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Exam 5: Gross Income: Exclusions

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Question 1

True/False

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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.

A) True
B) False

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Question 2

Multiple Choice

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Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company,Swan:

A) Must recognize $1,500 income from the life insurance proceeds.
B) Must recognize $1,300 income from the life insurance proceeds.
C) Does not recognize income because life insurance proceeds are tax-exempt.
D) Does not recognize income from the life insurance because the entire amount is a recovery of capital.
E) None of these.

F) B) and D)
G) C) and E)

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Question 3

Multiple Choice

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Cash received by an employee from an employer:

Calvin miscalculated his income in 2013 and overpaid his state income tax by $10,000.In 2015,he amended his 2013 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2013,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2015,Calvin must recognize $10,900 of gross income.

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2015.His total itemized deductions in 2015 were $18,000.In 2016,he received a $900 refund of his 2015 state income tax.The taxpayer must include the $900 refund in his 2016 Federal gross income in accordance with the tax benefit rule.

Flora Company owed $95,000,a debt incurred to purchase land that serves as security for the debt.

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.

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?

In the case of interest income from state and Federal bonds:

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:

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 $18,000 ($11,000 + $7,000) in gross income.

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

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.

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax.But she is interested in earning a higher return for comparable risk.Which of the following is correct:

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 $23,000 in his gross income.

Sam was unemployed for the first two months of 2015.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).

Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence,she received her regular salary of $8,000 from her employer.For the next 60 days,she received $12,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days,Julie received $6,000 on an income replacement policy she had purchased.Of the $26,000 she received,Julie must include in gross income:

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

What Federal income tax benefits are provided for college students?

Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock.During the year,Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split.The value of the shares received was $4,800.Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend.Stuart did not have the option of receiving cash from Blue.The additional shares he received had a value of $7,200.Stuart's gross income from the receipt of the additional Turquoise and Blue shares is: