Tax Ch 5

Answer 1

GROSS INCOME RELATED TO EMPLOYMENT
* Compensation for services is included in gross income
* Salary
* Wages
* Self-employment & business income
* Fringe benefits
* Commissions
* Fees
* Tips
* Anything received in return for services

Answer 2

FOREIGN EARNED INCOME (1 OF 2)

• Exclusion applies if a qualified individual has a tax home in a
  foreign country, and must either:

1. qualify as a bona fide resident of a foreign country or countries
   for an uninterrupted period that includes an entire taxable year
   (bona fide resident test), or
2. qualify by being present in a foreign country or countries for at
   least 330 full days during any period of twelve consecutive
   months (physical presence test).

• Amount of exclusion:
• 2024 - $126,500
• 2023 - $120,000

Answer 3

FOREIGN EARNED INCOME (2 OF 2)

• Bona fide resident
• Intend to work there for indefinite/long-term period
• Establish permanent quarters for self and family
• Physical presence test
• 330 days in consecutive 12 months
• Can begin on any day
• Exemption prorated by number of days

Answer 4

FOREIGN EARNED INCOME: EXAMPLE

Connor lives and works in France for 340 days out of the 365 days
during the 2024 calendar year. He meets the physical presence test.
The maximum amount of foreign earned income that he can exclude
from his gross income is $117,836 [(340/365) x $126,500)]

Answer 5

FOREIGN HOUSING COSTS EXCLUSION

• Applies to housing costs considered to be paid by an employer
• Amount = total housing expenses less a base amount (16% of
  maximum annual exclusion)
• Cannot exceed 30% of maximum foreign earned income
• Reduces the foreign earned income exclusion by a like amount

Answer 6

FOREIGN INCOME OPTIONS FOR U.S. TAXATION PURPOSES

Answer 7

FRINGE BENEFITS

• Taxable unless exception applies
• Excluded benefits must normally be offered on a non-iscriminatory
  basis
  – If benefits available to highly-compensated (key) employees are
  not available for non-highly compensated employees, the benefit
  is discriminatory.
  – May result in loss of exclusion for some or all employees

Answer 8

HCE AND KEY EMPLOYEES

• Highly Compensated Employee (HCE)
• Greater than 5% owner
• Compensation in excess of:
  – $155,000 (2024)
• Key Employee
• Greater than 5% owner
• Greater than 1% owner with compensation greater
  than$150,000 (not indexed)
• Officer with compensation greater than:
  –$220,000 (2024)

Answer 9

EMPLOYER-PROVIDED MEDICAL BENEFITS

Answer 10

MSAs AND HSAS

Answer 11

HSA RULES

• Contribution not tied to deductible.
• If eligible during last month of year, deemed eligible for entire year.
• Can make a one-time, tax-free IRA distribution to fund an HSA if the
  owner remains eligible for 12 months.
• Employer can make one-time transfer to HSA from:
  –Health reimbursement arrangement
  – Flexible spending plan

Answer 12

LIFE INSURANCE PREMIUMS

• Permanent Insurance
• Taxable to employee
• Group Term Insurance
• Cost of up to $50,000 death benefit excluded
  – Amounts over this are taxable to employee
• If plan discriminates, key employees must include cost of group
  term insurance in income
  –Greater of table cost or actual cost to employer

Question 13

UNIFORM PREMIUM TABLE

Answer 13

UNIFORM PREMIUM TABLE

Answer 14

GROUP TERM LIFE INSURANCE EXCLUSION: EXAMPLE

• Khabib’s employer provides him with $80,000 of group term life
  insurance for which Khabib pays none of the premiums. Khabib is
  56 years old at the end of the year.
• He can exclude the cost of the first $50,000 of coverage.
• $30,000/$1,000 = 30 units in excess of the excluded amount
• He must include $154.80 ($30 x $0.43 per thousand per month x
  12 months) in his gross income.
  – This amount is generally reported as part of Khabib’s W-2
  income.
• If Khabib pays any amount toward the cost of the insurance
  coverage, the taxable amount will be reduced by the amount of
  the payment.

Answer 15

OTHER COMMON FRINGE BENEFITS (1 OF 4)

Employee Death Benefits
* Excluded if:
–Employer has no obligation to pay
– Facts indicate gratuitous payment

Disability Insurance
* Employer pays premium: benefits taxable
* Employee pays premium after-tax: benefits excluded

Answer 16

OTHER COMMON FRINGE BENEFITS (2 OF 4)

Cafeteria Plans
* Employee chooses cash or benefits
* Benefits generally excluded from income
* Avoids constructive receipt if:
* Benefits are qualified
* Plan does not favor HCEs
* Nontaxable benefits to Key Employees < 25% of nontaxable
benefits provided to all employees
* Useful when benefit needs vary
* Helps manage fringe benefit costs for the employer; show value
of benefits

Answer 17

OTHER COMMON FRINGE BENEFITS (3 OF 4)

Flexible Spending Accounts (FSAs)
* Employee election to pay for medical/dependent care costs with
pre-tax dollars
* Salary reductions also exempt from payroll tax
* Amounts not spent are forfeited
* Entire amount available at beginning of year
* No recovery by employer if employee terminates employment
* Health care FSA maximum
* $3,050 in 2023
* $3,200 in 2024

Answer 18

OTHER COMMON FRINGE BENEFITS (4 OF 4)

Long-Term Care Insurance
* Activities of daily living (ADL)
* Eating
* Bathing
* Dressing
* Toileting
* Transferring
* Continence
* Pays benefits if owner cannot perform 2 or more ADLs
* Employer-paid premiums deductible
* Benefits not taxable if less than $410/day in 2024 ($420/day
for 2023) or the actual cost of care
* Not available through cafeteria plan or flexible spending account

Answer 19

OTHER EMPLOYEE FRINGE BENEFITS (1 OF 9)

• Meals
• For the convenience of the employer
• On the employer’s business premises
• Employer deduction for meals for convenience of employer limited
  to 50%
• Lodging
• Same conditions for meals, plus
• Employee required to accept as condition of employment
• No-Additional-Cost Services
• Service offered for sale to customers
• In line of business in which employee works
• Employer incurs no substantial cost
• Taxable to HCEs if plan is discriminatory

Answer 20

OTHER EMPLOYEE FRINGE BENEFITS (2 OF 9)

Qualified Employee Discounts
* Excluded from income if:
* Products: no more than cost of goods
* Services: no more than 20%
* If plan is discriminatory, HCEs must recognize discount.
Working Condition Fringe Benefits
* Employee would have been entitled to a deduction if paid
personally.

Answer 21

OTHER EMPLOYEE FRINGE BENEFITS (3 OF 9)

De Minimis Fringe Benefits
* Any property or service where the value is so small as to make
accounting impractical
* Occasional meal money provided due to overtime work
* Employer provided eating facilities if provided on non-
discriminatory basis
Qualified Transportation
* Transportation to work, transit pass, parking
* Commuting limit: $315 per month for 2024
* Parking limit: $315 per month for 2024
* May be discriminatory
* Not deductible by employer after 2017 (TCJA)

Answer 22

OTHER EMPLOYEE FRINGE BENEFITS (4 OF 9)

Qualified Moving Expense Reimbursements: Before 2018 and
After 2025
* Excluded from income if paid by employer
Qualified Moving Expense Reimbursements: 2018 - 2025
* Not excludible from income unless attributable to in-kind moving
and storage expenses for members of the U.S. Armed Forces on
active duty that move pursuant to a military order and incident to
a permanent change of station.
* Sunsets for tax years beginning after December 31, 2025

Answer 23

OTHER EMPLOYEE FRINGE BENEFITS (5 OF 9)

Qualified Retirement Planning Services
* Excluded if employer maintains qualified plan
* Information about the qualified plan, plus general advice and
information
* If discriminatory, HCEs must recognize income
Athletic Facilities
* Operated by the employer; and
* Located on the employer’s premises; and
* “Substantially all” of the use of the facility is by employees of the
employer, their spouses or their dependent children

Answer 24

OTHER EMPLOYEE FRINGE BENEFITS (6 OF 9)

Educational Assistance Programs
* Up to $5,250 excluded from income per year
* Written plan
* Can cover tuition, fees, books, supplies, and equipment
* Employee student loan payments (3/28/20 through 12/31/25)
* Undergraduate and graduate education
* May not be used for sports, games, or hobby classes
Dependent Care Assistance
* Up to $5,000 excluded from income, but no more than earned
income
* Must allow the employee to work
* Nondiscrimination requirements apply

Answer 25

OTHER EMPLOYEE FRINGE BENEFITS (7 OF 9)

Tuition Reduction Granted to Employees of Educational Institutions
* Generally, applies to undergraduate education
* Graduate education excluded if student performs teaching or
research activities
Adoption Assistance Programs
* Maximum exclusion is $16,810 (for 2024)
* Phaseout applies ($252,150 - $292,150 for 2024)
* Must meet nondiscrimination requirements

Answer 26

OTHER EMPLOYEE FRINGE BENEFITS (8 OF 9)

Employee Achievement Awards
* Must be tangible personal property
* To $1,600 (or $400 if not qualified)
Combat Pay and Military Benefits
* Excluded items:
* Combat zone pay
* Housing and subsistence allowances
* Death gratuity payments

Answer 27

OTHER EMPLOYEE FRINGE BENEFITS (9 OF 9)

Parsonage
* Value of home or rental allowance furnished to minister is excluded
Frequent Flyer Miles
* Announcement 2002-18
* Frequent flyer miles and other promotional benefits (through
rental car agencies or hotels) attributable to taxpayer’s
business that are exchanged for free travel and upgrades etc.,
are not currently considered income taxable

Answer 28

INCOME TAXATION & EMPLOYER RETIREMENT PLANS
* Involves Doctrine of Constructive Receipt
* Employee Deferrals
* Election made before income earned
* Excluded from current income
* Employer Contributions
* Excluded from employee’s current income
* Plan Earnings
* Tax deferred until distributions are made
* Plan Distributions
* Generally taxed as ordinary income
* Not subject to payroll taxes
* Early distribution penalty – 10%

Answer 29

SPECIAL RETIREMENT PLAN ISSUES (1 OF 2)

Roth 401(k) and Roth 403(b) Plans
* No tax deferral
* Distributions are tax free if it is a qualified distribution – must
meet both of the following requirements :
* Account open for 5 years, and
* Made after age 59½, disability, or death
* Distributions that are not qualified are taxed on a pro rata basis
consisting of income and return of basis.

Answer 30

SPECIAL RETIREMENT PLAN ISSUES (2 OF 2)

Stock Options
* Non-Qualified Stock Options (NQSO)
* Grant: no income recognition
* Exercise: ordinary income on bargain element (excess of
FMV over exercise price)
* Sale: LT or ST capital gain

• Incentive Stock Option (ISO)
  – Grant: no income recognition
  – Exercise: no income recognition
  –Sale: LTCG if held for 2 years from date of grant and 1 year
  from date of exercise

Answer 31

NQSO AND ISO COMPARISON

Answer 32

STOCK OPTION TAX CONSEQUENCES: EXAMPLE

Answer 33

GOVERNMENT-REQUIRED BENEFITS

• Unemployment Compensation
• Included in income, unless after-tax contributions made
• Workers’ Compensation
• Covers medical, rehab, lost income due to injuries and sickness
• Benefits excluded from income
• Social Security
• Taxation depends on income (Modified AGI)

Answer 34

SOCIAL SECURITY TAXATION

Modified AGI = AGI +
* Excluded municipal bond interest
* Excluded foreign earned income and housing allowances
* Excluded U.S. Savings Bond interest
* Excluded adoption assistance benefits
* Deducted student loan interest expense
* Excluded income from Guam, American Samoa, the Northern
Marianna Islands, and Puerto Rico

Answer 35

SOCIAL SECURITY TAXATION

Answer 36

SOCIAL SECURITY TAXATION: 50%

• If MAGI plus one-half of Social Security benefits exceeds the
  relevant base amount, but not the adjusted base amount, then the
  amount of benefits included in gross income is the lesser of:50% of Social Security benefits, or
  50% x [MAGI + (50% x Social Security benefits) – base amount]

Answer 37

SOCIAL SECURITY TAXATION: EXAMPLE 1

Julianna, a single tax filer, received the following this year:
* $15,000 of Social Security retirement benefits
* $5,000 of interest income
* $3,000 of dividend income
* $18,000 of income from her retirement plan

Since her MAGI plus one-half of her Social Security benefits exceeds
her base amount but not her adjusted base amount, her includible
Social Security benefits will use the “50% formulas.”

• Half of her Social Security benefits is $7,500.
• The second formula yields an inclusion amount of $4,250 [0.5 x
  ($26,000 + $7,500 - $25,000)].
• She will include $4,250 in her gross income.

Answer 38

SOCIAL SECURITY TAXATION: 85%

• If MAGI plus one-half of Social Security benefits exceeds the
  adjusted base amount, the amount of benefits included in gross
  income is the lesser of:
• 85% of Social Security benefits, or
• 85% x [MAGI + (50% x Social Security benefits) – adjusted base
  amount], plus
• Lesser of: Amount included from “50% formulas” or $4,500
  ($6,000 for married filing jointly; $0 for married filing
  separately)

Answer 39

SOCIAL SECURITY TAXATION: EXAMPLE 2 (1 OF 2)

Andrea, an unmarried taxpayer using the single filing status, received
$15,000 of Social Security retirement benefits this year. She also
received $5,000 of interest income and $48,000 of income from her
retirement plan during the year.

Since her MAGI ($53,000) plus one-half of her Social Security benefits
(0.5 x $15,000 = $7,500) exceeds her adjusted base amount
($34,000), she must calculate her includible Social Security benefits
using the “85% formulas.”

Answer 40

SOCIAL SECURITY TAXATION: EXAMPLE 2 (2 OF 2)

3. 0.85 x $15,000 = $12,750
4. 0.85 x [$53,000 + (0.50 x $15,000) - $34,000] = $22,525 plus the
   lesser of the amount calculated using the “50% formulas.”
5. 0.50 x $15,000 = $7,500
6. 0.50 x [$53,000 + (0.50 x $15,000) - $25,000] = $17,750

The lesser amount is $7,500.

The formula 4 total is the lesser of $30,025 ($22,525 + $7,500) or
$27,025 ($22,525 + $4,500)

The lesser of the formula 3 or 4 amounts is $12,750. Therefore,
$12,750 of the Social Security benefits must be included in Andrea’s
gross income.

Question 41

UPDATED FOR 2024:
Henrietta is unmarried, has a high-deductible medical plan, and recently set up an HSA.
Under what circumstances are contributions to Henrietta’s HSA deductible for 2024?

Contributions to Henrietta’s HSA by her employer are deductible by Henrietta.

Contributions made by Henrietta are only deductible to the extent that her contributions exceed the deductible on her high-deductible plan.

Contributions made by Henrietta up to $4,150 are deductible.

Contributions are only deductible to the extent of qualified medical expenses.

Answer 41

Contributions made by Henrietta up to $4,150 are deductible. TEST

Rationale

Option a is not correct because contributions made to Henrietta’s HSA by her employer are deductible by the employer, not Henrietta.

Option b is not correct because, beginning in 2007, the contribution limit is not determined by the deductible of the high-deductible plan. In addition, for years before 2007, the contribution would only be deductible up to the amount of the deductible, not the amount that exceeds the deductible.

Option d is not correct. Although distributions are only tax-free if they are used to pay for qualified medical expenses, contributions are not affected by qualified medical expenses. For 2024, Henrietta’s contributions up to $4,150 are deductible

Question 42

B.J. and Penny, a married couple, have income of $50,000 and Social Security benefits of $20,000. What amount of their Social Security benefits must be included in their gross income?

a. $13,600.
b. $14,000.
c. $17,000
d. $19,600.

Answer 42

The correct answer is c.

B.J. and Penny must include the lesser of:

0.85 ($20,000) = $17,000,
or

0.85 ($50,000 + $10,000 - $44,000) = $13,600 plus the lesser of:
$6,000
, or
0.50 ($50,000 + $10,000 - $32,000) = $14,000.

Therefore, B.J. and Penny must include $17,000 of their Social Security benefits in their gross income

Question 43

Dustin and Diamond are married and had the following income and expenses for this year.

1. Dustin’s salary of $60,000.
   What is Dustin and Diamond’s joint gross income?
   a. $71,584. b. $78,184. c. $78,250. d. $80,584.
2. Dustin’s employer provides him with a group-term life insurance policy for two times his salary. The policy premium paid by the employer is $150 per year. The Uniform Premium Table amount is $0.10.
3. Diamond had salary of $10,000 and unemployment compensation of $9,000
4. Diamond won $1,500 on a game show.

What is Dustin and Diamond’s joint gross income?

a. $71,584.
b. $78,184.
c. $78,250.
d. $80,584.

Answer 43

The correct answer is d.

All items will be included in income.

The premium on the insurance policy will be included as follows:

((($60,000 x 2) - $50,000) / 1,000) x 0.10 x 12 = $84 inclusion.

The amount the employer actually pays is irrelevant.

$60,000 + $84 + $10,000 + $9,000 + $1,500 = $80,584

Question 44

Which of the following statements is correct regarding the taxation of fringe benefits?

1. The value of the fringe benefit is included in the employee’s gross income unless the IRC specifically excludes it from taxation.
2. The value of the fringe benefit is excluded from the employee’s gross income unless the IRC specifies otherwise.
3. The value of the fringe benefit is taxable if the benefit is only provided to employees owning more than 5% of the company and the fringe benefit has a nondiscrimination requirement.
4. The value of the fringe benefit is always taxable if someone other than the employee (e.g., the employee’s spouse) benefits from the fringe benefit provided by the employer.

a. 1 and 2.
b. 1 and 3.
c. 2 and 4.
d. 3 and 4.

Answer 44

The correct answer is b. 1 and 3.

Someone who owns more than 5% of a company is a highly compensated employee and/or a key
employee.

If non-discrimination requirements apply, fringe benefits that are only provided to this group will be taxable, even if they are otherwise excluded from taxation.

Question 45

Which of the following is not a qualifying person for the purpose of employer-provided dependent care assistance?

a. A child of the employee regardless of whether the child can be claimed as a dependent on the employee’s tax return.

b. A dependent of the employee who has not attained the age of 13.

c. A dependent of the employee who is physically or mentally incapable of self-care and who has the same principal place of abode as the employee for more than one-half of the year.

d. The employee’s spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the employee for more than one-half of the year.

Answer 45

The correct answer is a.

Options b, c, and d list the three categories of qualifying persons for the purpose of employer-provided dependent care assistance.

Under the rules, a child of the employee must be claimed as a dependent of the employee in order to exclude employer-provided dependent care assistance from the employee’s income

Question 46

Brock receives stock options (ISOs) with an exercise price of $16 when the stock is trading at $16. Brock exercises these options two years after the date of the grant when the stock price is $37 per share.
Which of the following statements is correct?

a. Upon exercise, Brock will have no income for regular tax purposes.

b. Brock will have W-2 income of $21 per share upon exercise.

c. Brock will have $16 of AMT income upon exercise.

d. Brock’s adjusted basis for regular income tax will be $37 at exercise.

Answer 46

The correct answer is a.

Brock does not have regular income at the date of exercise.
Brock’s adjusted basis will be $16.

The AMT adjustment will be the difference between the fair market value and the exercise price ($37-$16=$21)

Question 47

Jose, a short order cook at the Junior’s Corner restaurant, works from 12 p.m. to 10 p.m. five days a week. Each workday, he is furnished two meals without charge. The manager of the restaurant encourages Jose to eat lunch in the employee break room each day before 12 p.m., but does not expressly require him to do so. The manager does, however, require Jose to eat dinner in the employee break room. The cost to the restaurant is $5 per lunch and $7 per dinner.
Assuming that Jose eats both lunch and dinner at the restaurant, what amount of this fringe benefit should be included in Jose’s income?

Neither the cost of the lunches nor the cost of the dinners should be included in Jose’s income.

Only the cost of the lunches should be included in Jose’s income because he is not required to eat them.

Only the cost of the dinners should be included in Jose’s income because is he required to eat them as part of his job.

Both the cost of the lunches and the dinners should be included in Jose’s income.

Answer 47

Neither the cost of the lunches nor the cost of the dinners should be included in Jose’s income.

Rationale

Because Jose is a food service employee and works during the normal lunch and dinner periods, he can exclude the value of the lunches and dinners from his gross income.

