True/False
Indicate whether the
statement is true or false.
|
|
|
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 can be excluded from Steve’s gross income as an
inheritance.
|
|
|
2.
|
Agnes receives a $5,000
scholarship which covers her tuition at Parochial High School. She may not exclude the $5,000 because
the exclusion applies only to scholarships to attend college.
|
|
|
3.
|
. If a scholarship does not satisfy the requirements for a gift, the
scholarship must be included in gross income
|
|
|
4.
|
In December 2018, Emily, a cash
basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2018. However, she did
not use the funds to pay the tuition until January 2015. Emily can exclude the $2,500 from her gross
income in 2018.
|
|
|
5.
|
Betty received a graduate
teaching assistantship that was awarded on the basis of academic achievement. The payments must be
included in her gross income.
|
|
|
6.
|
In 2018, Theresa was in an
automobile accident and suffered physical injuries. The accident was caused by Ramon’s
negligence. In 2018, Theresa collected from his insurance company. She received $15,000 for loss of
income, $10,000 for pain and suffering, $50,000 for punitive damages, and $6,000 for medical expenses
which she had deducted on her 2017 tax return (the amount in excess of 10% of adjusted gross income).
As a result of the above, Theresa’s 2018 gross income is increased by $56,000.
|
|
|
7.
|
Workers’ compensation
benefits are included in gross income if the employer also pays the employee while the employee is
recovering from his or her injury.
|
|
|
8.
|
Sam was unemployed for the first two months of 2018. 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).
|
|
|
9.
|
Sarah’s employer pays the hospitalization insurance premiums for a policy
that covers all employees and retired former employees. After Sarah retires, the hospital insurance
premiums paid for her by her employer can be excluded from her gross income.
|
|
|
10.
|
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.
|
|
|
11.
|
. If an employer pays for the employee’s long-term care insurance
premiums, the employee can exclude from gross income the premiums but all of the benefits collected
must be included in gross income
|
|
|
12.
|
Employees of a CPA firm located
in Maryland may exclude from gross income the meals and lodging provided by the employer while they
were on an audit in Delaware.
|
|
|
13.
|
Mauve Company permits employees to occasionally use the copying machine for
personal purposes. The copying machine is located in the office where the higher paid executives
work, so they occasionally use the machine. However, the machine is not convenient for use by the
lower paid warehouse employees and, thus, they never use the copier. The use of the copy machine may
not be excluded from gross income because the benefit is discriminatory.
|
|
|
14.
|
Fresh Bakery often has unsold
donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees
are not required to recognize gross income because the bakery does not incur any additional
cost.
|
|
|
15.
|
Nicole’s employer pays her $150 per month towards the cost of parking near
a railway station where Nicole catches the train to work. The employer also pays the cost of the rail
pass, $75 per month. Nicole can exclude both of these payments from her gross income.
|
|
|
16.
|
A U.S. citizen who works in
France from February 1, 2017 until January 31, 2018 is eligible for the foreign earned income
exclusion in 2017 and 2018.
|
|
|
17.
|
Generally, a U.S. citizen is
required to include in gross income the salary and wages earned while working in a foreign country
even if the foreign country taxes the income.
|
|
|
18.
|
Mia participated in a qualified state tuition program for the benefit of her son
Michael. She contributed $15,000. When Michael entered college, the balance in the fund satisfied the
tuition charge of $20,000. When the funds were withdrawn to pay the college tuition for Michael,
neither Mia nor Michael must include $5,000 ($20,000 – $15,000) in gross income
|
|
|
19.
|
Benny loaned $100,000 to his
controlled corporation. When it became apparent the corporation would not be able to repay the loan
in the near future, Benny canceled the debt. The corporation should treat the cancellation as a
nontaxable contribution to capital.
|
|
|
20.
|
Zork Corporation was very
profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that
had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to
retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the
discharge of its indebtedness but must reduce the basis in its assets.
|
|
|
21.
|
There are two categories of adjustments:
Deductions for adjuested gross
income
Deductions from adjusted gross income
|
|
|
22.
|
Deductions for AGI
include:
Ordinary and necessary
expenses incurred in a trade or business
Part of self-employment tax paid
Alimony paid
Certain payments to an IRA
and Health Savings Accounts
Unreimbursed moving expenses
Fees for college tuition and
related expenses
Interest on student loans
The capital loss deduction, and
Others
|
|
|
23.
|
Deductions for AGI
include:
Ordinary and necessary
expenses incurred in a trade or business
Part of self-employment tax paid
Alimony paid
Certain payments to an IRA
and Health Savings Accounts
Unreimbursed moving expenses
Fees for college tuition and
related expenses
Interest on student loans
The capital loss deduction, and
Others
|
|
|
24.
|
A
health savings account is a tax-exempt trust or custodial account you set up with a qualified HSA
trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to
qualify for an HSA.
|
Multiple Choice
Identify the
choice that best completes the statement or answers the question.
|
|
|
25.
|
Sharon had some insider
information about a corporate takeover. She unintentionally informed a friend, who immediately bought
the stock in the target corporation. The takeover occurred and the friend made a substantial profit
from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a
pearl necklace because she “made it all possible.” The necklace was worth $10,000, but
she already owned more jewelry than she desired.
a. | The necklace is a nontaxable gift received by Sharon because the friend was not
legally required to make the gift. | d. | The value of the necklace must be included in Sharon’s gross
income for the tax year it was received by her. | b. | The value of the necklace is not included in
Sharon’s gross income unless she sells it. | e. | None of these. | c. | The value of the
necklace is not included in Sharon’s gross income because passing the information was an
illegal act and the SEC can confiscate the necklace |
|
|
|
26.
|
Iris collected $150,000 on her
deceased husband’s life insurance policy. The policy was purchased by the husband’s
employer under a group policy. Iris’s husband had included $5,000 in gross income from the
group term life insurance premiums during the years he worked for the employer. She elected to
collect the policy in 10 equal annual payments of $18,000 each.
a. | None of the payments must be included in Iris’s gross income. | d. | For each $18,000
payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from gross income. | b. | The amount she
receives in the first year is a nontaxable return of capital. | e. | None of these. | c. | For each $18,000
payment that Iris receives, she can exclude $500 ($5,000/$180,000 ×
$18,000) from gross income. |
|
|
|
27.
|
Ben was diagnosed with a terminal illness. His physician estimated that Ben
would live no more than 18 months. After he received the doctor’s diagnosis, Ben cashed in his
life insurance policy and used the proceeds to take a trip to see relatives and friends before he
died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender
value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to
purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance
company.
a. | Neither Ben nor Henry is required to recognize gross income. | d. | Ben must recognize
$38,000 ($50,000 – $12,000) of gross income, but Henry does not recognize any gross
income. | b. | Both Ben and Henry must recognize $38,000 ($50,000 – $12,000) of gross
income. | e. | None of
these. | c. | Henry must recognize $38,000 ($50,000 – $12,000) of gross income, but Ben does
not recognize any gross income. |
|
|
|
28.
|
A scholarship recipient at State
University may exclude from gross income the scholarship proceeds used to pay for:
a. | Only tuition | d. | Meals and lodging. | b. | Tuition, books, and
supplies. | e. | None of
these. | c. | Tuition, books, supplies, meals, and lodging. |
|
|
|
29.
|
Ron, age 19, is a full-time
graduate student at City University. During 2018, he received the following payments:
Cash award for being the outstanding resident
adviser | $ 1,500 | Resident adviser
housing | 2,500 | State scholarship
for ten months (tuition and books) | 6,000 | State scholarship
(meals allowance) | 2,400 | Loan from college
financial aid office | 3,000 | Cash support from
parents | 2,000 | | $17,400 | | |
Ron served as a resident advisor in a dormitory and,
therefore, the university waived the $2,500 charge for the room he occupied. What is Ron’s
adjusted gross income for 2018?
a. | $1,500. | d. | $15,400. | b. | $3,900. | e. | None of these. | c. | $9,000. |
|
|
|
30.
|
During the current year, Khalid
was in an automobile accident and suffered physical injuries. The accident was caused by
Rashad’s negligence. Khalid threatened to file a lawsuit against Amber Trucking Company,
Rashad’s employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and
$70,000 in punitive damages. Amber’s insurance company will not pay punitive damages;
therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss
of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the
after-tax difference to Khalid between Khalid’s original claim and Amber’s offer?
a. | Amber’s offer is $20,000 less. ($50,000 + $90,000 + $70,000 – $100,000
– $90,000). | d. | Amber’s offer is $22,000 more. [($190,000 – $210,000) + ($120,000
× .35)]. | b. | Amber’s offer is $7,000 less.
