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Exam 5: Gross Income: Exclusions

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Question 21

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A U.S.citizen worked in a foreign country for the period July 1, 2011 through August 1, 2012.Her salary was $10,000 per month.Also, in 2011 she received $5,000 in dividends from foreign corporations (not qualified dividends) .No dividends were received in 2012.Which of the following is correct?

A) The taxpayer can exclude $60,000 from U.S.gross income for 2011 because the total salary earned in the foreign country in 2011 was less than the annual foreign earned income exclusion, but the dividends of $5,000 must be included in gross income.
B) The taxpayer can exclude a portion of the compensation income from U.S.gross income in 2011 and 2012, but must include the dividend income of $5,000 in gross income.
C) The taxpayer can exclude from U.S.gross income $60,000 salary in 2011, but in 2011 the taxpayer will exceed the twelve month limitation and, therefore, all of the 2012 compensation must be included in gross income.All of the dividends must be included in 2011 gross income.
D) The taxpayer can exclude a portion of the salary from U.S.gross income in 2011 and 2012, and all of the dividend income.
E) None of the above.

F) C) and E)
G) A) and D)

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Question 22

True/False

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Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

A) True
B) False

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Question 23

Multiple Choice

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Denny was neither bankrupt nor insolvent but was short of cash and could not make the mortgage payments on his personal residence in 2012. The bank that held the mortgage agreed to reduce the principal on the debt from $100,000 to $80,000 so that Denny's monthly mortgage payments could be reduced to a manageable amount. Denny also had a vacation home with a mortgage whose payments were beyond his means.The mortgage holder on the vacation home agreed to reduce the mortgage from $60,000 to $50,000.The value of the personal residence was $80,000 and the value of the vacation home was $45,000 at the dates of the debt reduction.

Roger is in the 35% marginal tax bracket. Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However, Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan, he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.

Christie sued her former employer for a back injury she suffered on the job in 2011.As a result of the injury, she was partially disabled.In 2012, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2011 return, reducing her taxable income by $12,000. Christie's 2012 gross income from the above is:

Ridge is the manager of a motel.As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies.Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent.The room that Ridge occupied normally rented for $70 per night, or $2,100 per month.On the average, 90% of the motel rooms were occupied.As a result of this rent-free use of a room, Ridge is required to include in gross income.

What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. Which of the following statements is true?

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

Generally, a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk.

Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $10,000 for his loss of income, and $50,000 punitive damages.As a result of the award, the amount Olaf must include in gross income is:

The CEO of Cirtronics Inc., discovered that the company's competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.

Sam was unemployed for the first two months of 2011.During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.

Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole.

John told his nephew, Steve, "if you maintain my house when I cannot, I will leave the house to you when I die.Steve maintained the house and when John died Steve inherited the house.The value of the residence must be included in Steve's gross income.

Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

Tommy, a senior at State College, receives free room and board as full compensation for working as a resident advisor at the university dormitory.The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800 for meals in the dormitory.Tommy had the option of receiving the meals or $800 in cash.Tommy accepted the meals.What is Tommy's gross income from working as a resident advisor?