Name: Taxation of Individuals Brian Spilker 11e - Test Bank
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Complete Test Bank With Answers

Sample Questions Posted Below

Taxation of Individuals, 11e (Spilker)

Chapter 5 Gross Income and Exclusions

1) Gross income includes all income realized during the year.

Answer: FALSE

Explanation: Deferred and excluded income is not included in gross income.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

2) Excluded income will never be subject to the federal income tax.

Answer: TRUE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

3) The all-inclusive definition of income means that gross income is defined very broadly.

Answer: TRUE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

4) A taxpayer who borrows money will include that amount borrowed in their gross income

under the all-inclusive definition of income.

Answer: FALSE

Explanation: Debt does not generate economic benefit.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.5) Realized income is included in gross income unless a tax provision specifies that it can be

deferred or excluded.

Answer: TRUE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

6) The principle of realization for tax purposes is very different from realization as it is

understood for financial reporting purposes.

Answer: FALSE

Explanation: Realization is similar for both tax and financial accounting.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

7) Wherewithal to pay represents the principle that a realized transaction should require a

taxpayer to sell other assets in order to pay income taxes.

Answer: FALSE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

8) Barter clubs are an effective means of avoiding realization for tax purposes.

Answer: FALSE

Difficulty: 3 Hard

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.9) The cash method of accounting requires taxpayers to recognize income only when income is

received as cash.

Answer: FALSE

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

10) When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter

has realized $100 of income.

Answer: TRUE

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

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

received).

Answer: FALSE

Difficulty: 3 Hard

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

12) When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross

income regardless of the cost of the asset.

Answer: FALSE

Explanation: Gross income only includes the net of sales proceeds less related selling expenses

and tax basis in the asset sold.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.13) 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.

Answer: TRUE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

14) When an asset is sold, the taxpayer calculates the gain or loss on the sale of the asset by

subtracting the tax basis of the asset from the proceeds of the sale.

Answer: TRUE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

15) The tax benefit rule applies when a taxpayer refunds amounts that were previously included

in income.

Answer: FALSE

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

16) 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.

Answer: TRUE

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.17) Constructive receipt represents the principle that cash-basis taxpayers will be taxed on

income when it is made available to them without substantial restrictions.

Answer: TRUE

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

18) Claim of right states that income has been realized if a taxpayer receives income and there

are substantial restrictions on the taxpayer’s use of the income.

Answer: FALSE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

19) Community property laws dictate that income earned by one spouse is treated as though it

were earned equally by both spouses.

Answer: TRUE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

20) Interest income is taxed in the year in which it is received by the taxpayer or credited to the

bank account.

Answer: TRUE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.21) The assignment of income doctrine requires that in order to shift income from the property

producing the income to another person, the taxpayer must transfer only the income to the other

person.

Answer: FALSE

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

22) For tax purposes, unearned income is income that has not yet been realized.

Answer: FALSE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

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

Answer: TRUE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

24) The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest

rate.

Answer: FALSE

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.25) Rental income generated by a partnership is reported by the partners as dividend income on

their own individual tax returns.

Answer: FALSE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

26) The tax law defines alimony to include transfers of property (but not cash) between former

spouses.

Answer: FALSE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

27) Regardless of when a divorce agreement is executed, alimony is included in gross income of

the recipient and is deductible for AGI by the payer.

Answer: FALSE

Explanation: For any divorce or separation agreement executed after December 31, 2018,

alimony payments are not included in the gross income of the person receiving the payments and

are not deductible by the person paying the alimony.

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.28) The receipt of prizes and awards is generally taxable.

Answer: TRUE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

29) Gambling winnings are included in gross income only to the extent that the winnings exceed

gambling losses incurred during the same period.

Answer: FALSE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

30) Generally, 85 percent of Social Security benefits are included in income of high-income

taxpayers.

Answer: TRUE

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

31) Unemployment benefits are excluded from gross income.

Answer: FALSE

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.32) A taxpayer generally includes in gross income the amount of debt forgiven by a lender.

Answer: TRUE

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

33) An employee may exclude up to a 40 percent employer-provided discount on services

received by the employee.

Answer: FALSE

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

34) A below-market loan (e.g., from an employer to an employee) is a common example of a

transaction that generates taxable imputed income.

Answer: TRUE

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

35) Interest earned on a federal Treasury bond is excluded from gross income (for federal tax

purposes).

Answer: FALSE

Difficulty: 1 Easy

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.36) Interest earned on a city of Denver bond is excluded from gross income (for federal tax

purposes).

Answer: TRUE

Difficulty: 1 Easy

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

37) Taxpayers meeting certain home ownership and use requirements can permanently exclude

up to $1,000,000 of realized gain on the sale of their principal residence.

Answer: FALSE

Difficulty: 1 Easy

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

38) Qualified fringe benefits received by an employee can be excluded from gross income.

Answer: TRUE

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

39) Scholarships are excluded from gross income for degree candidates even if the scholarship

pays for required fees and books in addition to tuition.

Answer: TRUE

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.40) Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings

accounts are excluded from gross income if the earnings are used to pay for qualifying

educational expenditures for college students (and not for elementary or secondary education).

Answer: FALSE

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

41) 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.

Answer: FALSE

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking; Analytical Thinking

AICPA: BB Critical Thinking

42) Anna received $15,000 from life insurance paid upon the death of her grandmother. Anna

can exclude the entire amount of the life insurance from her gross income.

Answer: TRUE

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

43) U.S. citizens generally are subject to tax on all income whether it is generated in the United

States or in foreign countries.

Answer: TRUE

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.44) To provide relief from double taxation, Congress allows a foreign-unearned income

exclusion for interest and dividends earned in foreign countries.

Answer: FALSE

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

45) Workers’ compensation benefits are excluded from gross income.

Answer: TRUE

Difficulty: 1 Easy

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

46) 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.

Answer: TRUE

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

47) Loretta received $6,200 from a disability insurance policy that she purchased directly this

year. Loretta must include all $6,200 in her gross income.

Answer: FALSE

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.48) Brad was disabled for part of the year, and he received $11,500 of benefits from a disability

insurance policy purchased by his employer. Brad must include all $11,500 of benefits in his

gross income because he was not taxed on the disability insurance premiums paid by his

employer.

