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Exam 5: Gross Income and Exclusions

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Question 51

True/False

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The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

A) True
B) False

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Question 52

Multiple Choice

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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:

A) business income
B) income from a partnership
C) interest income
D) dividend income because the partnership intends to organize next year as a limited liability company
E) None of the choices are correct

F) All of the above
G) C) and D)

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Question 53

Multiple Choice

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Deb has found it very difficult to repay her loans. Because of these difficulties, the bank decided to forgive one of her most recent loans, an amount of $45,000. After the loan was discharged, Deb had total assets of $232,000 and her remaining loans totaled $217,000. What amount must Deb include in her gross income?

Interest earned on a federal Treasury bond is excluded from gross income (for federal tax purposes).

Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and $10,000 of Social Security payments. What amount must Bernie include in his gross income?

The all-inclusive definition of income means that gross income is defined very broadly.

This year Ann has the following stock transactions. What amount is included in her gross income if Ann paid a $200 selling commission for each sale?

Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a community property state. How much income earned will Justin report on his tax return for this year?

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) .

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?

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?

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?

Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a common law state. How much income earned will Justin report on his tax return for this year?

The assignment of income doctrine requires that in order to shift income from the property producing the income to another person, the taxpayer must transfer only the income to the other person.

Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.

Regardless of when a divorce agreement is executed, alimony is included in gross income of the recipient and is deductible for AGI by the payer.

Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of 1 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?

Unemployment benefits are excluded from gross income.

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

Cyrus is a cash method taxpayer who reports on a calendar-year basis. Last year Cyrus received salary of $88,000 and at year-end his employer announced that Cyrus would receive an additional year-end bonus of $10,000 in cash and a new TV worth $2,000. Cyrus didn't receive his bonus check until January of this year and the TV didn't arrive until March of this year. Determine the amount Cyrus should include in his gross income for last year.