Question 1

Randy and Sharon are married and have two dependent children. Their 2016 tax and other related information is as follows:
 $\begin{array}{|l|r|}
\hline\text { Total salaries } & \$ 160,000 \
\hline \text { Bank account interest income } & 3,500 \
\hline \text { Municipal bond interest income } & 1,500 \
\hline \text { Value of employer provided medical insurance } & 12,500 \
\hline \text { Employer paid premiums for } \$ 50,000 \text { of group term life instrance } & 5,500 \
\hline \text { Dividend income from ABC stock } & 2,000 \
\hline \text { Loan from Randy's parents } & 5,000 \
\hline \text { Gift from Randy's parents } & 15,000 \
\hline \text { Gain from the sale of qualified small business stock acquired in 2006 } & 18,000 \
\hline \text { Total itemized deductions } & 17,000\\hline
\end{array}$ Compute Randy and Sharon's taxable income. (Show all calculations in good form.)

Accepted Answer

The answer of Randy and Sharon are married and have...

Question 2

After he was denied a promotion, Daniel sued his employer claiming sex discrimination. He was awarded $20,000 to cover medical bills he incurred because of the related emotional distress, $80,000 to punish his employer for discrimination, and $50,000 to compensate him for lost wages. What is the amount that must be included in Daniel's gross income for the year?

Accepted Answer

The answer of After he was denied a promotion, Daniel...

Question 3

In 2014 Betty loaned her son, Juan, $10,000 to help him buy a car. In 2016, before he repaid the $10,000, Betty told Juan that she was "tearing up" the $10,000 note as a graduation present. How should Juan treat the amount forgiven?

Accepted Answer

When Betty forgave the debt in 2016, it counted as a gift to Juan. The gift tax exclusion amount for 2016 was $14,000, meaning that Betty's forgiveness would fall within this amount and be considered an excludable gift. Therefore, the amount forgiven should not be treated as taxable income for Juan in either the year of the loan or the year of forgiveness.

Question 4

Jeremy, an American citizen, earned $200,000 during 2016 while employed in Switzerland. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses?

Accepted Answer

The foreign-earned income exclusion for 2016 is $101,300. Therefore, Jeremy can exclude up to $101,300 of his foreign-earned income from U.S. taxation. This leaves $98,700 of foreign-earned income (i.e., $200,000 - $101,300) subject to U.S. taxation. Since the foreign-earned income is subject to U.S. taxation, Jeremy can deduct his foreign expenses that are attributable to that income. Therefore, Jeremy can deduct $19,740 (i.e., $98,700 x 20%) of his foreign expenses.

Question 5

In 2014 Bonnie, a sole proprietor, loaned her employee, John, $10,000 to help him buy a car. In 2016, before he repaid the $10,000, Bonnie told John that she was "tearing up" the $10,000 note in recognition of his strong job performance. How should John treat the amount forgiven?

Accepted Answer

According to the IRS, when a debt is forgiven, the amount forgiven is generally considered taxable income. In this case, since Bonnie forgave the $10,000 loan in 2016, John should treat it as taxable income in the year of forgiveness (2016).

Question 6

Mark, a cash basis taxpayer, died on September 30, 2016. His wife, Charlotte, provides you with the following information.
From January 1, 2016 until his death, Mark received a salary of $35,000. Charlotte received a salary of $68,000 during 2016. Mark had earned commissions of $20,000 which Charlotte received after his death. Charlotte was the beneficiary of a $100,000 whole life policy purchased by Mark and a $50,000 group term life insurance policy purchased by Mark's employer. The employer had paid premiums of $250 on Mark's behalf. In addition, the corporation paid Charlotte a $10,000 employee death benefit in Mark's name. All employees' families received similar benefits regardless of financial need. Mark and Charlotte had itemized deductions of $15,600. What is the amount of their taxable income on their 2016 tax return?

Accepted Answer

The answer of Mark, a cash basis taxpayer, died on...

Question 7

In September of 2016, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 17 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?

