McGraw-Hill's Essentials of Federal Taxation 2020 Edition By Brian Spilker - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Essentials of Federal Taxation, 11e (Spilker) Chapter 5 Gross Income and Exclusions 1) Gross income includes all income realized during the year. Answer: …
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McGraw-Hill’s Essentials of Federal Taxation 2020 Edition By Brian Spilker – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Essentials of Federal Taxation, 11e (Spilker)
Chapter 5 Gross Income and Exclusions
1) Gross income includes all income realized during the year.
Answer: FALSE
Explanation: Deferred and excluded income is not included in gross income.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
2) Excluded income will never be subject to the federal income tax.
Answer: TRUE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
3) The all-inclusive definition of income means that gross income is defined very broadly.
Answer: TRUE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
4) A taxpayer who borrows money will include the amount borrowed in their gross income under the all-inclusive definition of income.
Answer: FALSE
Explanation: Debt does not generate economic benefit.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
5) Realized income is included in gross income unless a tax provision specifies that it can be deferred or excluded.
Answer: TRUE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
6) The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.
Answer: FALSE
Explanation: Realization is similar for both tax and financial accounting.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
7) Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.
Answer: FALSE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
8) Barter clubs are an effective means of avoiding realization for tax purposes.
Answer: FALSE
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
9) The cash method of accounting requires taxpayers to recognize income only when that income is received as cash.
Answer: FALSE
Explanation: Income is recognized in the form of cash, property, or services when received.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
10) When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.
Answer: TRUE
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
11) Recognized income may be in the form of cash or property received (but not services received).
Answer: FALSE
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
12) When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.
Answer: FALSE
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
13) Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.
Answer: TRUE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking
14) When an asset is sold, the taxpayer calculates the gain or loss by subtracting the tax basis of the asset from the proceeds of the sale.
Answer: TRUE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
15) The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.
Answer: FALSE
Explanation: The tax benefit rule applies when a refund is received that created a tax benefit in a prior year when it was deducted.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
16) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
17) Constructive receipt represents the principle that cash-basis taxpayers should be taxed on income when it is made available to them without substantial restrictions.
Answer: TRUE
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
18) Claim of right states that income has been realized if a taxpayer receives income and there are substantial restrictions on the taxpayer’s use of the income.
Answer: FALSE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
19) Community property laws dictate that income earned by one spouse is treated as though it were earned equally by both spouses.
Answer: TRUE
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
20) The date on which stock options are given to the employee is called the exercise date.
Answer: FALSE
Explanation: The grant date is the date employees are initially allocated stock options.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking
21) The date on which stock options are no longer subject to forfeiture is called the vesting date.
Answer: TRUE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
22) When stock options are exercised, they are converted into actual employer stock.
Answer: TRUE
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking
23) Interest income is earned in the year in which it is received by the taxpayer or credited to the bank account.
Answer: TRUE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
24) The assignment of income doctrine requires that to shift taxable income from property to another person, the taxpayer must transfer only the income to the other person.
Answer: FALSE
Explanation: A taxpayer must also transfer the ownership in the property to the other person.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
25) For tax purposes, unearned income means income that has not yet been realized.
Answer: FALSE
Explanation: For tax purposes, unearned income refers to gains and losses from the sale of property, dividends, interest, rents, royalties, and annuities.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
26) A portion of each payment from a purchased annuity represents income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
27) The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.
Answer: FALSE
Explanation: The annuity exclusion ratio = Original investment/Expected value of annuity.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
28) The capital gains (losses) netting process for taxpayers without 25 or 28 percent capital gains requires them to (1) net short-term and long-term gains, (2) net short-term and long-term losses, and (3) net the outcome to yield a final gain or loss to place on the tax return.
Answer: FALSE
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand; Analyze
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking
29) Dave and Jane file a joint return. They sell a capital asset at a $150,000 loss. Even though they have no capital gains, $6,000 of the loss can still be deducted in the current year.
Answer: FALSE
Explanation: Individual taxpayers may deduct up to $3,000 of net capital losses against ordinary income in a given year.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
30) Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.
Answer: FALSE
Explanation: A maximum rate of 25 percent is assessed on unrecaptured §1250 gain.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
31) Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.
Answer: TRUE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
32) Capital loss carryovers for individuals are carried forward indefinitely.
Answer: TRUE
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand; Analyze
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking
33) Rental income generated by a partnership is reported by partners as dividend income.
Answer: FALSE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
34) The tax law defines alimony to include transfers of property (but not cash) between former spouses.
Answer: FALSE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
35) Regardless of when a divorce agreement is executed, alimony is included in gross income of the recipient and deductible for AGI by the payor.
Answer: FALSE
Explanation: For any divorce or separation agreement executed after December 31, 2018, alimony payments are not included in the gross income of the person receiving the payments and are not deductible by the person paying the alimony.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
36) Prizes and awards are generally taxable.
Answer: TRUE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
37) Gambling winnings are included in gross income only to the extent that the winnings exceed gambling losses incurred during the same period.
Answer: FALSE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
38) Generally, 85 percent of Social Security benefits are included in income of high-income taxpayers.
Answer: TRUE
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
39) Unemployment benefits are excluded from gross income.
Answer: FALSE
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
40) A taxpayer generally includes in gross income the amount of debt forgiven by a lender.
Answer: TRUE
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
41) An employee may exclude up to a 40 percent employer-provided discount on services.
Answer: FALSE
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
42) A below-market loan (e.g., from an employer to an employee) is a common example of a transaction that generates taxable imputed income.
Answer: TRUE
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
43) Interest earned on a federal Treasury bond is excluded from gross income (for federal tax purposes).
Answer: FALSE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
44) Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).
Answer: TRUE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
45) Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of realized gain on the sale of their principal residence.
Answer: FALSE
Explanation: The exclusion is $250,000 ($500,000 if married filing jointly).
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
46) Qualified fringe benefits received by an employee can be excluded from gross income.
Answer: TRUE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
47) Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.
Answer: TRUE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
48) Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and not for elementary or secondary education).
Answer: FALSE
Explanation: False. The exclusion also applies to elementary or secondary education.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
49) Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must include $15,000 of this gift in his gross income this year.
Answer: FALSE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
50) Anna received $15,000 from life insurance paid upon the death of her grandmother. Anna can exclude the entire amount of the life insurance from her gross income.
Answer: TRUE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
51) U.S. citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.
Answer: TRUE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
52) To provide relief from double taxation, Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.
Answer: FALSE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
53) Workers’ compensation benefits are excluded from gross income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
54) 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.
Answer: TRUE
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
55) Loretta received $6,200 from disability insurance that she purchased directly this year. Loretta must include all $6,200 in her gross income.
Answer: FALSE
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
56) Brad was disabled for part of the year and he received $11,500 of benefits from a disability plan purchased by Brad’s employer as a nontaxable fringe benefit. Brad must include all $11,500 of benefits in his gross income because Brad was not taxed on the disability insurance premiums paid by his employer.
Answer: TRUE
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
57) Qualified retirement plans include defined benefit plans but not defined contribution plans.
Answer: FALSE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
58) Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can) contribute to an employee’s plan.
Answer: TRUE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
59) The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee’s compensation near retirement.
Answer: FALSE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
60) Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.
Answer: FALSE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
61) Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal.
Answer: FALSE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
62) Both employers and employees may contribute to defined contribution plans. However, the amount that employees may contribute to the plan in a given year is limited by the tax law while the amount that employers may contribute is not.
Answer: FALSE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
63) When an employer matches an employee’s contribution to the employee’s 401(k) account, the employee is immediately taxed on the amount of the employer’s matching contribution.
Answer: FALSE
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
64) Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k) accounts than employees who are not 50 years old by year-end.
Answer: TRUE
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
65) Heidi retired from GE (her employer) at age 56. At the end of the year, when she was 56 years of age, Heidi received a distribution from her GE-sponsored 401(k) account. Because Heidi was not at least 59½ years of age at the time of the distribution, she must pay tax on the full amount of the distribution and a 10 percent penalty on the full amount of the distribution.
Answer: FALSE
Explanation: The penalty is assessed on employees who receive distributions before they reach 59½ years of age or 55 years of age and have separated from service.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
66) Retired taxpayers over 59½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty.
Answer: FALSE
Explanation: Minimum distributions are required for the year in which an employee reaches 70½ years of age or retires, whichever comes later.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
67) Gross income includes:
Answer: A
Explanation: This is the all-inclusive definition of gross income.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking
68) Which of the following is not a necessary condition for income to be included in gross income?
Answer: B
Explanation: Income can be paid in cash, property, or services.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
69) 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?
Answer: C
Explanation: Gross income includes the value of property received in exchange for services.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
70) 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?
Answer: E
Explanation: No realization occurs until the stock is sold or becomes worthless.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
71) 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?
Answer: C
Explanation: Under constructive receipt Hillary is taxed on income when property is received or made available to her.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
72) Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:
Answer: D
Explanation: This is the definition of tax benefit rule.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
73) 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:
Answer: C
Explanation: This is the definition of the return of capital principle.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
74) 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):
Answer: A
Explanation: This is the definition of claim of right.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
75) Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clients make their checks payable to his son, Steve. This year Steve received checks in the amount of $62,000 for Dave’s plumbing services. Which of the following is a true statement?
Answer: A
Explanation: The assignment of income is not effective for tax purposes.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
76) Jack and Jill are married. This year Jack earned $72,000 and Jill earned $80,000 and they received $4,000 of interest income from a joint savings account. How much gross income would Jack report if he files married filing separately from Jill?
Answer: D
Explanation: In a community property state Jack is taxed on half of his separate income ($36,000) plus half of Jill’s separate income ($40,000) plus half of joint income ($2,000). In a common-law state, Jack is taxed on his separate income ($72,000) plus half of joint income ($2,000).
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
77) Identify which of the items below helps determine which taxpayer must recognize earned income:
Answer: D
Explanation: Both the residence and who earns the income dictate who recognizes income.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
78) 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?
Answer: E
Explanation: Property is included in gross income if it is capable of valuation.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
79) 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:
Answer: B
Explanation: Emily is taxed in the year the bonus is made available to her.
Difficulty: 1 Easy
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
80) Ophra is a cash-basis taxpayer who is employed in the publishing industry. This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise. Ophra asked her employer to issue the cruise tickets to her parents, and he complied with this request. Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets:
Answer: A
Explanation: Ophra cannot assign earned income.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
81) 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:
Answer: D
Explanation: Wherewithal to pay dictates that gains from installment sales are generally recognized over the periods in which payments are received.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking
82) This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?
Answer: B
Explanation: Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $4,000 of deduction produced a tax benefit of $200 if itemized deductions exceeded the standard deduction by $200.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
83) Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total itemized deductions exceeded the standard deduction by $350?
Answer: D
Explanation: Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $2,400 of deduction produced a tax benefit of $350, so the entire $170 is included in income.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
84) 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?
Answer: A
Explanation: Interest is taxed when credited to the account.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
85) Which of the following is true regarding stock options?
Answer: B
Explanation: No tax effect is incurred by employees or employers on the grant date.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
86) Which of the following refers to the date stock options are awarded to an employee?
Answer: A
Explanation: The grant date is the date on which an employee receives the stock options.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
87) Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working, when the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. What is the amount of Maren’s bargain element?
Answer: B
Explanation: 10 options × 10 shares × ($15 market price at exercise − $8 exercise price).
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
88) Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working, when the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. How much gain will Maren recognize on the sale and how much tax will she pay, assuming her marginal tax rate is 35 percent?
Answer: B
Explanation: The gain realized is $500 (100 shares × $20) less basis (100 shares × $15 exercise price). The tax is calculated as follows: $500 × 15% (preferential rate).
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
89) Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $10 per share) from his employer. At the time he started working the stock price was $11 per share. Now that the share price is $25 per share, he exercises all of the options. Two years later Bad Brad sells the stock for $27 per share. What is Bad Brad’s basis in his stock for purposes of calculating the gain or loss?
Answer: C
Explanation: The basis is the $6,000 (600 shares × $10 strike price) cash paid and the $9,000 (600 shares × $15 bargain element) income recognized on the exercise—which is equal to the market price on the exercise date less the strike price.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
90) Which of the following is a true statement about the first payment received from a purchased annuity?
Answer: B
Explanation: A portion of the first payment from a purchased annuity will be a return of capital depending upon the amount paid for the investment and the expected number of payments to be received.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
91) Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?
Answer: C
Explanation: This is the definition of annuity exclusion ratio for a fixed annuity.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
92) 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?
Answer: C
Explanation: The annuity exclusion ratio is ($3,200/100) = $32 return of capital per payment. Hence, $48 of the $80 is included in gross income.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
93) Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?
Answer: B
Explanation: The annuity exclusion ratio is [$300,000/(4 × 10)] = $7,500 return of capital per payment. Hence, $4,500 of each $12,000 payment is included in gross income.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
94) Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives. Later this year Harold will recover the remainder of his cost of the annuity. Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?
Answer: B
Explanation: The entire annuity payment is included in gross income once the cost of the annuity is recovered.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
95) To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?
Answer: E
Explanation: Tax basis and selling expenses reduce proceeds for a “casual” sale of property.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
96) When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?
Answer: D
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand; Analyze
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
97) Generally, long-term capital gains are taxed at:
Answer: E
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
98) In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin’s capital gains and losses?
Answer: A
Explanation: $2,000 (LTCG) + ($9,000) (LTCL) = ($7,000) (NLTCL); $25,000 (STCG) + ($15,000) (STCL) = $10,000 (NSTCG); ($7,000) (NLTCL) + $10,000 (NSTCG) = $3,000 (NSTCG).
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking
99) When the wash sale rules apply, the realized loss is:
Answer: D
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand; Analyze
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
100) The maximum amount of net capital losses individuals may deduct against their ordinary income per year is:
Answer: A
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
101) In the current year, Norris, an individual, has $50,000 of ordinary income, a net short-term capital loss (NSTCL) of $10,000, and a net long-term capital gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports:
Answer: E
Explanation: $2,800 NLTCG − $10,000 NSTCL = $7,200 NSTCL; use $3,000 NSTCL to reduce ordinary income, leaving $4,200 as a NSTCL carryforward.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Analyze
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking
102) Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2011. On December 31, 2019, she sold all 1,000 shares of her Ibis stock for $4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2020, for $3,000. What is Ms. Fresh’s recognized loss on her 2019 sale and what is her basis in her 1,000 shares purchased in 2020?
Answer: A
Explanation: $4,500 amount realized from Ibis sale − $5,000 tax basis in Ibis shares = $500 realized loss on sale of Ibis stock. Loss is not currently deductible because the Ibis shares were reacquired within 30 days of the original sale (wash sale). $500 nondeductible loss from original Ibis sale + $3,000 purchase price for new Ibis shares = $3,500 tax basis in new Ibis shares.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Analyze
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking
103) Kevin bought 200 shares of Intel stock on January 1, 2019, for $50 per share with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2019. The brokerage fee on the sale was $150. What is the amount of the gain/loss Kevin must report on his 2019 tax return?
Answer: B
Explanation: Amount Realized = (200 shares × $75) − $150 = $14,850; Adjusted Basis = (200 shares × $50) + $100 = $10,100; Gain = $14,850 − $10,100 = $4,750.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Analyze
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking
104) Nate is a partner in a partnership that received $5,000 of interest income this year. Nate’s share of the interest is $1,000, and he should report this income on his individual return as:
Answer: C
Explanation: Income from flow-through entities retains its character when reported on individual returns.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
105) Which of the following statements about alimony payments is true for divorce agreements executed before 2019?
Answer: E
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
106) Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to pay Barney $24,000 per year for five years (or until Barney’s death or remarriage) and $10,000 per year until their daughter, Pebbles, turns 19 years old. What amount (if any) is included in Barney’s gross income in 2019?
Answer: B
Explanation: Alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient.
Difficulty: 1 Easy
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
107) Charles and Camilla got divorced in 2018. Under the terms of the decree Charles pays Camilla $50,000 in cash in each of the next five years (or until Camilla’s death or remarriage). In addition, Charles transferred a castle worth $2,000,000 to Camilla in 2018 and will 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 in 2019?
Answer: C
Explanation: Property settlements and child support are not included in gross income, but alimony payments (cash) are includible.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
108) Hal Gore won a $1 million prize for special contributions to environmental research. This prize is awarded for public achievement, and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency. How much of the prize should Hal include in his gross income?
Answer: B
Explanation: Awards for scientific or public achievement are excluded only if the payor of the award transfers the award to a governmental unit (e.g., EPA) or a public charity.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
109) 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 Ethan include in his gross income?
Answer: A
Explanation: To be excludable, the prize must be associated with scientific, literary, or charitable achievement or received by a Team USA athlete from the U.S. Olympic Committee on account of their competition in the Olympic or Paralympic games.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
110) This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?
Answer: B
Explanation: Cash bonus payments are includible in gross income but awards of tangible property to employees for length of service or safety achievement are excluded for up to $400 of value.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
111) Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?
Answer: A
Explanation: Taxpayers must include the gross amount of their gambling winnings for the year in gross income.
Difficulty: 2 Medium
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
112) 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?
Answer: C
Explanation: High-income individuals include 85 percent of their Social Security benefits in gross income.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
113) Bart, a single taxpayer, has recently retired. This year, he received $24,000 in pension payments and $5,000 of Social Security payments. What amount must Bart include in his gross income for the Social Security payments?
Answer: D
Explanation: His modified AGI + 50% of Social Security benefits is $24,000 + $2,500 = $26,500, which is greater than $25,000 but less than or equal to $34,000. His taxable Social Security benefits are the lesser of (a) $2,500 (50 percent of his Social Security benefits) or (b) 50 percent of [$24,000 modified AGI + $2,500 (50% of Social Security benefits) − $25,000] = $750. Thus, his taxable Social Security benefits are $750.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
114) 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 percent 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?
Answer: D
Explanation: Employees must recognize imputed income to the extent they are allowed to purchase goods from their employer at a price below the employer’s cost. [$43,000 + ($4,000 × 0.10)] = $43,400.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
115) Joyce’s employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3 percent, which of the following is correct?
Answer: C
Explanation: Employees recognize compensation income on below-market loans from employers, calculated using the federal interest rate.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
116) Janine’s employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4 percent, which of the following is correct?
Answer: E
Explanation: The imputed interest rules do not apply to loans of $10,000 or less.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
117) 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?
Answer: A
Explanation: A discharge of indebtedness is not taxable if the taxpayer is insolvent before and after the debt forgiveness. If the discharge of indebtedness makes the taxpayer solvent, the taxpayer recognizes taxable income to the extent of her solvency.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
118) Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)?
| Bond | Interest | |
| General Motors | $ | 1,450 |
| City of New York | 900 | |
| State of New Jersey | 1,200 | |
| U.S. Treasury | 850 | |
Answer: D
Explanation: Interest on bonds issued by state and local governments is excluded from gross income for federal tax purposes.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
119) This year, Fred and Wilma, married filing jointly, 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?
Answer: D
Explanation: Fred and Wilma may exclude $500,000 of their $550,000 gain ($750,000 sales price − $200,000 cost = $550,000 gain) because they meet the ownership and use tests. Thus, they only include $50,000 of the gain in their gross income.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
120) 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?
Answer: A
Explanation: All of the gain is included in gross income because Barney and Betty do not meet the two-year ownership and use tests.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
121) Frank received the following benefits from his employer this year. What amount must Frank include in his gross income?
| Benefits Received | Amount | |
| Salary | $ | 54,450 |
| Health insurance | 2,900 | |
| Group-term life insurance ($50,000) | 1,800 |
Answer: A
Explanation: An employee may exclude from income the cost of medical and dental health insurance premiums and group-term life insurance (face $50,000) premiums an employer pays on the employee’s behalf.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
122) Ben’s employer offers employees the following benefits. What amount must Ben include in his gross income?
| Benefit | Value | ||
| Health insurance coverage | $ | 5,800 | |
| Group-term life insurance ($50,000) | 4,270 | ||
| Disability insurance coverage (considered purchased by Ben) | 3,600 | ||
| Whole life insurance coverage ($100,000) | 7,000 | ||
Answer: C
Explanation: If an employer pays disability premiums, and the employee chooses the premium as taxable compensation, it is considered employee-purchased and the benefits paid (if any) are excluded from the employee’s gross income. Employer-paid whole life insurance premiums are included in gross income. Only premiums on up to $50,000 of employer-paid group-term insurance are excluded from gross income.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
123) 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 freshmen on campus living. What amount must Shaun include in his gross income?
Answer: D
Explanation: College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student’s courses. Any excess scholarship amounts (such as for room) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
124) Graham has accepted an offer to do graduate work in the chemistry department at State University. The chemistry department offered Graham a $5,000 tuition reduction and $3,500 toward the cost of room and meals. Under the terms of the scholarship Graham must work in the chemistry labs during the summer as a research assistant. What amount must Graham include in his gross income?
Answer: C
Explanation: The scholarship exclusion applies to the tuition reduction but not the cost of room and board.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
125) Sam, age 45, saved diligently for his college education by putting part of his pay into U.S. Series EE savings bonds. Sam purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200. He has no other income this year. What amount must Sam include in his gross income?
Answer: D
Explanation: Taxpayers using the bond redemption proceeds from Series EE bonds to pay for qualified higher educational expenses of the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer may be allowed to exclude the interest from gross income. Qualified higher education expenses include the tuition and fees required for enrollment or attendance at an eligible educational institution.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
126) Brenda has $15,000 in U.S. Series EE savings 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?
