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Exam 5: Gross Income and Exclusions

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Question 51

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Acme published a story about Paul, and as a result Paul sued Acme for damage to his reputation, emotional distress, and punitive damages. Paul won an award of $40,750 for damages, $9,900 for emotional distress, and $73,250 for punitive damages. What amount must Paul include in his gross income?

A) $9,900
B) $40,750
C) $73,250
D) $114,000
E) All of these benefits are included in gross income

F) B) and C)
G) A) and D)

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Question 52

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Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Ethan include in his gross income?

A) $25,000
B) $25,000 because all prizes are taxable
C) $0 because prizes transferred to charities are excludable
D) $0 because all prizes are excludable
E) $0 because prizes from charities are excludable

F) A) and C)
G) A) and D)

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Question 53

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Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and not for elementary or secondary education).

Helen is a U.S. citizen and a 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 United States?

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?

Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange for property. This year Juan provided lawn-mowing services in exchange for $1,890 of car repair services, $4,200 of groceries, and a certificate of deposit (CD)for $6,300. The CD matures next year with interest. Finally, Juan received a gift card that can only be applied for $990 of clothing at a local mall. Juan has only applied the gift card to purchase $181 of clothing. Compute Juan's gross income, assuming that he uses the cash basis of accounting.

Cyrus is a cash method taxpayer who reports on a calendar-year basis. Last year Cyrus received salary of $88,000 and at year-end his employer announced that Cyrus would receive an additional year-end bonus of $10,000 in cash and a new TV worth $2,000. Cyrus didn't receive his bonus check until January of this year and the TV didn't arrive until March of this year. Determine the amount Cyrus should include in his gross income for last year.

Interest earned on a federal Treasury bond is excluded from gross income (for federal tax purposes).

Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($3,700) , her emotional distress ($6,000-she now fears peanut butter) , and punitive damages ($44,000) . What amount must Pam include in her gross income?

This year Zach was injured in an auto accident. As a result, he received the following payments. Zach received $18,000 of disability pay. Zach has disability insurance provided by his employer as a nontaxable fringe benefit. Zach's employer paid $4,300 in disability premiums for Zach this year. Zach's hospital bills totaled $4,500 and were paid by his health insurance. Zach has health insurance provided by his employer as a nontaxable fringe benefit. Zach's employer paid $6,250 in health insurance premiums for Zach this year. What amount must Zach include in his gross income?

This year Ed celebrated his 25^th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $321 and a $2,180 cash bonus. What amount must Ed include in his gross income?

A taxpayer generally includes in gross income the amount of debt forgiven by a lender.

Ben received the following benefits from his employer this year. What amount must Ben include in his gross income?

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.

Desai and Lucy divorced in 2018. Lucy has custody of their child, Andrea, and under the divorce decree Desai pays Lucy $120,000 per year. The payments must be made in cash and will cease if Lucy dies or remarries. The payments drop to $100,000 per year once Andrea reaches the age of 18. How much of the payments should Lucy include in gross income this year?

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. Assuming no unusual or hardship circumstances apply, how much of the gain is included in gross income?

Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700 on his various wagers. What amount must Rhett include in his gross income?

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.