Exam 4: Income Exclusions

Summary Problem: Tommy, a single taxpayer with no dependents, has the following items that may affect his taxable income. What is his adjusted gross income? Employee salary received \ 70,000 Child support paid to ex-wife 12,000 Total allowable itemized deductions 3,000 Cash gift received from parents 7,000 Gain on the sale of stock 5,000 Loss on the sale of personal residence (10,000) Loss on the sale of stock (6,000) Amount collected from a life insurance policy 40,000 Health insurance premiums paid by his employer 3,000 Winnings from gambling trip to Las Vegas 800 Cost of employer paid parking space 1,200 Government pension benefits received 15,000 Amount his dog earned from being in a television commercial 2,000

Match each statement with the correct term below. -Qualified pension plan

On her 18th birthday, Anna's grandfather gave her stock worth $100,000. During the current year, Anna receives $5,000 of dividends on the stock, which she uses to pay college expenses. The cost of Anna's tuition, fees, and books is $4,000. Anna's income from this event is:

Bonita, age 23, is an employee of Watson Hardware Distributors whose annual salary is $40,000. Watson provides employees with free group-term life insurance at twice their annual gross salary, free health and accident insurance, a qualified pension plan, and a cafeteria plan. Bonita's health and accident insurance cost Watson $1,920. The cost of her group-term life insurance coverage is $520. Watson pension plan allows employees to contribute up to 6% of their annual salary, which Watson matches. Bonita elects to have the maximum pension plan contribution made into the plan. Watson's cafeteria plan provides for $4,000; she elect to have dental coverage for $3,000 and elects to take the other $1,000 in cash. She submits medical insurance claims totaling $900 to the health insurance policy and is reimbursed $550. She receives the remaining $350 of medical insurance claims from the flexible benefits plan. How much gross income does Bonita have from her employment with Watson?

Match each statement with the correct term below. -Gift

Milton is experiencing cash flow problems during the current year. He owes $12,000 on his credit card. The credit card company agrees to reduce the debt to $9,000. Prior to the debt reduction, Milton's total assets were $40,000 and his total liabilities were $39,000. How much income must Milton recognize from the reduction of his credit card balance?

Each of the numbered items below is accorded only one of the following lettered treatments. Use the existing law as it applies to the current year, match the best answer to the statements below. -Marline receives $14 million in punitive damages for a personal physical injury.

Matt, a U.S. citizen, can exclude all of his $120,000 salary he earned as a bullfighter in Spain where he lived all year, from his U.S. tax return.

Sylvia is a United States citizen who has established legal residency in Japan. She has been teaching school there for several years. Her annual salary is $60,000. Anne's tax situation is

Mavis is injured in an automobile accident and sues the driver of the truck that struck her car. The court finds the driver liable and awards Mavis $10,000 to pay her medical expenses, $20,000 for her pain and suffering, and $5,000 for loss of income while she was unable to work. The court also finds the truck driver negligent and awards Mavis $50,000 in punitive damages. Which of the following statements concerning the receipt of these payments is/are correct? I.Mavis is not taxed on any of the payments because they relate to a personal physical injury. II.Mavis must include the loss of income payment in her gross income. III.The punitive damage payment is taxable. ​

Each of the numbered items below is accorded only one of the following lettered treatments. Use the existing law as it applies to the current year, match the best answer to the statements below. -Sarah, the managing partner in an accounting firm, has her downtown parking space ($325/per month) paid by the firm. None of the accounting staff receive parking privileges.

Harry owed $10,000 to his employer. The employer forgave the indebtedness due to Harry's hard work. Also, Harry allowed the holder of the mortgage on his vacation home to foreclose on the property. Although Harry is solvent, he wanted to get out from under the indebtedness. Therefore, the vacation home, which had a fair market value of $200,000, an original cost of $180,000, and a mortgage encumbering the property of $200,000, was surrendered. How much gross income resulted from these events?

Match each statement with the correct term below. -Cafeteria plan

Steve is an employee of Giant Valley Auto City. The company allows all employees to receive a 35% discount on service to their personal vehicles. Steve paid $975 for work done on his truck that normally costs $1,500. How much gross income must Steve recognize because of the discount?

Match each statement with the correct term below. -Damage payments

In May, Josefina receives stock worth $10,000 from the estate of her Uncle. The following November she receives a $500 cash dividend on the stock. Josefina must I.include the $500 dividend in her gross income. II.include the $10,000 value of the stock received in her gross income. ​

Match each statement with the correct term below. -Employee discount

Edward and Inez purchased their home in 2008 for $600,000. They financed the purchase with a $550,000 mortgage. In 2018, they fall upon hard times and cannot make the mortgage payments. They sell their home for $425,000. At the time of the sale, the mortgage balance is $450,000 on their home. The mortgage company cancels the remaining debt. Which of the following is true? ​ I. Edward and Inez will recognize no income on the cancellation of the mortgage loan. II. Edward and Inez will realize a loss on the sale of their home. ​ ​

Victor receives a $4,000 per year scholarship from Southern College. The college specifies that $2,500 is for tuition, books, supplies, and equipment for classes. The other $1,500 is for room and board. As part of the conditions of the scholarship, Victor must also work ten hours per week as a grader, for which he is paid $1,700 for the year. Of the total amount received, Victor will include in income:

Explain why the taxpayer in each of the following situations either does or does not have taxable income and determine the amount, if any, that the taxpayer would have to recognize. a.Leon works for Golfshop America, a large retailer of golf items. Golfshop allows all employees to purchase golf items at a 30% discount. Leon purchases a set of golf clubs for $700 that normally sells for $1,000 (cost of the golf clubs to Golfshop was $600). In addition, Leon is selected as salesman of the year and receives a gold putter worth $900. b.Brenda is a student at Atlantic University. Brenda pays the $15,000 cost ($10,000 for tuition and books; $5,000 for living expenses) of attending Atlantic University with a $5,000 general scholarship from the college of economics, a $5,000 student loan, and $3,000 from her parents. c.Becky pays off the loan on her son's car while he is a student at State University. The son, Daryl, owed $5,400 before Becky made the payment. d.Leona is injured while on the job. She receives $4,000 from workers' compensation during the time she was away from her job.