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Exam 5: Gross Income and Exclusions

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Question 31

True/False

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Interest income is taxed in the year in which it is received by the taxpayer or credited to the bank account.

A) True
B) False

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Question 32

Multiple Choice

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Hal Gore won a $1 million prize for special contributions to environmental research. This prize is awarded for public achievement, and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency. How much of the prize should Hal include in his gross income?

A) $400,000
B) $600,000
C) $1,000,000
D) None of the choices are correct because all prizes are excludable.
E) None of the choices are correct because prizes from charities are excludable.

F) B) and D)
G) A) and B)

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Question 33

Multiple Choice

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Sally is a cash-basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a true statement?

Jim received a $500 refund of state income taxes this year. Jim will not need to include the $500 in his gross income this year if he did not deduct state income taxes last year.

Barter clubs are an effective means of avoiding realization for tax purposes.

Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as:

Bernie is a former executive who is retired. This year Bernie received $235,000 in pension payments and $12,700 of Social Security payments. What amount must Bernie include in his gross income?

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount) .

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

Sam, age 45, saved diligently for his college education by putting part of his pay into U.S. Series EE savings bonds. Sam purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200. He has no other income this year. What amount must Sam include in his gross income?

Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of1 percent. Wendell would have paid interest of $2,500 this year if the interest rate on the loan had been set at the prevailing federal interest rate. Wendell used the funds as a down payment on a vacation home, and during the year he paid $500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest. What amount of gross income does Wendell recognize from the loan this year?

For tax purposes, unearned income is income that has not yet been realized.

Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $20,800 for tuition, $5,400 for fees, and $1,280 for books. In addition, Shaun's dormitory fees of $10,500 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

Jack and Jill are married. This year Jack earned $72,000, Jill earned $80,000, and they received $4,000 of interest income from a joint savings account. How much gross income would Jack report if he files married filing separately from Jill?

Frank received the following benefits from his employer this year. What amount must Frank include in his gross income?

NeNe is an accountant and a U.S. citizen who has accepted a permanent position in Madrid, Spain, for a Spanish financial services company. This year, NeNe spent the entire year working in Madrid. NeNe's employer paid $40,000 of her Madrid housing expenses this year. What amount of the $40,000 housing payments may NeNe exclude?

Bobby and Sissy got married two and a half years ago. Since that time, they have lived in Bobby's home. Sissy sold her previous home three years ago and excluded her entire gain ($80,000)at that time. Bobby and Sissy decided to move to a bigger home this year. As a result, they sold Bobby's home for $500,000 (original cost $150,000). How much of the gain from the sale is taxable?