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Exam 5: Gross Income and Exclusions

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Question 1

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A taxpayer generally includes in gross income the amount of debt forgiven by a lender.

A) True
B) False

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Question 2

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Generally,85 percent of Social Security benefits are included in income of high income taxpayers.

A) True
B) False

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Question 3

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

Charles and Camilla are getting divorced.Under the terms of the decree Charles will pay Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage) .In addition,Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son,Clyde,until he turns 19 years old.What amount (if any) is included in Camilla's gross income this year?

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

Loretta received $6,200 from disability insurance that she purchased directly this year.Loretta must include all $6,200 in her gross income.

Wilma has a $25,000 certificate of deposit (CD) at the local bank.The interest on this certificate,$1,000,was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CD before next year.Which of the following is a true statement?

To provide relief from double taxation,Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.

The tax law defines alimony to include transfers of property (but not cash) between former spouses.

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.

Identify the rule dictating that on a sale of an asset a taxpayer need only include the incremental gain in gross income rather than the entire proceeds from the sale:

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

Acme published a story about Paul and as a result Paul sued Acme for damage to his reputation,emotional distress,and punitive damages.Paul won an award of $20,000 for damages,$5,500 for emotional distress,and $50,000 for punitive damages.What amount must Paul include in his gross income?

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.Realization is similar for both tax and financial accounting.

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle.The buyer has promised to pay Henry in installment payments over the next few years.Identify the principle that will determine when Henry should be taxed on the gain from the sale:

A taxpayer who borrows money will include that amount borrowed in their gross income under the all-inclusive definition of income.Debt does not generate economic benefit.

Hank is a sales executive who earned $109,500 working for a multinational firm this year.Of the 365 days in this year Hank spent 340 days residing and working in an overseas office and 25 days working in the United States.What amount of Hank's salary will he be allowed to exclude from gross income in the U.S.(rounded to the nearest one-hundred dollars) ?

Gambling winnings are included in gross income only to the extent that the winnings exceed gambling losses incurred during the same period.

Qualified fringe benefits received by an employee can be excluded from gross income.

Irene's husband passed away this year.After his death,Irene received $250,000 of proceeds from life insurance on her husband,and she inherited her husband's stock portfolio worth $750,000.What amount must Irene include in her gross income?