QUESTIONS and PROBLEMS GROUP MULTIPLE CHOICE QUESTIONS LO 2 1 LO 2 1 LO 2 1 LO 2 1 1 The definition of gross income in the tax law is a All items specifically listed as income in the tax law b All cash payments received for goods provided and services performed c All income from whatever source derived d All income from whatever source derived unless the income is earned illegally 2 Which of the following is not taxable for income tax purposes a Prizes b Severance pay c Gifts d Partnership income e All of the above are taxable 3 All of the following items are taxable to the taxpayer receiving them, except a Life insurance proceeds b Unemployment compensation cEmbezzled funds d Prizes e Gambling winnings 4 Which of the following types of income is tax exempt a Unemployment compensation b Income earned illegally c Dividends from foreign corporations d Municipal bond interest e Dividends from utility corporations' stock 5 Which of the following is included in gross income a Loans b Scholarships for room and board c Economic impact payments in 2020 d Health insurance proceeds e None of the above 6 The classification of a worker as an employee or an independent contractor is a Made by the employer b Made by the employee c Based on a negotiation between the employer and employee d Based on a set of common law factors related to control and independence 7 Which of the following is likely to indicate classification of a worker as an employee a The worker must provide their own tools and equipment b The worker can provide services at a location they choose c The worker receives benefits like health care d The worker makes their services available to the general public 8 Which of the following items would be included in the gross income of the recipient LO 2 1 LO 2 2 LO 2 2 LO 2 3 LO 2 4 LO 2 11 LO 2 12 a Insurance payments for medical care of a dependent child b Insurance payments for loss of the taxpayer's sight c Season tickets worth $2,000 given to a son by his father d Payments to a student for working at the student union food court e Lodging provided to a worker on a remote oil rig 2 49 Chapter 2 Grecome and Exclusions IN 9 Malin is a married taxpayer and has three dependent children Malin's employer odfers health insurance for employees and Malin takes advantage of the benefit for her entire family ther spouse's emplover also offers health insurance but they opt miums through payroll dedictions while the employer paid the remaining $9,200 Malin's family visited health care professionals numerous times during the year and out) During the year Malin puid SL 200 toward her family's health insurance pre made total co payments toward medical services of $280 Malin's daughter had knee surgery due to a soccer injury and the insurance company paid the hospital $6,700 related to the surgery How much gross income should Malin recognize related to her directly and reimbursed Malin S100 for her out of pocket health care expenses b Hannah purchases a new sofa from her employer, Sofas R Us, for $1,200 The cost a A crystal paperweight worth $125 given to an employee for achieving 10 years of LO 2 3 LO 2 4 11 Which of the following is a fringe benefit excluded from income LO 2 5 a A mechanic at Denise's employer a car rental company provides $1 000 of repair services to Denise's personal car for free b Alfa Bet, a high tech corporation, pays for each employee's membership at the 24 Hour Biceps Gym closest to each Alfa Bet office c Quickchat Inc gives each employee a $10 giftcard to the local coffee shop on National Coffee Day d Hedaya, a doxtoral student at Ivy University, receives a full tuition waiver while serving as research assistant 12 Which of the following will result in the recognition of gross income LO 2 5 a Gaills employer allows her to set aside $4 000 from her wages to cover the cost of daycare for Gail's four year old daughter Gail's daycare costs are $4,300 for the year Jayden's employer purchases her commuting pass for the subway at a cost of $325 per month d Havana is a lawyer The law firm she works for pays for her subscription to Lawyer's Weekly, a trade magazine for attorneys e None of the above will result in recognition of gross income 13 Which of the following prizes or awards is not taxable LO 2 6 service to the company b Prizes from a television game show c Awards for superior performance on the job health insurance $ b $9 200 c $14 020 (99,200 56700 $1,200 $200 $400) d $8 000 ($9200 $1 200) e None of the above 70 George works at the Springfield Nuclear Plant as a nuclear technician The plant is located 15 miles from the town of Springfield George likes to eat his lunch at the his shift No other eating establishments are located near the plant George estimates plant's cafeteria because he is required to be available for nuclear emergences during the value of the meals he was provided during the current year as $1,300 He esti mates the cost for him to have prepared those lunches for himself as about $560 The cost of the meals to the power company was $470 How much income does George need to recognize from the meals a $1,300 b $560 c $470 d $830 ($1,300 $470) e None of the above Questions and Problems 249 LO 2 6 LO 2 7 LO 2 7 d A $100 gift card received as a prize in a raffle run by the local school parent teacher organization e All of the above are taxable 14 Huihana receives 4 tickets to the local professional football game for achieving 20 years of employment with her employer The tickets cost the employer $390 and have a market value of the same on the date awarded Huihana is in the highest tax bracket for single taxpavers How much gress income will Huihana recognize on the receipt of the tickets a $390 b $200 c $25 d So e $50 or $59 50 including the net investment income tax 15 A 67 year old taxpayer retires this year and receives the first payment on an annu ity that was purchased several years ago The taxpayer's investment in the annuity is $94,500, and the annuity pays $1,000 per month for the remainder of the taxpayer's life Based on IRS mortality tables, the taxpayer is expected to live another 20 years If the taxpayer receives $4,000 in annuity payments in the current year, the nontaxable portion calculated using the simplified method is a So b $1,500 c $1,800 d $4,000 e None of the above 16 Amara has an annuity and over time has recovered her entire investment but it continues to pay her $450 per month Amara should recognize how much of each monthly payment as gross income a $0 b Some amount greater than $450 c Some amount between SO and $450 d $450 17 Which of the following might result in life insurance proceeds that are taxable to the recipient a A life insurance policy in which the insured is the son of the taxpayer and the beneficiary is the taxpayer b A life insurance policy transferred by a partner to the partnership c A life insurance policy transferred to a creditor in payment of a debt d A life insurance policy purchased by a taxpayer insuring his or her spouse e A life insurance policy purchased by a corporation insuring an officer 18 Lupita dies in 2020 but has a $1 million life insurance policy that lists her spouse, M'Baku as the beneficiary M'Baku elects to receive all $1 million in a lump sum and spends $200,000 immediately on a new yacht M'Baku's gross income from the life insurance is a $0 b $200,000 c $800,000 d $1,000,000 19 Nomi is in the highest individual tax bracket and receives $375 in qualitied dividends from Omega Corp Nomi's tax liability (not including any net investment income tax) LO 2 8 LO 2 8 LO 2 9 with respect to these dividends is a So b $277 20 c $100 00 d $75 00 e $50 00 3 50 Chapter 2 Gross income and Exclusions LO 2 9 Rebecca recognize this year SO b $46 c523 d So it in first 5 years or Sio thereafter a State of California bond b City of New Orleans bond Bond of the Commonwealth of Puerto Rico d US Treasury Bond e All of the above are excluded from income 22 Which of the following gifts would probably be taxable to the person receiving the a One thousand dollars given to a taxpayer by his or her father b An acre of land given to a taxpayer by a friend A car even to a loyal employee by her supervisor when she retired to recognize her faithful service d A Mercedes Benz given to a taxpayer by his cousin e An interest in a partnership given to a taxpayer by his or her uncle 23 Kelly receives a $40,000 scholarship to Ivy University She uses $35,000 on tuition and books and $5,000 for rent while at school Kelly will recognize a SO 20 Rebecca, a single pagerins a Series IUS Savings Bond that increased in value by Sin during the year She makes no special election How much income must 21 Interest from which of the following types of bonds is included in federal taxable income 21 Gina receives a $2,900 distribution from her educational savings account She uses $150 to pay for qualified higher education expenses and $1400 on a vacation Immediately prior to the distribution, Gina's account balance is $5,000, $3,000 of which is herco tions What is Gina's table income (alter any exclusion) from the distribution LO 2 10 LO 2 11 LO 2 12 gross income b $5,000 $10,000 d $30 000 e $10,000 24 Hillary gets divorced in 2019 and is required to pay her ex spouse $200 per month LO 2 13 until her son reaches 18 years of age in 7 years and $120 per month thereafter How much of her 2020 payments are deductible as alimony a $0 b $2 400 c $1 440 d $960 LO 2 13 25 Donald and Michelle are divorced in the current year As part of the divorce settlement Michelle transfers a plot of land in Long Island, NY to Donald Michelle's basis in the prop erty was $20 000 and the market value of the property was $250,000 when transferred Donald holds the property through the end of the year and in hopes of building a resident on it How much income do Michelle and Donald recognize in the current year a $0 for Michelle and $20,000 for Donald b $230,000 for Michelle and $20,000 for Donald c $230,000 for Michelle and $0 for Donald d $0 for both Michelle and Donald e $0 for Michelle and $250,000 for Donald LO 2 14 a $1,400 b $560 L Ld c$840 d $0 e Some other amount Questions and Problems 2 51 LO 2 14 LO 2 14 LO 2 14 LO 2 14 27 Which of the following is correct for Qualified Tuition Programs (Section 529 plans) a Contributions are deductible, and qualified educational expense distributions are tax free b Contributions are not deductible, and qualified educational expense distributions are tax free Contributions are deductible, and qualified educational expense distributions are taxable d Contributions are not deductible, and qualified educational expense distributions are taxable 28 In 2020, Amy receives $8,000 (of which $3,000 is earnings) from a qualified tuition program She uses the funds to pay for tuition and other qualified higher education expenses What amount is taxable to Amy a $0 b $8,000 c$3 000 d $11,000 29 For married taxpayers filing a joint retum in 2020, at what AGI level does the phase out limit for contributions to Section 529 plans start a $110,000 b $190,000 c $220,000 d There is no phase out limit on Section 529 plan contributions 30 Which of the following is true with respect to education incentives a The contributions to qualified tuition programs (Section 529 plans) are deductible b The contributions to educational savings accounts (Coverdell ESA) are deductible c Tuition paid by a taxpayer eaming $300,000 of income is deductible d Married taxpayers have no income limit to contribute to a qualified tuition program (Section 529 plan) 31 During 2020, Carla single taxpayer) has a salary of $91,500 and interest income of S11 000 Calculate the maximum contribution Carl is allowed for an educational savings account a $0 b $400 c $1,000 d $2,000 e Some other amount 32 Wendy is a single taxpayer and pays tuition of $7,800 in 2020 Her 2020 AGU is $66,000 What is the amount of Wendy's tuition deduction a So b $7,800 c $4 000 d $2,000 e $3,733 33 33 Alicia loses her job part way through 2020 Her employer pays her wages of $15,450 up through her date of termination After that, she received $1,600 of unemployment compensation from the state until she gets a new job for which she is paid wages of $1,400 through year end Based on this information, Alicia's gross income for 2020 is a $15 450 h $16,850 c $17,050 d $18 450 e $21 850 LO 2 14 LO 2 14 LO 2 15 34 For 212 the mam perantage of Social Security benefits that could be included 35 Generally when calculating the cable portion of Social Security benefits, modified ad justed gross income (MAGI) is adjusted gross income (without Social Security benefits) $170,000, Kate and the bank revise her terms and lower the loan balance to $15 The market value of the home remains above $200,000 How much cancellation of Chapter 2 Grow become and Exclusion LO 2 16 in a taxpayer's gross income is a Os 25 c30 d 75 85 LO 2 16 LO 2 17 a Plus tax exempt interest Les personal and dependency exemptions cLessitemired deductions d Less tax exempt interest plus any foreign income exclusion e Less tax exempt interest income 36 Dana and Larry are married and live in Texas Dana earns a salary of $45,000 and Larry has $25 000 of rental income from his separate property If Dana and Larry Sle separate tax returns what amount of income must Larry report a $0 b $22 500 c $25 000 d $47 500 e None of the above L LO 2 17 37 Which of the following conditions need not be satisfied in order for a married tax paver residing in a community property state, to be taxed only on his or her separate salary 2 The husband and wife must live apart for the entire year A minor child must be living with the spouse, c The husband and wife must not file a joint income tax return d The husband and wife must not transfer carned income between themselves e All of the above must be satisfied LC LO 2 18 38 Jack borrows $13,000 from Sawyer Savings and Loan and uses the proceeds to acquire a used car When the loan balance is $12,000, Jack loses his job and is unable to make payments for three months When Jack gets a new job, the bank agrees to forgive the missed principal payments and reduces his loan to $11,500 Jack remains solvente when unemployed How much cancellation of debt income does Jack have SO b $500 c $1 500 d $2,000 LO LO 2 18 39 Kate acquires a principal residence in 2016 for $200,000 secured by a $180 000 med employer stops paying her after 10 days In 2020 when the mortgage balance LO debt income will Kate recognize b $20,000 c $10,000 d $150,000 e $170,000 2 53 GROUP 2 PROBLEMS LO 2 1 (Efrom gross income for the 2020 tax year Questions and Problems a Welfare payments b Commissions c Hobby income d Scholarships for room and board e $300 set of golf clubs, an employee award for length of service f Severance pay g Ordinary dividend of $50 h Accident insurance proceeds received for personal bodily injury 1 Inheritances 1 Gifts k Tips and gratuities 2 Jane is a roofing contractor Jane's friend needed a new root but did not have the cash to pay, Jane's friend instead paid with a used truck that Jane could use in her roofing business The truck had originally cost the friend $17 500 but it was gently used and only worth $6,000 Jane did not actually need the truck and ended up selling it to a used car dealer for $5,200 a few months later, Explain what amount of gross income Jane must recognize as a result of the truck payment and why LO 2 1 LO 2 1 3 Larry is a tax accountant and Sheila is a hairdresser Larry prepares Sheila's tax return for free and Sheila agrees to style Larry's hair six times for free in return for the tax return The value of the tax return is approximately $300 and the hair styling work is approximately $300 a How much of the $300 is includable income to Larry Why b How much of the $300 is includable income to Shetla Why LO 2 1 4 Kerry and Jim have a successful marijuana farm in the woods around Humboldt County, California Growing marijuana is illegal for federal purposes Are Kerry and Jim required by law to report the income from their farm on their tax return Why LO 2 2 5 Kristen, a single taxpayet, receives two 2020 For W 2 from the two employees she worked for during the year One Form W 2 lists her wages in les 12 and 5 as $18 700 Her other employer's Form W 2 has $13,000 in Box I but only $1 500 in both Box 3 and Box 3 Kristen participated in the second employer's 4010) plan She also received health care from her second employer Lastly her second employer peo vided $30 000 of group term life insurance to Kristen What amount should Kristen report as taxable wages in 2020 b What could explain the diference between Box Images and Bes 3 and 5 oed be second employer's W 27 6 Last four behavioral factors that could be used to classify a worker as either an em 7 Skyler is covered by his company's health insurance plan The health insurance costs his company $9 500 a year During the year, Skyder is diagnosed with a serious Ellen is a single tagaver Ellen's employer pays $150 per month ($1,800 this year) for her health insurance During the year, Ellen had medical expenses of $3,500 and the 11 Ellen's tax client, Tom, is employed at a large company that offers health care exible whether he wants to put as much as $2,750 of his salary into the health care fieth spending accounts to its employees Tom must decide at the beginning of the year expenses for his family during the year since his wife is seeing a psychiatrist sem spending account He expects that he will have to pay for at least $8,000 of medical and his daughter and son are both having their teeth straightened, Tom does not illness and health insurance pays $100 000 for surgery and treatment How much of full time, Richard also had $30 worth of personal typing done by his administrative 21 Chapter 2 Gronion and Exclusions LO 2 2 ployee or an independent contractor and provide a brief example, LO 2 3 the insurance and treatment payments are taxable to Skyler LO 2 3 insurance company paid $2 000 of the expenses How much of the above amounts any must be included in Ellen's gross income Why LO 2 4 9 Milton is a nurse whose employer provided meals for him on the employer's premises, since he is given only 30 minutes for lunch Is the value of these meals taxable income to Milton Explain 11 b Mary is a San Diego ambulance driver The city provides Mary with meals while she is working so she will be available for emergencies Is the value of these meals taxable income to Mary Explain c Indigo is the head of security at a casino The casino operator frequently provides meals from the casino butfett to Indigo as a gesture of goodwill for the great job she is doing Is the value of these meals taxable income to Indigo Explain LO 2 5 10 Linda and Richard are married and file a joint return for 2020 During the year, Linda who works as an accountant for a national airline, used $2,100 worth of free passes for travel on the airlines Richard used the same amount Linda and Richard also used $850 worth of employee discount coupons for hotel rooms at the hotel chain that is also owned by the airline Richard is employed at State University as an account ing clerk Under a tuition reduction plan, Richard saved $4,000 in tuition fees during 2020 He is studying for a master's degree in business at night while still working assistant at the University What is the amount of fringe benefits that should be cluded in Linda and Richard's gross income on their 2020 tax return LO 2 5 Questions and Problems 2 55 itemize deductions Should Ellen recommend that Tom put the maximum amount in his health care flexible spending account, and if so, why 10 2 6 12 How much of each of the following is taxable Cheline, an actress, received a $6,400 gift bag for attending the Academy Awards Ceremony during 2020, b Jon received a gold watch worth $660 for 25 years of service to his accounting firm (not a qualified award) c Kerry won $1,000,000 in her state lottery, d Deborah is a professor who received $30,000 as an award for her scientific research from the university that employs her 13 For each of the following independent cases, indicate the amount of gross income that must be included on the taxpayer's 2020 income tax return a Malchia won a $4,000 humanitarian award LO 2 6 LO 2 12 b Rob won a new automobile (with a sticker price of $15 700 and a market value of $14,500) for being the best junior tennis player in 2020 c George received a $3,500 tuition and fees scholarship to attend Western University LO 2 7 14 Lola, age 67, began receiving a $1 000 monthly annuity in the current year upon the death of her husband She received seven payments in the current year Her husband contributed S48,300 to the qualified employee plan Use the Simplified Method Worksheet below to calculate Lola's taxable amount from the annuity SIMPLIFIED METHOD WORKSHEET 1 Enter total amount received this year 1 2 Enter cost in the plan of the annuity starting date, 2 3 Age at annuity starting date Enter 55 ond under 360 56 60 310 61 65 260 66 70 210 71 and older 160 4 Divide line 2 by line 3 5 Multiply line 4 by the number of monthly payments this year If the annuity starting date was before 1987, also enter this amount on line 8, and skip 5 lines 6 and 7 Otherwise, go to line 6 6 Enter the amount, any recovered tax free in prior years 7 Subtract line 6 from line 2 8 7 8 Enter the smaller of line 5 or 7 9 Taxable amount this year Subtract line 8 from line 1 Do not enter less than zero 15 Shuron transfers to Russa life insurance policy with a cash surrender value of $27 000 and a face value of SIO,00 in exchange for real estate Russ continues to pay the premiums on the policy until Sharon dies 7 years later At that time, Russ has paid $12 000 in premiums and he collects the S100 000 face value How much of the 16 Greg died on July 1, 2020, and left Lea, his wife, a $45,000 life insurance policy which she elects to teceive at $9,000 per year plus interest for 5 years In the current year, 17 David is certified by his doctor as terminally ill with liver disease His doctor certifies 254 Cheie Grase bacee and exclusions LO 2 8 proceeds is able to Russ Why LO 2 8 Lea receives $9500 How much should Lea include in her gross income LO 2 8 that he cannot reasonably be expected to live for more than a year He sells his life insurance policy to Viatical Settlements Inc, for $250,000 He has paid $20,000 so far for the policy How much of the $250,000 must David include in his taxable income LO 2 8 18 Helen receives a $200 000 lump sum life insurance payment when her friend Alice dies How much of the payment is taxable to Helen LO 2 9 19 How are qualified dividends taxed in 2020 Please give the rates of tax which apply to qualified dividends, and specify when each of these rates applies LO 2 9 20 Describe the methods that an individual taxpayer that holds Series I Bonds can use to recognize interest LO 2 9 21 Sally and Charles Heck received the following Form 1099 DIV in 2020 CORFECTED checked GO PDP Devona Corporation 850 00 33133 Hihop Drive Alpino, CA 91901 69400 2020 Dividends and Distributions To 1095 O Copy Forf 27 1234567 313 13 1313 Saly Hick $ 0 00 1420 Pasadena Blvd UE Carolton, TX 75007 10 DN Questions and Problems 2 57 The Hecks also received the following dividends and interest in 2020 (Forms 1099 DIV not shown) Sally Charles Jointly Qualifying dividends Altus Inc $2 000 Buller Corp $350 Gene Corporation $3,100 Interest Porcine Bank 1 245 River Bank 650 City of New York Bonds 100 a Assuming the Hecks file a joint tax return, complete Schedule B of Form 1040 (on Page 2 59) for them for the 2020 tax year b What amounts are reported on Lines 2a and 2 of Form 10407 2a $ 25 $ c What amounts are reported on Lines 3a and 3b of Form 1040 3a $ LO 2 10 3b $ 22 Vandell is a taxpayer in the 22 percent tax bracket He invests in Otay Mesa Water District Bonds that pay 4 5 percent interest What interest on a taxable bond would provide the same after tax return to Vandell LO 2 10 23 Karen is a wealthy retired investment advisor who is in the 35 percent tax bracket She has a choice between investing in a high quality municipal bond paying 5 percent or a high quality corporate bond paying 7 percent What is the after tax return of each bond and which one should Karen invest in Explain your answer LO 2 11 24 In June of 2020, Kevin inherits stock worth $125,000 During the year, he collects $5,600 in dividends from the stock How much of these amounts, if any, should Kevin include in his gross income for 20207 Why LO 2 11 25, Gwen is a tax accountant who works very hard for a large corporate client The client is pleased and gives her a gift of $10,000 at year end How much of the gift is taxable to Gwen LO 2 11 26 Charlene receives a gift from her boyfriend of $10 000 He knows she is having financial problems and wants to help her How much of the gift is tocable to Charlene

Question

QUESTIONS and PROBLEMS GROUP MULTIPLE CHOICE QUESTIONS LO 2 1 LO 2 1 LO 2 1 LO 2 1 1  The definition of gross income in the tax law is  a  All items specifically listed as income in the tax law b  All cash payments received for goods provided and services performed c  All income from whatever source derived d  All income from whatever source derived unless the income is earned illegally 2  Which of the following is not taxable for income tax purposes  a  Prizes b Severance pay c  Gifts d  Partnership income e  All of the above are taxable 3  All of the following items are taxable to the taxpayer receiving them, except  a  Life insurance proceeds b  Unemployment compensation cEmbezzled funds d  Prizes e  Gambling winnings 4  Which of the following types of income is tax exempt  a  Unemployment compensation b  Income earned illegally c  Dividends from foreign corporations d  Municipal bond interest e  Dividends from utility corporations' stock 5  Which of the following is included in gross income  a  Loans b  Scholarships for room and board c  Economic impact payments in 2020 d  Health insurance proceeds e  None of the above 6  The classification of a worker as an employee or an independent contractor is  a  Made by the employer b  Made by the employee c  Based on a negotiation between the employer and employee d  Based on a set of common law factors related to control and independence 7  Which of the following is likely to indicate classification of a worker as an employee  a  The worker must provide their own tools and equipment b  The worker can provide services at a location they choose c  The worker receives benefits like health care  d  The worker makes their services available to the general public  8  Which of the following items would be included in the gross income of the recipient  LO 2 1 LO 2 2 LO 2 2 LO 2 3 LO 2 4 LO 2 11 LO 2 12 a  Insurance payments for medical care of a dependent child b Insurance payments for loss of the taxpayer's sight c  Season tickets worth $2,000 given to a son by his father d  Payments to a student for working at the student union food court e  Lodging provided to a worker on a remote oil rig 2 49 Chapter 2 Grecome and Exclusions IN 9  Malin is a married taxpayer and has three dependent children  Malin's employer odfers health insurance for employees and Malin takes advantage of the benefit for her entire family ther spouse's emplover also offers health insurance but they opt miums through payroll dedictions while the employer paid the remaining $9,200 Malin's family visited health care professionals numerous times during the year and out)  During the year Malin puid SL 200 toward her family's health insurance pre made total co payments toward medical services of $280  Malin's daughter had knee surgery due to a soccer injury and the insurance company paid the hospital $6,700 related to the surgery  How much gross income should Malin recognize related to her directly and reimbursed Malin S100 for her out of pocket health care expenses b  Hannah purchases a new sofa from her employer, Sofas R Us, for $1,200  The cost a  A crystal paperweight worth $125 given to an employee for achieving 10 years of LO 2 3 LO 2 4 11  Which of the following is a fringe benefit excluded from income  LO 2 5 a  A mechanic at Denise's employer a car rental company provides $1 000 of repair services to Denise's personal car for free b  Alfa Bet, a high tech corporation, pays for each employee's membership at the 24 Hour Biceps Gym closest to each Alfa Bet office c  Quickchat Inc  gives each employee a $10 giftcard to the local coffee shop on National Coffee Day d  Hedaya, a doxtoral student at Ivy University, receives a full tuition waiver while serving as research assistant 12  Which of the following will result in the recognition of gross income  LO 2 5 a Gaills employer allows her to set aside $4 000 from her wages to cover the cost of daycare for Gail's four year old daughter  Gail's daycare costs are $4,300 for the year Jayden's employer purchases her commuting pass for the subway at a cost of $325 per month d  Havana is a lawyer  The law firm she works for pays for her subscription to Lawyer's Weekly, a trade magazine for attorneys e  None of the above will result in recognition of gross income  13  Which of the following prizes or awards is not taxable  LO 2 6 service to the company b  Prizes from a television game show c Awards for superior performance on the job health insurance  $ b $9 200 c  $14 020 (99,200   56700   $1,200   $200   $400) d  $8 000 ($9200   $1 200) e  None of the above 70  George works at the Springfield Nuclear Plant as a nuclear technician  The plant is located 15 miles from the town of Springfield  George likes to eat his lunch at the his shift  No other eating establishments are located near the plant  George estimates plant's cafeteria because he is required to be available for nuclear emergences during the value of the meals he was provided during the current year as $1,300  He esti mates the cost for him to have prepared those lunches for himself as about $560  The cost of the meals to the power company was $470  How much income does George need to recognize from the meals  a $1,300 b  $560 c  $470 d  $830 ($1,300   $470) e None of the above Questions and Problems 249 LO 2 6 LO 2 7 LO 2 7 d  A $100 gift card received as a prize in a raffle run by the local school parent  teacher organization e  All of the above are taxable 14  Huihana receives 4 tickets to the local professional football game for achieving 20 years of employment with her employer  The tickets cost the employer $390 and have a market value of the same on the date awarded  Huihana is in the highest tax bracket for single taxpavers  How much gress income will Huihana recognize on the receipt of the tickets  a  $390 b  $200 c $25 d  So e $50 or $59 50 including the net investment income tax 15  A 67 year old taxpayer retires this year and receives the first payment on an annu  ity that was purchased several years ago  The taxpayer's investment in the annuity is $94,500, and the annuity pays $1,000 per month for the remainder of the taxpayer's life  Based on IRS mortality tables, the taxpayer is expected to live another 20 years  If the taxpayer receives $4,000 in annuity payments in the current year, the nontaxable portion calculated using the simplified method is  a  So b  $1,500 c  $1,800 d  $4,000 e  None of the above 16  Amara has an annuity and over time has recovered her entire investment but it continues to pay her $450 per month  Amara should recognize how much of each monthly payment as gross income  a  $0 b  Some