Answer: TRUE

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

49) Gross income includes:

A) all income from whatever source derived unless excluded by law

B) excluded income

C) deferred income

D) all realized income

E) all of these choices are correct.

Answer: A

Explanation: This is the all-inclusive definition of gross income.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

50) Which of the following is not a necessary condition for income to be included in gross

income?

A) income must be realized

B) income must be paid in cash

C) income cannot be excluded by law

D) income must be made available to a taxpayer on the cash basis

E) all of these choices are correct.

Answer: B

Explanation: Income can be paid in cash, property, or services.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.51) Sally is a cash-basis taxpayer and a member of the Valley Barter club. This year Sally

provided 100 hours of sewing services to the barter club in exchange for two football playoff

tickets. Which of the following is a true statement?

A) Sally need not recognize any gross income unless she sells the football tickets.

B) Sally’s exchange does not result in taxable income.

C) Sally is taxed on the value of the football tickets even if she cannot attend the game.

D) Sally is taxed on the value of her sewing services only if she is a professional seamstress.

E) None of the choices are correct.

Answer: C

Explanation: Gross income includes the value of property received in exchange for services.

Difficulty: 3 Hard

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

52) 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?

A) $10,000

B) $9,000

C) $1,000

D) Barney can deduct $10,000 only if he includes $1,000 in his taxable income.

E) None of the choices are correct – Barney is not entitled to a loss deduction.

Answer: E

Explanation: No realization occurs until the stock is sold or becomes worthless.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.53) Hillary is a cash-basis calendar-year taxpayer. During the last week of December she

received a letter containing a $5,000 check for services rendered. Which of the following is a

true statement?

A) Hillary is taxed on the $5,000 of service income in the year she cashes the check.

B) Hillary is taxed on the $5,000 of service income in the year the check was mailed.

C) Hillary is taxed on the $5,000 of service income in the year she receives the check.

D) Hillary is taxed on the $5,000 of service income in the year she provides the services.

E) None of the choices are correct.

Answer: C

Explanation: Under constructive receipt Hillary is taxed on income when property is received or

made available to her.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

54) Identify the rule that determines whether a taxpayer must include in income a refund of an

amount deducted in a previous year:

A) Tax refund rule

B) Constructive receipt

C) Return of capital principle

D) Tax benefit rule

E) None of the choices are correct

Answer: D

Explanation: This is the definition of tax benefit rule.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.55) Identify the rule dictating that on sale of an asset a taxpayer need only include the

incremental gain in gross income rather than the entire proceeds from the sale.

A) Tax benefit rule

B) Constructive receipt

C) Return of capital principle

D) Wherewithal to pay

E) None of the choices are correct

Answer: C

Explanation: This is the definition of the return of capital principle.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

56) Identify the rule that states that income has been realized when a taxpayer receives the

income and there are no restrictions on the taxpayer’s use of the income (e.g., no obligation to

repay the amount).

A) Claim of right

B) Constructive receipt

C) Return of capital principle

D) Wherewithal to pay

E) None of the choices are correct

Answer: A

Explanation: This is the definition of claim of right.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.57) Dave is a plumber who uses the cash method of accounting. This year Dave requested that

his clients make their checks payable to his son, Steve. This year Steve received checks in the

amount of $62,000 for Dave’s plumbing services. Which of the following is a true statement?

A) Dave is taxed on $62,000 of plumbing income this year.

B) Steve is taxed on $62,000 of plumbing income this year.

C) Steve is taxed on $62,000 of income from gifts received this year.

D) Dave may deduct the $62,000 received by Steve.

E) None of the choices are correct.

Answer: A

Explanation: The assignment of income is not effective for tax purposes.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

58) Jack and Jill are married. This year Jack earned $72,000, Jill earned $80,000, and they

received $4,000 of interest income from a joint savings account. How much gross income would

Jack report if he files married filing separately from Jill?

A) $72,000 if they reside in a common law state.

B) $74,000 if they reside in a community property law state.

C) $76,000 if they reside in a common law state.

D) $78,000 if they reside in a community property law state.

E) None of the choices are correct.

Answer: D

Explanation: In a community property state Jack is taxed on half of his separate income

($36,000) plus half of Jill’s separate income ($40,000) plus half of joint income ($2,000). In a

common law state, Jack is taxed on his separate income ($72,000) plus half of joint income

($2,000).

Difficulty: 3 Hard

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.59) Identify the item below that helps determine which taxpayer must recognize earned income.

A) Residence in a community property law state

B) Assignment of income

C) Residence in a common law state

D) Both residence in a community property law state and residence in a common law state

E) All of these choices are correct.

Answer: E

Explanation: Both the residence and the person who earns the income dictate who recognizes

income.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

60) This year Kevin provided services to several clients, each of whom paid with different types

of property. Which of the following payments is not included in Kevin’s gross income?

A) Cash

B) Shares of stock listed on the New York Stock Exchange.

C) A used car

D) Gold coins

E) All of these are included in gross income

Answer: E

Explanation: Property is included in gross income if it is capable of valuation.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.61) Emily is a cash-basis taxpayer, and she was an especially productive salesperson last year. In

December of last year her supervisor told Emily she had earned a $5,000 bonus. However, Emily

received the bonus check after year-end. Identify the principle that will determine when Emily is

taxed on the bonus.

A) Assignment of income

B) Constructive receipt

C) Return of capital principle

D) Wherewithal to pay

E) All of these choices are correct.

Answer: B

Explanation: Emily is taxed in the year the bonus is made available to her.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

62) Ophra is a cash-basis taxpayer who is employed in the publishing industry. This year her

employer informed her that because of her outstanding performance she is entitled to a free

world cruise. Ophra asked her employer to issue the cruise tickets to her parents, and he

complied with this request. Identify the principle that will determine whether Ophra or her

parents are taxed on the value of the cruise tickets.

A) Assignment of income

B) Constructive receipt

C) Return of capital principle

D) Wherewithal to pay

E) All of these choices are correct.

