Quiz 3: Gross Income: Inclusions and Exclusions

For tax purposes,income is recognized if the transaction meets three conditions: economic benefit,occurrence and completion,and not exempt from tax.

Lisa performed bookkeeping services for Donald charging him $650.Donald agreed that he would pay Lisa's credit card bill for the same amount.Lisa has received an economic benefit and must report $650 in income on her tax return.

Jeff owns 250 shares of Coca Cola common stock that have increased in value by $15 each.He must report the increase in income because a transaction has occurred.

If the process of a transaction begins and ends with an economic benefit for the taxpayer,he or she must report it in income even though the income is specifically exempt from tax.

Almost all individuals use the cash receipts and disbursements method of accounting.

Constructive receipt means the income is available to or in the control of the taxpayer regardless of whether the taxpayer chooses to utilize the income.

Income can only be realized in money or services.

If Lucas,an accountant,agrees to provide tax services to a neighbor in exchange for the neighbor agreeing to fix his pool,Lucas but not his neighbor will have to report income on this transaction at fair market value.

There are some instances where a cash-basis taxpayer can report income as though he or she is an accrual basis taxpayer.

For most individuals,interest income comes from interest-earning deposits at banks,savings and loans,or credit unions.

If an individual owns Series EE bonds,this person must report interest income,i.e.,the increase in bond value on an annual basis.

A taxpayer can exclude from gross income any interest earned on bonds issued by any state,any possession of the United States,any political subdivision of either of the foregoing,or of the District of Columbia as long as these bonds are not issued for private activities.

Interest on state bonds is tax-exempt if the bonds were issued for private activities,such as convention centers,industrial parks,or stadiums.

A taxpayer must file a Schedule B Forms 1040A or 1040)if he or she has received taxable interest of $1,550.

Dividends are generally taxed at capital gains rates if they are made from the corporation's current earnings and profits or accumulated earnings and profits.

A stock dividend in which a shareholder has the option to receive cash is not taxable.

Robert received a tax refund in 2016 from his state,which he deducted on his prior year's return as an itemized deduction.He must report the refund in income in 2016,subject to certain computations to determine the amount that is taxable.

All federal and state unemployment compensation benefits are not subject to income tax.

The taxability of social security benefits depends on the "provisional income" and filing status of the taxpayer.

Jury duty pay is taxable income,but it can be deducted from gross income if the amount must be given to the employer.

Discounts provided to employees for food by a restaurant owner are not taxable if the discounts do not exceed the gross profit percentage of the business.

The cost of holiday turkeys distributed to employees is included in the employees' income.

Employer-paid premiums on group-term life insurance in excess of $50,000 coverage are taxable to the employees based on the cost of the excess.

Payments received under workers' compensation acts are taxable to the recipient.

The initial original issue discount OID)on a bond is equal to the difference between the acquisition price and the maturity value.

If a person sells his or her car to a friend for a note receivable,this person has income that needs to be reported.

In general,an individual must recognize income on his or her tax return if the transaction has economic benefit,the transaction has reached a conclusion and the income from the transaction is tax-exempt income.

If Alex,an attorney,agrees to provide legal services to a friend in exchange for the friend agreeing to fix his car,Alex and his friend will have to report income on this transaction at fair market value.

Receipt of property or services does not trigger income recognition for tax purposes.

Banks and credit unions report interest income to taxpayers on Form 1099-INT.

When an individual's marginal ordinary income tax rate is 25% and less than 39.60%,the taxation rate on qualified dividends is 15%.

Payments received by a taxpayer for unemployment compensation are not taxable.

If an employee receives a prize or award from his or her employer,the award is included in W-2 income.

A de minimis benefit is one whose value is so small that keeping track of which employees received the benefit is administratively impractical.

Taxpayers are not required to "impute interest" on a deferred payment contract for which no interest,or a low rate of interest,is stated.

If a taxpayer is economically better off because of a transaction,the person must normally record income.