amount greater than $450 c Some amount between SO and $450 d  $450 17  Which of the following might result in life insurance proceeds that are taxable to the recipient  a  A life insurance policy in which the insured is the son of the taxpayer and the beneficiary is the taxpayer b  A life insurance policy transferred by a partner to the partnership c  A life insurance policy transferred to a creditor in payment of a debt d  A life insurance policy purchased by a taxpayer insuring his or her spouse e  A life insurance policy purchased by a corporation insuring an officer 18  Lupita dies in 2020 but has a $1 million life insurance policy that lists her spouse, M'Baku as the beneficiary  M'Baku elects to receive all $1 million in a lump sum and spends $200,000 immediately on a new yacht  M'Baku's gross income from the life insurance is a  $0 b  $200,000 c  $800,000 d  $1,000,000 19  Nomi is in the highest individual tax bracket and receives $375 in qualitied dividends from Omega Corp  Nomi's tax liability (not including any net investment income tax) LO 2 8 LO 2 8 LO 2 9 with respect to these dividends is a  So b $277 20 c  $100 00 d  $75 00 e $50 00 3 50 Chapter 2 Gross income and Exclusions LO 2 9 Rebecca recognize this year  SO b $46 c523 d  So it in first 5 years or Sio thereafter a State of California bond b City of New Orleans bond Bond of the Commonwealth of Puerto Rico d  US Treasury Bond e  All of the above are excluded from income 22  Which of the following gifts would probably be taxable to the person receiving the a  One thousand dollars given to a taxpayer by his or her father b  An acre of land given to a taxpayer by a friend A car even to a loyal employee by her supervisor when she retired to recognize her faithful service d  A Mercedes Benz given to a taxpayer by his cousin e  An interest in a partnership given to a taxpayer by his or her uncle 23  Kelly receives a $40,000 scholarship to Ivy University  She uses $35,000 on tuition and books and $5,000 for rent while at school  Kelly will recognize a  SO 20  Rebecca, a single pagerins a Series IUS  Savings Bond that increased in value by Sin during the year  She makes no special election  How much income must 21  Interest from which of the following types of bonds is included in federal taxable income  21  Gina receives a $2,900 distribution from her educational savings account  She uses $150 to pay for qualified higher education expenses and $1400 on a vacation  Immediately prior to the distribution, Gina's account balance is $5,000, $3,000 of which is herco tions  What is Gina's table income (alter any exclusion) from the distribution  LO 2 10 LO 2 11 LO 2 12 gross income  b  $5,000 $10,000 d  $30 000 e $10,000 24  Hillary gets divorced in 2019 and is required to pay her ex spouse $200 per month LO 2 13 until her son reaches 18 years of age in 7 years and $120 per month thereafter  How much of her 2020 payments are deductible as alimony  a  $0 b  $2 400 c  $1 440 d  $960 LO 2 13 25  Donald and Michelle are divorced in the current year  As part of the divorce settlement Michelle transfers a plot of land in Long Island, NY to Donald  Michelle's basis in the prop erty was $20 000 and the market value of the property was $250,000 when transferred Donald holds the property through the end of the year and in hopes of building a resident on it  How much income do Michelle and Donald recognize in the current year  a  $0 for Michelle and $20,000 for Donald b  $230,000 for Michelle and $20,000 for Donald c $230,000 for Michelle and $0 for Donald d  $0 for both Michelle and Donald e  $0 for Michelle and $250,000 for Donald LO 2 14 a $1,400 b  $560 L Ld c$840 d  $0 e  Some other amount Questions and Problems 2 51 LO 2 14 LO 2 14 LO 2 14 LO 2 14 27  Which of the following is correct for Qualified Tuition Programs (Section 529 plans)  a  Contributions are deductible, and qualified educational expense distributions are tax free  b  Contributions are not deductible, and qualified educational expense distributions are tax free  Contributions are deductible, and qualified educational expense distributions are taxable  d  Contributions are not deductible, and qualified educational expense distributions are taxable  28  In 2020, Amy receives $8,000 (of which $3,000 is earnings) from a qualified tuition program  She uses the funds to pay for tuition and other qualified higher education expenses  What amount is taxable to Amy  a  $0 b  $8,000 c$3 000 d $11,000 29  For married taxpayers filing a joint retum in 2020, at what AGI level does the phase  out limit for contributions to Section 529 plans start  a $110,000 b $190,000 c  $220,000 d  There is no phase out limit on Section 529 plan contributions 30  Which of the following is true with respect to education incentives  a  The contributions to qualified tuition programs (Section 529 plans) are deductible  b  The contributions to educational savings accounts (Coverdell ESA) are deductible  c  Tuition paid by a taxpayer eaming $300,000 of income is deductible d  Married taxpayers have no income limit to contribute to a qualified tuition program (Section 529 plan)  31  During 2020, Carla single taxpayer) has a salary of $91,500 and interest income of S11 000  Calculate the maximum contribution Carl is allowed for an educational savings account a $0 b  $400 c  $1,000 d  $2,000 e  Some other amount 32  Wendy is a single taxpayer and pays tuition of $7,800 in 2020  Her 2020 AGU is $66,000  What is the amount of Wendy's tuition deduction  a  So b  $7,800 c  $4 000 d  $2,000 e  $3,733 33 33  Alicia loses her job part way through 2020  Her employer pays her wages of $15,450 up through her date of termination  After that, she received $1,600 of unemployment compensation from the state until she gets a new job for which she is paid wages of $1,400 through year end  Based on this information, Alicia's gross income for 2020 is  a  $15 450 h $16,850 c  $17,050 d  $18 450 e  $21 850 LO 2 14 LO 2 14 LO 2 15 34  For 212 the mam perantage of Social Security benefits that could be included 35 Generally when calculating the cable portion of Social Security benefits, modified ad justed gross income (MAGI) is adjusted gross income (without Social Security benefits)  $170,000, Kate and the bank revise her terms and lower the loan balance