Exam 4: Gross Income: Concepts and Inclusions

Your client is considering transferring $25,000 from his savings account in a local bank paying 2% interest to a Mexico City bank paying 3%. What do you advise?

The purpose of the tax rules that apply to below-market loans between family members is to:

Our tax laws encourage taxpayers to assets that have appreciated in value and assets that have declined in value.

In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

On January 1, 2019, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 24 months. The amount received for the contract was $2,400. The taxpayer reported $1,200 as income on its financial statement for 2019, and should do the same for its tax return.

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."

If the alimony recapture rules apply, the recipient of alimony decreases his or her adjusted gross income (AGI) by a portion of the amount included in gross income as alimony in a prior year or years.

Ted earned $150,000 during the current year. He paid Alice, his former wife, $75,000 in alimony. The couple divorced in 2017. Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.

In the case of a zero interest below-market loan by a corporation to a shareholder-employee, what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

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).

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

Which of the following is not a requirement for an alimony deduction?

As a general rule: I. Income from property is taxed to the person who owns the property. II. Income from services is taxed to the person who earns the income. III. The assignee of income from property must pay tax on the income. IV) The person who receives the benefit of the income must pay the tax on the income.

Arnold was employed during the first six months of the year and earned a $90,000 salary. During the next six months, he collected $7,200 of unemployment compensation, borrowed $6,000 (using his personal residence as collateral), and withdrew $1,000 from his savings account (including $60 interest). When he left his former employer, he withdrew his retirement benefits (a qualified annuity) in a lump sum of $50,000. He made no contributions to the plan. Arnold's parents loaned him $10,000 (interest-free) on July 1 of the current year, when the Federal rate was 3%. Arnold did not repay the loan during the year and used the money for living expenses. Calculate Arnold's adjusted gross income for the year.

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie's adjusted gross income for the year is:

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2017 that will pay $1,100 upon its maturity on June 30, 2019. The taxpayer must recognize a portion of the income in 2018.

Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordon's age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, he must include in his 2019 gross income which of the following amounts?

Mark, a calendar year taxpayer, purchased an annuity for $50,000 in 2017. The annuity was to pay him $3,000 on the first day of each year, beginning in 2017, for the remainder of his life. Mark's life expectancy at the time he purchased the annuity was 20 years. In 2019 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months.

The financial accounting principle of conservatism is not well suited to the task of measuring taxable income.

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