Question 48

Which of the following fringe benefits provided by Oceanside Company would be taxable to its employee, Holly?

Flowers sent to Holly when her mother was ill.

The value of doughnuts provided by Oceanside on a weekly basis for the enjoyment of all employees.

Monthly dues to the local health club paid by Oceanside for Holly and all other employees.

A 10% employee discount on merchandise sold by Oceanside.

Answer 48

Monthly dues to the local health club paid by Oceanside for Holly and all other employees.

Rationale

In order for an athletic facility to be nontaxable, it must be on the premises of the employer. The other choices are all nontaxable to employees, assuming they are not provided on a discriminatory basis.

Question 49

Brock receives stock options (ISOs) with an exercise price of $16 when the stock is trading at $16. Brock exercises these options two years after the date of the grant when the stock price is $37 per share. Which of the following statements is correct?

Upon exercise, Brock will have no income for regular tax purposes.

Brock will have W-2 income of $21 per share upon exercise.

Brock will have $16 of AMT income upon exercise.

Brock’s adjusted basis for regular income tax will be $37 at exercise.

Answer 49

Upon exercise, Brock will have no income for regular tax purposes.

Rationale

Brock does not have regular income at the date of exercise.

Brock’s adjusted basis will be $16.

The AMT adjustment will be the difference between the fair market value and the exercise price ($37-$16=$21).

Question 50

Which of the following statements is correct regarding the taxation of fringe benefits?

1. The value of the fringe benefit is included in the employee’s gross income unless the IRC specifically excludes it from taxation.
2. The value of the fringe benefit is excluded from the employee’s gross income unless the IRC specifies otherwise.
3. The value of the fringe benefit is taxable if the benefit is only provided to employees owning more than 5% of the company and the fringe benefit has a nondiscrimination requirement.
4. The value of the fringe benefit is always taxable if someone other than the employee (e.g., the employee’s spouse) benefits from the fringe benefit provided by the employer.

1 and 2.
1 and 3.
2 and 4.
3 and 4.

Answer 50

1 and 3.

Rationale

Someone who owns more than 5% of a company is a highly compensated employee and/or a key employee.

If non-discrimination requirements apply, fringe benefits that are only provided to this group will be taxable, even if they are otherwise excluded from taxation.

Question 51

Rafael is single and received $28,000 of dividend income during the year. He also received $18,000 of Social Security benefits.
What portion of Rafael’s Social Security benefits are taxable?

$0.
$7,050.
$9,000.
$15,300.

Answer 51

7,050.

Rationale

The lesser of:
85% of $18,000 = $15,300

or

0.85 [$28,000 + 0.5 ($18,000) - $34,000] = $2,550
plus $4,500
equals $7,050

Question 52

Miguel has lived and worked in Florida for 30 years as a salesperson. He was divorced recently and decided he needed a change of scenery. He applied for and was offered a job in California. Miguel had the following expenses related to the move in 2024:

1. House hunting expenses - $5,000
2. Moving truck service - $12,000
3. Lodging en route - $600
4. Meals en route - $250
5. New driver’s license in California - $35
6. Ticket for speeding en route - $250

Miguel’s new employer reimbursed him for $8,000 in moving expenses. His salary for the year was $100,000. What is Miguel’s AGI?
$87,400.
$95,400.
$100,000.
$108,000.

Answer 52

108,000.
Rationale

None of the house hunting expenses, truck, meals, new driver’s license and ticket for speeding are deductible. Because the employer reimbursed him for $8,000 of the expenses, he must include the $8,000 in income. Thus, his AGI is $108,000. Because Miguel is not active duty military, the reimbursement is included in income.

Question 53

Which of the following is not a qualifying person for the purpose of employer-provided dependent care assistance?

A child of the employee regardless of whether the child can be claimed as a dependent on the employee’s tax return.

A dependent of the employee who has not attained the age of 13.

A dependent of the employee who is physically or mentally incapable of self care and who has the same principal place of abode as the employee for more than one-half of the year.

The employee’s spouse who is physically or mentally incapable of self care and who has the same principal place of abode as the employee for more than one-half of the year.

Answer 53

A child of the employee regardless of whether the child can be claimed as a dependent on the employee’s tax return.

Rationale

Options b, c, and d list the three categories of qualifying persons for the purpose of employer-provided dependent care assistance. Under the rules, a child of the employee must be claimed as a dependent of the employee in order to exclude employer-provided dependent care assistance from the employee’s income.

Question 54

UPDATED FOR 2024:

Sylvia recently decided to adopt a child named Anderson, who the state determined has special needs. Sylvia was excited to find out that her employer has an adoption assistance program that reimburses the maximum possible amount to employees who adopt children. Sylvia incurs the following expenses in 2024 associated with her adoption of Anderson:
1. Legal fees of $5,000
2. Court costs of $2,000
3. Renovation costs of $4,000 (to make her home more accessible to Anderson)

How much can Sylvia receive as a reimbursement from her employer and how much of that payment can she exclude from her income?

Answer 54

Sylvia can receive $16,810 from her employer and can exclude all of it from her income.

Rationale

Because Sylvia is adopting a child with special needs, she can receive the maximum reimbursement from her employer of $16,810 (without regard to her actual qualified adoption expenses) and all of that payment can be excluded from her gross income.

If Sylvia had adopted a child that did not have special needs, only the legal fees and court costs (the qualified adoption expenses) would have been subject to reimbursement.

Question 55

Which of the following requirements must be satisfied in order for a U.S. citizen to exclude foreign earned income from U.S. taxation?

Both the bona fide resident test and the physical presence test must be satisfied.

The income must be earned by employees of the U.S. government.

The taxpayer must also elect to take the foreign tax credit.

Either the bona fide resident test or the physical presence test must be satisfied.

Answer 55

Either the bona fide resident test or the physical presence test must be satisfied.

Rationale

A taxpayer who has foreign earned income is not required to satisfy both the bona fide resident test and the physical presence test. If the foreign earned income is earned by an employee of the U.S. government, it must be included in the taxpayer’s gross income. A taxpayer must choose either to exclude the foreign earned income from gross income or take the foreign tax credit; a taxpayer may not choose to do both.

Question 56

B.J. and Penny, a married couple, have income of $50,000 and Social Security benefits of $20,000. What amount of their Social Security benefits must be included in their gross income?

$13,600.
$14,000.
$17,000.
$19,600.

Answer 56

17,000.

Rationale

B.J. and Penny must include the lesser of:

0.85 ($20,000) = $17,000, or

0.85 ($50,000 + $10,000 - $44,000) = $13,600 plus the lesser of:
$6,000, or
0.50 ($50,000 + $10,000 - $32,000) = $14,000

Therefore, B.J. and Penny must include $17,000 of their Social Security benefits in their gross income.

Question 57

Claressa, age 68, had $50,000 in salary for the current year. She also received Social Security benefits of $10,000 and workers’
compensation of $25,000. Which of the following is true?

The salary, 100% of the Social Security benefits, and 100% of the workers’ compensation will be taxable to Claressa.

The salary, 75% of the Social Security benefits, and 50% of the workers’ compensation will be taxable to Claressa.

The salary, 50% of the Social Security benefits, and 100% of the workers’ compensation will be taxable to Claressa.

The salary and 85% of the Social Security benefits will be taxable to Claressa.

Answer 57

The salary and 85% of the Social Security benefits will be taxable to Claressa.

Rationale

The salary will be taxable at 100%. The workers’ compensation is excluded from income. Due to her high combined income, 85% of Claressa’s Social Security benefits will be subject to tax.

Question 58

Dustin and Diamond are married and had the following income and expenses for this year.

1. Dustin’s salary of $60,000
2. Dustin’s employer provides him with a group term life insurance policy for 2 times his salary. The policy premium paid by the employer is $150 per year. The Uniform Premium Table amount is $0.10.
3. Diamond had salary of $10,000 and unemployment compensation of $9,000.
4. Diamond won $1,500 on a game show.

What is Dustin and Diamond’s joint gross income?

$71,584.
$78,184.
$78,250.
$80,584.

Answer 58

$80,584.

Rationale

All items will be included in income. The premium on the insurance policy will be included as follows:
((($60,000 x 2) - $50,000) ÷ 1,000) x 0.10 x 12 = $84 inclusion. The amount the employer actually pays is irrelevant.

$60,000 + $84 + $10,000 + $9,000 + $1,500 = $80,584

Question 59

Laila recently entered an assisted living facility. She is unable to feed or dress herself, although she can still walk and go to the bathroom unassisted. Laila had a life insurance policy with a death payout of $100,000. She sold the policy to a viatical company for $60,000 and used the money to pay for her long-term care at the assisted living facility. Which of the following statements is true?

The policy proceeds will be excluded from Laila’s income.

85% of the policy proceeds will be taxed.

The policy will be included in Laila’s income at $100,000.

The policy will be included in Laila’s income at $60,000.

Answer 59

The policy proceeds will be excluded from Laila’s income.

Rationale

The policy is excluded from Laila’s income because she is chronically ill (she is unable to do 2 of the 6 activities of daily living) and the money was used to pay for long-term care.

Question 60

Which of the following can make contributions to Woody’s HSA?

Woody’s employer.
Woody’s aunt.
Woody’s ex-wife.
All of the above.

Answer 60

All of the above.
Rationale

Woody’s employer, as well as any other person (including his aunt and his ex-wife) can make contributions to his HSA.

Question 61

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Is computed in the same manner as an annuity [exclusion = (cost/expected return) × amount received].

May not exceed the portion contributed by the employer.

May not exceed 50% of the Social Security benefits received.

May be zero or as much as 85% of the Social Security benefits received, depending upon the taxpayer’s Social Security benefits and other income.

Answer 61

correct answer is D.

The taxable Social Security benefits are based on a formula intended to assure that low income taxpayers are not taxed on the Social Security benefits, but higher income taxpayers are taxed under the theory that, on the average the taxpayer will collect more from the Social Security program than he or she paid into the program

Question 62

Red, Inc. provides group term life insurance to the employees of the company. Susan, a highly paid vice-president, received $250,000 of coverage for the year costing Red, Inc. $2,800. The Uniform Premiums (based on Susan’s age) are $8 a year for $1,000 of protection. How much of this must Susan include in her gross income this year?

$1,600
$2,000
$2,240
$2,800

Answer 62

he correct answer is A.

$250,000 – $50,000 = $200,000 (because of the 50,000 exclusion)

$200,000 ÷ 1,000 = 200 units of coverage (each unit is $1,000 in coverage)

Therefore, the employee’s income is the amount from the IRS table ($8 × 200 = $1,600).

Question 63

Section 119 excludes the value of employer provided meals from the employee’s gross income:

A. Whenever the employer pays for the meal and it’s for the convenience of the employee.
B. When the meals are provided to the employee on the employer’s premises as a convenience to the employee.
C. When the meals are provided to the employee on the employer’s premises for the convenience of the employer.
D. All of the choices

Answer 63

When the meals are provided to the employee on the employer’s premises for the convenience of the employer.

Question 64

Employers of the Family Bowling Alley allow their employees to bowl without charge after the employee’s working hours and when there are adequate idle bowling lanes. Tom bowled 12 games during the month at no charge when the non-employee charge was $3.00 per game.

A. Tom must include $36 in gross income.
B. Tom must include in gross income the employer’s marginal cost of providing the bowling lanes and equipment.
C. Tom is not required to include anything in gross income because this is a “no-additional-cost service” fringe benefit.
D. Tom is not required to include the $36 in gross income if the arrangement is for the convenience of the employer.

Answer 64

Solution: The correct answer is C.

The free bowling qualifies as a “no-additional-cost service.”

Question 65

Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $7,000. The price Tan ordinarily charges a wholesaler is $8,500. The retail price of the furniture was $12,000, and Tan’s cost was $8,000. The company also paid for Peggy’s parking space in a garage near the office. The parking fee was $1,200 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees’ parking fees. Peggy’s inclusion in gross income from the above is:

$0
$1,000
$1,200
$3,800

Answer 65

Solution: The correct answer is B.

The furniture purchases were under a “qualified employee discount” plan, but the exclusion is limited to the employer’s gross profit. Because Peggy purchased the furniture for $7,000 when the employer’s cost was $8,000, she must include $1,000 of the discount in gross income. The parking space is a qualified transportation fringe and is not required to be available to all employees (i.e., can be provided on a discriminatory basis).