to $15 The market value of the home remains above $200,000  How much cancellation of Chapter 2 Grow become and Exclusion LO 2 16 in a taxpayer's gross income is a  Os 25 c30 d  75 85  LO 2 16 LO 2 17 a Plus tax exempt interest Les personal and dependency exemptions cLessitemired deductions d  Less tax exempt interest plus any foreign income exclusion e Less tax exempt interest income 36 Dana and Larry are married and live in Texas  Dana earns a salary of $45,000 and Larry has $25 000 of rental income from his separate property  If Dana and Larry Sle separate tax returns what amount of income must Larry report  a  $0 b  $22 500 c  $25 000 d  $47 500 e  None of the above L LO 2 17 37  Which of the following conditions need not be satisfied in order for a married tax  paver residing in a community property state, to be taxed only on his or her separate salary  2  The husband and wife must live apart for the entire year  A minor child must be living with the spouse, c  The husband and wife must not file a joint income tax return d  The husband and wife must not transfer carned income between themselves e  All of the above must be satisfied LC LO 2 18 38  Jack borrows $13,000 from Sawyer Savings and Loan and uses the proceeds to acquire a used car  When the loan balance is $12,000, Jack loses his job and is unable to make payments for three months  When Jack gets a new job, the bank agrees to forgive the missed principal payments and reduces his loan to $11,500  Jack remains solvente when unemployed  How much cancellation of debt income does Jack have    SO b  $500 c  $1 500 d $2,000 LO LO 2 18 39  Kate acquires a principal residence in 2016 for $200,000 secured by a $180 000 med employer stops paying her after 10 days  In 2020 when the mortgage balance LO debt income will Kate recognize  b  $20,000 c  $10,000 d  $150,000 e $170,000 2 53 GROUP 2 PROBLEMS LO 2 1 (Efrom gross income for the 2020 tax year Questions and Problems a  Welfare payments b  Commissions c  Hobby income d  Scholarships for room and board e  $300 set of golf clubs, an employee award for length of service f  Severance pay g  Ordinary dividend of $50 h  Accident insurance proceeds received for personal bodily injury 1  Inheritances 1  Gifts k  Tips and gratuities 2  Jane is a roofing contractor  Jane's friend needed a new root but did not have the cash to pay, Jane's friend instead paid with a used truck that Jane could use in her roofing business  The truck had originally cost the friend $17 500 but it was gently used and only worth $6,000  Jane did not actually need the truck and ended up selling it to a used car dealer for $5,200 a few months later, Explain what amount of gross income Jane must recognize as a result of the truck payment and why LO 2 1 LO 2 1 3  Larry is a tax accountant and Sheila is a hairdresser  Larry prepares Sheila's tax return for free and Sheila agrees to style Larry's hair six times for free in return for the tax return  The value of the tax return is approximately $300 and the hair styling work is approximately $300 a  How much of the $300 is includable income to Larry  Why  b  How much of the $300 is includable income to Shetla  Why  LO 2 1 4  Kerry and Jim have a successful marijuana farm in the woods around Humboldt County, California Growing marijuana is illegal for federal purposes  Are Kerry and Jim required by law to report the income from their farm on their tax return  Why  LO 2 2 5  Kristen, a single taxpayet, receives two 2020 For W 2 from the two employees she worked for during the year  One Form W 2 lists her wages in les 12 and 5 as $18 700  Her other employer's Form W 2 has $13,000 in Box I but only $1 500 in both Box 3 and Box 3  Kristen participated in the second employer's 4010) plan  She also received health care from her second employer  Lastly her second employer peo vided $30 000 of group term life insurance to Kristen   What amount should Kristen report as taxable wages in 2020 b  What could explain the diference between Box Images and Bes 3 and 5 oed be second employer's W 27 6  Last four behavioral factors that could be used to classify a worker as either an em  7 Skyler is covered by his company's health insurance plan  The health insurance costs his company $9 500 a year  During the year, Skyder is diagnosed with a serious   Ellen is a single tagaver  Ellen's employer pays $150 per month ($1,800 this year) for her health insurance  During the year, Ellen had medical expenses of $3,500 and the 11  Ellen's tax client, Tom, is employed at a large company that offers health care exible whether he wants to put as much as $2,750 of his salary into the health care fieth spending accounts to its employees  Tom must decide at the beginning of the year expenses for his family during the year since his wife is seeing a psychiatrist sem spending account  He expects that he will have to pay for at least $8,000 of medical and his daughter and son are both having their teeth straightened, Tom does not illness and health insurance pays $100 000 for surgery and treatment  How much of full time, Richard also had $30 worth of personal typing done by his administrative 21 Chapter 2 Gronion and Exclusions LO 2 2 ployee or an independent contractor and provide a brief example, LO 2 3 the insurance and treatment payments are taxable to Skyler  LO 2 3 insurance company paid $2 000 of the expenses  How much of the above amounts any must be included in Ellen's gross income  Why  LO 2 4 9  Milton is a nurse whose employer provided meals for him on the employer's premises, since he is given only 30 minutes for lunch  Is the value of these meals taxable income to Milton  Explain 11 b  Mary is a San Diego ambulance driver  The city provides Mary with meals while she is working so she will be available for emergencies  Is the value of these meals taxable income to Mary  Explain c Indigo is the head of security at a casino  The casino operator frequently provides meals from the casino butfett to Indigo as a gesture of goodwill for the great job she is doing  Is the value of these meals taxable income to Indigo  Explain LO 2 5 10  Linda and Richard are married and file a joint return for 2020  During the year, Linda who works as an accountant for a national airline, used $2,100 worth of free passes for travel on