer 29

$8,000

(Alimony paid pursuant to a divorce or separation agreement executed before December 31, 2018 would be income to Mary while child support would not. Funds qualify as child support only if 1) a specific amount is fixed or is contingent on the
child’s status (e.g., reaching a certain age); 2) it is paid solely for the support of minor children; and 3) it is payable by decree, instrument, or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% × $10,000) qualifies as child
support. The other $8,000 is alimony, which would be income to Mary. Note that for all divorce or separation agreements executed after December 31, 2018, the alimony is neither taxable to the recipient nor deductible by the payor)

Question 30

MCQ-01636
Clark did not itemize deductions on his Year 8 federal income tax return. In July Year 9, Clark received a state income tax refund of $900 plus interest of $10, for overpayment of Year 8 state income tax. What amount of the state tax refund and interest is taxable on Clark’s Year 9 federal income tax return?

Answer 30

$10

(Except for interest from state and local government bonds, interest income is fully taxable, so the $10 is included in income. Since Clark did not itemize deductions on his Year 8 federal income tax return, he did not deduct any state income taxes last year. Under the tax benefit rule, the refund is not taxable this year because Clark did not deduct the tax last year.)

Question 31

MCQ-08623
As a result of a divorce settled in 2016, a taxpayer received the following during the current year:
Cash from the property settlement: $100,000
Child support: $12,000
Alimony payments: $30,000

What amount, if any, must be included in gross income for the current year?

Answer 31

$30,000

Alimony payments paid according to a divorce agreement executed on or before December 31, 2018, are included in gross income. Alimony paid based on a divorce settled after December 31, 2018, is neither taxable to the recipient nor
deductible by the payor (per the Tax Cuts and Jobs Act of 2017). Child support and cash from property settlements are not included in gross income. Because this divorce was finalized in 2016, the alimony is included in gross income of the recipient.

Question 32

MCQ-01859
For a cash basis taxpayer, gain or loss on a year-end sale of listed stock arises on the…

Answer 32

Trade date

(Gain or loss on a year-end sale of listed stock arises on the trade date.
Rule: Whether on the cash or accrual method of accounting, taxpayers who sell stock or securities on an established securities market must recognize gains and losses on the trade date, rather than on the settlement date.)

Question 33

MCQ-05884
Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed?

Answer 33

An ordinary income

(Withdrawals from traditional IRAs (i.e., IRAs for which the contributions were deducted) are taxed as ordinary income. Withdrawals prior to age 59½ are also subject to a 10 percent penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject to the 10 percent penalty tax.)

Question 34

MCQ-06008
A 33-year-old taxpayer withdrew $30,000 from a deductible traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?

Answer 34

$13,500

Rule: Generally, unless an exception applies, retirement money cannot be withdrawn until the individual reaches the age of 59 ½. If retirement funds (without an exception) are withdrawn before the age of 59 ½, the premature distribution is subject to a 10% penalty tax (in addition to the applicable regular income tax that applies to all distributions of traditional IRA funds). The taxpayer is under the age of 59 ½, and the facts do not indicate that an exception applies; therefore, the taxpayer is subject to the 10% penalty on the IRA distribution in addition to the regular income tax. The regular income tax that applies is the marginal rate (the rate for the next dollar of taxable income). The effective tax rate is simply the total tax divided by the total
taxable income. In this case, the taxpayer would have to pay the regular tax on the distribution at the 35% marginal rate PLUS the 10% penalty on early distribution without an exception. The calculation to arrive at the total tax associated with the withdrawal follows:

Regular Income Tax: $30,000 × 35% = $10,500
Penalty Tax 30,000 × 10% 3,000 = $3,000

Total Tax: $13,500

Question 35

MCQ-04857
Mr. and Mrs. Williams decided during the current tax year to purchase their first new home. The cost of the home was $275,000, and a 20 percent down payment was required to secure a mortgage in the amount of $220,000. The Williamses decided to utilize $10,000 that was kept in a traditional IRA owned by Mrs. Williams. This amount was withdrawn on June 12 and used to fund the down payment on July 1. These amounts had been previously deducted as an adjustment by her on an individual tax return in the year of contribution. The remaining $45,000 for the down payment was drawn from a savings account. How much of the distribution from the Individual
Retirement Account is subject to the premature distribution penalty tax, and how much must be included in gross income on the Williamses’ current year joint income tax return?

Answer 35

$10,000

Generally, a premature distribution prior to age 59 1/2 from a traditional IRA is subject to a 10 percent penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic “HIM DEAD.”

Home buyer (first time) $10,000 max if used toward first home
Insurance (medical)
Medical expenses in excess of percentage of AGI floor

Disability
Education
Adoption or birth of child made within one year from the date of birth or adoption ($5,000 maximum exclusion)
Death

The amount removed from the IRA qualifies under the “H” exception above. However, the question states that contributions to the IRA had been previously deducted on Mrs. Williams’ individual tax return, thus this is a distribution from a deductible traditional IRA. Distributions from a deductible traditional IRA are taxable to the recipient as ordinary income and thus would be included in the Williamses’ taxable gross income in the year of distribution.