[($50,000 + $90,000 + $70,000 – $100,000 – $90,000) × .35)]. | e. | None of these. | c. | Amber’s offer is $4,500 more. {$190,000
– ($50,000 + $90,000) + [$70,000 × (1 –
.35)]}. |
|
|
|
31.
|
Theresa sued her former employer
for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income,
$300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As
a result of the settlement, Theresa must include in gross income:
a. | $700,000. | c. | $490,000 [($700,000/$1,000,000) × $700,000]. | b. | $500,000. | d. | $0. |
|
|
|
32.
|
All employees of United Company
are covered by a group hospitalization insurance plan, but the employees must pay the premiums
($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the
premiums. Instead of giving raises next year, United is considering paying the employee’s
hospitalization insurance premiums. If the change is made, the employee’s after-tax and
insurance pay will:
a. | Decrease by the same amount for all employees. | d. | Increase by the same amount for all
employees. | b. | Increase more for the lower paid employees (10% and 15% marginal tax
bracket). | e. | None of
these. | c. | Increase more for the higher income (35% marginal tax bracket)
employees. |
|
|
|
33.
|
James, a cash basis
taxpayer, received the following compensation and fringe benefits in the current year:
Salary | $66,000 | Disability income
protection premiums | 3,000 | Long-term care
insurance premiums | 4,000 | | |
?3?
His actual salary was $72,000. He received only $66,000
because his salary was garnished and the employer paid $6,000 on James’s credit card debt he
owed. The wage continuation insurance is available to all employees and pays the employee
three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance
is available to all employees and pays $150 per day towards a nursing home or similar facility. What
is James’s gross income from the above?
a. | $66,000. | d. | $75,000. | b. | $72,000. | e. | None of these | c. | $73,000 |
|
|
|
34.
|
The First Chance Casino has
gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from
the restaurant at no charge during working hours. In the case of the employees who operate the
gambling facilities, bar, and restaurant, 60% of all of Casino’s employees, the meals are
provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and
therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of
the following is correct?
a. | All the employees are required to include the value of the meals in their gross
income. | d. | All of the employees may exclude the value of the meals from gross
income. | b. | Only the restaurant employees may exclude the value of their meals from gross
income. | e. | None of
these. | c. | Only the employees who work in gambling, the bar, and the restaurant may exclude the
meals from gross income |
|
|
|
35.
|
An employee can exclude from gross income the value of meals provided by his or
her employer whenever:
a. | The meal is not extravagant. | d. | The meals are provided for the
convenience of the employee. | b. | The meals are provided on the employer’s
premises for the employer’s convenience. | e. | None of these. | c. | The meals are
provided on the employer’s premises for the employer’s
convenience. |
|
|
|
36.
|
Under the Swan Company’s cafeteria plan, all full-time employees are
allowed to select any combination of the benefits below, but the total received by the employee
cannot exceed $8,000 a year. I. | Group medical and hospitalization insurance for the employee,
$3,600 a year. | II.
| Group medical and hospitalization insurance for the
employee’s spouse and children, $1,200 a year. | III. | Child-care payments,
actual cost but not more than $4,800 a year. | IV. | Cash required to bring the total of
benefits and cash to $8,000. | | |
Which of the following statements is true?
a. | Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross
income must include the $2,000. | d. | All of these. | b. | Paul, a full-time employee, elects to receive
$8,000 cash because his wife’s employer provided these same insurance benefits for him. Paul is
not required to include the $8,000 in gross income. | e. | None of these. | c. | Sue, a full-time
employee, elects to receive choices I, II and $3,200 for III. Sue is required to include $3,200 in
gross income. |
|
|
|
37.
|
The de minimis fringe benefit:
a. | Exclusion applies only to property received by the employee. | d. | Exclusion applies
to employee discounts. | b. | Can be provided on a discriminatory
basis | e. | None of
these. | c. | Exclusion is limited to $250 per year. |
|
|
|
38.
|
Which of the statements are
correct?
IRA contributions after age 70½
a. | You can’t make regular
contributions to a traditional IRA in the year you reach 70½ and
older. | c. | You can make rollover contributions
to a Roth or traditional IRA regardless of your age.
| b. | You can still contribute to a Roth IRA
| d. | All
statements are correct. |
|
Multiple Response
Identify one
or more choices that best complete the statement or answer the question.
|
|
|
39.
|
Hazel, a solvent individual but
a recovering alcoholic, embezzled $6,000 from her employer. In the same year that she embezzled the
funds, her employer discovered the theft. Her employer did not fire her and told her she did not have
to repay the $6,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her
employer canceled the debt.
|
|
|
40.
|
The exclusion of interest on educational savings bonds:
|
|
|
41.
|
A U.S. citizen worked in a foreign country for the period July 1, 2017 through
August 1, 2018. Her salary was $10,000 per month. Also, in 2017 she received $5,000 in dividends from
foreign corporations (not qualified dividends). No dividends were received in 2018. Which of the
following is correct?
|