the airlines Richard used the same amount  Linda and Richard also used $850 worth of employee discount coupons for hotel rooms at the hotel chain that is also owned by the airline  Richard is employed at State University as an account ing clerk  Under a tuition reduction plan, Richard saved $4,000 in tuition fees during 2020  He is studying for a master's degree in business at night while still working assistant at the University  What is the amount of fringe benefits that should be cluded in Linda and Richard's gross income on their 2020 tax return  LO 2 5 Questions and Problems 2 55 itemize deductions  Should Ellen recommend that Tom put the maximum amount in his health care flexible spending account, and if so, why  10 2 6 12  How much of each of the following is taxable    Cheline, an actress, received a $6,400 gift bag for attending the Academy Awards Ceremony during 2020, b  Jon received a gold watch worth $660 for 25 years of service to his accounting firm (not a qualified award)  c  Kerry won $1,000,000 in her state lottery, d Deborah is a professor who received $30,000 as an award for her scientific research from the university that employs her  13  For each of the following independent cases, indicate the amount of gross income that must be included on the taxpayer's 2020 income tax return a  Malchia won a $4,000 humanitarian award  LO 2 6 LO 2 12 b  Rob won a new automobile (with a sticker price of $15 700 and a market value of $14,500) for being the best junior tennis player in 2020 c  George received a $3,500 tuition and fees scholarship to attend Western University LO 2 7 14  Lola, age 67, began receiving a $1 000 monthly annuity in the current year upon the death of her husband  She received seven payments in the current year  Her husband contributed S48,300 to the qualified employee plan  Use the Simplified Method Worksheet below to calculate Lola's taxable amount from the annuity SIMPLIFIED METHOD WORKSHEET 1  Enter total amount received this year  1  2  Enter cost in the plan of the annuity starting date, 2  3  Age at annuity starting date Enter 55 ond under 360 56 60 310 61 65 260 66 70 210 71 and older 160 4  Divide line 2 by line 3 5  Multiply line 4 by the number of monthly payments this year  If the annuity starting date was before 1987, also enter this amount on line 8, and skip 5 lines 6 and 7  Otherwise, go to line 6 6  Enter the amount, any recovered tax free in prior years  7  Subtract line 6 from line 2 8   7 8  Enter the smaller of line 5 or 7 9  Taxable amount this year  Subtract line 8 from line 1  Do not enter less than zero 15  Shuron transfers to Russa life insurance policy with a cash surrender value of $27 000 and a face value of SIO,00 in exchange for real estate  Russ continues to pay the premiums on the policy until Sharon dies 7 years later  At that time, Russ has paid $12 000 in premiums and he collects the S100 000 face value  How much of the 16  Greg died on July 1, 2020, and left Lea, his wife, a $45,000 life insurance policy which she elects to teceive at $9,000 per year plus interest for 5 years  In the current year, 17 David is certified by his doctor as terminally ill with liver disease  His doctor certifies 254 Cheie Grase bacee and exclusions LO 2 8 proceeds is able to Russ  Why LO 2 8 Lea receives $9500  How much should Lea include in her gross income  LO 2 8 that he cannot reasonably be expected to live for more than a year  He sells his life insurance policy to Viatical Settlements  Inc, for $250,000  He has paid $20,000 so far for the policy  How much of the $250,000 must David include in his taxable income  LO 2 8 18  Helen receives a $200 000 lump sum life insurance payment when her friend Alice dies  How much of the payment is taxable to Helen  LO 2 9 19  How are qualified dividends taxed in 2020  Please give the rates of tax which apply to qualified dividends, and specify when each of these rates applies  LO 2 9 20  Describe the methods that an individual taxpayer that holds Series I Bonds can use to recognize interest LO 2 9 21  Sally and Charles Heck received the following Form 1099 DIV in 2020 CORFECTED checked GO PDP Devona Corporation 850 00 33133 Hihop Drive Alpino, CA 91901 69400 2020 Dividends and Distributions To 1095 O Copy Forf 27 1234567 313 13 1313 Saly Hick $ 0 00 1420 Pasadena Blvd UE Carolton, TX 75007 10 DN Questions and Problems 2 57 The Hecks also received the following dividends and interest in 2020 (Forms 1099 DIV not shown)  Sally Charles Jointly Qualifying dividends  Altus Inc  $2 000 Buller Corp $350 Gene Corporation $3,100 Interest  Porcine Bank 1 245 River Bank 650 City of New York Bonds 100 a  Assuming the Hecks file a joint tax return, complete Schedule B of Form 1040 (on Page 2 59) for them for the 2020 tax year  b  What amounts are reported on Lines 2a and 2 of Form 10407 2a $ 25 $ c What amounts are reported on Lines 3a and 3b of Form 1040  3a $ LO 2 10 3b $ 22  Vandell is a taxpayer in the 22 percent tax bracket  He invests in Otay Mesa Water District Bonds that pay 4 5 percent interest  What interest on a taxable bond would provide the same after tax return to Vandell  LO 2 10 23  Karen is a wealthy retired investment advisor who is in the 35 percent tax bracket  She has a choice between investing in a high quality municipal bond paying 5 percent or a high quality corporate bond paying 7 percent  What is the after tax return of each bond and which one should Karen invest in  Explain your answer LO 2 11  24  In June of 2020, Kevin inherits stock worth $125,000  During the year, he collects $5,600 in dividends from the stock  How much of these amounts, if any, should Kevin include in his gross income for 20207 Why  LO 2 11 25, Gwen is a tax accountant who works very hard for a large corporate client  The client is pleased and gives her a gift of $10,000 at year end  How much of the gift is taxable to Gwen  LO 2 11 26  Charlene receives a gift from her boyfriend of $10 000  He knows she is having financial problems and wants to help her  How much of the gift is tocable to Charlene

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QUESTIONS and PROBLEMS GROUP MULTIPLE CHOICE QUESTIONS LO 2.1 LO 2.1 LO 2.1 LO 2.1 1. The definition of gross income in the tax law

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