Receipt of property or services will trigger income recognition.

A taxpayer must report in income imputed interest on a loan made below market interest rate.

Welfare payments received by a taxpayer must be reported in income.

A taxpayer does not have to report part of an original issue discount OID)as income every year.

For tax purposes,one of the requirements to recognize income is: A)The transaction must occur but it's not necessary to complete it. B)The income can be tax-exempt. C)There must be an economic benefit. D)All of these.

If an attorney performs some estate tax work for a client and the client agrees to pay $6,000 to him and $5,000 to a local financial institution for a debt the attorney owes,the attorney has income of: A)$11,000. B)$6,000. C)$5,000. D)None of these.

Pedro agreed to repair a house for a client and started to work on December 30,2014.On January 2,2016,he completed the job and received payment from the client.Pedro must record the income in: A)2015. B)2016. C)2014. D)Both 2015 and 2016.

If Tom,an accountant,agrees to provide accounting services to Fred,a friend,in exchange for Fred fixing Tom's office floor,then: A)Both of them must report income on their tax returns. B)Neither Tom nor Fred must report income on their tax returns. C)Fred must report income on his tax return. D)Tom must report income on his tax return.

Income may be realized in the form of: A)Services. B)Cash. C)Property. D)All of these.

When filing their tax returns,almost all individuals use: A)The cash receipts and disbursements method. B)The accounting method. C)The accrual method. D)The recognition method.

Under the cash receipts and disbursements method,the taxpayer reports income in the year: A)Income is received. B)Income is earned. C)Income is accrued. D)Income is negotiated.

Constructive receipt means the taxpayer has: A)Earned the income and accrued the income. B)Earned the income. C)Accrued the income. D)Control of the income for his or her use.

A taxpayer can exclude from income interest received from: A)Municipal bonds issued by the state. B)A seller-financed mortgage transaction. C)A credit union. D)A savings account established at a local bank.

When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%,the tax rate on qualified dividends is: A)15%. B)5%. C)10%. D)0%.

What is the tax liability for a single individual who has taxable income of $115,500,that includes a taxable qualified dividend of $2,000? All answers should be rounded to the nearest dollar. A)$24,817. B)$32,411. C)$25,377. D)$25,117.

What is the tax liability for a taxpayer who is married filing jointly with taxable income of $67,500,that includes a taxable qualified dividend of $1,000? All answers should be rounded to the nearest dollar. Use the appropriate ^{Tax Tables} or ^{Tax Rate Schedules}. A)$8,906. B)$9,051. C)$10,125. D)$9,201.

An individual must complete Schedule B Forms 1040A or 1040)if the following situation occurs: A)Received tax-exempt interest of $700. B)Received interest income of $100. C)Received dividend income of $1,000. D)Received interest income of $1,500.

Tom and Betsy,who are married filing jointly,reported a standard deduction of $12,600 on their 2015 tax return.They paid $500 to the state for income taxes in 2015.In 2016,they received a $125 refund of state taxes paid in 2015.What is the amount that Tom and Betsy need to report on their 2016 tax return? A)$375. B)$0. C)$125. D)$500.

Ruth,who files as head of household,reported itemized deductions of $9,350 on her 2015 tax return.Her itemized deductions included $300 of state taxes paid.In 2016,she received a $175 refund of state taxes paid in 2015.What is the amount that Ruth needs to report on her 2016 tax return? A)$0. B)$100. C)$175. D)$300.

Provisional income is calculated by starting with Adjusted Gross Income AGI)before social security benefits and adding back specific items.One of these items is: A)Capital gains. B)Wages. C)Deducted interest on educational loans. D)Qualified dividends.

Caroline,who files as head of household,received $9,000 of social security benefits.Her AGI before the social security benefits was $27,000.She also received $200 of tax- exempt interest.What is the amount of taxable social security benefits? A)$4,500. B)$9,000. C)$7,650. D)$3,350.

What item should not be included in income? A)Sick pay. B)Jury duty pay. C)Prizes and awards. D)Worker's compensation payments.

