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Flashcards in Gross Income Deck (48):
1


Mary is a CPA who works for a public accounting firm. How much of the following fringe benefits are excluded from her gross income if paid for or provided by her employer?


Membership in CPA association
$  75
Subscription to a banking association journal

(she has several bank clients)
40
Parking at her office
250
Personal photocopying on office machine
10
Coffee and doughnuts
20

A.
$290
B.
$135
C.
$395
D.
$385


$395

Answer (C) is correct.
Sec. 132 provides an exclusion from gross income of an employee for working condition fringe benefits and de minimis fringe benefits provided by an employer. A CPA’s membership in a CPA association and a subscription to a banking association journal for someone who has bank clients are considered working condition fringe benefits. Parking is specifically listed as a qualified transportation fringe benefit under Sec. 132(f)(1) and (2). However, the Taxpayer Relief Act of 1997 amended Sec. 132(f)(4) so that employers may now offer their employees cash instead of free parking. If employees choose the cash option, the cash received is included in gross income. For 2015, the excluded amount is limited to $250. Personal use of a photocopy machine and free coffee and doughnuts are examples of de minimis fringe benefits. Hence, all of the fringe benefits listed are excludable from Mary’s gross income (Publication 17). These benefits total $395.

2

Pablo died October 10 of the current year. Prior to his death, Pablo had done the following: He sold and delivered a truckload of oranges to a co-op but did not receive the $3,000 payment prior to his death. The payment was made to his executor. He sold a truck to Roscoe for $5,000, but the payment wasn’t received until after his death. Pablo’s basis in the truck was $1,000. What is the amount of income in respect of a decedent for the above two payments?

A.
$3,000 for the oranges and $4,000 for the truck.
B.
$3,000 for the oranges and $5,000 for the truck.
C.
None of the answers are correct.
D.
No amount for either transaction.

A.
$3,000 for the oranges and $4,000 for the truck.

Answer (A) is correct.
Income in respect of a decedent is that which is earned by the taxpayer but is neither received prior to his or her death, nor accrued prior to his or her death if on the accrual method, so it is not included in the decedent’s final return. Income in respect of a decedent is included in the recipient’s (e.g., the estate’s) income in the year received or accrued. It is calculated the same as if the decedent were still alive; therefore, Pablo’s executor will include $3,000 for the oranges and $4,000 for the truck as income in respect of a decedent.

3

During the current year, Mr. A, who is 67 years old, received Social Security benefits of $12,000. This amount was reported to him at year end on a Form SSA-1099. Because he received a Form SSA-1099, Mr. A must include this amount as income on his income tax return.

True.
False.

True.
Correct False.

Your answer is correct.
Social Security benefits are not taxed unless provisional income (the sum of one-half of the Social Security benefits plus modified adjusted gross income) exceeds a base amount. This base amount is $32,000 for a joint return and $25,000 for a single return. The base amount for a married person filing separately is $0. Receiving a Form SSA-1099 does not require Social Security benefits to be included in gross income.

4

Sandy received the following income in 2017:


Wages (Box 1 of W-2)
$50,000
Money won at weekly poker games
1,000
Christmas ham (fair market value)
22
Dependent care benefits (Box 10 of W-2)

(spent $3,000 for child care)
2,000
Group term life insurance ($40,000 death benefit)
50
How much gross income must be reported by Sandy on her tax return?


A.
$50,022

B.
$53,000

C.
$53,072

D.
$51,000

51,000


Answer D is correct.
Gross income includes all income except what the code specifically excludes. Fringe benefits are one such exclusion. The Christmas ham qualifies as a de minimis benefit because it does not cost more than $25 (Sec. 132). The group term life insurance is excludable up to the point that it exceeds $50,000, at which time the employee must include in gross income the amount indicated in Reg. Sec. 1-79-3(d)(2) (Sec. 79(a) and Publication 17). Dependent care assistance programs are employer-financed programs that provide child care for the employee’s dependents (Publication 907). An employee may exclude up to $5,000 of assistance each year (Sec. 129). Both the wages and money won at weekly poker games are included in the gross income total of $51,000 ($50,000 + $1,000).

5

Andre, an accrual-basis taxpayer, owns a six-unit apartment building for which he receives rent of $600 per month per unit. In the current year, five of the units were rented for the entire 12-month period. The sixth unit was occupied from January 1 through March 31. Upon vacating the unit, the tenant was not refunded his security deposit of $400 due to damages to the unit. The unit was subsequently rented for one year beginning August 1 of the current year. On August 1, the new tenant paid the first and last month’s rent and a refundable security deposit of $400. What is Andre’s total rental income for the current year?


A.
$40,800

B.
$41,800

C.
$42,200

D.
$41,200

B.
$41,800


Answer B is correct.
Accrual-basis taxpayers report income when it is earned. All amounts received or accrued as rents are includible in income. Security deposits are income if and when the lessor becomes entitled to the funds by reason of the lessee’s violation of the terms of the lease. Advance rent received upon execution of a lease is includible in gross income in the year received, whether the taxpayer is on the cash or the accrual basis. For the current year, Andre must include $36,000 for the five units rented continuously during the year. Although not specifically stated, it is presumed that Andre received rental income of $1,800 from unit six while it was occupied for the first 3 months of the current year. The $400 security deposit of the first tenant in unit six is includible as rental income because Andre became entitled to the funds to repair damages to the unit after the tenant vacated it. Andre also received rental income of $3,600, which included $600 of prepaid rent, from the second tenant of unit six. The refundable security deposit of $400 paid by the second tenant of unit six is not part of Andre’s rental income for the current year because Andre was not authorized to retain any portion of the deposit during the year (Publication 17).

6

Erin, a flight attendant, received wages of $45,000 for the year. The airline provided transportation on a stand-by basis, at no charge, from her home in Detroit to the airline’s hub in Chicago. The fair market value of the commuting flights was $7,500. Also, Erin received reimbursements, under an accountable plan, of $15,000 for overnight travel but only spent $9,000. The excess was returned. Erin became disabled in November and received workers’ compensation of $6,000. What amount must Erin include in gross income on her tax return?

A.
$45,000
B.
$51,000
C.
$52,500
D.
$58,500

A.
$45,000

Answer (A) is correct.
The commuting flights paid for by the employer are excluded from gross income Sec. 132(a)(5) as a qualified transportation benefit. The reimbursed overnight travel expenses are not included in gross income because they were reimbursed under an accountable plan. Workers’ compensation is excluded from gross income under Sec. 104(a). Therefore, only Erin’s salary of $45,000 is included in gross income as compensation for services rendered (Publications 17 and 463 and Sec. 61).

7



Question: 20
Ed owned stock in a corporation that has a dividend reinvestment plan. Ed chose to participate in the plan and, during the year, the corporation paid dividends. The plan allowed Ed to use his $4,000 dividend to buy 50 additional shares of stock at $80 per share when the fair market value of the stock was $96 per share. How much dividend income must Ed report on his income tax return?

A.
$4,000
B.
$0
C.
$4,800
D.
$800

C.
$4,800

Answer (C) is correct.
Dividends are gross income [Sec. 61(a)(7)]. A shareholder who elects to receive shares of greater value than his or her cash dividend would otherwise be under a dividend reinvestment plan receives a taxable distribution to the extent of the value of the shares (Publication 17). Because Ed was able to purchase 50 additional shares of stock when the fair market value of the stock was $96 per share, he must report $4,800 (50 × $96) of dividend income

8

Mr. Z owned 200 shares of Corporation K common stock. During the current year, Mr. Z received distributions from Corporation K of $600 in cash dividends, 100 additional shares of K’s common stock, and rights to purchase 100 more shares. The distributions were not disproportionate and the shareholders were not given an option to receive cash instead of the stock and stock rights. The fair market value of the total stock dividend shares and the total stock rights were $200 and $100, respectively. What is the amount of income from these distributions that is includible in Mr. Z’s income for the current year?


A.
$900

B.
$700

C.
$1,000

D.
$600


$600


Answer D is correct.
The $600 in cash dividends is included in taxable income under the general rule of Sec. 61(a)(7). Cash dividends from taxable domestic corporations are included in income provided they are paid out of earnings and profits (which is assumed unless information is given otherwise in the question). However, under Sec. 305(a), gross income generally does not include a stock dividend. Rights to purchase stock are also treated as a stock dividend for this purpose. There are exceptions under Sec. 305(b), but the usual stock dividend paid on common stock falls within the general rule and is not included in the shareholder’s income. Therefore, Mr. Z does not have to include any gross income from the stock dividend or distribution of stock rights. Mr. Z’s total taxable income from these distributions is the $600 of cash dividends. Note that under Sec. 307(a), Mr. Z will be required to allocate some of the basis of his original shares of common stock to the shares of stock received as a dividend. A basis allocation may be needed to the stock rights received as distributions depending upon the relative value of the stock rights and the underlying stock (Publication 17).

9

Mr. White owns stock in a corporation that has a dividend reinvestment plan. Mr. White chose to participate in the plan, and during the current year, he used his $3,000 dividend to purchase 30 additional shares of stock in the corporation. The purchase price reflected the fair market value of the stock. Mr. White does not have to include the $3,000 dividend in his taxable income since he did not receive the cash.

True.
False.

False.

Your answer is correct.
Dividends are gross income [Sec. 61(a)(7)]. A member of a dividend reinvestment plan that lets the member buy more stock at a price equal to its fair market value must report the dividends as income. The Sec. 301(a) distribution is generally a taxable dividend to the extent of the corporation’s earnings and profits. Mr. White reports dividend income of $3,000.

10

Scholarships and fellowships awarded degree candidates are not taxable unless they are used for

A Room & Board
B Supplies required for course study
C Tuition
D Books

A ROom and Board

11

Mr. and Mrs. Apple received the following income during 2015:
$200 in interest credited to their bank account but not withdrawn or used by them during the year
$2,000 in interest received as a beneficiary in a trust established by Mr. Apple’s father and included on Schedule K-1 from the trust
$100 in interest on a bond issued by the State of Georgia
$1,000 bond interest, City of Atlanta municipal bond
How much taxable interest income must Mr. and Mrs. Apple report on their 2015 tax return?
.
$3,300
B.
$0
C.
$2,200
D.
$1,300

C.
$2,200

Answer (C) is correct.
Interest is the value received or accrued for the use of money. Interest is reported under the doctrine of “constructive receipt” when the taxpayer’s account is credited with the interest. Accrued interest on a deposit that may not be withdrawn at the close of an individual’s tax year because of an institution’s actual or threatened bankruptcy or insolvency is not includible until the year in which such interest is withdrawable. All interest is gross income for tax purposes unless an exclusion applies. Payments to a holder of a debt obligation incurred by a state or local governmental entity (e.g., municipal or “muni” bonds) are generally exempt from federal income tax (Publications 17 and 538). Accordingly, Mr. and Mrs. Apple should report $2,200 ($2,000 + $200) on their 2015 income tax return because all interest is taxable income unless an exclusion applies and there is an exclusion for the interest earned on state and local bonds.

12

Matthew Kennedy received a dividend from Mayflow Corporation. Matthew has elected, using Mayflow’s dividend reinvestment plan, to purchase additional stock at FMV with the dividend received. The dividend was $1,500 and the FMV of the stock purchased was $1,475. A $25 service charge was applied to this transaction. What must Matthew report as dividend income on his tax return for the current year?


A.
$1,500

B.
$1,525

C.
$0

D.
$1,475

A.
$1,500


Answer A is correct.
If a taxpayer is a member of a dividend reinvestment plan and the taxpayer uses the dividends to buy more shares in the corporation, you must report the dividends as income. The taxpayer must report as dividend income the fair market value of the additional stock on the dividend payment date. The taxpayer also must include as dividend income any service charge subtracted from the cash dividends before the dividends are used to buy the additional stock (Publication 17). Matthew must report $1,500 ($1,475 + $25) as dividend income.

13



Question: 12
Mr. and Mrs. Jones are both over 65 years of age and are filing a joint return. Their income for the year consisted of the following:


Taxable interest
$  3,000
Social Security payments
25,000
Tax-exempt interest
1,000
Taxable pension
20,000
How much of the Social Security benefits is taxable?

A.
$12,500
B.
$5,500
C.
$2,250
D.
$1,500

C.
$2,250

Answer (C) is correct.
Under Sec. 86, if the sum of the “modified” adjusted gross income plus one-half of Social Security benefits exceeds $32,000 on a joint return but does not exceed $44,000, part of the Social Security benefits will be included in gross income. Modified adjusted gross income equals adjusted gross income plus tax-exempt interest [Sec. 86(b)(2)]. The includible portion of Social Security benefits is the lesser of one-half of the Social Security benefits or one-half of the excess as noted above. Mr. and Mrs. Jones would include $2,250 since it is the lesser of the two considerations (Publication 17).


Modified AGI

($3,000 + $1,000 + $20,000)
$24,000
One-half of Social Security benefits
12,500
Less $32,000 base amount
(32,000)


Excess
$  4,500


50% of excess or
$  2,250
50% of Social Security ($25,000 × 50%)
$12,500

14

With regard to the inclusion of Social Security benefits in gross income, which of the following statements is correct?
A.
The Social Security benefits in excess of modified adjusted gross income are included in gross income.
B.
The Social Security benefits in excess of one-half the modified adjusted gross income are included in gross income.
C.
85% of the Social Security benefits is the maximum amount of benefits to be included in gross income.

.C.
85% of the Social Security benefits is the maximum amount of benefits to be included in gross income.

Answer (C) is correct.
The taxable portion of Social Security benefits will depend upon the amount of provisional income in relation to the base amount and the adjusted base amount. If provisional income exceeds the adjusted base amount, then up to 85% of Social Security benefits may be taxable (Publication 17).

