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Exam 5: Gross Income and Exclusions

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Question 31

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Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12 years.Charles paid $180,000 for the annuity.How much of the first $20,000 payment should Charles include in gross income?

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$5,000.
A part of each payment represent...

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Question 32

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The capital gains (losses)netting process for taxpayers without 25 or 28 percent capital gains requires them to (1)net short-term and long-term gains, (2)net short-term and long-term losses, and (3)net the outcome to yield a final gain or loss to place on the tax return.

A) True
B) False

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Question 33

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Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.

Nate is a partner in a partnership that received $5,000 of interest income this year.Nate's share of the interest is $1,000, and he should report this income on his individual return as:

J.Z.(single taxpayer)is retired and received $10,000 of Social Security benefits this year.How much of the $10,000 Social Security benefits is taxable if his only other income was $28,000 of pension income?

Earnings from Internal Revenue Code

Jack and Jill are married.This year Jack earned $72,000 and Jill earned $80,000 and they received $4,000 of interest income from a joint savings account.How much gross income would Jack report if he files married filing separately from Jill?

Dave is a plumber who uses the cash method of accounting.This year Dave requested that his clients make their checks payable to his son, Steve.This year Steve received checks in the amount of $62,000 for Dave's plumbing services.Which of the following is a true statement?

Andres has received the following benefits this year. $\begin{array}{llcc} \text { Salary } &\$92,000 \\ \text { Contribution to qualified pension plan } &10,200\\ \text { Qualified health insurance premiums } &8,400\\ \text { Year-end bonus } &15,000\\ \text { Group-term life insurance premiums ( face =\$ 40,000) } &1,750\\ \text { Whole life insurance premiums (face \( =\$ 100,000 \) ) } &2,420\\ \text {Disability insurance premiums } &1,800\\\end{array}$ Besides these benefits Andres missed work for two months due to an illness.During his illness Andres received $6,500 in sick pay from a disability insurance policy.Assume Andres has disability insurance provided by his employer as a nontaxable fringe benefit.What amount, if any, must Andres include in gross income this year?

When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share)at the time she started working, when the stock price was $14 per share.Now that the share price is $20 per share, she exercises all of her options.If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent and her long-term capital gain tax rate is 15 percent?

Charles and Camilla got divorced in 2018.Under the terms of the decree Charles pays Camilla $50,000 in cash in each of the next five years (or until Camilla's death or remarriage) .In addition, Charles transferred a castle worth $2,000,000 to Camilla in 2018 and will pay $12,000 per year to support their son, Clyde, until he turns 19 years old.What amount (if any) is included in Camilla's gross income in 2019?

Loretta received $6,200 from disability insurance that she purchased directly this year.Loretta must include all $6,200 in her gross income.

Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of realized gain on the sale of their principal residence.

Kevin provided services to several clients this year who paid with different types of property.Which of the following payments is not included in Kevin's gross income?

Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal.

Which of the following is not a necessary condition for income to be included in gross income?

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working, when the stock price was $6 per share.When the share price was $15 per share, she exercised all of her options.Eighteen months later she sold all of the shares for $20 per share.How much gain will Maren recognize on the sale and how much tax will she pay, assuming her marginal tax rate is 35 percent?

To provide relief from double taxation, Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.