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Exam 5: Gross Income and Exclusions

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Question 21

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This year, Fred and Wilma sold their home (sales price $750,000; cost $200,000) . All closing costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is included in gross income?

A) $550,000
B) $300,000
C) $250,000
D) $50,000
E) None

F) A) and B)
G) A) and C)

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Question 22

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Cyrus is a cash method taxpayer who reports on a calendar-year. 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.

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Question 23

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J.Z. (single taxpayer) is retired and received $10,000 of Social Security benefits this year. How much of the $10,000 Social Security benefits is taxable if his only other income was $28,000 of pension income?

Desai and Lucy divorced this year. Lucy has custody of their child, Andrea, and under the divorce decree Desai pays Lucy $120,000 per year. The payments must be made in cash and will cease if Lucy dies or remarries. The payments drop to $100,000 per year once Andrea reaches the age of 18. How much of the payments should Lucy include in gross income 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) :

Emily is a cash basis taxpayer, and she was an especially productive salesperson last year. In December of last year her supervisor told Emily she had earned a $5,000 bonus. However, Emily received the bonus check after year end. Identify the principle that will determine when Emily is taxed on the bonus:

Andres has received the following benefits this year. $\begin{array} { l r } \text { Salary } & \$ 92,000 \\\text { Contribution to qualified pension plan } & 10,200 \\\text { Qualified health insurance premiums } & 8,400 \\\text { Year-end bonus } & 15,000 \\\text { Group-term life insurance premiums (face } = \$ 40,000 ) & 1,750 \\\text { Whole life insurance premiums (face } = \$ 100,000 ) & 2,420 \\\text { Disability insurance premiums } & 1,800\end{array}$ Besides these benefits Andres missed work for two months due to an illness. During his illness Andres received $6,500 in sick pay from a disability insurance policy. Assume Andres has disability insurance provided by his employer as a nontaxable fringe benefit. What amount, if any, must Andres include in gross income this year?

Helen is a U.S. citizen and CPA, who moved to London, England three years ago to work for a British company. This year, she spent the entire year in London and earned a salary of $110,000. How much of her salary will she be allowed to exclude from gross income in the U.S.?

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Hal include in his gross income?

Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4%, which of the following is correct?

Kathryn is employed by Acme and they have been very pleased with her performance this year. In December Kathryn was granted an extra week off with pay (pay for the week totaled $2,000). In addition, Kathryn was given tickets to a football bowl game worth $800 (Kathryn didn't use the tickets - she hates football). At year-end Kathryn was allowed to order new office furniture and Acme told her to take the old office furniture home. The office furniture was originally purchased for $7,000, but it was fully depreciated and only worth about $1,000. Determine the amount Kathryn should include in her 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?

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 because he did not deduct state income taxes last year.

Hillary is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services. Which of the following is a true statement?

Brenda has $15,000 in U.S. Series EE saving bonds and she is considering whether to cash the bonds. Under what conditions can Brenda exclude the interest on the savings bonds from her gross income?

This year, Barney and Betty sold their home (sales price $750,000; cost $200,000) . All closing costs were paid by the buyer. Barney and Betty owned and lived in their home for 18 months. How much of the gain is included in gross income?

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 total $217,000. What amount must Deb include in her gross income?

Community property laws dictate that income earned by one spouse is treated as though it was earned equally by both spouses.

Gross income includes all income realized during the year.

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?