Answer: A

Explanation: Ophra cannot assign earned income.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.63) This year Henry realized a gain on the sale of an antique car that he inherited from his uncle.

The buyer has promised to pay Henry in installment payments over the next few years. Identify

the principle that will determine when Henry should be taxed on the gain from the sale.

A) Assignment of income

B) Constructive receipt

C) Return of capital principle

D) Wherewithal to pay

E) All of these choices are true.

Answer: D

Explanation: Wherewithal to pay dictates that gains from installment sales are generally

recognized over the periods in which payments are received.

Difficulty: 3 Hard

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

64) This year Mary received a $200 refund of state income taxes that she deducted on her tax

return last year. Mary included a total of $4,000 of state income taxes when she itemized

deductions last year. What amount of the refund, if any, should Mary include in her gross income

this year?

A) $200 is included because Mary itemized her deductions last year.

B) $200 is included if itemized deductions exceeded the standard deduction by $200.

C) $200 is included because itemized deductions exceeded the standard deduction.

D) $200 is included even if Mary claimed the standard deduction.

E) None of the choices are correct – refunds of state income taxes are not included in gross

income.

Answer: B

Explanation: Refund amounts are included in gross income only to the extent that the original

deduction provided a tax benefit. The $4,000 of deduction produced a tax benefit of $200 if

itemized deductions exceeded the standard deduction by $200.

Difficulty: 3 Hard

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.65) Opal deducted $2,400 of state income taxes on her tax return last year. This year she

received a state income tax refund of $170. What amount of the refund, if any, should Opal

include in her gross income if last year her total itemized deductions exceeded the standard

deduction by $350?

A) $2,050

B) $350

C) $180

D) $170

E) None of these – refunds of state income taxes are not included in gross income

Answer: D

Explanation: Refund amounts are included in gross income only to the extent that the original

deduction provided a tax benefit. The $2,400 of deduction produced a tax benefit of $350, so the

entire $170 is included in income.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

66) 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?

A) Wilma must include the $1,000 of interest in her income this year.

B) Wilma must include the $1,000 of interest in her income when she cashes the CD.

C) Wilma must include the $1,000 of interest in her income this year only if the bank waives the

early withdrawal penalty.

D) Wilma must include the $1,000 of interest in her income next year if she does not pay the

early withdrawal penalty.

E) All of the choices are correct.

Answer: A

Explanation: Interest is taxed when credited to the account.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.67) Which of the following is a true statement about the first payment received from a purchased

annuity?

A) The payment is included in gross income.

B) A portion of the payment is a return of capital.

C) The payment can only be taxed in the year after the annuity was purchased.

D) The payment is not taxed until the annuity payments cease altogether.

E) None of these are true statements.

Answer: B

Explanation: A portion of the first payment from a purchased annuity will be a return of capital

depending upon the amount paid for the investment and the expected number of payments to be

received.

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

68) Which of the following describes how the annuity exclusion ratio is calculated for an annuity

paid over a fixed period?

A) The expected return is divided by the number of payments.

B) The original investment is divided by the prevailing interest rate.

C) The original investment is divided by the number of payments.

D) The expected return is divided by the prevailing interest rate.

E) None of the choices are correct.

Answer: C

Explanation: This is the definition of annuity exclusion ratio.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.69) 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?

A) $80

B) $72

C) $48

D) $32

E) None of the choices are correct.

Answer: C

Explanation: The annuity exclusion ratio is ($3,200/100) = $32 return of capital per payment.

Hence, $48 of the $80 is included in gross income.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

70) Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years.

The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will

Fran include in her gross income?

A) $7,500

B) $4,500

C) $12,000

D) $32,400

E) None of the choices are correct.

Answer: B

Explanation: The annuity exclusion ratio is [$300,000/(4 × 10)] = $7,500 return of capital per

payment. Hence, $4,500 of each $12,000 payment is included in gross income.

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.71) 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?

A) Harold will continue to apply the annuity exclusion ratio to determine the amount of each

annuity payment includible in gross income.

B) Harold will include the entire amount of each annuity payment in gross income after he

recovers the cost of the annuity.

C) The entire amount of each annuity payment is excluded from gross income after Harold

recovers his cost of the annuity.

D) Harold must request that the IRS calculate his exclusion ratio based upon a revised life

expectancy.

E) All of these choices are correct.

Answer: B

Explanation: The entire annuity payment is included in gross income once the cost of the

annuity is recovered.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

72) To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by

which of the following?

A) Tax basis of the property

B) Selling expenses

C) Amount realized

D) Tax basis of the property and selling expenses

E) All of these choices are correct

Answer: D

Explanation: Tax basis and selling expenses reduce proceeds for a “casual” sale of property.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.73) Nate is a partner in a partnership that received $5,000 of interest income this year. Nate’s

share of the interest is $1,000, and he should report this income on his individual return as:

A) business income

B) income from a partnership

C) interest income

D) dividend income because the partnership intends to organize next year as a limited liability

company

E) None of the choices are correct

Answer: C

Explanation: Income from flow-through entities retains its character when reported on

individual returns.

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

74) Which of the following statements about alimony payments is true for divorce agreements

executed before 2019?

A) To qualify as alimony, payments must be made in cash.

B) Alimony payments are includible in the gross income of the recipient.

C) To qualify as alimony, payments cannot continue after the death of the recipient.

D) To qualify as alimony, payments must be made under a written agreement or divorce decree

that does not designate the payments as “nonalimony” or child support.

E) All of the choices are correct.

Answer: E

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.75) Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to pay Barney

$24,000 per year for five years (or until Barney’s death or remarriage) and $10,000 per year until

their daughter, Pebbles, turns 19 years old. What amount (if any) is included in Barney’s gross

income in 2019?

A) $10,000

B) $24,000

C) $34,000

D) $39,000

E) None of the payments are included in gross income

Answer: B

Explanation: Alimony payments are in cash pursuant to a divorce and do not survive the death

of the recipient.

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

76) 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?

A) $2,062,000

B) $12,000

C) $50,000

D) $2,050,000

E) None of the payments are included in gross income

Answer: C

Explanation: Property settlements and child support are not included in gross income, but

alimony payments (cash) are includible.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.77) Hal Gore won a $1 million prize for special contributions to environmental research. This

prize is awarded for public achievement, and Hal directed the awarding organization to transfer

$400,000 of the award to the Environmental Protection Agency. How much of the prize should

Hal include in his gross income?

A) $400,000

B) $600,000

C) $1,000,000

D) None of the choices are correct because all prizes are excludable

E) None of the choices are correct because prizes from charities are excludable

Answer: B

Explanation: Awards for scientific or public achievement are excluded only if the payer of the

award transfers the award to a governmental unit (e.g., EPA) or a public charity.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

78) Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest

wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How

much of the prize should Ethan include in his gross income?

A) $25,000

B) $25,000 because all prizes are taxable

C) $0 because prizes transferred to charities are excludable

D) $0 because all prizes are excludable

E) $0 because prizes from charities are excludable

Answer: A

Explanation: To be excludable, the prize must be associated with scientific, literary, or

charitable achievement or received by a Team USA athlete from the U.S. Olympic Committee on

account of their competition in the Olympic or Paralympic games.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.79) This year Ed celebrated his 25th 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?

A) $2,250

B) $2,000

C) $250

D) $0 if Ed offers to contribute his watch and bonus to a qualified charity

E) $0—all employee awards are excluded from gross income

Answer: B

Explanation: Cash bonus payments are includible in gross income but awards of tangible

property to employees for length of service or safety achievement are excluded up to $400 of

value.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

80) Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots

and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700 on

his various wagers. What amount must Rhett include in his gross income?

A) $1,450

B) $1,200

C) $750

D) $250

E) $0—gambling winnings are not included in gross income

Answer: A

Explanation: Taxpayers must include the gross amount of their gambling winnings for the year

in gross income.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.81) 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) $0

Answer: C

Explanation: High-income individuals include 85 percent of their Social Security benefits in

gross income.

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

82) Bart, a single taxpayer, has recently retired. This year, he received $24,000 in pension

payments and $5,000 of Social Security payments. What amount must Bart include in his gross

income for the Social Security payments?

A) $4,250

B) $2,500

C) $1,500

D) $750

E) $0

Answer: D

Explanation: His modified AGI + 50 percent of Social Security benefits is $24,000 + $2,500 =

$26,500, which is greater than $25,000 but less than or equal to $34,000. His taxable Social

Security benefits are the lesser of (a) $2,500 (50 percent of his Social Security benefits) or (b) 50

percent of [$24,000 modified AGI + $2,500 (50% of Social Security benefits) − $25,000] =

$750. Thus, his taxable Social Security benefits are $750.

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.83) Karl works at Moe’s grocery. This year Karl was paid $43,000 in salary, but he was allowed

to purchase his groceries at 10 percent below Moe’s cost. This year Karl spent $3,600 to purchase

groceries, costing Moe $4,000. The groceries were worth $6,000. What amount must Karl

include in his gross income?

A) $46,600

B) $47,000

C) $49,000

D) $43,400

E) $45,500

Answer: D

Explanation: Employees must recognize imputed income to the extent they are allowed to

purchase goods from their employer at a price below the employer’s cost. [$43,000 + ($4,000 ×

0.10)] = $43,400.

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

84) 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.

Answer: C

Explanation: Employees recognize compensation income on below-market loans from

employers calculated using the federal interest rate.

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.85) Janine’s employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal

interest rate was 4 percent, which of the following is correct?

A) Janine recognizes $200 of taxable interest income.

B) Janine’s employer recognizes $200 of deductible interest expense.

C) Janine recognizes $200 of imputed compensation income.

D) Janine recognizes $200 of imputed dividend income.

E) None of the choices are correct.

Answer: E

Explanation: The imputed interest rules do not apply to loans of $10,000 or less.

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

86) 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 totaled $217,000. What

amount must Deb include in her gross income?

A) $15,000

B) $45,000

C) $30,000

D) $28,000

E) $0—Deb was not solvent when the loan was discharged

Answer: A

Explanation: A discharge of indebtedness is not taxable if the taxpayer is insolvent before and

after the debt forgiveness. If the discharge of indebtedness makes the taxpayer solvent, the

taxpayer recognizes taxable income to the extent of his or her solvency.

Difficulty: 3 Hard

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.87) Mike received the following interest payments this year. What amount must Mike include in

his gross income (for federal tax purposes)?

Bond Interest

General Motors $ 1,450

City of New York 900

State of New Jersey 1,200

U.S. Treasury 850

A) $1,450

B) $2,300

C) $2,650

D) $3,550

E) $4,400

Answer: B

Explanation: Interest on bonds issued by state and local governments is excluded from gross

income.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking; Analytical Thinking

AICPA: BB Critical Thinking

88) This year, Fred and Wilma, married filing jointly, sold their home (sales price $750,000; cost

$200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their

home for 20 years. How much of the gain is included in gross income?

A) $550,000

B) $300,000

C) $250,000

D) $50,000

E) None of the choices are correct.

Answer: D

Explanation: Fred and Wilma may exclude $500,000 of their $550,000 gain ($750,000

sales price − $200,000 cost = $550,000 gain) because they meet the ownership and use

tests. Thus, they only include $50,000 of the gain in their gross income.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.89) This year, Barney and Betty sold their home (sales price $750,000; cost $200,000). All

closing costs were paid by the buyer. Barney and Betty owned and lived in their home for 18

months. Assuming no unusual or hardship circumstances apply, how much of the gain is

included in gross income?

A) $550,000

B) $300,000

C) $250,000

D) $50,000

E) None of the choices are correct.

Answer: A

Explanation: All of the gain is included in gross income because Barney and Betty do not meet

the two-year ownership and use tests.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Reflective Thinking; Analytical Thinking

AICPA: BB Critical Thinking

90) Frank received the following benefits from his employer this year. What amount must Frank

include in his gross income?

Benefits Received Amount

Salary $ 54,450

Health insurance 2,900

Group-term life insurance (face $50,000) 1,800

A) $54,450

B) $57,350

C) $56,250

D) $59,150

E) $0—these benefits are excluded from gross income.

