Exam 4: Gross Income: Concepts and Inclusions

Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000. Fred later sells the stock for $100,000. Fred's recognized gain from the sale of the stock is $5,000.

Rachel owns rental properties. When Rachel rents to a new tenant, she usually requires the tenant to pay an amount in addition to the first month's rent. The additional amount serves as security for damages to the property and the tenant's failure to pay future rents. How should the payments be characterized (e.g., on lease documents) to minimize Rachel's current tax liability?

Jessica is a cash basis taxpayer. When Jessica failed to repay a loan, the bank garnished her salary. Each week $60 was withheld from Jessica's salary and paid to the bank. Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

Fred is a full-time teacher. He has written a book and receives royalties from it. Fred's mother, Mabel, is age 65 and lives on her Social Security benefits and gifts from her son, Fred. This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support. Fred must include the amount of the royalty check in his gross income.

The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.

The taxable portion of Social Security benefits may be affected by:

Roy is considering purchasing land for $10,000. He expects the land to appreciate in value 8% each year (compounded) and he will sell it at the end of 10 years. He also is considering purchasing a bond for $10,000. The bond does not pay any annual interest, but will pay $21,589 at maturity in 10 years. The before-tax rate of return on the bond is 8%. Roy is in the 40% (combined Federal and State) marginal tax bracket. Roy has other investments that earn an 8% before-tax rate of return. Given that the compound interest factor at 8% is 2.1589, and at 4.8% the factor is 1.5981, which alternative should Roy choose?

Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income):

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 8 payments. Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Green, Inc., provides group term life insurance for all of its employees. The coverage equals twice the employee's annual salary. Sam, a vice-president, worked all year for Green, Inc., and received $200,000 of coverage for the year at a cost to Green of $1,500. The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection. How much must Sam include in gross income this year?

Ralph purchased his first Series EE bond during the year. He paid $709 for a 10-year bond with a $1,000 maturity value. The yield to maturity on the bonds was 3.5%. Ralph is not required to recognize the $291 ($1,000 - $709) original issue discount until the bond matures. However, Ralph can elect to amortize the discount over the ten-year period.

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2017, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2018, before Rhonda filed her 2017 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2018. Things were going well in 2018 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2017 earnings. The partnership's income for 2018 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2017 and $18,000 in 2018.

How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2017 is $90,000. Only $40,000 was distributed to him in January 2017, and this was his share of the 2016 partnership profits. None of the 2017 profits were distributed. Mark's gross income from the partnership for 2017 is $40,000.

Daniel purchased a bond on July 1, 2017, at par of $10,000 plus accrued interest of $300. On December 31, 2017, Daniel collected the $600 interest for the year. On January 1, 2018, Daniel sold the bond for $10,200.

Arnold was employed during the first six months of the year and earned a $90,000 salary. During the next 6 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.

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2016. The dividend checks were mailed on December 31, 2016. Ed, a cash basis shareholder, received the dividend check on January 2, 2017. Ed cannot delay reporting the income from the dividend until 2017.

For purposes of determining gross income, which of the following is true?

Under the formula for taxing Social Security benefits, low income taxpayers are not required to include any of the Social Security benefits in gross income. But as income increases, 50% of the Social Security benefits may be included in gross income. Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax. Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

An advance payment received in June 2017 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.