Exam 5: Gross Income: Exclusions

Heather is a full-time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees. Which of the following is correct?

Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return. The interest rate is 5%. His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return. As an alternative, Juan can purchase a state bond a "double-exempt bond") yielding 4.9% interest that is exempt from both Federal and state income tax. Which investment would yield the greater after-tax return?

Employees of a CPA firm located in Maryland may exclude from gross income the meals and lodging provided by the employer while they were on an audit in Delaware.

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted.

Ed died while employed by Violet Company. His wife collected $40,000 on a group term life insurance policy that Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death. All of the premiums on the group term life insurance policy were excluded from the Ed's gross income. Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

Christie sued her former employer for a back injury she suffered on the job in 2018. As a result of the injury, she was partially disabled. In 2019, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2018 return, reducing her taxable income by $12,000. Christie's 2019 gross income from the above is:

Calvin miscalculated his income in 2016 and overpaid his state income tax by $10,000. In 2017, he amended his 2016 state income tax return and received a $10,000 refund and $900 interest. Calvin itemized his deductions in 2016, deducting $12,000 in state income tax and $30,000 total itemized deductions. As a result of the amended return in 2017, Calvin must recognize $10,900 of gross income.

The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casino's employees, the meals are provided for the convenience of the Casino. However, the hotel workers demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct?

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings. The copies made during the year would have cost $150 at a local office supply.

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement. The payments must be included in her gross income.

A U.S. citizen worked in a foreign country for the period July 1, 2017 through August 1, 2018. Her salary was $10,000 per month. Also, in 2017 she received $5,000 in dividends from foreign corporations not qualified dividends). No dividends were received in 2018. Which of the following is correct?

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School. She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.

The de minimis fringe benefit:

Evaluate the following statements: I. De minimis fringe benefits are those that are so immaterial that accounting for them is impractical. II) De minimis fringe benefits are subject to strict anti-discrimination requirements. III) Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income.

Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

The Royal Motor Company manufactures automobiles. Non-management employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Which of the following statements is correct?

The taxpayer was in the 35% marginal tax bracket in 2017 and deducted $15,000 in state income taxes as an itemized deduction that year. In 2018, he filed his 2017 state income tax return and received a $5,000 refund of state income taxes paid in 2017. His marginal tax rate in 2018 was 12%. What was the taxpayer's Federal tax benefit from the overpayment of his 2017 state income tax?

A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is:

If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.