Answer: D
Explanation: Specifically, taxpayers using the bond redemption proceeds from Series EE bonds to pay for qualified higher educational expenses of the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer may be allowed to exclude the interest from gross income.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
127) Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months after the gift, a $500 dividend was declared on the stock and paid to Dora’s granddaughter. What amount must Dora’s granddaughter include in her gross income?
Answer: E
Explanation: The gift of the stock is excluded but the dividend on the shares is taxable. Hence, the answer is $500.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
128) 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?
Answer: E
Explanation: Taxpayers exclude inheritances and life insurance proceeds from gross income.
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
129) 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.?
Answer: B
Explanation: Congress allows taxpayers to annually exclude a certain maximum amount, indexed for inflation, of foreign-earned income from taxation. In 2019, the maximum exclusion is $105,900.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
130) Hank is a U.S. citizen and is doing a three- to six-year assignment as a sales executive in Paris for a French company, which began this year. Hank earned $109,500 working for the French company this year but only lived in France for 180 days (out of 365 days). He will live full time in France next year. What amount of Hank’s $109,500 salary this year will he be allowed to exclude from gross income in the United States (rounded to the nearest $100)?
Answer: C
Explanation: $105,900 × [180/365] = $52,224.64, rounded to $52,200. Since Hank will have a tax home in a foreign country and spend more than 330 days in the foreign country over 12 months, he is eligible to exclude foreign-earned income. The exclusion is computed on a daily basis, the maximum exclusion is reduced pro rata for each day during the calendar year the taxpayer is not considered to be a resident of the foreign country or does not actually live in the foreign country.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
131) NeNe is an accountant and U.S. citizen who has accepted a permanent position in Madrid, Spain, for a Spanish financial services company. This year, NeNe spent the entire year working in Madrid. NeNe’s employer paid $40,000 of her Madrid housing expenses this year. What amount of the $40,000 housing payments may NeNe exclude?
Answer: D
Explanation: Since NeNe spent the entire year overseas, she may exclude the lesser of (a) $40,000 housing costs − $16,944 ($105,900 × 0.16) = $23,056 or (b) $14,826 ($105,900 × 0.14). Thus, she may exclude $14,826 of the housing costs paid by her employer.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
132) Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($3,700), her emotional distress ($6,000—she now fears peanut butter), and punitive damages ($44,000). What amount must Pam include in her gross income?
Answer: A
Explanation: The tax laws specify that any payments (other than punitive damages) on account of a physical injury or physical sickness are nontaxable. Damages taxpayers receive for emotional distress associated with a physical injury are also excludable. Punitive damages are fully taxable, however, because they are intended to punish the harm-doer rather than to compensate the taxpayer for injuries.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
133) This year Zach was injured in an auto accident. As a result he received the following payments.
Zach received $18,000 of disability pay. Zach has disability insurance provided by his employer as a nontaxable fringe benefit. Zach’s employer paid $4,300 in disability premiums for Zach this year.
Zach’s hospital bills totaled $4,500 and were paid by his health insurance. Zach has health insurance provided by his employer as a nontaxable fringe benefit. Zach’s employer paid $6,250 in health insurance premiums for Zach this year.
What amount must Zach include in his gross income?
Answer: B
Explanation: Any payment a taxpayer receives from a health and accident insurance policy for medical or dental expenses paid by the taxpayer is excluded from the taxpayer’s income. If the employer pays the disability premiums for an employee as a nontaxable fringe benefit, the employee must include all disability benefits in gross income.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
134) 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 (Round final answer to the nearest whole dollar)?
Answer: B
Explanation: The portion of disability benefits that represents premium paid as a nontaxable fringe benefit is included in gross income. The employer paid two-thirds of the cost and so two-thirds of the pay is includible [$2,200/($2,200 + $1,100)] × $18,000 = $12,000. The remaining portion (one-third) of the disability benefits is excluded from gross income because the premiums were paid by the taxpayer.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
135) 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?
Answer: E
Explanation: The tax laws specify that only payments on account of a physical injury or physical sickness are nontaxable. Damages taxpayers receive for emotional distress that are not associated with a physical injury are taxable, as are punitive damages and damages to reputation.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
136) Which of the following best describes distributions from a defined benefit plan?
Answer: A
Explanation: The full amount of distributions from defined benefit plans is taxable as ordinary income.
Difficulty: 1 Easy
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
137) Which of the following statements regarding contributions to defined contribution plans is true?
Answer: D
Explanation: The sum of employer and employee contributions is limited by the tax law. The limit is indexed for inflation.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
138) Which of the following best describes distributions from a traditional defined contribution plan?
Answer: A
Explanation: The full amount of distributions from defined contribution plans is taxable as ordinary income.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
139) Shauna received a distribution from her 401(k) account this year. In which of the following situations will Shauna be subject to an early distribution penalty?
Answer: B
Explanation: Taxpayers are subject to an early distribution penalty if they receive a distribution before they reach 59½ and are not retired, or have retired but not reached 55 years of age.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
140) Shauna received a $100,000 distribution from her 401(k) account this year. Assuming Shauna’s marginal tax rate is 25 percent, what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59th birthday and she has not yet retired?
Answer: D
Explanation: She must pay $25,000 of income tax on the distribution and a 10 percent early distribution penalty because she was not 59½ on the date of the distribution and she had not yet retired.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
141) Riley participates in his employer’s 401(k) plan. He retired in 2019 at age 75. When must Riley receive his 2019 distribution to avoid minimum distribution penalties?
