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Exam 5: Gross Income and Exclusions

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Question 21

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

A) Joyce recognizes $1,500 of taxable interest income.
B) Joyce's employer recognizes $1,500 of deductible interest expense.
C) Joyce recognizes $1,500 of imputed compensation income.
D) Joyce recognizes $1,500 of imputed dividend income.
E) None of the choices are correct.

F) C) and E)
G) A) and E)

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Question 22

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A portion of each payment received from a purchased annuity contract represents income.

A) True
B) False

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Question 23

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Community property laws dictate that income earned by one spouse is treated as though it were earned equally by both spouses.

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

Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must include $15,000 of this gift in his gross income this year.

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?

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives. Later this year Harold will recover the remainder of his cost of the annuity. Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

Constructive receipt represents the principle that cash-basis taxpayers will be taxed on income when it is made available to them without substantial restrictions.

To provide relief from double taxation, Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.

Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange for property. This year Juan provided lawn-mowing services in exchange for $1,275 of car repair services, $3,570 of groceries, and a certificate of deposit (CD)for $4,050. The CD matures next year with interest. Finally, Juan received a gift card that can only be applied for $850 of clothing at a local mall. Juan has only applied the gift card to purchase $100 of clothing. Compute Juan's gross income, assuming that he uses the cash basis of accounting.

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 payment will George include in his gross income?

Charles and Camilla got divorced in 2018. Under the terms of the decree Charles pays Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage) . In addition, Charles transferred a castle worth $2,000,000 to Camilla in 2018 and will 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 in 2019?

Desai and Lucy divorced in 2018. Lucy has custody of their child, Andrea, and under the divorce decree Desai pays Lucy $120,000 per year. The payments must be made in cash and will cease if Lucy dies or remarries. The payments drop to $100,000 per year once Andrea reaches the age of 18. How much of the payments should Lucy include in gross income this year?

Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred for the emotional distress he suffered when his neighbor accidentally ran over his dog.

Recognized income may be in the form of cash or property received (but not services received).

Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes) ?

Realized income is included in gross income unless a tax provision specifies that it can be deferred or excluded.

In January of the current year, Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months later in the same year after the gift, a $500 dividend was declared on the stock and paid to Dora's granddaughter. What amount must Dora's granddaughter include in her gross income for the current year?