15

Mr. and Mrs. Garden filed a joint return for 2015. Mr. Garden received $8,000 in Social Security benefits and Mrs. Garden received $4,000. Their income also included $10,000 taxable pension income and interest income of $2,000. What part of their Social Security benefits will be taxable for 2015? (The base amount for married fiing jointly is $32,000 for 2015.)

A.
$0
B.
$6,000
C.
$24,000
D.
$12,000

Answer (A) is correct.
Social Security benefits are generally not taxable unless additional income is received. The gross income inclusion is dependent on the relation of provisional income (PI) to the base amount (BA) and the adjusted base amount (ABA). If PI < BA, there is no inclusion. If PI falls between BA and ABA, up to 50% of Social Security benefits will be included. If PI > ABA, up to 85% of Social Security benefits will be included (Publication 17). The Gardens’ provisional income is calculated below.


AGI, excluding Social Security benefits
$12,000
+ 50% of Social Security benefits
6,000


= Provisional Income
$18,000
Since the Gardens’ provisional income is less than their base amount of $32,000, none of their Social Security benefits will be taxed.

16

Generally, Interest Income from the following bond is tax exempt except

A Local Gov bonds
B State Gov bonds
C Qualified private security bonds
D us Savings bonds

D
US savings bonds interest is taxaable

All other others are not

17


When Joe’s financial institution offered a substantial discount of $5,000 for early payment of his home mortgage, he borrowed from a family member to take advantage of this offer. How should Joe treat this discount transaction?

A.
Report $5,000 original issue discount as interest income.
B.
Report $5,000 on line 21, Other Income, on Form 1040.
C.
Reduce his home mortgage interest deduction by $5,000.
D.
No actions or reporting required.


B.
Report $5,000 on line 21, Other Income, on Form 1040.

Answer (B) is correct.
According to Publication 17, if a financial institution offers a discount for the early payment of a mortgage loan, the amount of the discount is canceled debt. When the canceled debt is a nonbusiness debt, it is to be reported as other income on line 21 of Form 1040.

18

Which of the following canceled debts is included with income?

A.
A cancelation of qualified principle residence indebtedness when the debt does not exceed $2,000,000.
B.
A canceled debt which is greater than the amount by which a taxpayer is insolvent.
C.
A canceled debt for which the payment of the debt would be deductible to a cash-method taxpayer.
D.
A student loan, provided the taxpayer works for a certain period of time in certain professions.

.
A canceled debt which is greater than the amount by which a taxpayer is insolvent.

Answer (B) is correct.
The excess of the debt canceled over the amount by which a taxpayer is insolvent must be included in gross income.

19

ll, a tax preparer, agreed to prepare the corporate tax return for EZ Interior Decorating Co. It was agreed that Bill’s fee would be $4,500. EZ was experiencing cash flow problems and offered Bill a computer with a fair market value (FMV) of $3,500, a printer valued at $400, and a monitor worth $250 instead of the agreed upon $4,500. EZ had paid $6,000 for these items. Bill accepted the equipment in lieu of cash. What is Bill’s basis in the property received?


A.
$0

B.
$4,150

C.
$4,500

D.
$6,000

.
$4,150


Answer B is correct.
Section 83(a) provides that the receipt of property for services provided is a taxable transaction. Accordingly, the fair market value of the property must be included in gross income as compensation, and the basis of the property will be its fair market value. Publication 17 states that if services were performed for a price agreed on beforehand, the price will be accepted as the FMV of the property only if there is no evidence to the contrary.

20

During the current year, Mr. Lamply received state unemployment benefits of $1,600. The union paid Mr. Lamply an additional $1,600 out of regular union dues. What amount must Mr. Lamply include in income?


A.
$800

B.
$3,200

C.
$0

D.
$1,600

.B
$3,200


Answer B is correct.
Gross income is defined under Sec. 61 as all income from whatever source derived which is not specifically excluded. There is no exclusion for unemployment compensation benefits [Sec. 85(a)].
Regulation 1.85-1(b)1(i) provides that amounts paid pursuant to private nongovernmental unemployment compensation plans are also includible in income without regard to Sec. 85.

21

r. Brown is a college student working on a degree in accounting. He received the following in 2017:
A $4,000 scholarship used for tuition at State University
A $1,000 scholarship used for fees and books
An $8,000 fellowship used for his room and board
Compute the amount Mr. Brown must include in income for 2017.


A.
$9,000

B.
$13,000

C.
$5,000

D.
$8,000


$8,000


Answer D is correct.
Publication 17 states that amounts received by an individual as scholarships or fellowships are excluded from gross income to the extent that the individual is a candidate for a degree from a qualified education institution and the amounts are used for required tuition or fees, books, supplies or equipment (not personal expenses, such as room and board). Accordingly, Mr. Brown is able to exclude $5,000 from income since it was used for tuition, fees, and books, and the $8,000 must be included in gross income since it was used for room and board.

22

Ms. Winter owns an apartment complex. She received $5,000 in December 2017 to cover the January rents for tenants who will be on vacation January 15, 2018, when the rent is due. Although she is a cash-basis taxpayer for purposes of filing her return, she uses the accrual method of accounting to maintain her books on the rental property. Since she uses the accrual method of accounting, she should report the $5,000 in 2018.

True.
False.

False.

Your answer is correct.
Prepaid rent is income when received, even if the lessor uses the accrual method of accounting.

23

Which of the following received after a decedent’s death is not income in respect of a decedent?
A.
Salary earned by the decedent but not received prior to death.
B.
Installment gain in payments from a contract entered into prior to death.
C.
Rent for the month after the decedent’s death but pursuant to a lease entered into prior to death.
D.
Collection on a cash-basis taxpayer’s accounts receivable that existed at the date of death.

C.
Rent for the month after the decedent’s death but pursuant to a lease entered into prior to death.

Answer (C) is correct.
Income in respect of a decedent is provided for under Sec. 691, but there is no statutory definition. It is generally considered to be all amounts of gross income that the decedent had a right to receive prior to death but that were not properly includible on his or her final income tax return. Rent that accrues after death is not something the decedent had a right to receive prior to death, so it is not income in respect of a decedent.

24

If a regulated investment company (mutual fund) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, the taxpayer is considered to have received the dividend on December 31.

True.
False.

False.

Your answer is incorrect.
According to Sec. 852(b)(7), any dividend declared by a regulated investment company in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed to have been received by each shareholder on December 31 of such a calendar year. This shall apply only if such a dividend is actually paid by the company during January of the following calendar year. Thus, the taxpayer has constructively received the dividend and should report it in the year declared.

25

Debby broke her leg this past year and was unable to work for 3 months. During this time, she received $2,500 in sick pay from her employer. She also received $1,000 from her personally purchased accident policy. How much of these benefits is taxable income to Debby?
A.
$0
B.
$2,500
C.
$1,000
D.
$3,500

B.
$2,500

Answer (B) is correct.
Under Sec. 61(a)(1), sick pay is included in gross income as part of the employee’s compensation for not working when sick. Specifically excluded from gross income are amounts received under an accident and health insurance policy purchased by the taxpayer even if the benefits are a substitute for lost income (Publication 17).

26

The Fringe Benefit that must be included in wages reported on w2

A Health or accident insurance coverage provided by employer
b Contributions by your employer to provide long-term care
C employer provided parking less than $250
d Group life insurance coverage over $50,000

D group term life insurance over 50,000

27


Klein, a master’s degree candidate at Briar University, was awarded a $12,000 scholarship from Briar. The scholarship was used to pay Klein’s university tuition and fees. Also, Klein received $5,000 for teaching two courses at a nearby college. What amount is includible in Klein’s gross income?

A.
$0
B.
$5,000
C.
$12,000
D.
$17,000

B.
$5,000

Answer (B) is correct.
Scholarships may be excluded from gross income provided a student is enrolled in a degree-seeking program and that the scholarship is used for qualified expenses such as tuition and fees. However, amounts received for services such as teaching must be included in gross income (Publication 17).

28

a Taxpayer received the following income
$200 interest credited to his bank acct but not withdrawn or used during the year
$2000 in interest received beneficiary in a trust establish by taxpayer father and included in the K1 from the trust
$100 interest on bond issued state of georga,
$1000 bond interest, city of Atlanta municipal bond.

How much is taxable income

A. $3,300
B. 0
C. $2,200
D. $1,3000

C
Income is constructive receipt when credited
Dist shares from trust, estate,s corp on K1 iis tax interest

Int obligations issued by an state, a poss or gov is not tax income

Tax int
Interst credit bank acct $200
+
Interest K1............................$2000

Total $2,200

29

Joan owned stock in W Corporation, which has a dividend reinvestment plan. Joan decided to participate in the plan, and during the current year the corporation paid dividends. The plan allowed Joan to use her $3,000 dividend to buy 30 additional shares of stock at $100 per share when the fair market value of the stock was $130 per share. How much dividend income must Joan report on her current-year income tax return?


A.
$0

B.
$3,000

C.
$3,900

D.
$900

.
$3,900


Answer C is correct.
Dividends are gross income [Sec. 61(a)(7)]. A shareholder who, under a dividend reinvestment plan, elects to receive shares of greater value than his or her cash dividend would otherwise receive a taxable distribution under Sec. 301(a) to the extent of the value of the shares (Publication 17). Because Joan was able to buy 30 additional shares when the fair market value of the stock was $130 per share, she must report $3,900 (30 × $130) of dividend income.

30

Rev. Jones, an ordained minister, received $8,400 designated as a housing allowance. Rev. Jones used the full amount to pay his mortgage principal of $1,000, mortgage interest of $6,300, and property taxes of $1,200. Rev. Jones itemized his deductions and deducted the home mortgage interest and property taxes. What is the amount Rev. Jones may exclude from income?


A.
$1,000

B.
$0

C.
$8,400

D.
$7,300

8,400


Answer C is correct.
A housing allowance, to the extent that the allowance is used to rent or provide a home, is excluded from gross income. A minister is also entitled to deduct mortgage interest and real property taxes paid on a personal residence even if the amounts expended are derived from a rental allowance that is excludable from the minister’s gross income [Publication 517 and IRC Sec. 265(a)(b)].

31

The foreign earned income exclusion can be applied for which of the following types of income?
A.
Salaries and wages.
B.
Pensions.
C.
Dividends and interest.
D.
All of the answers are correct.

A.
Salaries and wages.

Answer (A) is correct.
Foreign earned income includes pay for personal services, such as wages and salaries.

32

Generally interest income from the following bond is tax exempt except

A Local Gov Bonds
B State Gov Bonds
C Municipal Bond
D US. saving bond
E Inheritance

D US saving bond is taxable
all others are not

33

Scott and Dawn, husband and wife, are equal partners in a law firm. They had gross receipts of $120,000, less expense of $40,000 resulting in net income of $80,000 for the law firm. Dawn received an inheritance of $20,000. In addition, they had municipal bond interest of $3,000 and savings account interest of $2,000. What is their adjusted gross income on a married-filing-joint return?

A.
$82,000
B.
$102,000
C.
$142,000
D.
$105,000

Answer (A) is correct.
Gross receipts of a partnership and savings account interest are both part of gross income. The $40,000 of expense for the partnership are for AGI deduction. Neither the inheritance nor the municipal bond interest are taxable; thus, they would not be included in either gross income or adjusted gross income (AGI).
The equation for AGI is gross income minus for-AGI deductions.


Gross receipts from partnership
$120,000
Savings account interest
2,000


Gross income
$122,000
Less: expense from trade/business
(40,000)


AGI
$  82,000

34

Cyril, who is 68 years of age, received Social Security benefits of $12,000, wages of $5,000, interest and dividends of $4,000, unemployment compensation of $3,000, and municipal bond interest of $1,500. Calculate Cyril’s adjusted gross income.
 
 
A.
$12,000
 
B.
$22,200

C.
$25,500

D.
$19,200



A.
$12,000


Answer A is correct.
Adjusted gross income (AGI) is gross income minus any AGI deductions. Cyril has no deduction for AGI, so her AGI is equal to her gross income. Of her income, only the wages, interest, dividends, and unemployment compensation are taxable income (Publication 17). Thus, her gross income is $12,000 ($5,000 + $4,000 + $3,000), which is also her AGI. Municipal bond interest is tax-exempt.

35

Mr. Hawk, a factory assembly line worker, received the following benefits from his employer:


Medical insurance plan policy
$250
Christmas bonus
125
Reimbursement for college undergraduate physics course under a nondiscriminatory written plan
450
$40,000 nondiscriminatory group term life insurance policy
475
Membership in a local health club
550
How much is includible in Mr. Hawk’s income for the current year?

A.
$675
B.
$925
C.
$1,050
D.
$1,125

$675

Answer (A) is correct.
Benefits received from an employer are compensation for services and included in gross income under Sec. 61 unless provided otherwise. Sec. 106 excludes from gross income contributions to accident or health plans (a medical insurance plan) made by an employer on behalf of the employee. Sec. 79 provides for the inclusion in gross income of the cost of group term life insurance paid by the employer, but only to the extent that such cost exceeds the cost of $50,000 of such insurance provided the plan is not discriminatory. Hence, the cost of Mr. Hawk’s group term life insurance is not included in gross income.
Sec. 127, which provides an exclusion of payments up to $5,250 per year made to reimburse an employee for educational expenses, covers expenses for undergraduate courses. Therefore, the reimbursement for the physics course is excluded. There is no provision excluding Christmas bonuses or memberships in off-premises health clubs so $675 ($125 bonus + $550 membership) is includible in gross income (Publication 17).

