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Exam 5: Gross Income and Exclusions

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Question 1

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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?

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

F) B) and C)
G) None of the above

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A

Question 2

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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?

A) $5,500
B) $20,000
C) $50,000
D) $70,000
E) All of these benefits are included in gross income

F) B) and E)
G) C) and D)

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Question 3

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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?

Simon was awarded a scholarship to attend State Law School from Gary Harris & Associates, Attorneys at Law. The scholarship pays Simon's tuition ($7,000 per semester), fees ($500 per semester), and a $4,500 per semester stipend to pay for food and housing. In order to qualify for the stipend, Simon must work 10 hours per week at Gary Harris & Associates during the term. How much of the scholarship is Simon required to include in gross income?

Kevin provided services to several clients this year who paid with different types of property. Which of the following payments is not included in Kevin's gross income?

Henry works part-time on auto repairs and restoration projects. This year Henry was paid $5,400 for repairs he made to his neighbor's auto. Henry's neighbor promised to pay Henry another $2,200 in cash next year. Henry's brother borrowed $4,100 in cash in December of this year and gave him a negotiable promissory note for $4,300 due in three months with interest. Henry sold the note in January for $3,500. Finally, Henry restored a car for the football coach. The coach paid him with a pass to next year's football games. The pass is worth $750. Compute Henry's gross income assuming that he uses the cash basis of accounting.

Gross income includes all income realized during the 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:

Constructive receipt represents the principle that cash basis taxpayers should be taxed on income when it is made available to them without substantial restrictions.

Excluded income will never be subject to the federal income tax.

Aubrey and Justin divorced on June 30 of this year. Through June 30 Aubrey earned $62,000 of salary, and Justin earned $45,000. For the year Aubrey reported a total salary of $130,000, and Justin earned a total 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?

Robert will be working overseas on a permanent assignment for an international company beginning on March 1 of this year (306 days this year). His salary is $11,000 per month while Robert is overseas, but only $9,200 per month otherwise. What is the minimum amount of Robert's salary that he must include in gross income this year? (Round your final answer to the nearest whole dollar amount & assume that there are 365 days in this year)

Samantha was ill for four months this year. Samantha missed work during this period, but disability insurance paid $18,000 of disability pay to replace her missed salary. Samantha shares the cost of the insurance with her employer. This year Samantha's employer paid $2,200 in disability premiums for Samantha as a nontaxable fringe benefit and Samantha paid the remaining $1,100 of premiums from her salary. What amount of the disability pay must Samantha include in her gross income (rounded to the nearest whole dollar) ?

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

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

Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred for the emotional distress he suffered when his neighbor accidentally ran over his dog.

Caroline is retired and receives income from a number of sources. The interest payments are from bonds that Caroline purchased over past years and a disability insurance policy that Caroline purchased after her retirement. Calculate Caroline's gross income. $\begin{array} { l r } \text { Distributions from qualified pension plan } & \$ 5,400 \\\text { Interest on bonds issued by City of Austin, Texas } & 2,500 \\\text { Social Security benefits } & 8,200 \\\text { Interest on U.S. Treasury Bills } & 2,300 \\\text { Interest on bonds issued by Ford Motor Company } & 1,900 \\\text { Interest on bonds issued by City of Quebec, Canada } & 2,750 \\\text { Disability insurance benefits } & 9,500\end{array}$

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?

Karl works at Moe's grocery. This year Karl was paid $43,000 in salary but he was allowed to purchase his groceries at 10% below Moe's cost. This year Karl spent $3,600 to purchase groceries costing Moe $4,000 and worth $6,000. What amount must Karl include in his gross income?

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income?