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ACCT 4251 Gross Income Questions and Answers
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ACCT 4251 Gross Income Questions and Answers
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CHAPTER 5--GROSS INCOME: EXCLUSIONSStudent: ___________________________________________________________________________
1. 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.
True False
2. In his will, John named his nephew Steve as executor of the estate. Steve is to receive a fee of $12,000
for serving as executor. When John died, Steve performed the executorial services and received the fee.
Steve can exclude the $12,000 from gross income as an inheritance from his uncle’s estate.
True False
3. 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 $12,000 from the groups of 7 or more and $6,000 in voluntary tips from all other customers.
Brooke must include $18,000 ($12,000 + $6,000) in gross income.
True False
4. Marvin was the beneficiary of a $50,000 group term life insurance policy on his wife. His wife’s
employer paid all of the premiums on the policy. Marvin used the life insurance proceeds to purchase a
United States Government bond, which paid him $2,000 interest during the current year. Marvin’s
Federal gross income from the above is $2,000.
True False
5. 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 $52,000, the face amount of
the policy plus $2,000 interest. Zack is not required to recognize any income from the above
transactions.
True False
6. Ed died while employed by Violet Company. His wife collected $50,000 on a group-term life insurance
policy that Violet provided its employees, and $5,000 of accrued salary Ed had earned prior to his death.
Ed’s wife is not required to recognize any income from the receipt of the $55,000.
True False
7. 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.
True False
1
,8. 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. Insurance Purchase, Inc., is required to
recognize income from the above transactions, but Betty is not required to include her gain in gross
income.
True False
9. Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School. She may
exclude the $5,000 scholarship she received for tuition at the private high school.
True False
10. If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross
income.
True False
11. Amber received a scholarship to be used as follows: tuition $6,000; room and board $4,000; and books
and laboratory supplies $1,000. Amber is required to include only $4,000 in her gross income.
True False
12. In December 2010, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring
semester of 2011. However, she did not use the funds to pay the tuition until January 2011. Emily can
exclude the $2,500 from her gross income in 2010...........
True False
13. Because graduate teaching assistantships are awarded on the basis of academic achievement, the
payments are generally scholarships and therefore are excluded from gross income.
True False
14. In 2010, Theresa was in an automobile accident and suffered physical injuries. The accident was caused
by Ramon’s negligence. In 2011, 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 2010 tax return (the amount in excess of 7.5% of adjusted gross income). As a result of the above,
Theresa’s 2011 gross income is increased by $33,000.
True False
15. Worker’s compensation benefits are excluded from gross income.
True False
16. Sam was unemployed for the first two months of 2010. During that time, he received $3,000 of state
unemployment benefits. He worked for the next six months and earned $12,000. In September he was
injured on the job and collected $4,000 of worker’s compensation benefits. Sam’s Federal gross income
from the above is $15,000.
True False
2
,17. 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.
True False
18. 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.
True False
19. 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.
True False
20. 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.
True False
21. Members of a research team can exclude from gross income the value of their lodging furnished at the
research base located at the South Pole.
True False
22. Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed.
Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of
housing. Carla must include the $4,800 housing supplement in gross income.
True False
23. Roger is in the 35% marginal tax bracket. Roger’s employer has created a flexible spending account for
medical and dental expenses that are not covered by the company’s health insurance plan. Roger had his
salary reduced by $1,200 during the year for contributions to the flexible spending plan. However, Roger
incurred only $1,100 in actual expenses for which he was reimbursed. Under the plan, he must forfeit the
$100 unused amount. His after-tax cost of overfunding the plan is $65.
True False
24. 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 frequently use
the machine. However, the machine is not convenient for use by the lower paid warehouse employees.
Because this fringe benefit benefits the higher paid employees but not the lower paid warehouse
employees, the plan is discriminatory and thus the benefit is taxable to the executives.
True False
25. 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.
True False
3
, 26. 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.
True False
27. A U.S. citizen who works in France from February 1, 2010 until January 31, 2011 is eligible for the
foreign earned income exclusion in 2010 and 2011.
True False
28. Generally, a U.S. citizen is not required to include in gross income the salary and wages earned while
working in a foreign country if the foreign country taxes the income.
True False
29. Ted’s property was taken by the State of Virginia to build a highway overpass. He disputed the amount
of the condemnation award he was to receive and ultimately collected an amount for the property plus
$12,000 interest on the award. Ted can exclude from gross income the interest he received from the
State of Virginia associated with the condemnation award.
True False
30. A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2010. His total
itemized deductions in 2010 were $18,000. In 2011, he received a $900 refund of his 2010 state income
tax. The taxpayer must include the $900 refund in his 2011 Federal gross income in accordance with the
tax benefit rule.
True False
31. The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2010 and
as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in 2011. The
taxpayer can add $5,000 to his 2011 gross income in accordance with the tax benefit rule to correct for
the 2010 error.
True False
32. Mother participated in a qualified state tuition program for the benefit of her son. She contributed
$14,000. When the son 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 her son, the son must include $6,000 in his
gross income.
True False
33. The earnings from a qualified state tuition program account are deferred from taxation until they are
used for qualified higher education expenses. At that time, the amount taken from the fund must be
included in the gross income of the person who contributed to the account.
True False
34. Tom loaned $20,000 to his controlled corporation. When it became apparent the corporation would not
be able to repay the loan in the near future, Tom canceled the debt. The corporation should treat the
cancellation as a nontaxable contribution to capital.
True False
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