Question 1

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

Accepted Answer

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition, as long as they are used for qualified educational expenses.

Question 2

Earnings from Internal Revenue Code

Accepted Answer

The Internal Revenue Code (IRC) does not generate earnings; it is a comprehensive set of tax laws in the United States that govern federal tax obligations.

Question 3

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.

Accepted Answer

The standard retirement benefit under a defined benefit plan typically depends on both the number of years of service and the amount of the employee's compensation, often considering the employee's earnings near retirement or an average of the employee's earnings over a certain period.

Question 4

Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.

Accepted Answer

Distributions from defined benefit plans are generally taxed as ordinary income to beneficiaries, not as long-term capital gains.

Question 5

Interest earned on a federal Treasury bond is excluded from gross income (for federal tax purposes).

Accepted Answer

Interest earned on federal Treasury bonds is subject to federal income tax, but it may be exempt from state and local income taxes.

Question 6

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.

Accepted Answer

Any payment received as compensation for emotional distress is considered taxable income and must be included in gross income.

Question 7

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

Accepted Answer

Qualified fringe benefits, such as health insurance or educational assistance programs, can be excluded from an employee's gross income. However, there are limits and restrictions on the types and amounts of benefits that can be excluded.

Question 8

Workers' compensation benefits are excluded from gross income.

Accepted Answer

Workers' compensation benefits are considered non-taxable income and are therefore excluded from gross income for tax purposes.

Question 9

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

Accepted Answer

The foreign earned income exclusion applies to earned income such as wages and salaries, not to passive income such as interest and dividends.

Question 10

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.

Accepted Answer

Gifts are not considered taxable income for the recipient, so Trevor does not need to include any part of the $25,000 gift in his gross income.

Question 11

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.

Accepted Answer

Taxpayers meeting certain home ownership and use requirements can exclude up to $250,000 of realized gain on the sale of their principal residence if filing singly, or $500,000 if filing jointly, not $1,000,000.

Question 12

Qualified retirement plans include defined benefit plans but not defined contribution plans.

Accepted Answer

This statement is false. Qualified retirement plans include both defined benefit plans and defined contribution plans.

Question 13

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

Accepted Answer

Disability insurance benefits that Loretta purchased directly (with after-tax dollars) are generally not taxable and do not need to be included in her gross income.

Question 14

A below-market loan (e.g., from an employer to an employee)is a common example of a transaction that generates taxable imputed income.

Accepted Answer

A below-market loan is considered as a form of compensation and generates taxable imputed income for the employee receiving the loan.

Question 15

U.S.citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.

Accepted Answer

U.S. citizens are generally subject to tax on all income whether it is generated in the United States or in foreign countries, with certain exceptions and exclusions for income earned abroad.

Question 16

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.

Accepted Answer

Life insurance proceeds are generally not taxable income and can be excluded from gross income. Therefore, Anna can exclude the entire $15,000 from her gross income.

Question 17

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.

Accepted Answer

Defined benefit plans guarantee a specific amount of retirement income based on factors such as length of service, salary history, and age, while defined contribution plans specify how much money is contributed by both the employer and employee to the employee's account, but do not guarantee a specific benefit amount at retirement.

Question 18

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.

Accepted Answer

Since the disability plan was purchased by Brad's employer as a nontaxable fringe benefit, and Brad did not pay the premiums with after-tax dollars, the benefits received from such a plan are generally taxable and must be included in Brad's gross income.

Question 19

An employee may exclude up to a 40 percent employer-provided discount on services.

Accepted Answer

An employee may exclude from income a discount of up to 20 percent on services provided by the employer.

Question 20

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

Accepted Answer

Interest earned on municipal bonds issued by a state or local government is generally exempt from federal income tax. This includes bonds issued by the city of Denver. However, there may be exceptions for certain types of bonds or if the bondholder is subject to alternative minimum tax.

Quiz 5: Gross Income and Exclusions