Answer: B
Explanation: To avoid minimum distribution penalties, the taxpayer must receive the first distribution by no later than April 1 of the year after which the employee turns 70½ or the year in which the employee retires (if later). Because Riley is over 70½ years of age and he has retired, he can receive his 2019 distribution no later than April 1 of 2020.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
142) Riley participates in his employer’s 401(k) plan. He turns 70 years of age on February 15, 2019, and he plans on retiring on July 1, 2021. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?
Answer: D
Explanation: To avoid minimum distribution penalties, the taxpayer must receive the first distribution by no later than April 1 of the year after which the employee turns 70½ or the year in which the employee retires (if later). Because Riley turns 70½ years of age in 2019, but does not retire until 2021, he must receive his first distribution no later than April 1, 2022, to avoid minimum distribution penalties.
Difficulty: 2 Medium
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking
143) 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?
| Shares | Firm | Total Purchase Price | Sales price | Value at year-end | ||
| 100 | IBM | $ | 5,000 | $7,000 | ||
| 200 | ATT | 7,500 | 9,500 | |||
| 500 | Dell | 12,500 | 13,000 | |||
Answer: $2,100. ATT: ($9,500 − $200) − $7,500 = $1,800. Dell ($13,000 − $200) − $12,500 = $300.
The increase in value in the IBM stock is not yet realized.
Difficulty: 2 Medium
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Understand
Accessibility: Keyboard Navigation
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
144) Blake is a limited partner in Kling-On Partners. This year Kling-On reported that Blake’s share of dividend income was $3,700 and his share of municipal interest was $2,750. Early this year Blake found a bundle of $100 bills in the alley outside his apartment. When no one claimed the money, the cash (a total of $2,400) was returned to Blake. Finally, Blake earned salary of $42,000 but almost $6,500 was withheld for income taxes and FICA tax. Compute Blake’s realized income and gross income.
Answer: $3,700 + $2,750 + $2,400 + $42,000 = $50,850 realized – $2,750 = $48,100 gross income.
Realized income is $50,850, but gross income excludes municipal interest.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
145) 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.
Answer: $5,400 + $750 = $6,150.
Gross income includes all income unless it is specifically excluded or deferred, and cash-basis taxpayers realize income when valuable property is received.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
146) Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange 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 (CD) for $4,050. The (CD) matures next year with interest. Finally, Juan received a gift card that can only be applied for $850 of clothing at a local mall. Juan has only applied the gift card to purchase $100 of clothing. Compute Juan’s gross income assuming that he uses the cash basis of accounting.
Answer: $1,275 + $3,570 + $4,050 + $850 = $9,745.
Gross income includes all income unless it is specifically excluded or deferred, and cash-basis taxpayers realize income when valuable property is received.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
147) This year Kelsi received a $1,900 refund of state income taxes that she paid last year. Last year Kelsi claimed itemized deductions of $13,100, including $2,800 of state income taxes. How much of the refund, if any, must Kelsi include in gross income if the standard deduction last year was $12,000?
Answer: $1,100.
The tax benefit is the lesser of the refund ($1,900) or the excess of the itemized deductions above the standard deduction ($13,100 − $12,000 = $1,100). Hence, Kelsi must include $1,100 of the $1,900 refund in gross income.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
148) In April of this year Victoria received a $1,400 refund of state income taxes that she paid last year. Last year Victoria claimed itemized deductions of $14,590. Victoria’s itemized deductions included state income taxes paid of $3,750. How much of the refund, if any, must Victoria include in gross income if the standard deduction last year was $12,000?
Answer: $1,400.
The tax benefit is the lesser of the refund ($1,400) or the excess of the itemized deductions above the standard deduction ($14,590 − $12,000 = $2,590). Hence, Victoria must include the entire $1,400 refund in gross income.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
149) Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned 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?
Answer: $109,000 = [1/2 × ($130,000 + $88,000)].
Under community property systems, the income earned from services by one spouse is treated as though it were earned equally by both spouses.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
150) Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a common-law state. How much income earned will Justin report on his tax return for this year?
Answer: $88,000.
Under common-law systems, the income earned from the services of one spouse is included in the gross income of the spouse who earned it.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
151) Cyrus is a cash-method taxpayer who reports on a calendar-year basis. 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.
Answer: $88,000.
Under constructive receipt, the bonus and the TV are not included in gross income until the year received.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
152) Kathryn is employed by Acme and the company has 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.
Answer: $2,000 + $800 + $1,000 = $3,800.
Gross income includes the value of property received.
Difficulty: 3 Hard
Topic: Realization and Recognition of Income
Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
153) Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working, when the stock price was $14 per share. Now that the share price is $20 per share, she exercises all of her options. How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal tax rate is 25 percent?
Answer: $2,600 and $650.
The bargain element ($2,600) is income [20 options × 10 shares × ($20 market price − $7 exercise price)]. The tax is calculated as follows: $2,600 × 25%.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
154) Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working, when the stock price was $14 per share. Now that the share price is $20 per share, she exercises all of her options. If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent and her long-term capital gain tax rate is 15 percent?
Answer: $1,000 and $150.
The gain realized is $5,000 (200 shares × $25) less basis of $4,000 (200 shares × $20 exercise price). The tax is calculated as follows: $1,000 × 15% (preferential rate).
