Exam 5: Gross Income: Exclusions

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.

Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband. The employer also paid the husband $35,000, which represented an amount equal to Beverly's salary for the year prior to her death. The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000. As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments. In the year of her death, he collected $8,000, which included $1,500 interest income. Which of these items are subject to income tax for Beverly's spouse?

Louise works in a foreign branch of her employer's business. She earned $5,000 per month throughout the relevant period. Which of the following is correct?

An employee can exclude from gross income the value of meals provided by his or her employer whenever:

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?

The taxpayer's marginal federal and state tax rate is 25%. Which would the taxpayer prefer?

If a tax-exempt bond will yield approximately 0.65 (1 - 0.35) times the yield on a taxable bond of equal risk, who benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or the investors?

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

Tommy, a senior at State College, receives free room and board as full compensation for working as a resident adviser at the university dormitory. The regular housing contract is $2,000 a year in total, $1,200 for lodging, and $800 for meals in the dormitory. He had the option of receiving the meals or $800 in cash and accepted the meals. What must Tommy include in gross income from working as a resident adviser?

As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.

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.

The exclusion for health insurance premiums paid by an employer applies to:

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 antidiscrimination requirements. III) Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income.

Randy is the manager of a motel. As a condition of his employment, Randy is required to live in a room on the premises so that he would be there in case of emergencies. Randy considered this a fringe benefit since he would otherwise be required to pay $800 per month rent. The room that Randy occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Randy is required to include in gross income.

The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500.

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

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 for punitive damages. As a result of the award, the amount Olaf must include in gross income is:

In December 2019, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2020 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2019 tax return. He had $150,000 of taxable income that year. On June 30, 2020, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:

During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad's negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages. Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

Carmen had worked for Sparrow Corporation for 30 years when she died of a heart attack at age 60. She was practically penniless at the time of her death, owed a $12,000 hospital bill, and had a disabled spouse. The company was very concerned about its public image, and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means, the board of directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life. Discuss both sides of the question of whether Carmen (or her estate) and her spouse realize any taxable income from these transactions.