Question 1

Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3%, which of the following is correct?

Accepted Answer

When an employer lends an employee money interest-free or at a rate lower than the federal interest rate, the employee is considered to have received imputed compensation income. In this case, Joyce received a $50,000 interest-free loan, so she must recognize $1,500 of imputed compensation income ($50,000 x 3%). Option A is incorrect because Joyce did not pay any interest, so she has no taxable interest income. Option B is incorrect because the employer did not pay any interest, so there is no deductible interest expense. Option D is incorrect because a loan is not a dividend.

Question 2

Frank received the following benefits from his employer this year. What amount must Frank include in his gross income? $$\begin{array} { l r } 
\underline{\text { Benefits Received } }& \underline{\text { Amount }} \
\text { Salary } & \$ 54,450 \
\text { Health insurance } & 2,900 \
\text { Group term life insurance } ( \$ 50,000 ) & 1,800
\end{array}$$

Accepted Answer

Frank must include his salary of $54,450 in his gross income. Health insurance and group term life insurance up to $50,000 are generally not included in gross income.

Question 3

Sam, age 45, saved diligently for his college education by putting part of his pay into U.S. Series EE saving 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?

Accepted Answer

Sam must include the difference between the purchase price and the redemption price, which is $700, in his gross income. However, there is an exception where the interest earned on savings bonds may not be taxable if the taxpayer uses the proceeds to pay for qualified education expenses, such as tuition and fees. In this case, Sam could potentially exclude up to $350 (half of the $700 interest earned) from his gross income if he uses the proceeds to pay for his own college tuition and fees.

Question 4

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?

Accepted Answer

The answer of Bart, a single taxpayer, has recently retired....

Question 5

This year, Fred and Wilma 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?

Accepted Answer

Fred and Wilma can exclude up to $500,000 of the gain from the sale of their home because they meet the ownership and use tests for the home sale exclusion. The gain is $550,000 ($750,000 - $200,000), so $50,000 is included in gross income.

Question 6

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 freshman on campus living. What amount must Shaun include in his gross income?

Accepted Answer

The $8,500 for dormitory fees is considered compensation for services (counseling freshmen) and must be included in Shaun's gross income. The other amounts are qualified scholarships and are not included in gross income.

Question 7

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?

Accepted Answer

The granddaughter must include the $500 dividend in her gross income, as dividends are considered taxable income. The value of the stock itself is not included in gross income as it was a gift.

Question 8

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 340 days (out of 365 days). What amount of Hank's $109,500 salary this year will he be allowed to exclude from gross income in the U.S. (rounded to the nearest one-hundred dollars)?

Accepted Answer

Hank can utilize the foreign earned income exclusion for the portion of his salary earned while living and working abroad. In 2020, the maximum exclusion amount is $107,600. However, since Hank only lived in France for 340 days, his exclusion amount will be prorated based on the number of days he resided in France. Therefore, 340/365 x $107,600 = $100,336 is the maximum exclusion amount that Hank can claim. Since Hank earned $109,500, he will be able to exclude $92,400 ($100,336/$109,500 x $100,000).

Question 9

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?

Accepted Answer

When a loan is forgiven, it is generally considered to be taxable income. In this case, the forgiven loan amount was $45,000, which must be included in Deb's gross income.

Question 10

Ben's employer offers employees the following benefits. What amount must Ben include in his gross income? $\begin{array}{c}
\begin{array}{l}
\underline{\text{Benefit}}\
\text{Health insurance coverage}\
\text{Group term life insurance (\$ 50,000) }\
\text{Disability insurance coverage (considered purchased by Ben)}\
\text{Whole life insurance coverage (\$ 100,000) }\
\end{array}
\begin{array}{lll}
&&
\end{array}
\begin{array}{lll}
\underline{\text { Value }} \
\$ 5,800 \
4,270 \
3,600 \
7,000\
\end{array}
\end{array}$

Accepted Answer

Employer-paid health insurance coverage, group term life insurance up to $50,000, and disability insurance coverage are not included in gross income. However, the value of the whole life insurance coverage over $50,000 ($100,000 - $50,000 = $50,000) is taxable and must be included in Ben's gross income. Therefore, the total amount Ben must include in his gross income is $5,800 + $7,000 = $10,800.

Question 11

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?

Accepted Answer

The answer of NeNe is an accountant and U.S. citizen,...

Question 12

Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)? $$\begin{array} {c} 
{ \underline { \text { Bond } } } & \underline { \text { Interest } } \
\text { General Motors } & \$ 1,450 \
\text { City of New York } & 900 \
\text { State of New Jersey } & 1,200 \
\text { U.S. Treasury } & 850
\end{array}$$

Accepted Answer

Mike must include the total amount of interest received in his gross income, which is:

$1,450 + $900 + $1,200 + $850 = $4,400

Therefore, the correct answer is D) $2,300, which is the closest option to $2,200 ($4,400 divided by 2).

Question 13

Brenda has $15,000 in U.S. Series EE saving 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?

Accepted Answer

To exclude the interest on U.S. Series EE saving bonds from gross income, all three conditions mentioned in choices A, B, and C must be met. The proceeds must be used to pay for qualified higher education expenses, the taxpayer's modified AGI must fall within a certain phase-out range, and the expenses must be incurred by the taxpayer, their spouse, or a dependent. If all three conditions are met, then Brenda can exclude the interest from her gross income.

Question 14

Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4%, which of the following is correct?

Accepted Answer

The answer of Janine's employer loaned her $5,000 this year...

Question 15

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?

Accepted Answer

The gain is $550,000 ($750,000 - $200,000). Since they owned and lived in their home for less than 2 years, none of the gain is excluded from gross income.

Question 16

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?

Accepted Answer

Both pension payments and social security payments are taxable income, therefore Bernie must include both amounts in his gross income. The total amount would be $250,000 + $10,000 = $260,000. However, because social security payments only count towards taxable income if the total amount exceeds a certain threshold, Bernie will only have to include a portion of his social security payments in his gross income. The calculation of this taxable portion is done using a specific formula based on Bernie's income and social security payments. In this case, the taxable portion of Bernie's social security payments would be $8,500, resulting in a total gross income of $250,000 + $8,500 = $258,500.

Question 17

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?

Accepted Answer

Life insurance proceeds received due to the death of the insured are generally not included in gross income. Similarly, inherited property is not included in gross income, although it may be subject to estate tax.

Question 18

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.?

Accepted Answer

For 2023, the Foreign Earned Income Exclusion allows U.S. citizens living abroad to exclude up to $120,000 of foreign earned income. Helen can exclude $99,200 of her salary from U.S. gross income.

Question 19

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?

Accepted Answer

The $3,500 for room and meals is considered taxable income, while the $5,000 tuition reduction is not taxable as it is a qualified scholarship.

Question 20

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% 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?

Accepted Answer

To calculate Karl's gross income, we need to add his salary to the amount he saved by purchasing groceries at 10% below Moe's cost.

First, we need to calculate how much Karl saved on groceries:

Moe's cost for Karl's groceries = $4,000 
Karl's price for his groceries (10% below Moe's cost) = $3,600 
Amount saved by Karl = $4,000 - $3,600 = $400

Next, we can add Karl's salary and the amount he saved on groceries:

Gross income = Salary + Amount saved on groceries 
Gross income = $43,000 + $400 
Gross income = $43,400

Therefore, the best choice is (D) $43,400.

Quiz 5: Gross Income and Exclusions