Exam 4: Gross Income: Concepts and Inclusions

Jay,a single taxpayer,retired from his job as a public school teacher in 2010.He is to receive a retirement annuity of $1,000 each month and his life expectancy is 150 months.He contributed $30,000 to the pension plan during his 35-year career;so his adjusted basis is $30,000.What is the correct method for reporting the pension income?

Sarah,a widow,is retired and receives $24,000 interest income and dividends and $8,000 in Social Security benefits.Sarah is considering selling a stock at a $6,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?

When stock is sold after the dividend is declared but prior to the record date,the buyer must recognize as income the dividend received,rather than a recovery of the amount of the dividend that is included in the price of the stock.

Orange Cable TV Company,an accrual basis taxpayer,allows its customers to pay by the year in advance ($350 per year),or two years in advance ($680).In September 2010,the company collected the following amounts applicable to future services: As a result of the above,Orange Cable should report as gross income:

At the beginning of 2010,Mary purchased a 3-year certificate of deposit (CD)for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize income from the certificate of deposit each year,2010-2012,and $3,600 from the Series EE bonds in 2019.

In 2010,Todd purchased an annuity for $180,000.The annuity is to pay him $2,000 per month for the rest of his life.His life expectancy is 150 months.Which of the following is correct?

Seth,a calendar year taxpayer,purchased an annuity for $20,000 in 2008.The annuity was to pay him $2,000 on the first day of each year,beginning in 2008,for the remainder of his life.Seth's life expectancy at the time he purchased the annuity was 15 years.In 2010,Seth developed a deadly disease,and doctors estimated that he would live for no more than 24 months.

Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00,when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily received sole ownership of their personal residence.This property transfer is classified as a property settlement rather than as alimony as the transfer was a result of a divorce.

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

Judy is a cash basis attorney.In 2010,she performed services in connection with the formation of a corporation and received stock with a value of $3,000 for her services.By the end of the year,the value of the stock had decreased to $1,000.She continued to hold the stock.Judy must recognize $3,000 of gross income from the stock for 2010.

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization,then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 25% of the winner's AGI.

Sharon made a $60,000 interest-free loan to her son,Todd,who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

Edward and Jane are divorced in 2009.At the time of the divorce,Edward had a lawsuit pending.He had filed suit against a former employer for overtime pay.As part of a divorce agreement,Edward agreed to pay Jane one-half of the proceeds from the lawsuit.In 2010,Edward collected $100,000 from the former employer and paid Jane $50,000.What are the tax consequences for Edward receiving the $100,000 and then paying Jane the $50,000?

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.

On January 5,2010,Jane purchased a bond paying interest at 6% for $30,000.On September 30,2010,she gave the bond to Tim.The bond pays $1,800 interest on December 31.Jane and Tim are cash basis taxpayers.When Tim collects the interest in December 2010:

Arnold was employed during the first six months of the year and earned a $46,000 salary.During the next 6 months,he collected $4,800 of unemployment compensation,borrowed $6,000 (using his personal residence as collateral),and withdrew $1,000 from his savings account (including $60,interest).His luck was not all bad,for in December he won $800 in the lottery on a $5 ticket.Because of his dire circumstances,Arnold's parents loaned him $10,000 (interest-free)on July 1 of the current year,when the Federal rate was 8%.Arnold did not repay the loan during the year and used the money for living expenses.Calculate Arnold's adjusted gross income for the year.

Debbie is age 67 and unmarried and her only sources of income are $240,000 in taxable interest and $20,000 of Social Security benefits.Debbie's adjusted gross income for the year is:

ABC Corporation mails out its annual Christmas bonuses to employees on December 23rd.Ed,a cash basis taxpayer,is an employee who is on a ski trip until January 3rd of the new year,but is aware that his annual Christmas bonus arrives on the 28th of December.Ed can delay reporting the income from the bonus until the new year.

Wayne owns a 25% interest in the capital and profits of Emerald Company (a calendar year partnership).For tax year 2010,the partnership earned revenue of $500,000 and had operating expenses of $200,000.During the year,Wayne withdrew from the partnership a total of $64,000.He also invested an additional $20,000 in the partnership.For 2010,Wayne's gross income from the partnership is: