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Exam 4: Gross Income: Concepts and Inclusions

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Question 41

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Jay,a single taxpayer,retired from his job as a public school teacher in 2012.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?

A) Since Jay is no longer working, none of the pension payments must be included in his gross income.
B) The first $36,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable.
C) The first $180,000 he receives is taxable and the last $36,000 is a nontaxable recovery of capital.
D) All of the last 12 payments he received ($14,400) are taxable.
E) None of the above.

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

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Question 42

Multiple Choice

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Seth,a calendar year taxpayer,purchased an annuity for $50,000 in 2010.The annuity was to pay him $3,000 on the first day of each year,beginning in 2010,for the remainder of his life.Seth's life expectancy at the time he purchased the annuity was 20 years.In 2012,Seth developed a deadly disease,and doctors estimated that he would live for no more than 24 months.

A) If Seth dies in 2013, a loss can be claimed on his final return for his unrecovered cost of the annuity.
B) If Seth dies in 2013, his returns for the two previous years can be amended to allocate the entire cost of the annuity to the years in which he received payments and reported gross income.
C) If Seth is still alive at the end of 2012, he is not required to recognize any gross income because of his terminal illness.
D) If Seth is still alive in 2032, his recovery of capital for that year is $500.
E) None of the above.

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

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Question 43

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Lois,who is single,received $9,000 of Social Security benefits.She also received $30,000 from dividends,interest,and her employer's pension plan.If Lois sells a capital asset that produces a $1,000 recognized loss,Lois's taxable income will decrease by less than $1,000.

In the case of a person with other income of $300,000,15% of his or her Social Security benefits received are excluded from gross income.

Orange Cable TV Company,an accrual basis taxpayer,allows its customers to pay by the year in advance ($500 per year) ,or two years in advance ($950) .In September 2011,the company collected the following amounts applicable to future services: As a result of the above,Orange Cable should report as gross income:

Tim and Janet were divorced.Their only marital property was a personal residence with a value of $120,000 and cost of $50,000.Under the terms of the divorce agreement,Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years,or until Tim's death,whichever should occur first.Tim and Janet lived apart when the payments were made to Tim.The divorce agreement did not contain the word "alimony."

With respect to the prepaid income from services,which of the following is true?

Jerry purchased a U.S.Series EE savings bond for $279.The bond has a maturity value in 10 years of $500 and yields 6% interest.This is the first Series EE bond that Jerry has ever owned.

When stock is sold after the record date for a dividend that has been declared,the seller must recognize as income the dividend received.

José,a cash method taxpayer,is a partner in J&T Accounting Services,a calendar year partnership.Under the partnership agreement,José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2012.However,in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership.In March 2012,José received $40,000 as his share of distributed 2011 profits.The partnership earnings before partners' withdrawals for 2012 totaled $1 million.Compute José's gross income from the partnership for 2012.

At the beginning of 2013,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 2013,and $3,600 from the Series EE bonds in 2022.

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits.Debbie's adjusted gross income for the year is:

In the case of a zero interest below-market loan by a corporation to a shareholder-employee,what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

If the alimony recapture rules apply,the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.Her share of the profits for 2012 was $90,000.She withdrew $40,000 from the partnership in 2012.In January 2013,after her share of the profits for 2012 had been computed,she withdrew her remaining $50,000 share of 2012 profits.As a result,Rhonda must recognize $40,000 of gross income in 2012 and $50,000 in 2013.

Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at a $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?

Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2012.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected,Copper Company declared a $2.00 per share dividend on September 30th,payable on October 15th,to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18,2012.

Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.

The annual increase in the cash surrender value of a life insurance policy: