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Exam 5: Gross Income and Exclusions

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Question 51

Multiple Choice

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Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:

A) Tax benefit rule.
B) Return of capital principle.
C) Tax refund rule.
D) Constructive receipt.
E) None of the choices are correct.

F) A) and E)
G) A) and C)

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Question 52

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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 53

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Recognized income may be in the form of cash or property received (but not services received).

Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and $10,000 of social security payments. What amount must Bernie include in his 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 for18 months. Assuming no unusual or hardship circumstances apply, how much of the gain is included in gross income?

Which of the following statements about alimony payments is true?

Rental income generated by a partnership is reported by the partners as dividend income on their own individual tax returns.

A portion of each payment received from a purchased annuity contract represents income.

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.

Juan works as a landscaper for local businesses on weekends, and he often provides services inexchange for property. This year Juan provided lawn-mowing services in exchange for $1,275 of car repair services, $3,570 of groceries, and a certificate of deposit (C.D.) for $4,050. The C.D. matures next year with interest. Finally, Juan received a gift card that can only be applied for $850 ofclothing at a local mall. Juan has only applied the gift card to purchase $100 of clothing. ComputeJuan's gross income assuming that he uses the cash basis of accounting.

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 as a condition of receiving the dormitory fees to counsel freshman on campus living. What amount must Shaun include in his gross income?

Alex is 63 years old and retired. This year Alex won $212,200 in the state lottery. Alex alsoreceived $20,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 15 years, for $157,500. Alex received $10,000 in Social Security benefits for the year. Calculate Alex's gross income.

Acme published a story about Paul and as a result Paul sued Acme for damage to hisreputation, 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?

Which of the following is a true statement about the first payment received from a purchased annuity?

This year Ann has the following stock transactions. What amount is included in her gross income if Ann paid a$200 selling commission for each sale?

The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

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 Karlinclude in his gross 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?

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

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?