Exam 5: Gross Income: Exclusions

A debtor undergoing a Chapter 11 reorganization under the bankruptcy laws who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income.

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings. The copies made during the year would have cost $150 at a local office supply.

Peggy is an executive for the Tan Furniture Manufacturing Company.Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items.The retail price of the furniture was $12,500, and Tan's cost was $9,000.The company also paid for Peggy's parking space in a garage near the office.The parking fee was $600 for the year.All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy.However, the company does not pay other employees' parking fees.Peggy's gross income from the above is:

Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages.Jack must include in his gross income as a damage award:

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may exclude the $5,000 scholarship she received although the scholarship is to attend a private high school.

In 2012, Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $25,000 for loss of income, and $100,000 in punitive damages.Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $120,000 for pain and suffering, $25,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

The exclusion of interest on educational savings bonds:

Because graduate teaching assistantships are awarded on the basis of academic achievement, the payments are generally scholarships and therefore are excluded from gross income.

The taxpayer is a Ph.D.student in accounting at City University.The student is paid $1,500 per month for teaching two classes.The total amount received for the year is $13,500.

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.

Sam was unemployed for the first two months of 2011.During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy.Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

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.

Matilda works for a company with 1,000 employees.The company has a hospitalization insurance plan that covers all employees.However, the employee must pay the first $3,000 of his or her medical expenses each year.Each year, the employer contributes $1,500 to each employee's health savings account (HSA).Matilda's employer made the contributions in 2011 and 2012, and the account earned $100 interest in 2012.At the end of 2012, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy.As a result, Matilda must include in her 2012 gross income:

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.

Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock.During the year, Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split.The value of the shares received was $4,800.Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend.Stuart did not have the option of receiving cash from Blue.The additional shares he received had a value of $7,200.Stuart's gross income from the receipt of the additional Turquoise and Blue shares is:

The exclusion for health insurance premiums paid by the employer applies to:

Sonja is a United States citizen who has worked in Spain for the past 10 months.She received $5,000 a month as compensation.Her employer has offered to extend Sonja's contract to work in Spain for another 5 months at the same rate of pay.If she rejects the offer, she can return to the United States and receive the same salary.While working in Spain, she is subject to the Spain income tax, which is approximately 11% of her gross pay.The marginal tax rate on her income taxed in the United States is 25%.Compare Sonja's after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States.

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.

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.