Exam 5: Gross Income Exclusions

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

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes,provided the privilege is not abused.Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings.The copies made during the year would have cost $150 at a local office supply.

Gold Company was experiencing financial difficulties,but was not bankrupt or insolvent.The National Bank,which held a mortgage on other real estate owned by Gold,reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver,Inc.Pink,Inc. ,the holder of a mortgage on Gold's building,agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years.As a result of the above,Gold must:

Sonja is a United States citizen who has worked in Spain for the past 10 months.She received $8,000 a month as compensation.Her employer has offered to extend Sonja's contract to work in Spain for another 6 months at the same rate of pay.If she rejects the offer,she can return to the United States and receive a salary of $10,000 per month.While working in Spain,she is subject to the Spain income tax,which is approximately 11% of her gross pay.The marginal tax rate on her income taxed in the United States is 25%.Compare Sonja's after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States.

Matilda works for a company with 1,000 employees.The company has a hospitalization insurance plan that covers all employees.However,the employee must pay the first $3,000 of his or her medical expenses each year.Each year,the employer contributes $1,500 to each employee's health savings account (HSA).Matilda's employer made the contributions in 2016 and 2017,and the account earned $100 interest in 2017.At the end of 2017,Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy.As a result,Matilda must include in her 2017 gross income:

The exclusion of interest on educational savings bonds:

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

Cash received by an employee from an employer:

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?

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months.After he received the doctor's diagnosis,Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy,and he collected $50,000,the cash surrender value of the policy.Henry enjoys excellent health,but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

Generally,a U.S.citizen is 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.

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 $6,000 on James's credit card debt he owed.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 towards a nursing home or similar facility.What is James's gross income from the above?

On January 1,2006,Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1,2016,the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal Corporation is neither bankrupt nor insolvent,the acquisition and retirement of the bonds results in which of the following:

In the case of interest income from state and Federal bonds:

Sam was unemployed for the first two months of 2016.During that time,he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September,he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

Peggy is an executive for the Tan Furniture Manufacturing Company.Peggy purchased furniture from the company for $9,500,the price Tan ordinarily would charge a wholesaler for the same items.The retail price of the furniture was $12,500,and Tan's cost was $9,000.The company also paid for Peggy's parking space in a garage near the office.The parking fee was $600 for the year.All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy.However,the company does not pay other employees' parking fees.Peggy's gross income from the above is:

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000)in gross income.

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.

Gull Corporation was undergoing reorganization under the bankruptcy laws.The shareholders,who had made loans of $300,000 to the corporation,agreed to accept additional stock with a value of $200,000 instead of repayment on the debt.The Old Line Insurance Company,which had a $400,000 mortgage on the building,agreed to reduce the principal to $250,000.A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand.Finally,the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000.Compute the corporation's gross income and other adjustments necessary as a result of the above transactions.

Tommy,a senior at State College,receives free room and board as full compensation for working as a resident advisor 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.Tommy had the option of receiving the meals or $800 in cash.Tommy accepted the meals.What must Tommy include in gross income from working as a resident advisor?