Exam 4: Income Exclusions

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. -Raymond dies on July 8^th of the current year. Out of love and respect for Raymond, his employer gives his widow $5,000.

Clark, a single taxpayer with expected taxable income of $190,000, needs your advice on an investment decision. Clark wants to invest $10,000 in long-term bonds. Clark can obtain a 6% return by investing in 10-year Ford Motors' bonds. What is the minimum interest rate that Clark should demand from an investment in State of Tennessee bonds of identical risk and duration?

Gordon's family health insurance costs $6,000 annually. Gordon and his wife are in the 24% marginal tax rate bracket. His employer offers a cafeteria plan that would allow him to cover the insurance premium. How much would the insurance coverage effectively cost if he took advantage of his employer's cafeteria plan?

Sanford's employer has a qualified pension plan that allows employees to contribute up to 10% of their gross salaries to the plan. The employer matches the contribution at the rate of 50% of the employee's contribution. Sanford's current annual salary is $80,000. This is his only source of income. If he contributes the maximum amount to the pension plan, what is Sanford's gross income for the current year?

Gifts received are not subject to income taxation; however the donor is subject to the gift tax rules on the making of a gift.

Any income earned subsequent to the death of the decedent from inherited property is excludable from the heir's taxable income.

David, an employee of Lima Corporation, is a U.S. citizen and the regional sales manager for South America. His office is in Miami and he spends nine months each year on business in South America. Which of the following statements about the treatment of his income from Lima Corporation is correct?

During the current year, Vera receives the following interest payments: How much of the $3,675 Vera receives is taxable? Third National B ank Savings Account \ 1,000 Toaster oven received for opening the savings account 100 Treasury B ond interest 2,000 City of Nassau, Bahamas, bonds 500 Interest from Federal income tax refund 75

Dean is a singer. After a singing engagement in a night club in Dallas, an article in Dallas City magazine identified him as a local celebrity who had a drug dependency. Dean sues the magazine for slander. The court determines that the article is false and awards Dean $20,000 for humiliation, $50,000 for loss of singing engagements, and $175,000 in punitive damages. Which of the following statements about the receipt of these payments is/are correct? I.The $50,000 for loss of singing engagements is taxable. II.All of the payments are nontaxable because they are made on account of injury to Dean's reputation ​

Bart's spouse, Carla, dies during the current year. Carla's life insurance policy names Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from the CD. What are the tax effects of these events for Bart? I.The $2 million is excluded from gross income. II.Bart has no taxable income from these transactions. ​

Which of the following statements is/are correct? I.Belle is retired. Her only sources of income are her $1,500 per month pension and $12,000 of Social Security benefits. Belle must include $6,000 of the Social Security benefits in her gross income. II.Eileen and Daren divorce during the current year. Per the divorce agreement, Daren is to receive alimony of $600 per month, $400 per month for child support, and the family house that is valued at $200,000. Daren must recognize $600 per month as income. ​

Items that are excluded from gross income include all of the following with the exception of:

Melvin was in an accident which was the other driver's fault. Melvin received $15,000 for pain and suffering, emotional distress, and lost wages. Melvin may exclude the entire $15,000.

Bonita's employer has a nondiscriminatory childcare reimbursement plan (a type of flexible benefits plan). Bonita expects that her childcare expenses will total $2,000 for the current year. If she does not participate in the reimbursement plan, she will be allowed a $400 tax credit for childcare. Bonita's marginal tax rate is 24%. What are the tax effects of Bonita's alternatives? I.Bonita will save $2,000 by using the reimbursement plan. II.The reimbursement plan is $80 more favorable than the tax credit for Bonita. ​

Summary Problem: Ralph, age 44, is an account executive for Cobb Advertising, Inc. Ralph's annual salary is $90,000. Other benefits paid by Cobb Advertising were: In addition to the benefits above, Cobb Advertising has a qualified pension plan into which employees can contribute (and Cobb matches) up to 5% of their annual salary. Ralph contributes the maximum allowable to the plan. Ralph has never been able to itemize his allowable personal deductions (i.e., he always uses the standard deduction). In 2018, Ralph receives a refund of $300 of his 2017 State income taxes and a 2017 Federal tax refund of $400. Other sources of income: Health and Accident Insurance Premiums \ 1,500 Group-Term Life Insurance Policy ( \ 135,000 of coverage) 250 Country Club Dues 3,660 Dues to professional organizations, trade journals 550 Parking space in downtown garage 3,300 Required: Compute Ralph's 2018 gross income.

Samuel slips on an icy spot in front of an apartment and is hospitalized for three weeks. The owner of the apartment pays Samuel's $14,000 medical expenses and gives him $4,000 for his pain and suffering. Samuel receives his regular $1,800 salary from his employer while he couldn't work and also receives $7,000 in disability pay from a plan that he had purchased. Samuel's gross income from these payments is:

Match each statement with the correct term below. -Employer-provided lodging

Sergio owns Sergio's Auto Restoration as a sole proprietorship. His business has fallen on hard times and his bank has agreed to reduce the debt on his warehouse from $175,000 to $150,000. The warehouse, which was purchased in 2005 at cost of $190,000, has a fair market value of $160,000 and an adjusted basis of $140,000. Before the debt reduction Sergio's total assets are $680,000 and his total liabilities are $700,000. Discuss the tax effect of the debt reduction and determine the minimum amount of income Sergio must recognize from the discharge.

Jolie purchased her residence in 2012 for $500,000 by borrowing $450,000. In 2018, she becomes unemployed and can no longer afford to make the full monthly payment on the mortgage. When the mortgage balance is $430,000, the bank agrees to reduce her mortgage to avoid foreclosure. Jolie is insolvent before and after the mortgage reduction. What is Jolie's basis in her residence if the bank agrees to reduce the mortgage on the residence to $300,000?

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. -Kenneth receives a new Ford Explorer worth $28,900 that his parents bought him for his 24^th birthday.