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Exam 5: Gross Income: Exclusions

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Question 1

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Brooke works part-time as a waitress in a restaurant.For groups of 7 or more customers,the customer is charged 15% of the bill for Brooke's services.For parties of less than 7,the tips are voluntary.Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers.Using the customary 15% rate,her voluntary tips would have been only $6,000.Brooke must include $17,000 ($11,000 + $6,000)in gross income.

A) True
B) False

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False

Question 2

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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.

A) True
B) False

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True

Question 3

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Calvin's property was taken by the State of Louisiana to build a highway overpass.He disputed the amount of the condemnation award he was to receive and ultimately collected an amount for the property plus $15,000 interest on the award.Calvin can exclude from gross income the $15,000 interest he received from the State of Louisiana associated with the condemnation award.

Carla is a deputy sheriff.Her employer requires that she live in the county where she is employed.Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing.Carla can exclude the $4,800 housing supplement from gross income because she is required to live in the high cost area.

James,a cash basis taxpayer,received the following compensation and fringe benefits in 2011: His actual salary was $72,000.He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed.The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled.The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility.What is James's gross income from the above?

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim,the insurance company paid Zack $53,000,the face amount of the policy plus $3,000 interest.Zack must include $53,000 in his gross income.

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.

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

Juan,was considering purchasing an interest in a tax-exempt bond fund for $100,000,when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%,and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative,Juan can purchase a state bond (a "double-exempt bond")yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

What Federal income tax benefits are provided for college students?

For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to over $1,500 of income that is subject to tax.

Gold Company was experiencing financial difficulties,but was not bankrupt or insolvent.The National Bank,which held a mortgage on other real estate owned by Gold,reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver,Inc.Pink,Inc.,the holder of a mortgage on Gold's building,agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years.As a result of the above,Gold must:

In 2011,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2012,Theresa collected from his insurance company.She received $15,000 for loss of income,$25,000 punitive damages,and $8,000 for medical expenses which she had deducted on her 2011 tax return (the amount in excess of 7.5% of adjusted gross income).As a result of the above,Theresa's 2012 gross income is increased by $33,000.

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?

Evaluate the following statements:

Peggy is an executive for the Tan Furniture Manufacturing Company.Peggy purchased furniture from the company for $8,000.The price Tan ordinarily charges a wholesaler is $9,500.The retail price of the furniture was $12,500,and Tan's cost was $9,000.The company also paid for Peggy's parking space in a garage near the office.The parking fee was $600 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 gross income from the above is:

Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work.So they frequently use the machine.However,the machine is not convenient for use by the lower paid warehouse employees.Because this fringe benefit benefits the higher paid employees but not the lower paid warehouse employees,the plan is discriminatory and thus the benefit is taxable to the executives.

Beverly died during the current year.At the time of her death,her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy,Beverly's spouse elected to collect the proceeds in installments.In the year of death,he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees,and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income the $46,000 she received.

Cash received by an individual: