Exam 4: Gross Income: Concepts and Inclusions

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

After the divorce in 2015, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child. Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21. During the year, Jeff paid the $18,000 required under the divorce agreement. Darlene must include the $12,000 in gross income.

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Green, Inc., provides group term life insurance for all of its employees. The coverage equals twice the employee's annual salary. Sam, a vice-president, worked all year for Green, Inc., and received $200,000 of coverage for the year at a cost to Green of $1,500. The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection. How much must Sam include in gross income this year?

In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

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?

Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordon's age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2018 gross income which of the following amounts?

Jim and Nora, residents of a community property state, were married in early 2017. Late in 2017 they separated, and in 2018 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2017 and 2018.

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2018. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2019. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:

Under the terms of a divorce agreement entered into in 2017, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income):

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2016 that will pay $1,100 upon its maturity on June 30, 2018. The taxpayer must recognize a portion of the income in 2017.

Ralph purchased his first Series EE bond during the year. He paid $709 for a 10-year bond with a $1,000 maturity value. The yield to maturity on the bonds was 3.5%. Ralph is not required to recognize the $291 ($1,000 - $709) original issue discount until the bond matures. However, Ralph can elect to amortize the discount over the ten-year period.

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Judy is a cash basis attorney. This year, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services. By the end of the year, the value of the stock had decreased to $2,000. She continued to hold the stock. Judy must recognize $4,000 of gross income from the stock for the current year.

Teal company is an accrual basis taxpayer. On December 1, 2018, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2019. Teal delivered the item on January 4, 2019. Teal included the sale in its 2018 income for financial accounting purposes.

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?

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:

Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income.

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

At the beginning of 2018, 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 $1,240 of income from the certificate of deposit in 2018, and $3,600 from the Series EE bonds in 2027.