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Exam 4: Gross Income: Concepts and Inclusions

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Question 21

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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?

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The formula for the taxation of Social S...

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Question 22

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Susan purchased an annuity for $200,000. She is to receive $18,000 each year and her life expectancy is 13 years. If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.

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Question 23

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In 2019 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?

After his 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.

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 30% of the winner's AGI.

At the beginning of 2019, 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 2019, and $3,600 from the Series EE bonds in 2028.

Under the terms of a divorce agreement entered into in 2017, Ron is to pay his former wife Jill $10,000 per month. The payments are to be reduced to $7,000 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:

In January 2019, 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 2019.

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?

April, a calendar year taxpayer, is a 40% partner in Pale Partnership, whose fiscal year ends on September 30th. For the fiscal year ending September 30, 2019, the partnership had $400,000 net income and for fiscal year ending September 30, 2020, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2019 is $160,000 ($400,000 × 40%).

Jim and Nora, residents of a community property state, were married in early 2018. Late in 2018 they separated, and in 2019 they divorced. Each earned a salary, and they received income from community-owned investments in all relevant years. They filed separate returns in 2018 and 2019.

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

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.

Katherine is 60 years old and is bargaining with her employer over deferred compensation. In exchange for reducing her current year's salary by $50,000, she can receive a lump-sum amount in five years when she will retire. If she receives the $50,000 in the current year, she will invest in certificates of deposit that yield 5%. Katherine is in the 24% marginal tax bracket in all relevant years. What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.]

Jay, a single taxpayer, retired from his job as a public school teacher in 2019. He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months. He contributed $36,000 to the pension plan during his 35- year career, so his adjusted basis is $36,000. Jay collected 192 payments before he died. What is the correct method for reporting the pension income?

Ted was shopping for a new automobile. He found one that met his needs and agreed to purchase it for $23,000. He had shopped around and concluded that he could not get a better price from another dealer. After he had paid for the automobile, the dealer called to notify Ted that he was entitled to a manufacturer's rebate of $1,500. The next week he received a $1,500 check from the manufacturer. How much should Ted include in gross income?

Jessica is a cash basis taxpayer. When she failed to repay a loan, the bank garnished her salary. Each week $60 was withheld from Jessica's salary and paid to the bank. Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2019, Linda made several deliveries and collected $400 from customers. However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2020. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2020.

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?