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Exam 5: Gross Income and Exclusions

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Question 41

True/False

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

A) True
B) False

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Question 42

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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, which began this year. Hank earned $109,500 working for the French company this year but only lived in France for 340 days (out of 365 days) . What amount of Hank's $109,500 salary this year will he be allowed to exclude from gross income in the U.S.? (rounded to the nearest one-hundred dollars)

A) Hank can exclude his entire salary because he worked more than 330 days overseas
B) 102,000
C) 94,400
D) 101,300
E) None of his salary can be excluded from gross income because Hank must reside overseas for the entire year

F) A) and D)
G) A) and E)

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Question 43

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This year Ed celebrated his 25^th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?

For tax purposes, unearned income means income that has not yet been realized.

Worker's compensation benefits are excluded from gross income.

Interest income is earned in the year in which it is received by the taxpayer or credited to the bank account.

Ben's employer offers employees the following benefits. What amount must Ben include in his gross income? $\begin{array} { | l | r | } \hline \text { Benefit } & \text { Value } \\\hline \text { Health insurance coverage } & \$ 5,800 \\\hline \text { Group term life insurance } ( \$ 50,000 ) & 4,270 \\\hline \text { Disability insurance coverage (considered purchased by Ben) } & 3,600 \\\hline \text { Whole life insurance coverage } ( \$ 100,000 ) & 7,000 \\\hline\end{array}$

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?

Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she exercises all of her options. If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent?

Prizes and awards are generally taxable.

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.

Which of the following is true regarding stock options?

Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4%, which of the following is correct?

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?

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

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. What is the amount of Maren's bargain element?

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

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?

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.

Loretta received $6,200 from disability insurance that she purchased directly this year. Loretta must include all $6,200 in her gross income.