Exam 4: Gross Income: Concepts and Inclusions

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day.If Tom works, he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Ted loaned money to a business acquaintance. The loan was for $100,000 and was to be repaid at the rate of $13,000 each year for ten years. The effective interest rate was 5%. He also purchased an annuity contract for $100,000 that would pay him $13,000 each year for ten years. Will Ted's gross income for the first year differ with the loan as compared to the annuity contract? Explain your answer.

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2012 that will pay $1,100 upon its maturity on June 30, 2014. The taxpayer must recognize a portion of the income in 2012.

A sole proprietorship purchased an asset for $1,000 in 2012 and its value was $1,500 at the end of 2012. In 2013, the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2013 but an economic loss of $100 in 2013.

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 $250,000 of coverage for the year at a cost to Green of $3,000.The Uniform Premiums (based on Sam's age) are $.30 per month for $1,000 of protection.How much must Sam include in gross income this year?

The annual increase in the cash surrender value of a life insurance policy:

The B & W partnership earned taxable income of $100,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $40,000 during the year. Bryan must include in gross income his $50,000 share of the profits from the partnership.

Determine the proper tax year for gross income inclusion in each of the following cases.

In December 2012, Mary collected the December 2012 and January 2013 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2012 for the 2013 rent should be included in her 2013 gross income.

At the beginning of 2013, Mary purchased a 3-year certificate of deposit (CD) for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%. She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000. Mary must recognize $1,240 of income from the certificate of deposit in 2013, and $3,600 from the Series EE bonds in 2022.

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Lois, who is single, received $9,000 of Social Security benefits.She also received $30,000 from dividends, interest, and her employer's pension plan.If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by less than $1,000.

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

Rachel, who is in the 35% marginal tax bracket, is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120, and the cost is calculated to yield her an expected 6% return on her investment.As an alternative, Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?

Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00, when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.Her share of the profits for 2012 was $90,000.She withdrew $40,000 from the partnership in 2012.In January 2013, after her share of the profits for 2012 had been computed, she withdrew her remaining $50,000 share of 2012 profits.As a result, Rhonda must recognize $40,000 of gross income in 2012 and $50,000 in 2013.

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year), or two years in advance ($950).In September 2011, the company collected the following amounts applicable to future services: As a result of the above, Orange Cable should report as gross income: