Question 1

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

Accepted Answer

A) True 
 B)False

Question 2

Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and not for elementary or secondary education).

Accepted Answer

A) True 
 B)False

Question 3

Gross income includes all income realized during the year.

Accepted Answer

A) True 
 B)False

Question 4

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

Accepted Answer

A) True 
 B)False

Question 5

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

Accepted Answer

A)  $10,000 
B)  $9,000 
C)  $1,000 
D)  Barney can deduct $10,000 only if he includes $1,000 in his taxable income 
E)  None of the choices are correct - Barney is not entitled to a loss deduction. 
A)  $10,000 
B)  $9,000 
C)  $1,000 
D)  Barney can deduct $10,000 only if he includes $1,000 in his taxable income 
E)  None of the choices are correct - Barney is not entitled to a loss deduction.

Question 6

This year Larry received the first payment from an annuity that promises to pay him $3,000 per month for the rest of his life. The IRS tables indicate that given Larry's age, he should expect to receive 310 monthly payments. The cost of the annuity to Larry was $620,000. How much of the first $3,000 payment should Larry include in gross income?

Accepted Answer

$3,000 − [$620,000/310] = $1,000
A part

Question 7

Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment should Charles include in gross income?

Accepted Answer

$5,000
A part of each payment represents

Question 8

Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)?

Accepted Answer

A)  $1,450 
B)  $2,300 
C)  $2,650 
D)  $3,550 
E)  $4,400 
A)  $1,450 
B)  $2,300 
C)  $2,650 
D)  $3,550 
E)  $4,400

Question 9

This year Joseph joined the board of directors. Besides his director's fees, Joseph received the following employee benefits:
   
The stock bonus consisted of 5,000 shares of Bell stock given to Joseph as compensation. At the time of the transfer the stock was listed at $4 per share. What amounts, if any, should Joseph include in gross income this year?

Accepted Answer

$ 239,000 = $204,000 + $20,000

Question 10

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

Accepted Answer

A) True 
 B)False

Question 11

Loretta received $6,200 from a disability insurance policy that she purchased directly this year. Loretta must include all $6,200 in her gross income.

Accepted Answer

A) True 
 B)False

Question 12

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount):

Accepted Answer

A)  Claim of right. 
B)  Constructive receipt. 
C)  Return of capital principle. 
D)  Wherewithal to pay. 
E)  None of the choices are correct. 
A)  Claim of right. 
B)  Constructive receipt. 
C)  Return of capital principle. 
D)  Wherewithal to pay. 
E)  None of the choices are correct.

Question 13

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

Accepted Answer

A)  Tax basis of the property. 
B)  Selling expenses. 
C)  Amount realized. 
D)  Tax basis of the property and selling expenses. 
E)  All of the choices are correct. 
A)  Tax basis of the property. 
B)  Selling expenses. 
C)  Amount realized. 
D)  Tax basis of the property and selling expenses. 
E)  All of the choices are correct.

Question 14

When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.

Accepted Answer

A) True 
 B)False

Question 15

Henry works part-time on auto repairs and restoration projects. This year Henry was paid $5,400 for repairs he made to his neighbor's auto. Henry's neighbor promised to pay Henry another $2,200 in cash next year. Henry's brother borrowed $4,100 in cash in December of this year and gave him a negotiable promissory note for $4,300 due in three months with interest. Henry sold the note in January of next year for $3,500. Finally, Henry restored a car for the football coach. The coach paid him this year with a pass to next year's football games. The pass is worth $750. Compute Henry's gross income for this tax year assuming that he uses the cash basis of accounting.

Accepted Answer

$5,400 + $750 = $6,150
Gross i

Question 16

Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a True statement?

Accepted Answer

A)  Sally need not recognize any gross income unless she sells the football tickets. 
B)  Sally's exchange does not result in taxable income. 
C)  Sally is taxed on the value of the football tickets even if she cannot attend the game. 
D)  Sally is taxed on the value of her sewing services only if she is a professional seamstress. 
E)  None of the choices are correct. 
A)  Sally need not recognize any gross income unless she sells the football tickets. 
B)  Sally's exchange does not result in taxable income. 
C)  Sally is taxed on the value of the football tickets even if she cannot attend the game. 
D)  Sally is taxed on the value of her sewing services only if she is a professional seamstress. 
E)  None of the choices are correct.

Question 17

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.

Accepted Answer

A) True 
 B)False

Question 18

Generally, 85 percent of Social Security benefits are included in income of high-income taxpayers.

Accepted Answer

A) True 
 B)False

Question 19

This year, Fred and Wilma, married filing joint, sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is included in gross income?

Accepted Answer

A)  $550,000 
B)  $300,000 
C)  $250,000 
D)  $50,000 
E)  None 
A)  $550,000 
B)  $300,000 
C)  $250,000 
D)  $50,000 
E)  None

Question 20

Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a community property state. How much income earned will Justin report on his tax return for this year?

Accepted Answer

$109,000 = [1/2 × ($130,000 +

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and not for elementary or secondary education).

Gross income includes all income realized during the year.

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment should Charles include in gross income?

Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)?

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

Loretta received $6,200 from a disability insurance policy that she purchased directly this year. Loretta must include all $6,200 in her gross income.

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount):

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.

Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a True statement?

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.

Generally, 85 percent of Social Security benefits are included in income of high-income taxpayers.

This year, Fred and Wilma, married filing joint, sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is included in gross income?

Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a community property state. How much income earned will Justin report on his tax return for this year?

An Introduction to Tax

Tax Compliance, the IRS, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview, Dependents, and Filing Status

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters

Exam 5: Gross Income and Exclusions

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and not for elementary or secondary education).

Gross income includes all income realized during the year.

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment should Charles include in gross income?

Mike received the following interest payments this year. What amount must Mike include in his gross income (for federal tax purposes)?

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

Loretta received $6,200 from a disability insurance policy that she purchased directly this year. Loretta must include all $6,200 in her gross income.

Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g., no obligation to repay the amount):

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.

Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing services to the barter club in exchange for two football playoff tickets. Which of the following is a True statement?

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.

Generally, 85 percent of Social Security benefits are included in income of high-income taxpayers.

This year, Fred and Wilma, married filing joint, sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is included in gross income?

Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned salary of $88,000. Aubrey and Justin live in a community property state. How much income earned will Justin report on his tax return for this year?

An Introduction to Tax

Tax Compliance, the IRS, and Tax Authorities

Tax Planning Strategies and Related Limitations

Individual Income Tax Overview, Dependents, and Filing Status

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters