Exam 4: Income Exclusions

Hector's employer has a qualified pension plan to which it contributes 6% of his gross salary. Hector's current annual salary is $50,000. The pension plan also earns $2,500 during the current year on contributions made to the plan on behalf of Hector. What is Hector's gross income from these transactions for the current year?

Barbara was the legal owner of a $100,000 life insurance policy on herself. Glenna is the stated beneficiary. Shortly before her death, Barbara transfers ownership of the policy to Glenna for $15,000. Glenna makes one premium payment in the amount of $1,000 before Barbara dies. Glenna subsequently receives the $100,000 life insurance proceeds. How much of the $100,000 is taxable to Glenna?

Benton leases a Park City condominium from Walnut Rental for $750 a month. Benton operates a carpet store in Park City. During October and November Benton does not make his monthly payments. Instead, Walnut allows him to paint another rental property of Walnut's instead of paying rent. What is Walnut's tax treatment of these events? I.Walnut can capitalize the $1,500 and depreciate it. II.Walnut can deduct the $1,500 as an operating expense. III.Walnut includes the $1,500 in its gross income for the year. IV.The $1,500 must be added to the basis of the condominium. ​

Linc's annual salary is $80,000. His employer, Riddle Corporation, has a qualified pension plan that allows employees to contribute up to 10% of their salaries, which is matched by the employer. Linc and Riddle Corporation each pay $7,500 into the plan. Riddle provides all employees with health and accident insurance by paying 75% of the cost of the policy. Linc's policy cost $3,200. Riddle also offers a flexible benefits plan that employees can use to pay their share of the cost of the medical insurance, other medical costs, and child-care costs. Linc elects to have $2,500 paid into the plan. He uses $800 to pay his share of the medical insurance costs and was reimbursed for $1,700 of medical and childcare costs from the plan. As an officer, Riddle Corporation pays Linc's $3,300 parking cost. Riddle Corporation has a workout room in its office building that is used exclusively by employees and their families. Dues to a comparable facility would be $100 per month. What is Linc's 2018 taxable income from Riddle Corporation?

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.Cory is an employee of Simmons, Inc. Several years ago Cory purchased a used bus from Simmons. The bus had an adjusted basis of $30,000. Cory agreed to pay $20,000 (the fair market value of the bus) for the bus if Simmons would finance the purchase over four years. During the current year, when the debt on the bus was $5,000, Simmons told Cory that he didn't have to make any more payments on the bus because of his perfect safety record over the last five years. b.Several years ago Lauren's grandfather gave her $10,000 worth of City of Eau Claire, Wisconsin bonds. After receiving $400 of interest in the current year, she sells the bonds for a gain of $800. c.Portal Corporation employs Berry at an annual salary of $40,000. Portal provides a qualified pension plan into which all employees are permitted to contribute up to 6% of their annual salaries. Portal matches contributions dollar-for-dollar. Berry contributes 6%. d.Carla, a student at State College, receives a $3,000 scholarship for her grades in previous years. She also earns $6,000 from a part time job. Her annual costs are $6,000 for tuition, books and supplies and $7,000 for room and board. Her parents pay the remaining $4,000 of her college costs.

While staying at Vail Heights Resort, Jared falls over a pool cleaning vacuum hose left near the edge of the swimming pool, and suffers severe internal injuries. As part of the settlement, Jared receives the following amounts: How much of the settlement must be included in Jared's Gross Income? Pain and Suffering \ 105,000 Loss of Wages 16,200

To keep the employees on the premises in case an emergency arises, the Riverview Hotel provides meals to its employees in a room adjacent to their restaurant. Since the meals are provided as a convenience to the employer and on their premises, the value of the meals is excluded in the income of the employees.

Bob and Linda purchased their vacation home in 2015 for $400,000. They financed the purchase with a $350,000 mortgage. In 2018, they fall upon hard times and cannot make the mortgage payments, and their mortgage is foreclosed. The mortgage company sells the house for $300,000. At the time of the sale, the mortgage balance is $325,000. The mortgage company cancels the remaining debt on the mortgage. How much income do Bob and Linda have from the cancellation of the remaining debt on their home?

Graham and Lucy purchased their home in 2004 for $450,000. They finance the purchase with a $350,000 mortgage. In 2012, when their original mortgage balance was $340,000, they took out a second mortgage for $100,000 and added a second garage. In 2018, they fall upon hard times and cannot make the mortgage payments. The mortgage company sells their home for $350,000. At the time of the sale, the mortgage balances are $330,000 on their home and $90,000 on their second mortgage. The mortgage company cancels the remaining debt. Immediately before the cancellation, Graham and Lucy's total assets (including the $350,000 value of their home) were valued at $450,000 and their liabilities were $540,000 What are the income tax consequences of the sale of the residence and cancellation of the debt by the mortgage company?

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. -Jeane's medical insurance carrier reimburses him 80% of his qualified medical expenses. During the current year Jeane receives $3,682 in payments.

The income tax treatment of damages received from personal physical injuries is an application of the:

Melissa owns 40,000 shares of Wilkerson Corporation common stock that cost $99,000 four years ago. During the current year, Wilkerson distributes a 10% stock dividend to shareholders. Melissa receives 4,000 new shares when the market value of the stock is $9 per share. Later in the year, the corporation distributes a cash dividend of $0.50 per share. What are the tax effects of these distributions to Melissa? I.The $22,000 cash dividend is included in gross income. II.The $36,000 stock dividend is included in gross income. III.Only $20,000 of the cash dividend is included in gross income. IV.At the end of the year, the per share basis in the stock is $2.25. ​

Francisco's employer establishes Health Savings Accounts (HSA's) for its employees. The plan provides for his employer to pay $1,000 into Francisco's HSA, and Francisco to also contribute $1,000 to his HSA. During the year, the plan pays for $1,500 of Francisco's medical expenses not covered by the employer's regular medical insurance plan. I.Francisco must include the $1,000 contribution by his employer in his adjusted gross income. II.The $500 still in the account at the end of the year carries forward to the following year. ​

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. -David's employer laid him off for three months during the slow winter season. He collects $4,375 in unemployment compensation.

Myra's employer paid her health and accident insurance premium of $5,600. Since she had the option to take the cash and purchase her own insurance, the $5,600 must be included in income.

Nancy teaches school in a Chinese university. She is a U.S. citizen and has been teaching in China for 5 years. In the current year she will earn $100,000. What are some of Nancy's options for reporting U.S. gross income? I.She may include the foreign earned income in her gross income, calculate her U.S. income tax, and take a tax credit for foreign taxes paid. II.She may exclude up to $104,100 in foreign earned income for the current year. III.She may exclude all of her income because it is earned outside of the U.S. ​

Norma is in the 32% marginal tax bracket. Because of her high tax rate, Norma would like to reinvest a $10,000, 6%, certificate of deposit in a tax-exempt bond. What is the minimum rate of interest Norma would have to receive to make the tax exempt-bond a more profitable investment?

Maureen is injured on the job and has to retire. Before her retirement, Maureen earned $20,000 in wages. After her retirement, her employer pays her $5,000 for vacation time that accrued before she was injured. In addition, she receives $10,000 to compensate her for sick pay from an accident and health insurance plan that was paid for by her employer. How much of the above payments should Maureen include in her gross income?

Rex is a programmer with Monon Electronics Corporation. His annual salary is $50,000. As part of his compensation package, he receives a term-life insurance policy equal to his annual salary. All members of the programming staff receive this benefit. Members of the sales staff have a cafeteria plan from which to select various benefits including life and health insurance coverage. I.Rex has an excludable amount of income because of the nature of his employment benefit. II.Rex must include $50,000 in his gross income because that is the value of the insurance benefit. III.Rex must include the cost of the insurance policy in his gross income. IV.If the benefit is only available to "key" employees and Rex is a "key" employee, he may exclude the cost of the premiums paid from his gross income. ​

Match each statement with the correct term below. -Punitive damages