R1 M2 - Gross Income: Part I Flashcards
When it comes to personal reputation or anything that does not cause death punitive damage and compensatory damages are taxable.
Punitive damage is fully taxable as ordinary income if the reward was received in a business context, when someone personal reputation is tarnished (reward for defamation), personal injury. The only case that a punitive damage would be tax exempt is if the injury resulted in death.
Jay received a court award for damages to his personal reputation by the National Gossip. He also received punitive damages. Which of the following statements is true?
A. Only the compensatory damages are taxable. B. None of the damages are taxable. C. The compensatory damages are not taxable, but the punitive damages are taxable. D. All of the damages are taxable.
Choice “D” is correct. Personal reputation awards and punitive damage awards are both included in taxable income.
Choices “B”, “A”, and “C” are incorrect, per the above explanation.
What items represents Taxable interest Income?
- Interest from federal bonds
- Interest from industrial development bonds
- Interest from corporate bonds
-Part of the proceeds from an installment sale is taxable as interest
-Interest paid by the federal or state government for late payment of tax refund is taxable
The items below represent taxable interest income:
What is reduces or is an offset to the interest received and a reduction to the bond’s basis?
The amortization of a bond premium is an offset (reduction to the interest received and a reduction to the bond’s basis.
The amortization of a bond discount is an addition to the interest received and an addition to the bond’s basis.
Which one of the following statements is correct with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest?
A. The amortization is treated as an itemized deduction. B. The bond's basis is increased by the amortization. C. The bond's basis is reduced by the amortization. D. The amortization is not treated as a reduction of taxable income.
Choice “C” is correct. The bond’s basis is reduced by the amortization of the premium.
Choice “A” is incorrect. The amortization of the premium is an offset to interest income on the bond rather than a separate interest deduction.
Choice “B” is incorrect. The bond’s basis will be decreased by the amortization.
Choice “D” is incorrect. The amortization of the premium will reduce taxable income.
Red, Inc. provides group term life insurance to the employees of the corporation. Susan, a manager, received $200,000 of coverage for the year at a cost to Red, Inc. of $2,800. The annual IRS-established uniform cost of insurance (based on Susan’s age) is $9 a year for $1,000 of coverage. How much of the premiums must Susan include in gross income this year?
A. $2,800 B. $1,350 C. $1,800 D. $0
Interest U.S Series EE Saving Bonds issued after 1989 is tax exempt when:
- Taxpayer is over 24 when the bond is issued
- It is used for higher education (tax free scholarship reduces the amount or offset it) of the taxpayer, spouse or dependent.
- married taxpayer files a joint return and,
- the taxpayer income meets what is required (if they are high earners there would be a phase out of the interest that will be tax exempt).
Nia Johnson invested in a certificate of deposit (CD) at the local bank. The total interest to be earned on the CD amounted to $1,000. However, Nia withdrew the money early and only earned $800. The bank reported $1,000 of interest and a $200 early withdrawal penalty to Nia for tax reporting. How will Nia report the interest earned and the early withdrawal penalty?
A. $1,000 as interest income and a $200 itemized deduction for the early withdrawal penalty B. $1,000 as interest income and a $200 adjustment to AGI for the early withdrawal penalty C. $800 as interest income D. $1,000 as interest income and no deduction for the early withdrawal penalty
Choice “B” is correct. The $1,000 interest income is reported in gross income and a $200 adjustment is taken for the forfeited interest due to withdrawing the money early from the investment.
Choice “A” is incorrect. The $1,000 interest income is reported in gross income and the $200 early withdrawal penalty is deducted as an adjustment, not an itemized deduction.
Choice “C” is incorrect. The interest income and penalty should not be netted. Instead, the interest income of $1,000 is reported as interest, with a separate $200 adjustment for the early withdrawal penalty.
Choice “D” is incorrect. The $1,000 interest income is reported in gross income. The $200 penalty for withdrawing the money early is an adjustment to AGI rather than an itemized deduction.