36

Randi, a flight attendant, received wages of $30,000 in the current year. The airline provided transportation on a stand-by basis, at no charge, from her home in Detroit to the airline’s hub in Chicago. The fair market value of the commuting flights was $5,000. Also in the current year, Randi received reimbursements under an accountable plan of $10,000 for overnight travel, but only spent $6,000. The excess was returned. Randi became disabled in November of the current year and received workers’ compensation of $4,000. What amount must Randi include in gross income on her current-year tax return?


A.
$37,000

B.
$34,000

C.
$30,000

D.
$35,000

C.
$30,000


Answer C is correct.
The commuting flights paid for by the employer are excluded from gross income since they are no-additional-cost fringe benefits. The reimbursed overnight travel expenses are not included in gross income because they could have been deducted by Randi as qualified business expenses and the excess reimbursements were returned. Workers’ compensation is excluded from gross income under Sec. 104(a) (Publications 17 and 463). Therefore, only Randi’s salary of $30,000 is included in gross income as compensation for services rendered (Sec. 61).

37

Mr. Gonzales received a Form 1099-INT from his local bank in the amount of $1,200 for the current taxable year. Because the local bank was insolvent, Mr. Gonzales was not permitted to make any withdrawals from the bank during the current year. Under these circumstances, Mr. Gonzales must exclude from his current-year gross income the interest reported by the local bank.

True.
False.


Correct True.

Your answer is correct.
Accrued interest on a deposit that may not be withdrawn at the close of an individual’s tax year because of an institution’s actual or threatened bankruptcy or insolvency is not includible in the depositor’s income until the year in which such interest is withdrawable [Sec. 451(g)].

38

As a result of a fire, Sam had to vacate his apartment for a month and move to a motel. His rent for the apartment had been $600 per month. No rent was charged for the month the apartment was vacated. His motel rent for this month was $1,000. He normally pays $200 a month for food, but food expenses for the month he lived in the motel were $500. He received $1,100 from his insurance company to cover his living expenses. Based on this information, determine the amount, if any, he must include in income.


A.
$700

B.
$0

C.
$400

D.
$300

C.
$400


Answer C is correct.
A taxpayer whose residence is damaged or destroyed and who must temporarily occupy another residence can exclude from gross income any insurance payment received as reimbursement for living expenses during such period. This exclusion is limited to the excess of actual living expenses incurred by the taxpayer, $1,500 ($1,000 rent + $500 food), over the normal living expenses of $800 ($600 rent + $200 food) the taxpayer would have incurred during the period, or $700 ($1,500 – $800). The exclusion covers additional costs incurred in renting suitable housing and any extraordinary expenses for transportation, food, and miscellaneous items. The amount of the reimbursement included in income is $400 ($1,100 reimbursement – $700 exclusion).

39

Dolph is a member of the U.S. armed forces and served in an active status in a combat zone declared by executive order of the President from January 25 of the current year through March 17 of the current year. He returned to the United States and received his regular duty pay for the rest of the current year. Dolph’s entire income tax liability is forgiven for the current year.

True.
False

Correct False.

Your answer is correct.
In general, members of U.S. armed forces include the same items in income as do civilians. One exception is that members of the armed forces may exclude all pay received for any month during any part of which they served in a combat zone. Dolph would not have to include his pay from January to March but would have to include the rest of his regular duty pay for the rest of the current year.

40

Troy, a cash-basis taxpayer, owns an office building. His records reflect the following for 2016:

On March 1, 2016, office B was leased for 12 months. A $900 security deposit was received, which will be used as the last month’s rent.
On September 30, 2016, the tenant in office A paid Troy $3,600 to cancel the lease expiring on March 31, 2017.
The lease of the tenant in office C expired on December 31, 2016, and the tenant left improvements valued at $1,400. The improvements were not in lieu of any required rent.
Considering just these three amounts, what amount must Troy include in rental income on his income tax return for 2016?

A.
$5,000
B.
$4,500
C.
$1,800
D.
$5,900

B.
$4,500

Answer (B) is correct.
Rental income includes the $900 security deposit and the $3,600 lease cancelation payment. If a tenant receives payments for the cancellation of a lease on property used as the tenant’s home, a gain is taxed as a capital gain, b
. The security deposit must be included because it was intended as rent, and the cancelation payment was in lieu of rent, so it also must be included. The $1,400 of leasehold improvements are excluded from income since they were not in lieu of rent (Publication 17 and IRC Sec. 109).

900+3600=4500

41

Mr. A sold a tract of land and reported the sale using the installment method of accounting. The net sale price was $80,000, and the cost basis was $40,000. After A’s death, the final $10,000 installment (plus interest) was collected by his personal representative. What amount (other than interest) must be reported as profit on a Form 1041, U.S. Income Tax Return for Estates and Trusts, for the year in which the $10,000 was received?


A.
$2,500

B.
$10,000

C.
$5,000

D.
$0

$5,000


Answer C is correct.
Income in respect of a decedent is the amount that the decedent had a right to receive prior to death but that was not properly includible on his or her final income tax return. It retains its same character to the recipient as it would have been in the hands of the decedent. There is no step-up in basis under Sec. 1014(c), so the same gross profit margin is used on an installment receipt. The gross profit margin was 50% ($40,000 ÷ $80,000), so $5,000 ($10,000 × 50%) is income in respect of a decedent. The remaining $5,000 is merely a return of capital.

42

During the current year, ZM & T, under a qualified plan for education assistance, paid for an employee’s graduate-level course in computer telecommunications. The exclusion from gross income for educational assistance program benefits applies to payments for graduate-level courses.

True.
False.


Correct True.

Your answer is correct.
Section 127 provides an exclusion from an employee’s gross income of amounts paid by the employer for educational assistance for all courses. The payments must be made pursuant to an educational assistance program as defined in that section. Tax legislation in 2001 made graduate courses eligible for the exclusion beginning in 2002.

Graded False.

43

Ms. Oak rented a small house to Mr. Acorn for $500 a month for all of the current year. The house was in serious need of rehabilitation. Mr. Acorn, an electrician, approached Ms. Oak with a proposal that he would rewire the house in lieu of payment of his January through April rent (4 months). Ms. Oak accepted Mr. Acorn’s offer, and Mr. Acorn completed his work in July. In August, Ms. Oak notified Mr. Acorn that she would be out of town for 3 months starting at the beginning of September, and she asked him to “look after things.” While she was away, he paid $200 to have the furnace repaired. When she returned at the end of November, he paid her $1,300 (3 months’ rent for September, October, and November less the $200 he had paid for the furnace). Mr. Acorn timely paid his rent on the first of each month for May, June, July, August, and December. What amount should Ms. Oak include in her current-year gross rental income?

A.
$4,000
B.
$4,200
C.
$6,000
D.
$6,200

D
In general, improvements made by a lessee on the lessor’s property are excluded from income under Sec. 109 unless they are in lieu of rent. In this case, Mr. Acorn rewired the house in lieu of 4 months’ rent. The $2,000 ($500 × 4) of improvements must be included in income. (). Therefore, Ms. Oak must include all 12 months of rent in income, for a total of $6,000.
12x500=600

44


A restaurant owner is required to allocate tip income to the servers. For the current year, total food and drink sales equaled $100,000. Total tips reported by servers equaled $5,000. What amount is the employer to allocate?

A.
$5,000
B.
$3,000C.
$0
D.
$8,000

B.
$3,000

Answer (B) is correct.
Food service employers required to allocate tip income use 8% of food and drink sales to determine the allocable amount. The employer’s allocation is $3,000 [($100,000 × 8%) – $5,000].

45

All the following are taxable interest income Except
A Fair market value of gift recieved for opening a savings acct
B Interest income recieved municipal Bond
C OID
D interest on federal refurnish

B interest income recieved municipal bond

46

When Dick and Jane married 5 years ago, Jane’s parents loaned them $30,000 for a down payment on a house. Dick and Jane made regular payments until Jane’s parents were killed in an accident in the current year. One of the terms of Jane’s parents’ will was that any balance remaining on the loan would be forgiven at their death and would be considered a gift. Dick and Jane must recognize income in the current year due to the forgiveness of the debt.

True.
False.

Correct False.

Your answer is correct.
If a creditor gratuitously cancels a debt, the amount forgiven is treated as a gift. The IRC provides for exclusion from the gross income of the recipient the value of property acquired by gift or inheritance. A gift is a transfer for less than full or adequate consideration that results from the detached and disinterested generosity of the transferor. Gift transfers include inter vivos (between the living) gifts and gifts by bequest (of personal property by a will), devise (of real property by a will), and inheritance (under state intestacy law).

47

A taxpayer had municipal bond interest of $6000, Certificate of deposit interest of $4000, reinvested corporate bond int of $2000, Mutual fund municipal bond int $7000 and savings acct int of $1000

How much is taxable?

Interest Municipal bond not tax
cd interest..............$4000
Corporate bond int........$2000
Savings acct int................$1000

total $7000

48

Income in respect of decedent must not be included in the income of which of the following?

A The descents estate (if recieved by estate)
B The benefiarcy filing (if the right to income is passed directly and received by beneficiary
C Any person to whom the estate properly distributes the right to recieve it
D the decedents final Form 1040 filing

D the dependents final form 1040 filing