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Exam 5: Gross Income and Exclusions

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Question 1

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Alex is 63 years old and retired. This year Alex won $212,200 in the state lottery. Alex also received $20,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 15 years, for $157,500. Alex received $10,000 in Social Security benefits for the year. Calculate Alex's gross income.

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$230,200 = $212,200 + $9,500 + $8,500
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Question 2

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Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and $10,000 of social security payments. What amount must Bernie include in his gross income?

A) $250,000
B) $255,000
C) $258,500
D) $260,000
E) Zero

F) All of the above
G) A) and B)

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Question 3

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NeNe is an accountant and U.S. citizen, who has accepted a permanent position in Madrid, Spain for a Spanish financial services company. This year, NeNe spent the entire year working in Madrid. NeNe's employer paid $40,000 of her Madrid housing expenses this year. What amount of the $40,000 housing payments may NeNe exclude?

Which of the following is a true statement about the first payment received from a purchased annuity?

Samantha was ill for four months this year. Samantha missed work during this period, but disability insurance paid $18,000 of disability pay to replace her missed salary. Samantha shares the cost of the insurance with her employer. This year Samantha's employer paid $2,200 in disability premiums for Samantha as a nontaxable fringe benefit and Samantha paid the remaining $1,100 of premiums from her salary. What amount of the disability pay must Samantha include in her gross income? (rounded to the nearest whole dollar)

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?

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 $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

U.S. citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.

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 $20,000 for damages, $5,500 for emotional distress, and $50,000 for punitive damages. What amount must Paul include in his gross income?

Irene's husband passed away this year. After his death, Irene received $250,000 of proceeds from life insurance on her husband, and she inherited her husband's stock portfolio worth $750,000. What amount must Irene include in her gross income?

A below-market loan (e.g., from an employer to an employee) is a common example of a transaction that generates taxable imputed income.

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.

Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3%, which of the following is correct?

Jim received a $500 refund of state income taxes this year. Jim will not need to include the $500 in his gross income this year if he did not deduct state income taxes last year.

Bobby and Sissy got married 2.5 years ago. Since that time, they have lived in Bobby's home. Sissy sold her previous home three years ago and excluded her entire gain ($80,000) at that time. Bobby and Sissy decided to move to a bigger home this year. As a result, they sold Bobby's home for $500,000 (original cost $150,000). How much of the gain from the sale is taxable?

Which of the following statements about alimony payments is true?

Gross income includes

Deb has found it very difficult to repay her loans. Because of these difficulties, the bank decided to forgive one of her most recent loans, an amount of $45,000. After the loan was discharged, Deb had total assets of $232,000 and her remaining loans total $217,000. What amount must Deb include in her gross income?

Charles and Camilla are getting divorced. Under the terms of the decree Charles will pay Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage) . In addition, Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son, Clyde, until he turns 19 years old. What amount (if any) is included in Camilla's gross income this year?

This fall Angelina, age 35, plans to attend college. To fund her tuition she cashed in Series EE savings bonds with a redemption value of $24,000 and an original cost of $16,800. Angelina plans on spending $7,200 of the proceeds to pay tuition. The redemption proceeds are Angelina's only source of income. What amount of interest must Angelina include in gross income this year?