Exam 5: Gross Income: Exclusions

In December 2017, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2018 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2017 tax return. He had $150,000 of taxable income that year. On June 30, 2018, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:

Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:

Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. The premiums for Meg's coverage were $1,800. Meg was absent from work for two months as a result of a kidney infection. Meg's employer's insurance company paid Meg's regular salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had purchased. Meg must include $11,800 in her gross income.

The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2017 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in 2018. The taxpayer must add $5,000 to his 2018 gross income in accordance with the tax benefit rule to correct for the 2017 error.

Ben was hospitalized for back problems. While he was away from the job, he collected his regular salary from an employer-sponsored income protection insurance policy. Ben's employer-sponsored hospitalization insurance policy also paid for 90% of his medical expenses. Ben also collected on an income protection policy that he purchased. Which of the above sources of income are taxable? Explain the basis for excluding any item or items.

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

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 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barney's gross income from the above is:

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:

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 non-employee charge was $20 per round.

Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Ridge 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, Ridge is required to include in gross income.

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.

Bob had a terminal illness and realized that he "can't take it with him." Therefore, he cashed in his insurance policy and received $120,000. He had paid $50,000 in premiums on the policy. He used the money to fulfill his lifelong ambitions of going to the Super Bowl, driving an expensive sports car, and vacationing in Bermuda.Was Bob's behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use?

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.

Calvin miscalculated his income in 2015 and overpaid his state income tax by $10,000. In 2016, he amended his 2015 state income tax return and received a $10,000 refund and $900 interest. Calvin itemized his deductions in 2015, deducting $12,000 in state income tax and $30,000 total itemized deductions. As a result of the amended return in 2016, Calvin must recognize $10,900 of gross income.

James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: ​ 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?

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

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: a.The progressiveness of the tax system? b.The complexity of the tax system?

On January 1, 2007, 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, 2017, 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:

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.