Exam 5: Gross Income: Exclusions

Roger is in the 35% marginal tax bracket. Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan. Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan. However, Roger incurred only $1,100 in actual expenses for which he was reimbursed. Under the plan, he must forfeit the $100 unused amount. His after-tax cost of overfunding the plan is $65.

John told his nephew, Steve, "if you maintain my house when I cannot, I will leave the house to you when I die." Steve maintained the house and when John died, Steve inherited the house. The value of the residence can be excluded from Steve's gross income as an inheritance.

Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value of these benefits from gross income. What are the effects of the exclusions on the following? a. The progressiveness of the tax system. b. The complexity of the tax system.

When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts. Betty sold the policy for $32,000, and Insurance Purchase, Inc. became the beneficiary. She had paid total premiums of $19,000. Betty died eight months after the sale. Insurance Purchase, Inc., collected $50,000 on the policy. The company had paid additional premiums of $4,000 on the policy. Betty's estate is not required to recognize a $13,000 gain from the sale of her life insurance policy; and Insurance Purchase, Inc. is required to recognize a $14,000 gain from the insurance policy.

Doug and Pattie received the following interest income in the current year: Savings account opened at Greenbacks Bank \ 4,000 U.S.Treasury bonds 250 Interest on State of Iowa bonds 200 Interest on Federal tax refund 150 Interest on state income tax refund 75 Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return?

Margaret is trying to decide whether to place funds in a qualified tuition program. Her son will be attending college in four years. She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in four years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in four years. Her son will be in the 12% marginal tax bracket in all relevant years. Given these assumptions, should Margaret participate in the qualified tuition program?

Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals.

Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost.

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customer's loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan:

A U.S. citizen is always required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account.

Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays when the number of players on the course is at its lowest. Tom, an employee of the country club, played 40 rounds of golf during the year at no charge when the nonemployee charge was $20 per round.

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

Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for nine months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, Barney receives a $1,500 research grant to pursue his own research and studies. Barney's gross income from the above is:

James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: Salary \ 66,000 Disability income protection premiums 3,000 Long-term care insurance premiums 4,000 His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid the $6,000 owed on James's credit card. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day toward a nursing home or similar facility. What is James's gross income from the above?

Early in the year, Marlon was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marlon paid by a medical insurance policy he purchased \1 0,000 Damage settlement to replace his lost salary 15,000 What is the amount that Marlon must include in gross income for the current year?

Tonya is a cash basis taxpayer. In 2019, she paid state income taxes of $8,000. In early 2020, she filed her 2019 state income tax return and received a $900 refund.

Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed. Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing. Carla must include the housing supplement in her gross income.

Barry, a solvent individual but a recovering alcoholic, embezzled $6,000 from his employer. In the same year that he embezzled the funds, his employer discovered the theft. His employer did not fire him and told him he did not have to repay the $6,000 if he would attend Alcoholics Anonymous. Barry met the conditions and his employer canceled the debt.