Answer: A

Explanation: An employee may exclude from income the cost of medical and dental health

insurance premiums and group-term life insurance (face $50,000) premiums an employer pays

on the employee’s behalf.

Difficulty: 1 Easy

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

written consent of McGraw-Hill Education.AICPA: BB Critical Thinking

91) Ben received the following benefits from his employer this year. What amount must Ben

include in his gross income?

Benefit Value

Health insurance coverage – paid by employer Group-term life insurance premiums (face $50,000) – paid by employer Disability insurance coverage (assume it is considered purchased by Ben) Whole-life insurance premiums ($100,000) – paid by employer $ 5,800

4,270

3,600

7,000

A) $9,400

B) $11,070

C) $10,600

D) $7,000

E) $0—none of these benefits are included in gross income.

Answer: C

Explanation: If an employer pays disability premiums, and the employee chooses the premium

as taxable compensation, it is considered employee purchased and the benefits paid (if any) are

excluded from the employee’s gross income. Employer-paid whole-life insurance premiums are

included in gross income. Only premiums on up to $50,000 of employer-paid group-term

insurance are excluded from gross income.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.92) Shaun is a student who has received an academic scholarship to State University. The

scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun’s

dormitory fees of $8,500 were paid by the university when he agreed to counsel freshman on

campus living. What amount must Shaun include in his gross income?

A) $9,500

B) $11,000

C) $2,500

D) $8,500

E) $0—none of these benefits are included in gross income.

Answer: D

Explanation: College students seeking a degree are allowed to exclude from gross income

scholarships that pay for tuition, fees, books, supplies, and other equipment required for the

student’s courses. Any excess scholarship amounts (such as for room or meals) are fully taxable.

The scholarship exclusion applies only if the recipient is not required to perform services in

exchange for receiving the scholarship.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

93) Graham has accepted an offer to do graduate work in the chemistry department at State

University. The chemistry department offered Graham a $5,000 tuition reduction and $3,500

toward the cost of room and meals. Under the terms of the scholarship Graham must work in the

chemistry labs during the summer as a research assistant. What amount must Graham include in

his gross income?

A) $8,500

B) $5,000

C) $3,500

D) $2,500

E) $0—none of these benefits are included in gross income

Answer: C

Explanation: The scholarship exclusion applies to the tuition reduction but not the cost of room

and board.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.94) Sam, age 45, saved diligently for his college education by putting part of his pay into U.S.

Series EE savings bonds. Sam purchased the bonds for $6,500, and this year he redeemed the

bonds for $7,200. He has no other income this year. What amount must Sam include in his gross

income?

A) $7,200

B) $6,500

C) A maximum of $350 if Sam uses the proceeds to pay for his college tuition and fees

D) $700 unless Sam uses at least some portion of the proceeds to pay for his college tuition and

fees

E) $0—proceeds from cashing bonds sold at a discount are not realized income

Answer: D

Explanation: Taxpayers using the bond redemption proceeds from Series EE bonds to pay for

qualified higher educational expenses of the taxpayer, the taxpayer’s spouse, or a dependent of

the taxpayer may be allowed to exclude the interest from gross income. Qualified higher

education expenses include the tuition and fees required for enrollment or attendance at an

eligible educational institution.

Difficulty: 1 Easy

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

95) Brenda has $15,000 in U.S. Series EE savings bonds and she is considering whether to cash

in the bonds. Under what conditions can Brenda exclude the interest on the savings bonds from

her gross income?

A) Brenda can exclude the interest if she uses the proceeds to pay for college tuition.

B) Brenda’s modified AGI must be below a phase-out range for the exclusion.

C) The proceeds must be used for higher education expenses of Brenda, her spouse, or Brenda’s

dependent.

D) All of these are necessary conditions for Brenda to exclude the interest.

E) None of these are correct – the interest is always included in gross income.

Answer: D

Explanation: Specifically, taxpayers using the bond redemption proceeds from Series EE bonds

to pay for qualified higher educational expenses of the taxpayer, the taxpayer’s spouse, or a

dependent of the taxpayer may be allowed to exclude the interest from gross income.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.96) 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?

A) $2,000

B) $15,000

C) $15,500

D) $2,500

E) None of the choices are correct.

Answer: E

Explanation: The gift of the stock is excluded but the dividend on the shares is taxable. Hence,

the answer is $500.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

97) 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) $1 million.

B) $750,000.

C) $500,000.

D) $0, but only if Irene does not opt to receive the life insurance proceeds in a lump sum.

E) $0—none of these benefits are included in gross income.

Answer: E

Explanation: Taxpayers exclude inheritances and life insurance proceeds from gross income.

Difficulty: 1 Easy

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.98) Helen is a U.S. citizen and a CPA who moved to London, England, three years ago to work

for a British company. This year, she spent the entire year in London and earned a salary of

$110,000. How much of her salary will she be allowed to exclude from gross income in the

United States?

A) $82,000.

B) $105,900.

C) $105,500.

D) $108,000.

E) All of her salary is included in gross income.

Answer: B

Explanation: Congress allows taxpayers to annually exclude a certain maximum amount,

indexed for inflation, of foreign-earned income from taxation. In 2019, the maximum exclusion

is $105,900.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.99) Hank is a U.S. citizen and is doing a three- to six-year assignment as a sales executive in

Paris for a French company. The assignment began this year. Hank earned $109,500 working for

the French company this year but only lived in France for 180 days (out of 365 days). He will

live full time in France next year. What amount of Hank’s $109,500 salary this year will he be

allowed to exclude from gross income in the United States (rounded to the nearest hundred

dollars)?

A) Hank can exclude his entire salary because he worked more than 330 days overseas.

B) $102,000

C) $52,200

D) $105,900

E) None of his salary can be excluded from gross income because Hank must reside overseas for

the entire year.

Answer: C

Explanation: $105,900 × [180/365] = $52,224.66 rounded to $52,200. Since Hank will have a

tax home in a foreign country and spend more than 330 days in the foreign country over 12

months, he is eligible to exclude foreign-earned income. The exclusion is computed on a daily

basis. The maximum exclusion is reduced pro rata for each day during the calendar year the

taxpayer is not considered to be a resident of the foreign country or does not actually live in the

foreign country.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.100) NeNe is an accountant and a 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?

A) NeNe can exclude all of the housing payment because she worked more than 330 days

overseas.

B) $16,944

C) $23,056

D) $14,826

E) None of her salary can be excluded from gross income.

Answer: D

Explanation: Since NeNe spent the entire year overseas, she may exclude the lesser of

(a) $40,000 housing costs − $16,944 ($105,900 × 0.16) = $23,056 or (b) $14,826

($105,900 × 0.14). Thus, she may exclude $14,826 of the housing costs paid by her

employer.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

101) Pam recently was sickened by eating spoiled peanut butter. She successfully sued the

manufacturer for her medical bills ($3,700), her emotional distress ($6,000—she now fears

peanut butter), and punitive damages ($44,000). What amount must Pam include in her gross

income?

A) $44,000

B) $50,000

C) $47,700

D) $9,700

E) $0—none of these benefits are included in gross income

Answer: A

Explanation: The tax laws specify that any payments (other than punitive damages) on account

of a physical injury or physical sickness are nontaxable. Damages taxpayers receive for

emotional distress associated with a physical injury are also excludable. Punitive damages are

fully taxable, however, because they are intended to punish the harm-doer rather than to

compensate the taxpayer for injuries.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.102) This year Zach was injured in an auto accident. As a result, he received the following

payments.

Zach received $18,000 of disability pay. Zach has disability insurance provided by his employer

as a nontaxable fringe benefit. Zach’s employer paid $4,300 in disability premiums for Zach this

year.

Zach’s hospital bills totaled $4,500 and were paid by his health insurance. Zach has health

insurance provided by his employer as a nontaxable fringe benefit. Zach’s employer paid $6,250

in health insurance premiums for Zach this year.

What amount must Zach include in his gross income?

A) $22,500

B) $18,000

C) $4,500

D) $10,550

E) $0—none of these benefits are included in gross income

Answer: B

Explanation: Any payment a taxpayer receives from a health and accident insurance policy for

medical or dental expenses paid by the taxpayer is excluded from the taxpayer’s income. If the

employer pays the disability premiums for an employee as a nontaxable fringe benefit, the

employee must include all disability benefits in gross income.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.103) 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)?

A) $18,000

B) $12,000

C) $7,000

D) $1,100

E) $0—none of these disability pay is included in gross income

Answer: B

Explanation: The portion of disability benefits that represents premium paid as a nontaxable

fringe benefit is included in gross income. The employer paid two-thirds of the cost and so two-

thirds of the pay is includible [$2,200/ ($2,200 + $1,100)] × $18,000 = $12,000. The remaining

portion (one-third) of the disability benefits is excluded from gross income because the

premiums were paid by the taxpayer.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

104) 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?

A) $5,500

B) $20,000

C) $50,000

D) $70,000

E) All of these benefits are included in gross income.

Answer: E

Explanation: The tax laws specify that only payments on account of a physical injury or physical

sickness are nontaxable. Damages taxpayers receive for emotional distress that are not associated

with a physical injury are taxable, as are punitive damages and damages to reputation.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.105) This year Ann has the following stock transactions. What amount is included in her gross

income if Ann paid a $200 selling commission for each sale?

Total

Purchase

Shares Firm

price Sales price Value at year-end

100 IBM $ 5,000 $7,000

200 ATT 7,500 $ 9,500

500 Dell 12,500 13,000

Answer: $2,100. ATT: ($9,500 − $200) − $7,500 = $1,800. Dell ($13,000 − $200) − $12,500 =

$300.

The increase in value in the IBM stock is not yet realized.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

106) Blake is a limited partner in Kling-On Partners. This year Kling-On reported that Blake’s

share of dividend income was $3,700 and his share of municipal interest was $2,750. Early this

year Blake found a bundle of $100 bills in the alley outside his apartment. When no one claimed

the money, the cash (a total of $2,400) was returned to Blake. Finally, Blake earned salary of

$42,000 but almost $6,500 was withheld for income taxes and FICA tax. Compute Blake’s

realized income and gross income.

Answer: $3,700 + $2,750 + $2,400 + $42,000 = $50,850 realized – $2,750 = $48,100 gross

income

Realized income is $50,850 but gross income excludes municipal interest.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Reflective Thinking; Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.107) Henry works part time on auto repairs and restoration projects. This year Henry was paid

$5,400 for repairs he made to his neighbor’s auto. Henry’s neighbor promised to pay Henry

another $2,200 in cash next year. Henry’s brother borrowed $4,100 in cash in December of this

year and gave him a negotiable promissory note for $4,300, due in three months with interest.

Henry sold the note in January of next year for $3,500. Finally, Henry restored a car for the

football coach. The coach paid him this year with a pass to next year’s football games. The pass

is worth $750. Compute Henry’s gross income for this tax year, assuming that he uses the cash

basis of accounting.

Answer: $5,400 + $750 = $6,150

Gross income includes all income unless specifically excluded or deferred, and cash-basis

taxpayers realize income when valuable property is received.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

108) 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.

Answer: $1,275 + $3,570 + $4,050 + $850 = $9,745

Gross income includes all income unless specifically excluded or deferred, and cash-basis

taxpayers realize income when valuable property is received.

Difficulty: 1 Easy

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.109) This year Kelsi received a $1,900 refund of state income taxes that she paid last year. Last

year Kelsi claimed itemized deductions of $13,100, including $2,800 of state income taxes. How

much of the refund, if any, must Kelsi include in gross income if the standard deduction last year

was $12,000?

Answer: $1,100

The tax benefit is the lesser of the refund ($1,900) or the excess of the itemized

deductions above the standard deduction ($13,100 − $12,000 = $1,100). Hence, Kelsi

must include $1,100 of the $1,900 refund in gross income.

Difficulty: 3 Hard

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

110) In April of this year Victoria received a $1,400 refund of state income taxes that she paid

last year. Last year Victoria claimed itemized deductions of $14,590. Victoria’s itemized

deductions included state income taxes paid of $3,750. How much of the refund, if any, must

Victoria include in gross income if the standard deduction last year was $12,000?