Accepted Answer

Michelle meets the requirements for the Section 1202 exclusion, which allows for a exclusion of 100% of the gain from the sale of qualified small business stock if certain conditions are met. Since she held the stock for more than 6 months, and the sale occurred more than 5 years from the date of issuance, the entire gain qualifies for the exclusion. Therefore, she will not recognize any gain and the answer is A.

Question 8

This year, Jason sold some qualified small business stock that he acquired in 2008. His basis in the stock was $100,000 and he sold it for a $300,000 gain. How much of Jason's gain is taxable?

Accepted Answer

Since Jason held the qualified small business stock for more than 5 years, he is eligible for a 50% exclusion on the gain. Therefore, only $150,000 of his $300,000 gain is taxable.

Question 9

In September of 2016, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 17 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. What is the basis in the new stock she purchased?

Accepted Answer

Since Michelle sold the qualified small business stock for $1,000,000 and had a basis of $200,000, she had a capital gain of $800,000. However, since she held the stock for more than a year, she qualifies for the reduced long-term capital gains tax rate.

She then purchased other qualified small business stock for $1,100,000 within 45 days of the sale. In order to defer her capital gain taxes on the sale, she must reinvest the entire $1,000,000 proceeds from the sale into the new stock.

Therefore, her basis in the new stock would be $1,100,000 (the purchase price) minus $1,000,000 (proceeds from the sale that she reinvested) plus $200,000 (her original basis in the sold stock) = $300,000.

So, the correct choice is B.

Question 10

For a taxpayer who is not insolvent nor under bankruptcy proceedings, the discharge of debt is generally

Accepted Answer

Generally, when a taxpayer receives a discharge of debt, it is considered income and is taxable unless the taxpayer can demonstrate that an exception or exclusion applies. However, there are some exceptions for specific types of debt, such as certain student loan debt and qualified principal residence indebtedness.

Question 11

This year, Jonathan sold some qualified small business stock that he acquired in December 2010. His basis in the stock was $100,000 and he sold it for a $300,000 gain. How much of Jason's gain is taxable?

Accepted Answer

A)Qualifying small business stock acquired after September 27,2010 and held longer than five years is eligible for a 100% exclusion.

Question 12

Jillian has just accepted an offer from accounting firm for a full-time position after completion of her master's degree. In addition to paying a high salary and premiums on the basic health insurance policy, the firm will pay the benefits listed below. Which of the following benefits can be excluded (assume the benefits are provided on a non-discriminatory basis to all employees)?

Accepted Answer

C)No exclusion of income is allowed unless specifically provided in the law.Only the eyecare coverage has a relevant exclusion as it would be considered medical and health premiums.

Question 13

Faye is a marketing manager for Healthy Corp. She earns a salary of $100,000 and has received the following benefits:
• Healthy pays 75% of all employees' health and accident insurance coverage. Healthy paid $6,000 towards the cost of Faye's health insurance during the year.
• Faye participates in the cafeteria plan and had elected to have $2,000 withheld from her pay to cover the remaining cost of the health insurance premiums and an additional $1,500 to cover dental and other health care costs not paid by insurance (i.e. funding a flexible spending account). The full $1,500 was used to pay for various qualifying medical costs.
• Healthy pays the cost of disability insurance coverage for all employees. The insurance will pay 75% of salary if employees are out of work for a significant period. The cost of Faye's premiums was $600.
• Healthy pays for the cost of veterinary insurance for all employees. The cost of coverage for Faye's dog was $400.
• Healthy pays for the cost of daycare for its employees' children. The cost for Faye's two children was $8,000.
• All employees receive a 20% discount on Healthy's products. The typical markup on their products is 25%. Faye enjoyed $1,200 of savings through the discount program.
• Faye won the manager of the year award earlier in the year and received an all-expense paid week at a desert spa valued at $3,500.
• Healthy pays Faye's annual membership dues of $500 to the American Marketing Association.
• Healthy paid for the full $2,500 cost of Faye's attendance at the American Marketing Association's annual conference in Orlando.
How much income must Faye recognize from her employment?

Accepted Answer

The answer of Faye is a marketing manager for Healthy...

Question 14

Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2014 and does not return to the U.S. until March 5, 2017. During her stay in Rome, Jan earned $112,000 in 2016. Jan may exclude

Accepted Answer

Jan meets the physical presence test as she was present in Italy for more than 330 full days during a 12-month period (November 1, 2015, to October 31, 2016). Therefore, she may use the foreign earned income exclusion for the 2016 tax year. The maximum amount that can be excluded for 2016 is $101,300, so Choice C is the correct answer.

Question 15

Connor owes $4 million and has assets of only $1 million. He declares and files personal and business bankruptcy and his creditors approve a payment plan of $.25 per dollar. Connor has a net operating loss carryover of $2 million. The remaining 75 percent of his debt will be canceled. Connor must recognize income of

Accepted Answer

The answer of Connor owes $4 million and has assets...

Question 16

Exter Company is experiencing financial difficulties. It has assets worth $2 million, but owes liabilities of $2.1 million. It has a longstanding relationship with the bank. The bank has agreed to forgive $300,000 of debt principal. Because of this debt forgiveness, Exter will recognize income of

Accepted Answer

According to the question, the bank forgives $300,000 of debt principal. This means that Exter's liabilities will decrease by $300,000. As a result, Exter's assets ($2 million) will exceed its liabilities ($1.8 million), resulting in a net increase in Exter's equity. This increase in equity represents income for Exter. Hence, Exter will recognize income of $200,000 (the difference between the forgiven debt principal of $300,000 and the remaining liabilities of $100,000). Therefore, the best choice is C.

Question 17

Tim earns a salary of $40,000. This year, Tim's employer establishes a cafeteria plan under which Tim signed a salary reduction of $2,500 for which $1,500 is to cover his health insurance premiums and $1,000 is transferred to a flexible spending account to reimburse medical expenses. During the year, he is reimbursed $900 for medical expenses. What is the total taxable to Tim this year?

Accepted Answer

The answer of Tim earns a salary of $40,000. This...

Question 18

Jamal, age 52, is a human resources manager for Triple W Company. His annual salary is $110,000 and he receives the following fringe benefits during the current year:
• Triple W pays for all employees' health and accident insurance. Triple W pays $7,000 for Jamal's health insurance during the year.
• Triple W provides Jamal with group-term life insurance coverage of $200,000 during the year. The monthly inclusion amount per $1,000 of coverage is $.23.
• Triple W has a flexible benefits plan in which employees may participate to pay any qualifying medical costs not reimbursed by their health insurance. Jamal has $1,600 withheld from his salary under the plan. During the year he receives reimbursements of $1,300.
• Triple W pays parking costs for all management employees. Jamal's parking costs $220 month.
• Triple W pays Jamal's annual membership dues of $450 to the Society of Human Resource Management Association. The company also subscribes to several management journals for Jamal costing $650 a year.
• Jamal took a college class on financial accounting and Triple W reimbursed his tuition of $6,000 through its tuition assistance program for all employees.
• Jamal's consumption of coffee provided by Triple W is estimated at $250 a year.
How much income must Jamal report from his job?

Accepted Answer

The answer of Jamal, age 52, is a human resources...

Question 19

The discharge of certain student loans is excluded from income if all of the following are present except for

Accepted Answer

The discharge of certain student loans is excluded from income if the loan meets the criteria of being made by governmental, educational, or charitable organizations, the loan proceeds were used to pay for education expenses, and the loan forgiveness is contingent upon the individual's working in certain professions for a specified period of time. Age is not a factor in determining whether a student loan is eligible for exclusion from income.

Question 20

Melanie, a U.S. citizen living in Paris, France for the last three years, earns a salary of $125,000 in 2016. Melanie's housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income?

Accepted Answer

According to the Foreign Earned Income Exclusion for 2016, the maximum amount of foreign earned income that can be excluded from U.S. taxation is $101,300. However, Melanie can also exclude a portion of her housing costs from her income, as long as those costs are considered reasonable. In this case, Melanie's housing costs are $24,000, which is reasonable. Therefore, she can also exclude this amount from her income. As a result, Melanie can exclude a total of $125,300 from her income ($101,300 for foreign earned income, plus $24,000 for housing costs).

Quiz 19: Gross Income: Exclusions