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Exam 5: Gross Income: Exclusions

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Question 51

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Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60.She was practically penniless at the time of her death,owed a $12,000 hospital bill,and had a disabled spouse.The company was very concerned about its public image,and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means,the Board of Directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life.Discuss both sides of the question whether Carmen (or her estate)and her spouse realize any taxable income from the above.

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The argument that Carmen and her spouse ...

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Question 52

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Adam repairs power lines for the Egret Utilities Company.He is generally working on a power line during the lunch hour.He must eat when and where he can and still get his work done.He usually purchases something at a convenience store and eats in his truck.Egret reimburses Adam for the cost of his meals.

A) Adam must include the reimbursement in his gross income.
B) Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer.
C) Adam can exclude the reimbursement from his gross income because he eats the meals on the employer's business premises (the truck) .
D) Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home.
E) None of these.

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

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Question 53

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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.Meg's 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.

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

What Federal income tax benefits are provided for college students?

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement.The payments must be included in her gross income.

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.The note was to be paid over a five-year period.When the balance on the note was $80,000,Jewel began having financial difficulties.To accelerate her cash inflows,Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

Zack was the beneficiary of a life insurance policy on his 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.

Generally,a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the 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.

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees,and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

A U.S.citizen worked in a foreign country for the period July 1,2013 through August 1,2014.Her salary was $10,000 per month.Also,in 2013 she received $5,000 in dividends from foreign corporations (not qualified dividends) .No dividends were received in 2014.Which of the following is correct?

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

When Betty was diagnosed as having a terminal illness,she sold her life insurance policy to Insurance Purchase,Inc. ,a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000 and Insurance Purchase,Inc. ,became the beneficiary.She had paid total premiums of $19,000.Betty died 8 months after the sale.Insurance Purchase,Inc. ,collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase,Inc. ,is required to recognize a $14,000 gain from the insurance policy.

Beverly died during the current year.At the time of her death,her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy,Beverly's spouse elected to collect the proceeds in installments.In the year of death,he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?

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 after­tax difference to Khalid between Khalid's original claim and Amber's offer?

Barbara was injured in an automobile accident.She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: $\begin{array} { l } \text { Damages for 25 \% loss of the use of her right arm }&\$200,000\\ \text {Medical expenses }&30,000\\ \text { Loss of wages}&10,000\\ \text { Punitive damages}&100,000\\&\$340,000\end{array}$ The defendant's insurance company is reluctant to pay punitive damages.Also,the company disputes the amount of her loss of wages amount.Instead,the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses.Assuming Barbara is in the 35% marginal tax bracket,will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: