Exam 4: Gross Income: Concepts and Inclusions

Theresa,a cash basis taxpayer,purchased a bond on July 1,2007,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2010,she sold the bond for $10,150,which included $200 of accrued interest.

The amount of an individual's salary withheld and paid into the Social Security program reduces the amount of benefits received that must be included in gross income after the individual reaches retirement age.

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?

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan,the bank garnished her salary.Each week $40 was withheld from Jessica's salary and paid to the bank.Jessica is not required to include the $40 each week in her gross income because she does not have the ability to pay tax on money she did not receive.

The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.

Freddy purchased a certificate of deposit for $20,000 on January 1,2010.The certificate's maturity value in two years (December 31,2011)is $22,050,yielding 5% before-tax interest.

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

Kathy operates a gym.She sells memberships that entitle the member to use the facilities at any time.A one-year membership costs $360 ($360/12 = $30 per month);a two-year membership costs $600 ($600/24 = $25 per month).Cash payment is required at the beginning of the membership period.On July 1,2010,Kathy sold a one-year membership and a two-year membership.

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 $40,000 has no gross income from the life insurance protection provided by the employer.

In January 2010,Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year,but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558,with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2010.

Daniel purchased a bond on July 1,2010,at par of $10,000 plus accrued interest of $400.On December 31,2010,Daniel collected the $800 interest for the year.On January 1,2011,Daniel sold the bond for $10,200.

Father made an interest-free loan of $15,000 to Son who used the money to buy a certificate of deposit.If Son's investment income for the year is less than $1,000,Father is not required to impute interest income.

Margaret made a $90,000 interest-free loan to her son,Adam,who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit.Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit.The relevant Federal interest rate is 8% compounded semiannually.The loan is outstanding for the entire year.

In the case of a zero interest below-market loan by a corporation to a shareholder-employee,why would the corporation prefer that the loan was made to the individual because he or she was an employee,rather than because he or she was a shareholder? What could be done to strengthen the corporation's argument?

Under the terms of a divorce agreement,Ron is to pay his former wife Jill $10,000 per month.The payments are to be reduced to $3,000 per month when their 15 year-old child reaches age 18.During the current year,Ron paid $120,000 under the agreement.Assuming all of the other conditions for alimony are satisfied,Ron can deduct from gross income (and Jill must include in gross income)as alimony:

Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2010.Copper Company is a publicly held company that has declared a $1.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected,Copper Company declared a $1.00 per share dividend on September 30th,payable on October 15th,to stockholders of record as of October 10th.The daughter received the $1,000 dividend on October 18,2010.

Betty purchased an annuity for $24,000 in 2010.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.

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

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 $100.For Tom to have a positive cash flow from working and hiring the painter:

In some foreign countries,the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?