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Exam 5: Gross Income and Exclusions

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Question 1

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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?

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$109,000 = [1/2 × ($130,000 + ...

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Question 2

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Jack and Jill are married. This year Jack earned $72,250, Jill earned $82,250, and they received $11,800 of interest income from a joint savings account. How much gross income would Jack report if he files married filing separately from Jill?

A) $72,250 if they reside in a common law state.
B) $77,250 if they reside in a community property law state.
C) $94,050 if they reside in a common law state.
D) $83,150 if they reside in a community property law state.
E) None of the choices are correct.

F) B) and C)
G) C) and D)

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Question 3

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

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 marriedfiling jointly.

Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.

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.

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.

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.

Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($4,270) , her emotional distress ($6,300-she now fears peanut butter) , and punitive damages ($45,000) . What amount must Pam include in her gross income?

Workers' compensation benefits are excluded from gross income.

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

Wilma has a $45,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $2,700, 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?

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

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 $119,250 for Dave's plumbing services. Which of the following is a true statement?

Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

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

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 taxpayer who borrows money will include that amount borrowed in their gross income under the all-inclusive definition of income.

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

This year Ann has the following stock transactions. What amount is included in her gross income if Ann paid a $285 selling commission for each sale?