Exam 5: Gross Income: Exclusions

The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime, approximately 25 days each year. The supper money received:

If an employer pays for the employee's long-term care insurance premiums, the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.

Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: ​ The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return For comparable risk. Which of the following is correct:

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

Ron, age 19, is a full-time graduate student at City University. During 2017, he received the following payments: ​ Ron served as a resident adviser in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron's adjusted gross income for 2017?

Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.

Melody works for a company with only 22 employees. Her employer contributed $2,000 to her health savings account (HSA), and the account earned $100 in interest during the year. Melody withdrew only $1,200 to pay medical expenses during the year. Melody is not required to recognize any gross income from the HSA for the year.

Carmen had worked for Sparrow Corporation for thirty 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 whether Carmen (or her estate) and her spouse realize any taxable income from the above.

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement. The payments must be included in her gross income.

If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wife's employer paid all of the premiums on the policy. Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year. Mel's Federal gross income from the above is $2,500.

The CEO of Cirtronics Inc., discovered that the company's competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.

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.

Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income:

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

The Royal Motor Company manufactures automobiles. Non-management employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Which of the following statements is correct?

Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000. Ashley is required to include only $9,000 in her gross income.

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted.

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