Unit 3

Question 1

Is interest income Gross income?

Answer 1

All interest is gross income unless exclusion. noncash deminimis gift is tax free <10$ or <40$ (5k deposit)

Question 2

Below Market Loans gross income?

Answer 2

May be equivalent of a receipt of income in amount of forgone interest. . Interest is imputed.

Question 3

Below Market Loan Exception

Answer 3

No interest is imputed for any day where total loans between borrower and lender are below certain amounts. <10k unless for income producing assets.

Question 4

Original Issue Discount

Answer 4

is the excess of the stated redemption price at maturity over issue price and is included in income based on effective interest rate method of amortization.

Question 5

Redemption of US Saving Bond for education Phaseout

Answer 5

Starts phase out 82.25k for 2020

123k MFJ

PHASE OUT AT 97k

Dated after 24 birthday

Question 6

Interest on State/Local Gov Obligations

Answer 6

Not gross income.
Does not include private equity bonds >10% proceeds used in private business, 5% private loans. unless residential rental housing.

Question 7

Interest on State/Local/Fed tax refunds is income

Answer 7

TRUE

Question 8

Income from Dividiends

Answer 8

Taxable. Any distibution in excess of p&L is considered recovery of capital and is not taxable but reduce basis.

Question 9

Income from Mutual Funds GI?

Answer 9

Depend on character of income source.

Tax exempt= tax exempt.

Question 10

Reinvested DIvidends

Answer 10

Taxed in year paid, added to basis and treated as ordinary dividends.

Question 11

Stock Dividends GI?

Answer 11

Not GI usually unless: choice to elect cash/other property

Some receive cash, or some common shareholders receive preferred stock.

Question 12

Nonstatutory Stock Option

Answer 12

Options do not qualify for favorable tax treatment. Taxed.

Question 13

Nonstatutory Stock Option Taxed when..

Answer 13

Easy FMV = When transferable

Hard FMV = taxed when right to receive stock is unconditional

Question 14

Employee Stock Purchase Plans

Answer 14

No income when granted untill disposed of. When disposed = ordinary income or excess over FMV = gain. . ALso option price cannot be smaller than 85
5 of FMV stock. Exercisable with 5 years. no more than 25k purchased per year. Not transferable, may have compensation income.

Question 15

Income with respect to Decedent IRD

Answer 15

IRS is all amount decedent was entitized too as GI but not included in computing income on final return.

Question 16

Decedents Final Form 1040 would not include IRD

Answer 16

TRUE