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
155) Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working, when the stock price was $13 per share. Three years later, when the share price was $23 per share, she exercised all of her options. If Suzanne holds the shares for two additional years and sells them when the market price is $30, how much gain will Suzanne recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?
Answer: $7,200 and $1,080.
The gain realized is $7,200; $12,000 realized (400 shares × $30) less basis $4,800 (400 shares × $12 exercise price). The tax is calculated as follows: $7,200 × 15% (preferential rate).
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
156) Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment should Charles include in gross income?
Answer: $5,000.
A part of each payment represents a return of the original $180,000 investment and the remainder ($60,000) is income. The original investment ($180,000) divided by the number of years indicates that $15,000 of each payment is a return of capital, so the remaining $5,000 is income.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
157) This year Larry received the first payment from an annuity that promises to pay him $3,000 per month for the rest of his life. The IRS tables indicate that given Larry’s age, he should expect to receive 310 monthly payments. The cost of the annuity to Larry was $620,000. How much of the first $3,000 payment should Larry include in gross income?
Answer: $3,000 − [$620,000/310] = $1,000.
A part of each payment represents a return of the original $620,000 investment. The return of capital is prorated over the expected payment period so that each $3,000 monthly payment is composed of $2,000 of return of capital ($620,000/310 payments) and $1,000 of income.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
158) Mr. and Mrs. Smith purchased 100 shares of stock for $45 per share on June 30, 2011. On March 30, 2019, the Smith family decides to sell these shares for $30, generating a loss of $15 per share. On April 15, 2019, the Smith family realized they made a mistake and repurchased 100 shares for $35 per share. Can the Smith family deduct a long-term or short-term capital loss from the sale on March 30, 2019? If not, will the Smiths ever receive a tax benefit for their loss?
Answer: The Smith family will have a ($1,500) long-term capital loss. They had held the original stock for over a year; thus, the loss would be categorized as long term. However, the loss cannot be deducted on the 2019 tax return. The wash sale rules disallow the deduction because the Smith family sold and purchased similar stock in the same company within 30 days of selling the original shares. However, the loss is added to the basis of the newly acquired stock. Thus, the basis of the new stock is $5,000, or $3,500 (100 shares × $35) plus $1,500 (the disallowed loss).
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Analyze
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AICPA/AACSB: BB Critical Thinking / Analytical Thinking
159) Desai and Lucy divorced in 2018. 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?
Answer: $100,000.
The constant payments qualify as “alimony” and should be included in Lucy’s gross income. The drop in payments is treated as child support because these payments cease upon the occurrence of a specific contingency related to the child.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
160) 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?
Answer: $4,000.
J.Z.’s modified AGI + 50 percent of his Social Security benefits equals $28,000 + $5,000 (50% × $10,000) = $33,000. Thus, his taxable Social Security benefits are the lesser of (a) $5,000 (50 percent of his Social Security benefits) or (b) 50 percent of [$28,000 modified AGI + $5,000 (50% of Social Security benefits) − $25,000] = $4,000. Thus, his taxable Social Security benefits are $4,000.
Difficulty: 3 Hard
Topic: Types of Income
Learning Objective: 05-02 Understand the distinctions between the various sources of income, including income from services and property.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
161) Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of 1 percent. Wendell would have paid interest of $2,500 this year if the interest rate on the loan had been set at the prevailing federal interest rate. Wendell used the funds as a down payment on a vacation home and during the year he paid $500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest. What amount of gross income does Wendell recognize from the loan this year?
Answer: $52,000.
Wendell must include $2,000 in gross income from the discounted interest rate he received on the loan ($2,500 interest at federal rate minus $500 he actually was required to pay). Also, Wendell must include the $50,000 in gross income because the discharge of the debt is additional compensation.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
162) Bobby and Sissy got married two and a half years ago. Since that time, they have lived in Bobby’s home. Sissy sold her previous home three years ago and excluded her entire gain ($80,000) at that time. Bobby and Sissy decided to move to a bigger home this year. As a result, they sold Bobby’s home for $500,000 (original cost $150,000). How much of the gain from the sale is taxable?
Answer: $0.
Because Bobby meets the ownership test, Bobby and Sissy meet the use test, and Sissy did not claim her exclusion within the previous two years, they may exclude the entire gain up to $500,000.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
163) 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 and assume that there are 365 days in this year.)
Answer: $39,618.
The maximum foreign-earned income exclusion for the year is $105,900. Robert will earn $18,400 during January and February and $110,000 during the remainder of the year. Since he will be spending a total of more than 330 days abroad over a 12-month consecutive period, he is eligible to exclude foreign-earned income. However, he will be able to claim only a partial exclusion based upon his time abroad this year [$105,900 full exclusion × 306/365 (days in foreign country/days in year)] and thus he will report gross income of $39,618 ($128,400 – $88,782).
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
164) 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?
Answer: $12,000 per semester.
The entire scholarship is included in gross income because the terms of the scholarship require Simon to perform services.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
165) This fall Angelina, age 35, plans to attend college. To fund her tuition she cashed in Series EE savings bonds with a redemption value of $24,000 and an original cost of $16,800. Angelina plans on spending $7,200 of the proceeds to pay tuition. The redemption proceeds are Angelina’s only source of income. What amount of interest must Angelina include in gross income this year?
Answer: $5,040.
Angelina has realized interest of $7,200 but she is only eligible to exclude 30 percent of the interest income because she is only using 30 percent of the proceeds for a qualified purpose ($7,200/$24,000). Angelina is not required to phase out the amount of the exclusion because her modified gross income is below the threshold for the phase-out of the exclusion.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
166) Teresa was married on November 1 of this year and on that day received numerous gifts from her extended family. Her grandfather presented Teresa with a check for $15,000; her uncle gave Teresa 1,000 shares of Ford stock worth $10 per share (the uncle purchased the shares for $25 each); and her aunt presented Teresa with $50,000 of corporate bonds (Teresa received $1,500 of semiannual interest from the bonds on December 31 of this year). Finally, Teresa’s parents paid off $50,000 of her student loan debt including $2,000 of accrued interest. What amount, if any, must Teresa include in gross income this year?
Answer: $500 (two months of six months’ interest received).
All of the gifts are excludable except for the interest that accrued on the corporate bonds after the date of the transfer.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
167) Andres has received the following benefits this year.
| Salary | $ | 92,000 |
| Contribution to qualified pension plan | 10,200 | |
| Qualified health insurance premiums | 8,400 | |
| Year-end bonus | 15,000 | |
| Group-term life insurance premiums (face = $40,000) | 1,750 | |
| Whole life insurance premiums (face = $100,000) | 2,420 | |
| Disability insurance premiums | 1,800 |
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?
Answer: $115,920 = $92,000 + $15,000 + $2,420 + $6,500.
The disability pay of $6,500 is included in gross income because the insurance premiums were paid as a nontaxable fringe benefit.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
168) This year Joseph joined the board of directors. Besides his director’s fees, Joseph received the following employee benefits:
| Salary | $ | 204,000 |
| Contributions to qualified pension plan | 25,000 | |
| Qualified health insurance premiums | 8,000 | |
| Stock bonus | 20,000 | |
| Annual director’s fee | 15,000 | |
| Group-term life insurance premiums (face = $40,000) | 1,800 |
The stock bonus consisted of 5,000 shares of Bell stock given to Joseph as compensation. At the time of the transfer the stock was listed at $4 per share. What amounts, if any, should Joseph include in gross income this year?
Answer: $239,000 = $204,000 + $20,000 + $15,000.
Joseph would report the value of the stock ($20,000) as compensation.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
169) 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.
| Distributions from qualified pension plan | $ | 5,400 |
| Interest on bonds issued by City of Austin, Texas | 2,500 | |
| Social Security benefits | 8,200 | |
| Interest on U.S. Treasury bills | 2,300 | |
| Interest on bonds issued by Ford Motor Company | 1,900 | |
| Interest on bonds issued by City of Quebec, Canada | 2,750 | |
| Disability insurance benefits | 9,500 |
Answer: $12,350 = $5,400 + $2,300 + $1,900 + $2,750.
Caroline is not taxed on the disability payments because she purchased the insurance. In addition, Caroline’s gross income is clearly below the Social Security phase-in threshold, so the Social Security benefits are also excluded.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
170) Alex is 63 years old and retired. This year Alex won $212,200 in the state lottery. Alex also received $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.
Answer: $230,200 = $212,200 + $9,500 + $8,500.
The annuity return of capital is ($157,500/15) = $10,500; thus, the taxable portion is $9,500. Given Alex’s income, his Social Security benefits are 85 percent taxable (i.e., $10,000 × 85 percent).
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
171) Vincent is a writer and U.S. citizen. After being out of work for the first half of the year, Vincent moved permanently to Ireland on July 4. He worked for an Irish magazine and earned $110,000 in salary from July 4th to December 31st. Earlier in April of this year Vincent received a $1,500 refund of the $3,600 in state income taxes his previous employer withheld from his pay last year. Vincent claimed $12,800 in itemized deductions last year (the standard deduction for a single filer was $12,000). Vincent wants to elect to use the foreign-earned income exclusion to the extent he is eligible. Calculate Vincent’s gross income for this year. (Round your final answer to the nearest whole dollar amount and assume there are 365 days in the year.)
Answer: $58,285 = $110,000 − $52,515 + $800.
$105,900 × 181/365 = $52,515 maximum exclusion. The tax benefit is the lesser of the refund ($1,500) or the excess of the itemized deductions above the standard deduction ($12,800 − $12,000 = $800). Hence, Vincent must include $800 of the $1,500 refund in gross income.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
172) Lisa and Collin are married. Lisa works as an engineer and earns a salary of $116,000. Collin works at a beauty salon and reported wages of $45,000. Lisa received $500 of interest from corporate bonds and $250 of interest from a municipal bond. Lisa acquired these bonds prior to her marriage to Collin. Collin’s father passed away on April 14. He inherited cash of $50,000 and his baseball card collection, valued at $2,000. As beneficiary of his father’s life insurance policy, Collin also received $150,000. The couple spent a weekend in Atlantic City in November and came home with gambling winnings of $1,200. Collin was injured in an accident at the salon. He was unable to work for a month, but during this time he received $5,000 from disability insurance he purchased several years ago. Collin also received $2,000 in workers’ compensation, and $1,500 from the salon for the emotional trauma he suffered from the accident. Calculate Lisa and Collin’s gross income for this year assuming they will file married filing jointly.
Answer: $162,700 = $116,000 + $45,000 + $500 + $1,200.
The municipal interest, inheritance and life insurance, disability pay, workers’ compensation, and damages are all excluded from gross income.
Difficulty: 3 Hard
Topic: Exclusion and Deferral Provisions
Learning Objective: 05-03 Apply basic income exclusion and deferral provisions to compute gross income.
Bloom’s: Apply
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AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
