REG 27 - Income 1 - Gross Income Flashcards Preview

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Flashcards in REG 27 - Income 1 - Gross Income Deck (16):
1

A cash-basis taxpayer should report gross income
A. For the year in which income is either actually or constructively received, whether in cash or in property.
B. For the year in which income is either actually or constructively received in cash only.
C. Only for the year in which income is actually received whether in cash or in property.
D. Only for the year in which income is actually received in cash.

A. A cash-basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.

2

Charles and Marcia are married cash-basis taxpayers. In 2014, they had interest income as follows:

- $500 interest on federal income tax refund.
- $600 interest on state income tax refund.
- $800 interest on federal government obligations.
- $1,000 interest on state government obligations.

What amount of interest income is taxable on Charles and Marcia's 2014 joint income tax return?
A. $500
B. $1,100
C. $1,900
D. $2,900

Refunds and recoveries attributable to a prior tax year are excluded from income to the extent that the amount does not reduce the amount of tax imposed for the earlier year. However, interest received on these refunds and recoveries is taxable interest income.

Thus, Charles and Marcia should include the interest received on the state and federal income tax refunds as interest income on their income tax return. In addition, Charles and Marcia should include the interest received on federal government obligations as taxable interest income on their income tax return because interest on these obligations is taxable. However, interest on state government obligations is tax-exempt income and, as a result, Charles and Marcia should not include interest income from these obligations on their income tax return.

Hence, Charles and Marcia should report $1,900 of interest income, the sum of the $500 interest on federal income tax refund, $600 interest on state income tax refund and $800 interest on federal government obligations.

3

Micro Corp., a calendar year, accrual basis corporation, purchased a 5-year, 8%, $100,000 taxable corporate bond for $108,530, on July 1, 2014, the date the bond was issued.
The bond paid interest semiannually. Micro elected to amortize the bond premium. For Micro's 2014 tax return, the bond premium amortization for 2014 should be

I. Computed under the constant yield to maturity method.

II. Treated as an offset to the interest income on the bond.

Both I and II. Taxpayers may elect to amortize taxable bonds purchased at a premium. Non-taxable bonds purchased at a premium generally are required to be amortized. The amortized bond premium is based on the constant yield to maturity. The amount amortized usually reduces the taxpayer's basis in the bonds and, for taxable bonds, results in an offsetting deduction for interest received from the bond.

This response correctly states that the bond premium amortization should be computed under the constant yield to maturity method. In addition, this response correctly indicates that the bond premium amortization would be treated as an offset to the interest income from the bond.

4

Clark bought series EE U.S. Savings Bonds in 2014. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the
A. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).
B. Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.
C. Bonds must be bought by the owner of the bonds before the owner reaches the age of 24.
D. Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

A. Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid may exclude the interest income on the bonds from gross income. The conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bond must have made the purchase after reaching the age of 24 and be the sole owner of the bonds (or joint owner with his or her spouse).

As this response states that one of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse), it is correct.

5

T/F: A stock dividend is taxable to all shareholders if some or all of the shareholders can elect a cash distribution in lieu of receiving shares of stock.

True

6

T/F: Original issue discounts on long-term bonds will increase interest income, as the discount must be amortized over the life of the bond.

True

7

T/F: A stock split generates gross income to shareholders if the aggregate value of the corporate stock increases after the split.

False.
A stock dividend or split requires the taxpayer to adjust the basis of the stock's new number of shares.

8

T/F: Interest on a series EE savings bond used to pay educational expenses cannot be excluded by a taxpayer whose AGI exceeds the applicable threshold for the year.

True

9

T/F: TP found a $100 bill on the sidewalk. The $100 is included in TP's gross income.

True

10

T/F: A cash-basis taxpayer received a check on December 30, but he was unable to cash the check before year end. The taxpayer is still required to recognize the check as income in the year of receipt.

True
Constructive receipt requires a cash basis taxpayer to include the value of property in income in the period in which the right to (or control of) the property is acquired.

They had the check in hand and could have cashed it. Simply because they didn't cash it doesn't mean that they don't have to include it in income.

11

An individual received $50,000 during the current year pursuant to a divorce decree. A check for $25,000 was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for $15,000 as a property settlement. What amount should be included in the individual's gross income?
A. $50,000
B. $40,000
C. $25,000
D. $0

C. Alimony is included in the recipient's income, but child support payments and property settlements are not.

12

Y/N: TP is supposed to receive alimony payments of $50,000 for the first two years after divorce, but nothing thereafter. The alimony is front loaded and subject to recapture in the third year.

Yes
Special front loading rules require recapture of deductions and income if alimony payments decline more than $15,000 over the first three years after the divorce.

13

T/F: TP is taxed on the receipt of title to a house under a divorce decree worth $42,000 subject to a mortgage of $20,000 and an adjusted basis of $38,000.

False.
Taxed based on the adjusted basis??

14

T/F: The transfer of property between spouses incident to a pending divorce qualifies as an alimony payment.

False.
Property transfers to a former spouse under a divorce decree are not a taxable event. The transferor's basis in the property transfers to the transferee.

15

T/F: A taxpayer made a $100,000 alimony payment in the year of divorce and no payments thereafter. The alimony will be subject to recapture under the front loading rules.

True
Special front loading rules require recapture of deductions and income if alimony payments decline more than $15,000 over the first three years after the divorce.

16

T/F: TP bought a 10-year annuity at a cost of $5,000. If TP receives annual payments of $800 from the annuity, he will only be taxed on $300 of each payment.

True

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