Answer: $1,400

The tax benefit is the lesser of the refund ($1,400) or the excess of the itemized

deductions above the standard deduction ($14,590 − $12,000 = $2,590). Hence, Victoria

must include the entire $1,400 refund in gross income.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.111) Aubrey and Justin file married filing separately. This year, Aubrey earned salary of

$130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a community property

state. How much income earned will Justin report on his tax return for this year?

Answer: $109,000 = [1/2 × ($130,000 + $88,000)]

Under community property systems, the income earned from services by one spouse is treated as

though it were earned equally by both spouses.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

112) Aubrey and Justin file married filing separately. This year, Aubrey earned salary of

$130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a common law state.

How much income earned will Justin report on his tax return for this year?

Answer: $88,000

Under common law systems, the income earned from the services of one spouse is included in

the gross income of the spouse who earned it.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

113) Cyrus is a cash method taxpayer who reports on a calendar-year basis. Last year Cyrus

received salary of $88,000 and at year-end his employer announced that Cyrus would receive an

additional year-end bonus of $10,000 in cash and a new TV worth $2,000. Cyrus didn’t receive

his bonus check until January of this year and the TV didn’t arrive until March of this year.

Determine the amount Cyrus should include in his gross income for last year.

Answer: $88,000

Under constructive receipt, the bonus and the TV are not included in gross income until the year

received.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.114) Kathryn is employed by Acme and they have been very pleased with her performance this

year. In December Kathryn was granted an extra week off with pay (pay for the week totaled

$2,000). In addition, Kathryn was given tickets to a football bowl game worth $800. (Kathryn

didn’t use the tickets—she hates football.) Right before year-end Kathryn was allowed to order

new office furniture and Acme told her to take the old office furniture home. The office furniture

was originally purchased for $7,000, but it was fully depreciated and only worth about $1,000.

Determine the amount Kathryn should include in her gross income.

Answer: $2,000 + $800 + $1,000 = $3,800

Gross income includes the value of property received.

Difficulty: 2 Medium

Topic: Realization and Recognition of Income

Learning Objective: 05-01 Apply the concept of realization.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

115) Charles purchased an annuity from an insurance company that promised to pay him

$20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How much of the

first $20,000 payment should Charles include in gross income?

Answer: $5,000

A part of each payment represents a return of the original $180,000 investment and the

remainder ($60,000) is income. The original investment ($180,000) divided by the number of

years indicates that $15,000 of each payment is a return of capital, so the remaining $5,000 is

income.

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.116) This year Larry received the first payment from an annuity that promises to pay him $3,000

per month for the rest of his life. The IRS tables indicate that given Larry’s age, he should expect

to receive 310 monthly payments. The cost of the annuity to Larry was $620,000. How much of

the first $3,000 payment should Larry include in gross income?

Answer: $3,000 − [$620,000/310] = $1,000

A part of each payment represents a return of the original $620,000 investment. The return of

capital is prorated over the expected payment period so that each $3,000 monthly payment is

composed of $2,000 of return of capital ($620,000/310 payments) and $1,000 of income.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Reflective Thinking; Analytical Thinking

AICPA: BB Critical Thinking

117) 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?

Answer: $100,000

The constant payments qualify as “alimony” and should be included in Lucy’s gross income. The

drop in payments is treated as child support because these payments cease upon the happening of

a specific contingency related to the child.

Difficulty: 1 Easy

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Reflective Thinking; Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.118) J.Z. (single taxpayer) is retired and received $10,000 of Social Security benefits this year.

How much of the $10,000 Social Security benefits are taxable if his only other income was

$28,000 of pension income?

Answer: $4,000

J.Z.’s modified AGI + 50 percent of his Social Security benefits equals $28,000 +

$5,000 (50% × $10,000) = $33,000. Thus, his taxable Social Security benefits are the

lesser of (a) $5,000 (50 percent of his Social Security benefits) or (b) 50 percent of

[$28,000 modified AGI + $5,000 (50 percent of Social Security benefits) − $25,000] =

$4,000. Thus, his taxable Social Security benefits are $4,000.

Difficulty: 2 Medium

Topic: Types of Income

Learning Objective: 05-02 Discuss the distinctions between the various sources of income,

including income from services and property.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

119) Wendell is an executive with CFO Tires. At the beginning of this year the corporation

loaned Wendell $50,000 at an interest rate of 1 percent. Wendell would have paid interest of

$2,500 this year if the interest rate on the loan had been set at the prevailing federal interest rate.

Wendell used the funds as a down payment on a vacation home, and during the year he paid

$500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest. What

amount of gross income does Wendell recognize from the loan this year?

Answer: $52,000

Wendell must include $2,000 in gross income from the discounted interest rate he received on

the loan ($2,500 interest at federal rate minus $500 he actually was required to pay). Also,

Wendell must include the $50,000 in gross income because the discharge of the debt is additional

compensation.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.120) Bobby and Sissy got married two and a half 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?

Answer: $0.

Because Bobby meets the ownership test, Bobby and Sissy meet the use test, and Sissy did not

claim her exclusion within the previous two years, they may exclude the entire gain up to

$500,000.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

121) Robert will be working overseas on a permanent assignment for an international company

beginning on March 1 of this year (306 days this year). His salary is $11,000 per month while

Robert is overseas, but only $9,200 per month otherwise. What is the minimum amount of

Robert’s salary that he must include in gross income this year? (Round your final answer to the

nearest whole dollar amount and assume that there are 365 days in this year.)

Answer: $39,618

The maximum foreign-earned income exclusion for the year is $105,900. Robert will earn

$18,400 during January and February and $110,000 during the remainder of the year. Since he

will be spending a total of more than 330 days abroad over a 12-month consecutive period, he is

eligible to exclude foreign earned income. However, he will be able to claim only a partial

exclusion based upon his time abroad this year [$105,900 full exclusion × 306/365 (days in

foreign country/days in year)] and thus he will report gross income of $39,618 ($128,400 –

88,782).

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.122) Simon was awarded a scholarship to attend State Law School from Gary Harris &

Associates, Attorneys at Law. The scholarship pays Simon’s tuition ($7,000 per semester) and

fees ($500 per semester) and provides a $4,500 per-semester stipend to pay for food and housing.

In order to qualify for the stipend, Simon must work 10 hours per week at Gary Harris &

Associates during the term. How much of the scholarship is Simon required to include in gross

income?

Answer: $12,000 per semester

The entire scholarship is included in gross income because the terms of the scholarship require

Simon to perform services.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

123) 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?

Answer: $5,040

Angelina has realized interest of $7,200 but she is only eligible to exclude 30 percent of the

interest income since she is only using 30 percent of the proceeds for a qualified purpose

($7,200/$24,000). Angelina is not required to phase out the amount of the exclusion because her

modified gross income is below the threshold for the phase-out of the exclusion.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.124) Teresa was married on November 1 of this year and on that day received numerous gifts

from her extended family. Her grandfather presented Teresa with a check for $15,000; her uncle

gave Teresa 1,000 shares of Ford stock worth $10 per share (the uncle purchased the shares for

$25 each); and her aunt presented Teresa with $50,000 of corporate bonds. (Teresa received

$1,500 of semiannual interest from the bonds on December 31 of this year.) Finally, Teresa’s

parents paid off $50,000 of her student loan debt, including $2,000 of accrued interest. What

amount, if any, must Teresa include in gross income this year?

Answer: $500 (two months of six months’ interest received)

All of the gifts are excludable except for the interest that accrued on the corporate bonds after the

date of the transfer.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

125) Andres has received the following benefits this year.

Salary $92,000

Contribution to qualified pension plan 10,200

Qualified health insurance premiums 8,400

Year-end bonus 15,000

Group-term life insurance premiums (face = $40,000) 1,750

Whole-life insurance premiums (face = $100,000) 2,420

Disability insurance premiums 1,800

Besides these benefits Andres missed work for two months due to an illness. During his illness

Andres received $6,500 in sick pay from a disability insurance policy. Assume Andres has

disability insurance provided by his employer as a nontaxable fringe benefit. What amount, if

any, must Andres include in gross income this year?

Answer: $115,920 = $92,000 + $15,000 + $2,420 + $6,500

The disability pay of $6,500 is included in gross income because the insurance premiums were

paid as a nontaxable fringe benefit.

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.126) This year Joseph joined the board of directors for a company. Besides his director’s fees,

Joseph received the following employee benefits:

Salary $204,000

Contributions to qualified pension plan 25,000

Qualified health insurance premiums 8,000

Stock bonus 20,000

Annual director’s fee 15,000

Group-term life insurance premiums (face = $40,000) 1,800

The stock bonus consisted of 5,000 shares of Bell stock given to Joseph as compensation. At the

time of the transfer the stock was listed at $4 per share. What amounts, if any, should Joseph

include in gross income this year?

Answer: $239,000 = $204,000 + $20,000 + $15,000

Joseph would report the value of the stock ($20,000) as compensation.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.127) Caroline is retired and receives income from a number of sources. The interest payments

are from bonds that Caroline purchased over past years and a disability insurance policy that

Caroline purchased. Calculate Caroline’s gross income.

Distributions from qualified pension plan Interest on bonds issued by city of Austin, Texas Social Security benefits 8,200

Interest on U.S. Treasury bills Interest on bonds issued by Ford Motor Company Interest on bonds issued by city of Quebec, Canada $5,400

2,500

2,300

1,900

2,750

Disability insurance benefits 9,500

Answer: $12,350 = $5,400 + $2,300 + $1,900 + $2,750

Caroline is not taxed on the disability payments because she purchased the insurance. In

addition, Caroline’s gross income is clearly below the Social Security phase-in threshold, so the

Social Security benefits are also excluded.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

128) 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.

Answer: $230,200 = $212,200 + $9,500 + $8,500

The annuity return of capital is ($157,500/15) = $10,500; thus, the taxable portion is $9,500.

Given Alex’s income, his Social Security benefits are 85 percent taxable (i.e., $10,000 × 85

percent).

Difficulty: 2 Medium

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.129) Vincent is a writer and a U.S. citizen. After being out of work for the first half of the year,

Vincent moved permanently to Ireland on July 4. He worked for an Irish magazine and earned

$110,000 in salary from July 4th to December 31st. Earlier in April of this year Vincent received

a $1,500 refund of the $3,600 in state income taxes his previous employer withheld from his pay

last year. Vincent claimed $12,800 in itemized deductions last year (the standard deduction for a

single filer was 12,000). Vincent wants to elect to use the foreign-earned income exclusion to the

extent he is eligible. Calculate Vincent’s gross income for this year. (Round your final answer

to the nearest whole dollar amount and assume there are 365 days in the year.)

Answer: $58,285 = $110,000 − $52,515 + $800

$105,900 × 181/365 = $52,515 maximum exclusion. The tax benefit is the lesser of the

refund ($1,500) or the excess of the itemized deductions above the standard deduction

($12,800 − $12,000 = $800). Hence, Vincent must include $800 of the $1,500 refund in

gross income.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

130) Lisa and Collin are married. Lisa works as an engineer and earns a salary of $116,000.

Collin works at a beauty salon and reported wages of $45,000. Lisa received $500 of interest

from corporate bonds and $250 of interest from a municipal bond. Lisa acquired these bonds

prior to her marriage to Collin. Collin’s father passed away on April 14. He inherited cash of

$50,000 and his baseball card collection, valued at $2,000. As beneficiary of his father’s life

insurance policy, Collin also received $150,000. The couple spent a weekend in Atlantic City in

November and came home with gambling winnings of $1,200. Collin was injured in an accident

at the salon. He was unable to work for a month, but during this time he received $5,000 from

disability insurance he purchased several years ago. Collin also received $2,000 in workers’

compensation, and $1,500 from the salon for the emotional trauma he suffered from the accident.

Calculate Lisa and Collin’s gross income for this year, assuming they will file married filing

jointly.

Answer: $162,700 = $116,000 + $45,000 + $500 + $1,200

The municipal interest, inheritance and life insurance, disability pay, workers’ compensation, and

damages are all excluded from gross income.

Difficulty: 3 Hard

Topic: Exclusion Provisions

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.

Taxation of Individuals Brian Spilker 11e – Test Bank

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