The following fringe benefit provided by the employer is not taxable to the employee: A)Educational assistance for up to $10,000 per person. B)Employer-paid premiums on group-term life insurance with coverage of $40,000 per person. C)Sick pay. D)Vacation pay.

Employer-paid premiums on life insurance are not taxable to the employees,unless the coverage is in excess of ________. A)$50,000 B)$5,000 C)$5,250 D)$51,000

Payments under written dependent care assistance plans are tax-free,except that the exclusion for a single person cannot exceed his or her earned income and cannot exceed ________. A)$5,150 B)$5,000 C)$2,500 D)$5,250

Marie is a graduate student at a state university.In 2016,she received a scholarship of $10,500 $7,000 for tuition and fees and $3,500 for campus housing)and a graduate assistantship that pays $6,000.What is the amount that she must report on her tax return? A)$9,500. B)$6,000. C)$7,000. D)$3,500.

If a student must perform certain services for the educational institution e.g.,graduate assistantships),the amount paid for services is considered: A)A fellowship. B)Wages. C)A scholarship. D)All of these.

Employers can reimburse employees for up to per year of educational assistance,whether or not job-related. A)$5,520 B)$5,150 C)$5,250 D)$5,000

Which one of the following items is not exempt under the umbrella of compensation for injuries or sickness? A)Employer-provided adoption assistance. B)Payments received under workers' compensation acts. C)Payments received for damages as a result of personal physical injuries. D)Disability income received from a terrorist attack in a foreign country while employed by the U.S.government.

Life insurance proceeds because of the death of the insured are fully excludable from the gross income of the recipient if the payment is made: A)As a lump sum. B)It does not matter how these payments are made. C)Over time. D)It does not matter how these payments are made and over time.

Taxable income includes: A)Welfare payments. B)Sick pay. C)Child support payments. D)Workers' compensation payments.

Taxable income does not include: A)Interest payments. B)Child support payments. C)Alimony payments. D)Qualified dividend payments.

Martin redeemed $3,000 principal of $2,000 and interest of $1,000)of Series I Savings Bonds to pay qualified higher education expenses.His qualified expenses for the year totaled $2,500 and AGI consists of wages of $20,000.What is the amount of interest that Martin must include in income? Round interim calculations to three decimal places) A)$833. B)$0. C)$1,000. D)$167.

Morris redeemed $6,000 principal of $4,500 and interest of $1,500)of Series I Savings Bonds to pay qualified higher education expenses.His qualified expenses for the year totaled $6,500 and AGI consists of wages of $32,000.What is the amount of interest that Morris can exclude from income? A)$1,000. B)$1,500. C)$0. D)$500.

Imputed interest rules do not apply to the following: A)Sale of a farm for $1 million or less. B)Sale of property for $3,000 or less. C)Sale of a personal residence. D)Both sale of property for $3,000 or less and sale of a personal residence.

Imputed interest rules apply to term loans or demand loans in which the interest rate is less than the Applicable Federal Rate AFR).Which of the following transaction does not fall under these rules? Assume in all situations that interest is below the AFR. A)Gift loans of $14,000 in which interest foregone is in the form of a gift. B)Loans in which the below-market or interest-free loan would have a significant effect on the tax liability of the borrower or lender. C)Loans in which a principal purpose is to avoid tax. D)Both gift loans of $14,000 in which interest foregone is in the form of a gift and loans in which a principal purpose is to avoid tax.

Joel purchased $125,000 of A and D Corporation's newly issued bonds for $114,500.The bonds carry an interest rate of 8% and mature in 5 years.What is the initial OID on these bonds? A)$10,000. B)$2,000. C)$2,100. D)$10,500.

The original issue discount OID)rules apply to all debt instruments with OID,except: A)U)S.savings bonds. B)Tax-exempt debt. C)Non-business loans of $10,000 or less between natural persons. D)All of these.

An individual with an original issue discount OID)instrument must report annually a portion of the OID as: A)Miscellaneous income. B)Qualified dividend income. C)Interest income. D)Capital gains.

On December 30,2016,Robert agreed to repair a damaged house wall and started to work on that date.He will finish and get paid for the job in January of 2017.Robert needs to record the income received from his work in the year: A)Half in 2016 and the other half in 2017. B)2016. C)2017. D)He does not have to report the income at all.

Income may be realized in the form of: A)Money. B)Property. C)Services. D)All of these.

Under the cash method,an individual reports income when: A)income is received or earned. B)income is accrued. C)income is earned. D)income is received or constructively received.

Interest income on Series EE and Series E U.S.Savings Bonds can be reported: A)only on an annual basis. B)either at the maturity date or on an annual basis. C)only at the maturity date of the bond issue. D)No need to report; this type of interest income is always tax-exempt income.

An individual must complete Schedule B Forms 1040A or 1040)if the following situation occurs: A)Received interest income of $1,300. B)Received interest income of $600. C)Received interest income of $1,500. D)Received interest income of $1,750.

When an individual's marginal ordinary income tax rate is less than 25%,the tax rate on qualified dividends is: A)5%. B)0%. C)15%. D)10%.

Items that must be reported on line 21 Other Income)of the Form 1040 include: A)Jury duty pay. B)Wages. C)Capital gains. D)Tax-exempt dividends.

Corporate distributions to shareholders that represent a nontaxable return of capital are those that are: A)made from the excess over earnings and profits of the corporation. B)made from the bank account of the corporation. C)made from accumulated retained earnings of the corporation. D)made from current year's profit of the corporation.

Tax-exempt interest includes the following items,except: A)interest on bonds issued by the local government to build a convention center. B)interest on municipal bonds. C)interest on bonds issued by any state. D)interest on bonds issued by the District of Columbia.

The following corporate dividends are not taxable to the shareholders: A)Property dividends. B)Stock split. C)Cash dividends. D)None of these.

Corporate and mutual fund payers are required to provide shareholders a Form ________ that indicates the amount of dividends in box 1a. A)1099-DVI B)1098-DIV C)1098-INT D)1099-DIV

A married,filing jointly taxpayer's lower limit of provisional income for social security purposes is: A)$44,000. B)$32,000. C)$34,000. D)$25,000.

An example of nontaxable income is: A)Vacation pay. B)Child support payment. C)Holiday bonus. D)Alimony payment.

Employer-paid premiums on life insurance are not taxable to employees if the coverage does not exceed: A)$50,000. B)$52,200. C)$51,000. D)$100,000.

The exclusion for dependent care assistance plans cannot exceed ________ for a taxpayer who is married but filing as "married filing separately". A)$2,500 B)$5,200 C)$2,000 D)$3,500

Working condition fringes include: A)Bonus earned by the employee. B)The use of an employer-provided vehicle for business purposes. C)Professional organization dues paid by the employer. D)Professional organization dues paid by the employer and the use of an employer-provided vehicle for business purposes.

Compensation for sickness or injury which is exempt from income includes: A)Damages other than punitive damages)received as a result of personal physical injuries or sickness. B)Wages for sick days paid by an employer. C)Unemployment compensation payments. D)All of these.

The amount of savings bond interest exempt from tax is phased out completely when an individual is married and his or her modified AGI reaches: A)$116,300. B)$92,550. C)$115,750. D)$146,300.

For purposes of computing the amount of savings bond interest exempt from tax,Modified AGI is adjusted gross income plus: A)standard deduction. B)deduction for moving expenses. C)itemized deductions. D)deduction for student loan interest.

The imputed interest rules apply to the following: A)Sales in which all payments are due in six months or less. B)Sale of a personal residence. C)Sales of property for $3,000 or less. D)All of these.

For tax purposes,one of the requirements to recognize income is: A)The transaction does not have to have an economic benefit. B)The transaction does not have to be completed. C)The income cannot be tax-exempt. D)None of these.

If Raphael,a roofer,decides to fix the roof of his neighbor,Angela,in exchange for Angela providing bookkeeping services for his business,then ________ must report income on the tax return. A)Raphael and Angela B)Either Raphael or Angela C)Raphael D)Angela

When a taxpayer reports income when received,this is called the ________ method. A)Accrual basis of accounting B)Income tax progressive C)Cash receipts and disbursements D)Deferred

Which type of interest received is taxable and must be reported on the tax return? A)Tax-exempt interest. B)Interest on municipal bonds. C)Interest on a savings account. D)Tax-exempt interest and interest on a savings account.

When an individual's marginal ordinary income tax rate is less than 25%,the tax rate on qualified dividends is ________. A)10% B)0% C)15% D)5%

Felix,a single taxpayer,claimed $180 of state tax as an itemized deduction on his 2015 tax return.The total itemized deductions on his tax return were $6,350.In 2016,he received a $25 refund from the state.What is the amount Felix has to report on his 2016 tax return? A)$0. B)$50. C)$25. D)$180.

The taxability of social security benefits depends on the provisional income and ________. A)Dependency exemptions of the taxpayer B)Standard deduction of the taxpayer C)Itemized deductions of the taxpayer D)Filing status of the taxpayer

What is the taxable amount of social security income reported on the tax return if a single taxpayer received $9,400 in social security benefits and $150 in interest income? A)$4,775. B)$0. C)$4,700. D)$7,990.

The following income item is not taxable: A)Alimony. B)Sick Pay. C)Jury duty. D)Child support.

Discounts offered to employees on services cannot exceed ________ of the normal selling price. A)75% B)10% C)5% D)20%

Laura is a student at a state university.In 2016,she received a scholarship of $6,000 for tuition and fees and an assistantship for $3,000.What is the amount that Laura must report in income? A)$9,000. B)$3,000. C)$6,000. D)$0.

Under a dependent care assistance plan,the exclusion for a head of household taxpayer cannot exceed his or her earned income and: A)$5,150. B)$5,250. C)$2,500. D)$5,000.

The following items under compensation for sickness or injury are exempt from income and do not have to be reported on the taxpayer's tax return: A)Sick pay. B)Workers' compensation payments. C)Welfare payments. D)Welfare payments and Workers' compensation payments.

The imputed interest rules do not apply to the following: A)Sales of property for $3,000 or less. B)Certain carrying charges. C)Sales in which all payments are due in 6 months or less. D)All of these.

With OID instruments,taxpayers report annually a portion of the OID as: A)Capital gain. B)Dividend income. C)Tax- exempt interest income. D)Interest income.

For tax purposes,name the three conditions that a transaction must meet for income recognition.

Does forgiveness of a loan repayment by the lender represent income to the borrower?

Define constructive receipt.

In what form can a taxpayer realize income?

Describe the various situations where a taxpayer must file a Schedule B Forms 1040A or 1040)when receiving interest income.

Determine the amount of tax liability under the following two situations. 1.The taxpayer is single with taxable income of $54,690 that includes qualified dividends of $450. 1.The taxpayer is married filing jointly with taxable income of $64,500 that includes qualified dividends of $300.

A taxpayer received a 1099-G for 2016 showing $350 of state income tax refund that he received during the year from 2015 state taxes paid.Does the taxpayer have to report the state income tax refund of $350 in 2016?

Does forgiveness of debt result in taxable income to the taxpayer borrower)?

What are cafeteria plans?

Name three items that are exempt from income under the umbrella of compensation for injuries or sickness.

Name three types of nontaxable income do not include items that are exempt under the umbrella of compensation for injuries or sickness).

Are life insurance proceeds taxable to the recipient?

The imputed interest rules do not apply to certain transactions.Name three situations where this is a true statement.

When is an original issue discount OID)created? How is the initial OID computed?

How does the taxpayer report interest income on an original issue discount OID)instrument?