Question 36

MCQ-04756
DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent’s gross income?

I. Kent was selected for the award by DAC without any action on Kent’s part.
II. Pursuant to Kent’s designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.

Answer 36

Both I and II

Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies when the winner is selected for the award without entering into a contest (i.e., without any action on
the individual’s part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions “I” and “II” must be met in order for Kent to exclude the award from his gross income.

Question 37

MCQ-08899
A retiree invested $100,000 in an annuity that pays $12,000 annually for 10 years. What portion of the first payment should be included in the retiree’s gross income?

Answer 37

$2,000

The annuity contract is a fixed-period annuity with payments received over 10 years. The original investment in the annuity contract is $100,000 so $10,000 of each annuity
payment is nontaxable return of capital ($100,000 / 10 years). The annual annuity payment is $12,000, so $2,000 is included in gross income ($12,000 payment − $10,000 return of capital).

Question 38

MCQ-08656
Flowers, a married taxpayer, purchased an annuity for $64,400 that will pay $700 per month over the
life of Flowers and Flowers’ spouse. At the time of purchase, the couple’s joint life expectancy was 23
years. Flowers received payment beginning April 1, Year 1, amounting to $6,300 in the first year of
the annuity contract. How much is includable in Flowers’ gross income in the first year?

Answer 38

$4,200

The investment amount is divided over the number of months of expected recovery. $64,400 / 276 = $233.33 (23 years × 12 months = 276 months). This is the amount of each
payment that is a cost recovery and not taxable. Payments began in April of this year, resulting in 9 payments this year ($233.33 × 9 = $2,100). This is the portion of the $6,300 that is not taxable. So the taxable amount is $4,200 ($6,300 – $2,100 = $4,200).

Question 39

MCQ-01571
With regard to the inclusion of Social Security benefits in gross income, for the Year 8 tax year, which of the following statements is correct?

Answer 39

Eighty-five percent of the Social Security benefits is the maximum amount of benefits to be
included in gross income.

The amount of Social Security benefits that is taxed is dependent on whether the combined income (AGI plus interest on tax-exempt bonds and 50 percent of the Social Security
benefits) is greater than a threshold amount. If the combined income is less than the threshold, the amount taxed is the lesser of 1) 50 percent of the benefits; or 2) 50 percent of the excess of the combined income over the threshold. If the combined income is greater than the threshold, the amount taxed is the lesser of 1) amount calculated above plus 85 percent of the excess of the combined income over the threshold; or 2) 85 percent of the benefits. Thus, 85 percent of the benefits is the maximum amount of benefits that may be included in gross income.

Question 40

MCQ-15040
Porter was unemployed for part of the current year. Porter received $35,000 of wages, $6,400 from a
state unemployment compensation plan, and $2,000 from his former employer’s company-paid
supplemental unemployment benefit plan. What is the amount of Porter’s gross income for the
current year?

Answer 40

$43,400

Gross income includes all income unless it is specifically excluded in the tax code. Wages and all unemployment compensation are not excluded from being
taxable; therefore, they are included in the taxpayer’s gross income for tax purposes.

Wages received: $35,000
State unemployment compensation: $6,400
Employer’s unemployment compensation plan: $2,000

Total: $43,400

Question 41

MCQ-01482
Klein, a master’s degree candidate at Blair University, was awarded a $12,000 scholarship from Blair in Year 8. The scholarship was used to pay Klein’s Year 8 university tuition and fees. Also in Year 8, Klein received $5,000 for teaching two courses at a nearby college. What amount is includable in
Klein’s Year 8 gross income?

Answer 41

$5,000

Scholarships are nontaxable for degree-seeking students to the extent that the proceeds are spent on tuition, fees, books, and supplies. The $5,000 for teaching courses is taxable
compensation for services delivered.

Question 42

MCQ-15814
An individual taxpayer had the following transactions during the current year:

Workers’ compensation payments: $30,000
Damages received for slander: $40,000
Loss on the sale of a personal residence: $75,000
W-2 wages: $80,000

What is the taxpayer’s adjusted gross income?

Answer 42

$120,000

The taxpayer’s adjusted gross income (AGI) is $120,000, which consists of the $80,000 wages and the $40,000 damages received for slander. Compensation for services and
damages received for non-physical injury, such as slander, are included in taxable gross income. Workers’ compensation payments are excluded from taxable gross income and the loss on the sale of a personal residence is a non-deductible personal loss.

Question 43

MCQ-01485
Which payment(s) is (are) included in a recipient’s gross income?

I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.

II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

Answer 43

Both I and II

I. A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship.

II. There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university-sponsored research.

Question 44

MCQ-01794
Under a $150,000 insurance policy on her deceased father’s life, May Green is to receive $12,000 per year for 15 years. Of the $12,000 received in the current year, the amount subject to income tax is:

Answer 44

$2,000

Death benefit: $150,000
Amount received in the current year: $12,000
Less: Return of principal ($150,000 ÷ 15 years): ($10,000)

Total Taxable interest: $2,000