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Exam 4: Gross Income: Concepts and Inclusions

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Question 31

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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?

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Perhaps in Ted's mind he is $1,500 riche...

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Question 32

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Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.If Son's investment income for the year is less than $1,000,Father is not required to impute interest income.

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Question 33

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Determine the proper tax year for gross income inclusion in each of the following cases.

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 30,2012,the partnership had $400,000 net income and for fiscal year ending September 30,2013,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2012 is $160,000 ($400,000 ´ 40%).

On January 5,2012,Tim purchased a bond paying interest at 6% for $30,000.On September 30,2012,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2012:

Rachel,who is in the 35% marginal tax bracket,is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120,and the cost is calculated to yield her an expected 6% return on her investment.As an alternative,Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?

The taxable portion of Social Security benefits is dependent upon:

Under the terms of a divorce agreement,Kim was to pay her husband Tom $3,000 per month in alimony and $2,000 per month in child support.For a twelve-month period,Kim can deduct from gross income (and Tom must include in gross income) :

Mabel is age 65 and lives on her Social Security benefits and gifts from her son,Fred.Fred is a full-time teacher.He has written a book and receives royalties from it.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Mabel must include the amount of the royalty check in her gross income.

In 2012,Todd purchased an annuity for $200,000.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?

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:

The Green Company,an accrual basis taxpayer,provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services,Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year,the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above,Green must include in gross income for the current year:

After the divorce,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.

An advance payment received in June 2012 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

Maroon Corporation expects the employees' income tax rates to increase next year.The employees use the cash method.The company presently pays on the last day of each month.The company is considering changing its policy so that the December salaries will be paid on the first day of the following year.What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning for December 2012.

Judy is a cash basis attorney.In 2012,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 2012.

Rachel owns rental properties.When Rachel rents to a new tenant,she usually requires the tenant to pay an amount in addition to the first month's rent.The additional amount serves as security for damages to the property and the tenant's failure to pay future rents.How should the payments be characterized (e.g.,on lease documents)to minimize Rachel's current tax liability?

Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

For purposes of determining gross income,which of the following is true?

On January 1,2012,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2013.