Exam 5: Gross Income: Exclusions

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his 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)?

Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis.They each were able to convince the mortgage holder to reduce the principal amount on the mortgage.Sally's mortgage is on her personal residence and Ed's mortgage is on rental property he owns.

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:

Heather's interest and gains on investments for 2012 were as follows: Heather's gross income from the above is:

The president of Silver Corporation is assigned a secretary.When the secretary has completed work on company matters, the secretary is available to do the president's personal matters (pick up laundry, buy groceries) so long as the privilege is not abused.No other employee has a personal secretary.

Beverly died during the current year.At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments.In the year of death, he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?

Early in the year, Marion was in an automobile accident during the course of his employment.As a result of the physical injuries he sustained, he received the following payments during the year: What is the amount that Marion must include in gross income for the current year?

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent.Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board).Jena's gross income for the year is:

The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy.Eagle has offered to pay for the employees' hospitalization insurance in exchange for a wage reduction.The employees each currently pay premiums of $4,000 a year for their insurance.

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.

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.

The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2012 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in 2013. The taxpayer must add $5,000 to his 2013 gross income in accordance with the tax benefit rule to correct for the 2012 error.

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.

Nicole's employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass, $75 per month.Nicole can exclude both of these payments from her gross income.

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.

Members of a research team must include in gross income the value of their lodging furnished at the research base located at the South Pole.

In December 2012, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2013. However, she did not use the funds to pay the tuition until January 2013.Emily can exclude the $2,500 from her gross income in 2012.

The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account.

Adam repairs power lines for the Egret Utilities Company.He is generally working on a power line during the lunch hour.He must eat when and where he can and still get his work done.He usually purchases something at a convenience store and eats in his truck.Egret reimburses Adam for the cost of his meals.