Exam 4: Gross Income: Concepts and Inclusions

In 2004, Terry purchased land for $150,000. In 2012, Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property. Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.

The Green Company, an accrual basis taxpayer, provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services, Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year, the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above, Green must include in gross income for the current year:

In 2012, Todd purchased an annuity for $200,000.The annuity is to pay him $2,500 per month for the rest of his life.His life expectancy is 100 months.Which of the following is correct?

Turner, Inc., provides group term life insurance to the officers of the corporation only.Janet, a vice-president, received $400,000 of coverage for the year at a cost to Turner, Inc.of $5,600.The Uniform Premiums (based on Janet's age) are $15 a year for $1,000 protection.How much of this must Janet include in gross income this year?

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

With respect to the prepaid income from services, which of the following is true?

Betty purchased an annuity for $24,000 in 2012.Under the contract, Betty will receive $300 each month for the rest of her life.According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.

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.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2009, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2012, she sold the bond for $10,300, which included $200 of accrued interest.

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

Which of the following is not a requirement for an alimony deduction?

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?

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2012.The certificate's maturity value in two years (June 30, 2014) is $21,218, yielding 3% before-tax interest.

Teal company is an accrual basis taxpayer.On December 1, 2012, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2013. Teal delivered the item on January 4, 2013.Teal included the sale in its 2012 income for financial accounting purposes.

Jake is the sole shareholder of an S corporation that earned $50,000 in 2012. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2012. Jake is required to recognize $15,000 of income from the S corporation in 2012.

Travis and Andrea were divorced.Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000), and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000).Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks.In addition, Andrea was to receive $50,000 for eight years.

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest.In December, Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Terri purchased an annuity for $100,000.She was to receive $8,000 per year and her life expectancy was 20 years. She died after receiving 15 payments.Terri's final return should reflect a loss of $40,000 (5 payments not made ´ $8,000).

José, a cash method taxpayer, is a partner in J&T Accounting Services, a calendar year partnership.Under the partnership agreement, José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2012. However, in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2012, José received $40,000 as his share of distributed 2011 profits.The partnership earnings before partners' withdrawals for 2012 totaled $1 million.Compute José's gross income from the partnership for 2012.