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Exam 5: Gross Income and Exclusions

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Question 61

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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.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

F) C) and E)
G) C) and D)

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Question 62

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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.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.

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

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Question 63

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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?

Which of the following statements regarding contributions to defined contribution plans is true?

When an asset is sold, the taxpayer calculates the gain or loss by subtracting the tax basis of the asset from the proceeds of the sale.

Identify which of the items below helps determine which taxpayer must recognize earned income:

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?

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 because he did not deduct state income taxes last year.

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

Vincent is a writer and 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 4^th to December 31^st.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.)

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:

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?

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?

Mike received the following interest payments this year.What amount must Mike include in his gross income (for federal tax purposes) ? $\begin{array}{llcc} \quad\quad\quad\quad\quad \text { Bond } & \text { Interest } \\ \text { General Motors } &\$1,450\\ \text { City of New York } &900\\ \text { State of New Jersey } &1,200\\ \text { U.S. Treasury} &850\\\end{array}$

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

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?

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

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?

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?

Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k)accounts than employees who are not 50 years old by year-end.