Exam 5: Gross Income: Exclusions

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.

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.

Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk.

In 2012, Bob's unincorporated business has a net loss of $30,000.Bob has investment income of $40,000.Itemized deductions and personal exemptions total $26,000.Thus, on his 2012 tax return, his taxable income was a negative $16,000.In 2012, Bob discovered that an employee has stolen $25,000 (pocketing the proceeds from unrecorded sales) from the business.This $25,000 theft loss is included in calculating the net loss of Bob's business of $30,000.In 2013, Bob recovers the $25,000 from the former employee.How can the tax benefit rule assist Bob in 2013?

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

George is employed by the Quality Appliance Company.All the full time employees are allowed to purchase appliances at the company's cost plus 10%.The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company.George purchased a refrigerator for $500.The company's normal selling price for the refrigerator is $800.George also received a service contract, at no charge, that had a value of $150.During the year, George was required to have his refrigerator serviced once.The cost of the call would have been $75 if he had not had the service contract.Is George required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call?

Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future, Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor.Albert had a life insurance policy with a face amount of $100,000.Albert had paid $10,000 of premiums on the policy.The insurance company has offered to pay him $75,000 to cancel the policy, although its cash surrender value was only $60,000.Albert accepted the $75,000.Albert used $5,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Section 119 excludes the value of meals from the employee's gross income:

Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000, but she already owned more jewelry than she desired.

In December 2012, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2013 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2012 tax return.He had $150,000 of taxable income that year. On June 30, 2013, he sold the building and, as a result, received a $500 refund on his fire insurance premiums.As a result of the above:

Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. Which of the following statements is true?

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.

Doug and Pattie received the following interest income in the current year: Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account.What amount of interest income should they report on their joint income tax return?

Calvin's property was taken by the State of Louisiana to build a highway overpass. He disputed the amount of the condemnation award he was to receive and ultimately collected an amount for the property plus $15,000 interest on the award. Calvin can exclude from gross income the $15,000 interest he received from the State of Louisiana associated with the condemnation award.

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?

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?

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?