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Exam 5: Gross Income: Exclusions

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Question 21

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In December 2019, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the spring semester of 2020. However, she did not use the funds to pay the tuition until January 2020.Emily can exclude the $2,500 from her gross income in 2019.

A) True
B) False

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Question 22

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Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence, she received her regular salary of $8,000 from her employer.For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased.Of the $26,000 she received, Julie must include in gross income:

A) $0.
B) $6,000.
C) $8,000.
D) $14,000.
E) $20,000.

F) B) and E)
G) B) and D)

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Question 23

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Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy.In the first year, Carin collected $17,500 from the insurance company.She must include in gross income:

Iris collected $150,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $18,000 each.

Matilda works for a company with 1,000 employees.The company has a hospitalization insurance plan that covers all employees.However, the employee must pay the first $3,000 of his or her medical expenses each year.Each year, the employer contributes $1,500 to each employee's health savings account (HSA) .Matilda's employer made the contributions in 2018 and 2019, and the account earned $100 interest in 2019.At the end of 2019, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy.As a result, Matilda must include in her 2019 gross income:

A taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2019 and as a result, his taxable income was reduced by $5,000.The taxpayer discovered his error in 2020.The taxpayer must add $5,000 to his 2020 gross income in accordance with the tax benefit rule to correct for the 2019 error.

Zack was the beneficiary of a life insurance policy on his deceased wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his gross income.

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses.At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account.

Tommy, a senior at State College, receives free room and board as full compensation for working as a resident adviser at the university dormitory.The regular housing contract is $2,000 a year in total, $1,200 for lodging, and $800 for meals in the dormitory.He had the option of receiving the meals or $800 in cash and accepted the meals.What must Tommy include in gross income from working as a resident adviser?

Juan was considering purchasing an interest in a tax-exempt bond fund for $100,000 when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative, Juan can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Benny loaned $100,000 to his controlled corporation.When it became apparent that the corporation would not be able to repay the loan in the near future, Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

Margaret is trying to decide whether to place funds in a qualified tuition program.Her son will be attending college in four years.She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments.Thus, $10,000 will accumulate to $11,948 (after-tax) in four years.Margaret expects tuition to increase at the rate of 5% each year to $12,155 in four years.Her son will be in the 12% marginal tax bracket in all relevant years.Given these assumptions, should Margaret participate in the qualified tuition program?

Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness.The premiums for Meg's coverage were $1,800.Meg was absent from work for two months as a result of a kidney infection.Her employer's insurance company paid Meg's regular salary of $8,000 while she was away from work.Meg also collected $2,000 on a wage continuation policy she had purchased.Meg must include $11,800 in her gross income.

In 2019, Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2020, Theresa collected from his insurance company.She received $15,000 for loss of income, $10,000 for pain and suffering, $50,000 for punitive damages, and $6,000 for medical expenses that she had deducted on her 2019 tax return (the amount in excess of 10% of adjusted gross income).As a result of this, Theresa's 2020 gross income is increased by $56,000.

If an employer pays for an employee's long-term care insurance premiums, the employee can exclude from gross income the premiums, but all of the benefits collected must be included in gross income.

Sharon had some insider information about a corporate takeover.She unintentionally informed a friend, who immediately bought the stock in the target corporation.The takeover occurred and the friend made a substantial profit from buying and selling the stock.The friend told Sharon about his stock dealings and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000, but she already owned more jewelry than she desired.

If a tax-exempt bond will yield approximately 0.65 (1 - 0.35) times the yield on a taxable bond of equal risk, who benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or the investors?

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe.After the company had paid $400,000 in premiums, Joe died, and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.

All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee) .None of the employees has sufficient medical expenses to deduct the premiums.Instead of giving raises next year, United is considering paying the employee's hospitalization insurance premiums.If the change is made, the employee's after-tax and insurance pay will: