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Exam 5: Gross Income Exclusions

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Question 61

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Margaret is trying to decide whether to place funds in a qualified tuition program.Her son will be attending college in 4 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 4 years.Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 years.Her son will be in the 15% marginal tax bracket in all relevant years.Given these assumptions,should Margaret participate in the qualified tuition program?

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Margaret can accumulate $11,948 by inves...

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Question 62

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The Royal Motor Company manufactures automobiles.Non-management employees of the company can buy a new automobile for Royal's cost plus 2%.The automobiles are sold to dealers at cost plus 20%.Generally,management employees of Local Dealer,Inc. ,are allowed to buy a new automobile from the company at the dealer's cost.Which of the following statements is correct?

A) The non-management employees who buy automobiles at a discount are not required to recognize income from the purchase.
B) None of the employees who take advantage of the fringe benefits described above are required to recognize income.
C) Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased.
D) All of these.
E) None of these.

F) A) and E)
G) C) and D)

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Question 63

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The de minimis fringe benefit:

The taxpayer incorrectly took a $5,000 deduction (e.g. ,incorrectly calculated depreciation)in 2016 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2017.The taxpayer must add $5,000 to his 2017 gross income in accordance with the tax benefit rule to correct for the 2016 error.

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.

Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:

During the current year,Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company,Rashad's employer,claiming $50,000 for pain and suffering,$90,000 for loss of income,and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages;therefore,Amber has offered to settle the case for $100,000 for pain and suffering,$90,000 for loss of income,and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

Barney is a full-time graduate student at State University.He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived.The university waives tuition for all of its employees.In addition,he receives a $1,500 research grant to pursue his own research and studies.Barney's gross income from the above is:

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.