Question 1

John told his nephew,Steve,"if you maintain my house when I cannot,I will leave the house to you when I die.Steve maintained the house and when John died Steve inherited the house.The value of the residence must be included in Steve's gross income.

Accepted Answer

Inherited property is generally not taxable as income, but any income generated by the property, such as rental income or capital gains upon selling the property, would be subject to taxation. Therefore, the value of the residence itself is not included in Steve's gross income, but any income generated by the property after inheriting it would be subject to taxation.

Question 2

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

Accepted Answer

Melody's HSA contributions and earnings exceeded her withdrawals for qualified medical expenses, so she is not required to recognize any gross income from the HSA for the year.

Question 3

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

Accepted Answer

The $45,000 life insurance proceeds are not taxable as income, but any interest earned on the proceeds after they are received is taxable. Therefore, Mel's Federal gross income from the $2,500 interest earned on the government bond is $2,500.

Question 4

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees,and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income the $46,000 she received.

Accepted Answer

The $40,000 received from the group term life insurance policy is excluded from Ed's wife's gross income since it was paid out due to Ed's death. The $6,000 of accrued salary is also excluded from Ed's wife's gross income since it was earned by Ed prior to his death. Therefore, Ed's wife is not required to recognize $46,000 as gross income.

Question 5

If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.

Accepted Answer

Scholarships that are used for qualified education expenses are excluded from gross income and are not considered gifts. However, scholarships that do not meet the requirements for a qualified education expense, such as those used for room and board or non-educational expenses, are included in gross income.

Question 6

Workers' compensation benefits are included in gross income because the payments replace wages the individual would have otherwise received.

Accepted Answer

Workers' compensation benefits are not included in gross income as they are considered to be a form of insurance, rather than income.

Question 7

Because graduate teaching assistantships are awarded on the basis of academic achievement,the payments are generally scholarships and therefore are excluded from gross income.

Accepted Answer

The answer of Because graduate teaching assistantships are awarded on...

Question 8

Brooke works part-time as a waitress in a restaurant.For groups of 7 or more customers,the customer is charged 15% of the bill for Brooke's services.For parties of less than 7,the tips are voluntary.Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers.Using the customary 15% rate,her voluntary tips would have been only $6,000.Brooke must include $17,000 ($11,000 + $6,000)in gross income.

Accepted Answer

Brooke must include the actual amount she received, which is $18,000 ($11,000 + $7,000), in her gross income, not the hypothetical amount.

Question 9

Sam was unemployed for the first two months of 2010.During that time,he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September,he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

Accepted Answer

Sam's Federal gross income is the total amount of income he received from all sources before any deductions or exemptions. In this case, his income from unemployment benefits, earnings from work, and workers' compensation benefits add up to $18,000, making the statement true.

Question 10

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $15,000 in premiums and he collected $30,000 from the insurance company.Gary is required to include the gain of $15,000 ($30,000 - $15,000)in gross income.

Accepted Answer

When an individual cashes in a life insurance policy, any amount received above the premiums paid is considered taxable income and must be included in gross income. In this case, Gary received $15,000 more than he paid in premiums, so this amount must be included in his gross income for tax purposes.

Question 11

Ashley received a scholarship to be used as follows: tuition $9,000; room and board $6,000; and books and laboratory supplies $2,000.Ashley is required to include only $6,000 in her gross income.

Accepted Answer

According to IRS guidelines, scholarships used for qualified education expenses such as tuition, fees, books, and supplies are generally not taxable. Therefore, Ashley can exclude the tuition and books/supplies portions of her scholarship from her gross income. However, the room and board portion is generally considered taxable income unless it is specifically required as a condition of the scholarship. As the question does not mention any such requirement, we must assume that Ashley can only exclude the $6,000 used for tuition and books/supplies and must include the remaining $6,000 for room and board in her gross income.

Question 12

In 2011,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2012,Theresa collected from his insurance company.She received $15,000 for loss of income,$25,000 punitive damages,and $8,000 for medical expenses which she had deducted on her 2011 tax return (the amount in excess of 7.5% of adjusted gross income).As a result of the above,Theresa's 2012 gross income is increased by $33,000.

Accepted Answer

Theresa received $15,000 for loss of income, $25,000 for punitive damages, and $8,000 for medical expenses. Only the $8,000 for medical expenses that exceeded 7.5% of her adjusted gross income should be counted as income in 2012. Therefore, her 2012 gross income is increased by $8,000, not $33,000.

Question 13

For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to over $1,500 of income that is subject to tax.

Accepted Answer

A person in the 35% marginal tax bracket would have to earn $1,538 of income subject to tax to have $1,000 of after-tax income. Therefore, $1,000 of tax-exempt income is equivalent to over $1,500 of income subject to tax.

Question 14

Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness.The premiums for Meg's coverage were $1,200.Meg was absent from work for two months as a result of a kidney infection.Meg's employer's insurance company paid Meg's regular salary of $8,000 while she was away from work.Meg also collected $2,000 on a wage continuation policy she had purchased.Meg is not taxed on any of the above amounts.

Accepted Answer

The answer of Meg's employer carries insurance on its employees...

Question 15

In December 2011,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2012.However,she did not use the funds to pay the tuition until January 2012.Emily can exclude the $2,500 from her gross income in 2011.

Accepted Answer

Scholarships used for tuition and related expenses are generally excludable from gross income. Since Emily is a cash basis taxpayer, she reports income when received, but scholarships for future educational expenses can be excluded when received if they are used for qualified expenses.

Question 16

If an employer pays for the employee's long-term care insurance premiums,the employee can exclude from gross income the premiums and all of the benefits collected.

Accepted Answer

The answer of If an employer pays for the employee's...

Question 17

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim,the insurance company paid Zack $53,000,the face amount of the policy plus $3,000 interest.Zack must include $53,000 in his gross income.

Accepted Answer

Life insurance proceeds paid due to the death of the insured are generally not taxable income. In this case, the $50,000 Zack received as the face amount of the policy would not be taxable. The extra $3,000 paid as interest is taxable income and must be reported on Zack's tax return.

Question 18

When Betty was diagnosed as having a terminal illness,she sold her life insurance policy to Insurance Purchase,Inc.,a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000 and Insurance Purchase,Inc.,became the beneficiary.She had paid total premiums of $19,000.Betty died 8 months after the sale.Insurance Purchase,Inc.,collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty is required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase,Inc.,is required to recognize a $14,000 gain from the insurance policy.

Accepted Answer

Betty's gain from the sale of her life insurance policy is not taxable due to the viatical settlement exemption for terminally ill individuals. Insurance Purchase, Inc.'s gain is calculated as the death benefit minus the total investment (purchase price plus additional premiums), which is $14,000, so that part is correct.

Question 19

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and their family members.Sarah can exclude from her gross income the premiums for herself and her family members.

Accepted Answer

This is because employer-paid premiums for health insurance are not considered taxable income for the employee, according to IRS regulations.

Question 20

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may exclude the $5,000 scholarship she received although the scholarship is to attend a private high school.

Accepted Answer

According to IRS rules, scholarships used for qualified education expenses (including tuition, fees, books, and supplies), are generally tax-free. Therefore, Agnes may exclude the $5,000 scholarship she received from her taxable income. It does not matter if the scholarship was awarded for attendance at a private high school.

Quiz 5: Gross Income: Exclusions