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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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In December 2012,Mary collected the December 2012 and January 2013 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2012 for the 2013 rent should be included in her 2013 gross income.

A) True
B) False

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Question 2

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If the alimony recapture rules apply,the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

A) True
B) False

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Question 3

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The amount of Social Security benefits received by an individual that he or she must include in gross income:

Mabel is age 65 and lives on her Social Security benefits and gifts from her son,Fred.Fred is a full-time teacher.He has written a book and receives royalties from it.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Mabel must include the amount of the royalty check in her gross income.

Judy is a cash basis attorney.In 2012,she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services.By the end of the year,the value of the stock had decreased to $2,000.She continued to hold the stock.Judy must recognize $4,000 of gross income from the stock for 2012.

On January 5,2012,Tim purchased a bond paying interest at 6% for $30,000.On September 30,2012,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2012:

In January 2012,Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year,but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558,with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2012.

Thelma and Mitch were divorced.The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000.Under the terms of the divorce agreement,Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years,or until Thelma's death,whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.Mitch paid the $600,000 to Thelma over the six-year period.The divorce agreement did not contain the word "alimony." Then,Mitch sold the stocks for $1,300,000.Mitch's recognized gain from the sale is:

On January 1,2012,Faye gave Todd,her son,a 36-month certificate of deposit she purchased December 31,2010,for $8,638.Faye gave Todd 1,000 shares of ABC,Inc.,on December 2,2012.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30,2012,ABC,Inc.,had declared a dividend of $1.00 payable to stockholders of record on December 5th.How much interest and dividends should Todd include in his gross income for 2012?

Theresa,a cash basis taxpayer,purchased a bond on July 1,2009,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2012,she sold the bond for $10,300,which included $200 of accrued interest.

On a particular Saturday,Tom had planned to paint a room in his house,but his employer gave him the opportunity to work that day.If Tom works,he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

On January 1,Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

Ted loaned money to a business acquaintance.The loan was for $100,000 and was to be repaid at the rate of $13,000 each year for ten years.The effective interest rate was 5%.He also purchased an annuity contract for $100,000 that would pay him $13,000 each year for ten years.Will Ted's gross income for the first year differ with the loan as compared to the annuity contract? Explain your answer.

After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Jerry purchased a U.S.Series EE savings bond for $279.The bond has a maturity value in 10 years of $500 and yields 6% interest.This is the first Series EE bond that Jerry has ever owned.

Green,Inc.,provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam,a vice-president,worked all year for Green,Inc.and received $250,000 of coverage for the year at a cost to Green of $3,000.The Uniform Premiums (based on Sam's age) are $.30 per month for $1,000 of protection.How much must Sam include in gross income this year?

At the beginning of 2013,Mary purchased a 3-year certificate of deposit (CD)for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize $1,240 of income from the certificate of deposit in 2013,and $3,600 from the Series EE bonds in 2022.

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Orange Cable TV Company,an accrual basis taxpayer,allows its customers to pay by the year in advance ($500 per year) ,or two years in advance ($950) .In September 2011,the company collected the following amounts applicable to future services: As a result of the above,Orange Cable should report as gross income:

In 2004,Terry purchased land for $150,000.In 2012,Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property.Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.