Fundamentals of Taxation

Business

Quiz 3 :

Gross Income: Inclusions and Exclusions

Quiz 3 :

Gross Income: Inclusions and Exclusions

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Under what circumstances is a state or local income tax refund included in the taxable income of a taxpayer?
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Taxpayers refers to those who report and record their earnings with the government in a year and pay a certain amount based on their income. Government bodies have offered certain relaxations for taxpayers to reduce their taxable income which maybe standardised or itemised. Taxpayers can utilise the allowance to reduce some amount from the tax to be paid to the state or local body or ask for refund if permitted.Standardised deduction refers to a flat amount that applies to all qualified taxpayers which is a portion of the income that's non-taxable. It is based on the person's source of income, age, disability and dependability. Whereas, itemized deduction includes expenditure on products, services or contribution like charitable gifts.
Taxpayers using standard deduction get to reduce a certain amount from tax, which is less than those who use itemised deduction. But in case of refund policy, taxpayers who used itemised deduction are more probable to receive that refund amount as taxable income in the next year. This is because, the amount they deducted and received as refund are counted as earning in the next year.
So, the circumstance when the state or local tax refund to be included as taxable income is when the taxpayer use itemised deduction in the previous year.

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Congress has chosen to exempt certain income from taxation, such as scholarships, gifts, life insurance proceeds, municipal bond interest, and employee fringe benefits. Given that one of the primary purposes of the IRC is to raise revenue for the government, why do you think Congress would provide these and other exemptions?
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Tax exemption refers to relaxation of certain items from taxable roof which can be used by taxpayer to reduce their burden. They are generally given to drive the interest of people towards that field, which would have needed more attention. Non-taxable allowance are also given with keeping in mind interests of people and need of that item.
Congress has given certain items tax exemption which include-scholarship for studies, life s insurance, municipal bond and much more. Scholarships when given tax exemption, can be utilised completely by the individual for their studies which would attract more young adults to take up education and economic status will no more be an obstacle. This would improve the educational level of the country and economic status of the people. If tax exemption is lifted, many people cannot afford higher education thus affecting all.
Thus, congress has chosen to give tax exemptions on certain items, keeping in mind the educational and general interest of people and their welfare.

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What is an employer-provided fringe benefit?
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Fringe benefit is a form of pay other than salary by the employer for the performance of the employee. Any benefit provided to an employee is taxable and are included under their income. This can be helped by the employer by showing the benefit under certain categories which are non-taxable and this is termed as employer provided fringe benefit.
Common examples of fringe benefits include medical, dental insurance, housing allowance, educational assistance, sick pay, meal discounts and much more. They are taxable.Employers usually provide all employees with personalized benefit statement every year. This would include their income and other benefits the company provides. Employers provide various fringe benefits to retain their valuable employees and also offers flexible work environment. However, these benefits are taxable unless they fall under certain categories which include-
Discounts provided to employees for products sold in business normally and in the interest of employee, discounts cannot exceed more than a level where that would affect the income of employee. Business related trips taken by the employee for official purposes. Employees moving outside work environment for official purpose. Vehicle allowance, accident insurance due to work, meals and lodging on business purpose are non-taxable fringe benefit to be provided by the employer.
So, employer provided fringe benefits refers to those benefits provided other than salary for the performance of employee at work, which may be taxable or non-taxable.

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Robert and Vilma Greene are married filing jointly. They are 68 and 66 years old, respectively. Their address is 1001 N.W. 93 Street, Miami, Florida 33022. Additional information about Mr. and Mrs. Greene, who are retired, is as follows: Social security numbers: Robert: 412-34-5670. Vilma: 412-34-5671. img Form 1099-INT for Robert shows this amount: Box 1 = $9,100 from CD Bank. Form 1099-INT for Vilma shows this amount: Box 1 = $7,500 from CD Bank. Prepare the tax return for Mr. and Mrs. Greene using the appropriate form. They want to contribute to the presidential election campaign.
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What is meant by the concept of constructive receipt ?
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Under what circumstances are social security benefits taxable to a single taxpayer?
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How do dividends and earnings and profits relate to each other?
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Define and give examples of a de minimis employee fringe benefit.
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Leo owns all of the stock in a newly formed corporation. During 2010, the first year of operation, the corporation realized current earnings and profits of $10,000. Leo received a $12,000 distribution from the corporation. How much, if any, of the distribution is taxable to Leo? Why?
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John and Martha Holloway are married filing jointly. They are 35 and 31 years old, respectively. Their address is 10010 Dove Street, Atlanta, Georgia 30301. Additional information about Mr. and Mrs. Holloway is as follows: Social security numbers: John: 412-34-5670. Martha: 412-34-5671. img Form 1099-DIV for John shows this amount: Box 1a and Box 1b = $345 from MAR Brokerage. From 1099-INT for John shows these amounts: Box 1 = $450 from ABC Bank. Box 4 = $35. John is a construction worker, and Martha is a secretary. Prepare the tax return for Mr. and Mrs. Holloway using the appropriate form. They want to contribute to the presidential election campaign.
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Your friend John files his own tax returns. He received a computer as a dividend from a closely held corporation. He says that he does not need to report the computer as dividend income because the dividend was not paid in cash. Is he right? Why?
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Explain how income is recognized under the cash method of accounting.
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How are dividends taxed?
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Carl and Elizabeth Williams are married filing jointly. They are 45 and 40 years old, respectively. Their address is 19010 N.W. 135 Street, Miami, Florida 33022. Additional information about Mr. and Mrs. Williams is as follows: Social security numbers: Carl: 412-34-5670. Elizabeth: 412-34-5671. img From 1099-INT for Carl and Elizabeth shows this amount: Box 1 = $2,450 from Global Bank. They also received tax-exempt interest of $500, as well as $45 for jury duty pay when Carl went to court to serve for a few days. Carl received two weeks of workers' compensation pay for a total of $3,100. Dependent: Son, Carl, Jr., who is 7 years old. His social security number is 412-34-5672. Carl is a sales manager, and Elizabeth is an office clerk. Prepare the tax return for Mr. and Mrs. Williams using the appropriate form. They do not want to contribute to the presidential election campaign.
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Interest on corporate bonds is taxable to the recipient whereas interest on municipal bonds is tax-free. Would you expect that the interest rate on a corporate bond would be higher or lower than the rate on a municipal bond of comparable quality and term? Why?
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Refer to Example 3-4 in the chapter. Explain why Antonio is required to report income even though he did not receive an asset (either cash or property).
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When determining the taxability of social security benefits, the IRC uses the concept of provisional income. How is provisional income calculated?
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Are there circumstances in which income is recognized even when a cash-basis taxpayer does not receive cash? Explain.
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What is a dividend ?
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Under what circumstances is a dividend nontaxable to a shareholder recipient?
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