Question 1

This year Kelsi received a $1,900 refund of state income taxes that she paid last year. Last year Kelsi claimed itemized deductions of $7,450 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 $6,350?

Accepted Answer

The answer of This year Kelsi received a $1,900 refund...

Question 2

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?

Accepted Answer

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.

Question 3

Bobby and Sissy got married 2.5 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?

Accepted Answer

The answer of Bobby and Sissy got married 2.5 years...

Question 4

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 (Rounded to the nearest whole dollar)?

Accepted Answer

The portion of disability benefits that represents premium paid as a nontaxable fringe benefit is included in gross income. The employer paid 2/3ʳᵈˢ of the cost and so 2/3ʳᵈˢ of the pay is includible [$2,200/ ($2,200 + $1,100)] × $18,000 = $12,000. The remaining portion (1/3) of the disability benefits is excluded from gross income because the premiums were paid by the taxpayer.

Question 5

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 of next year for $3,500. Finally, Henry restored a car for the football coach. The coach paid him this year with a pass to next year's football games. The pass is worth $750. Compute Henry's gross income for this tax year assuming that he uses the cash basis of accounting.

Accepted Answer

The answer of Henry works part-time on auto repairs and...

Question 6

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.

Accepted Answer

The answer of Blake is a limited partner in Kling-On...

Question 7

Cyrus is a cash method taxpayer who reports on a calendar-year. 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.

Accepted Answer

The answer of Cyrus is a cash method taxpayer who...

Question 8

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?

Accepted Answer

The answer of Desai and Lucy divorced in 2018. Lucy...

Question 9

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?

Accepted Answer

The answer of Aubrey and Justin file married filing separately....

Question 10

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?

Accepted Answer

The answer of Charles purchased an annuity from an insurance...

Question 11

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?

Accepted Answer

The answer of This year Larry received the first payment...

Question 12

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 $8,940. 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 $6,350?

Accepted Answer

The answer of In April of this year Victoria received...

Question 13

Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of one 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?

Accepted Answer

The answer of Wendell is an executive with CFO Tires....

Question 14

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?

Accepted Answer

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.

Question 15

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 (C.D.) for $4,050. The C.D. matures next year with interest. Finally, Juan received a gift card that can only be applied for $850 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.

Accepted Answer

The answer of Juan works as a landscaper for local...

Question 16

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?

Accepted Answer

The answer of This year Ann has the following stock...

Question 17

Kathryn is employed by Acme and they have 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). Just right before 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.

Accepted Answer

The answer of Kathryn is employed by Acme and they...

Question 18

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?

Accepted Answer

The answer of Aubrey and Justin file married filing separately....

Question 19

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?

Accepted Answer

The answer of J.Z. (single taxpayer) is retired and received...

Question 20

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?

Accepted Answer

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.

Quiz 5: Gross Income and Exclusions