Exam 4: Gross Income: Concepts and Inclusions

George and Erin divorced in 2020, and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Jim and Nora, residents of a community property state, were married in early 2018.Late in 2018 they separated, and in 2019 they divorced.Each earned a salary, and they received income from community-owned investments in all relevant years.They filed separate returns in 2018 and 2019.

Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years. She died after receiving eight payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019.The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

In 2019, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for four years beginning in 2020.The team accepted the counteroffer.Juan constructively received $3 million in 2019.

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018.The dividend checks were mailed on December 31, 2018.Ed, a cash basis shareholder, received the dividend check on January 2, 2019.Ed cannot delay reporting the income from the dividend until 2019.

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Under the terms of a divorce agreement entered into in 2017, Ron is to pay his former wife Jill $10,000 per month. The payments are to be reduced to $7,000 per month when their 15-year old child reaches age 18.During the current year, Ron paid $120,000 under the agreement.Assuming all of the other conditions for alimony are satisfied, Ron can deduct from gross income (and Jill must include in gross income) as alimony:

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest.In December, he collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Tim and Janet divorced in 2018.Their only marital property was a personal residence with a value of $120,000 and cost of $50,000.Under the terms of the divorce agreement, Janet would receive the house and would pay Tim $15,000 each year for five years, or until Tim's death, whichever should occur first.Tim and Janet lived apart when the payments were made to Tim.The divorce agreement did not contain the word "alimony."

In 2019 Todd purchased an annuity for $150,000.The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months.Which of the following is correct?

Jay, a single taxpayer, retired from his job as a public school teacher in 2019.He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months.He contributed $36,000 to the pension plan during his 35- year career, so his adjusted basis is $36,000.Jay collected 192 payments before he died.What is the correct method for reporting the pension income?

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

With respect to income from services, which of the following is true?

Barney painted his house, which saved him $3,000.According to the realization requirement, Barney must recognize $3,000 of income.