M2-Gross Income: Part 1

Question 1

What are the requirements for payments to be classified as alimony?

Answer 1

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.

Note: The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions).

Question 2

Damages for personal injury (i.e., workers’ compensation for a job related injury) are specifically excluded from gross income. (true or false)

Answer 2

true

Question 3

Wages and interest on US Treasury bonds are includable in gross income and must be reported as part of gross income on a taxpayer’s income tax return (true or false)

Answer 3

true

Question 4

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 or inheritances). (true or false)

Answer 4

true

Question 5

Interest income from US obligations (US Treasury Certificates) is generally (taxable or nontaxable)

Answer 5

Taxable

Question 6

Interest income on a federal tax refund is (taxable or nontaxable)?

Answer 6

Taxable

even though the refund itself is not taxed.

Question 7

The amount of social security benefits that is taxed is dependent on whether the combined income (AGI plus interest on tax-exempt bonds are 50% 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% of the benefits; or 2)50% of the excess of the combined income over the threshold. (true or false)

Answer 7

True

If the combined income is greater than the threshold, the amount taxed is the lesser of 1)amount calculated above plus 85% of the excess of the combined income over the threshold; or 2)85% of the benefits.

Thus 85% of the benefits is the maximum amount of benefits that may be included in gross income.

Question 8

Interest on state government obligations is not taxable. (true or false)

Answer 8

true

Question 9

Interest on federal government obligations IS taxable (true or false)

Answer 9

true

Interest on state refunds & Interest on Federal refunds are also taxable

Question 10

Unemployment is included in adjusted gross income (true or false)?

Answer 10

True

Question 11

Generally, the FMV 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. (true or false)

Answer 11

true

Question 12

An accruable expense is one in which the services have been received/performed but have not been paid for by the end of the reporting period. (true or false)

Answer 12

True

Question 13

Is child support taxable?

Answer 13

No, alimony is.

Inheritance is also not taxable.

Question 14

Payments for the support of a spouse are income to the spouse receiving the payments and are deductible to arrive at AGI by the contributing spouse. (true or false)

Answer 14

true

Child support is not taxable
Property settlements are not taxable

Question 15

An individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest will have what result?

Answer 15

The bond’s basis is reduced by the amortization of the premium.

For bonds acquired after 12/31/1987, the amortization of the premium is an offset to interest income on the bond rather than a separate interest deduction.

The amortization will reduce taxable income.

Question 16

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. (true or false)

Answer 16

True

Question 17

Generally, unless an exception applies, retirement money cannot be withdrawn until the individual reaches the age of 59 1/2. If retirement money (without an exception) is withdrawn before the age of 59 1/2, 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 money). (true or false)

Answer 17

True

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. (which is not used, we use the MARGINAL rate on this)

Question 18

When total payments received do not equal the total due, the amounts are first allocated to child support. (true or false)

Answer 18

true

Question 19

Generally a premature distribution (prior to retirement or other allowable age) from an individual retirement account is subject to a 10% penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic “HIM DEAD”.

Answer 19

H Home buyer (1st time) $10,000 max if used toward first home
I Insurance (medical)
M Medical expenses in excess of 10% of AGI
D Disability
E Education
A And
D Death

Question 20

Funds qualify as child support only if:

Answer 20

1) a specific amount is fixed or contingent on the child’s status (e.g., reaching a certain aget)
2) It is paid solely for the support of minor children
3) it is payable by decree, instrument, or agreement

The actual use of the funds is irrelevant to the issue.

Question 21

The first $50,000 of group term life insurance is nontaxable benefit. Amounts exceeding this are taxable based on IRS tables. (true or false)

Answer 21

True

Question 22

Alimony includes ONLY payments received in cash or its equivalent. (e.g., the payment of bills on behalf of the ex-spouse). (true or false)

Answer 22

True

Question 23

Series EE US Savings Bonds after 1989 conditions:

Answer 23

1) the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse)
2) 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.

The bonds must be bought and put in the name of the owner or co-owner, not in the name of the dependent child.

The owner must be at least 24 years old before the bonds issue date.

There is no requirement that the bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Question 24

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. (true or false)

Answer 24

True

Question 25

Filing form 1040EZ means that Clark did not itemize in the prior year and, therefore, did not deduct any state income taxes last year. (true or false)

Answer 25

true

Under the tax benefit rule, the refund is not taxable this year because the taxpayer did not deduct the tax last year. (assuming that the taxpayer filed a form 1040EZ the year before)

Question 26

Life insurance proceeds on the life of an officer when the corporation is the owner and beneficiary are not reported as taxable income of the corporation. (also note that any expense related to the premiums would not have been tax deductible for the corporation). (true or false)

Answer 26

true

Question 27

Withdrawals from traditional IRAs (i.e., IRAs for which the contributions were deducted) are taxed as ordinary income. (true or false)

Answer 27

true

Withdrawals prior to age 59 1/2 are also subject to a 10% penalty tax (unless an exception applies).

Question 28

Gross income also includes treasure troves to the extent of its value in US currency. (true or false)

Answer 28

true

Question 29

Gross income includes employee achievement awards not in the form of tangible personal property. (true or false)

Answer 29

true