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Exam 5: Gross Income and Exclusions

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Question 1

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Hank is a U.S. citizen and is doing a three to six year assignment as a sales executive in Paris for a French company, which began this year. Hank earned $109,500 working for the French company this year but only lived in France for 340 days (out of 365 days) . What amount of Hank's $109,500 salary this year will he be allowed to exclude from gross income in the U.S. (rounded to the nearest one-hundred dollars) ?

A) Hank can exclude his entire salary because he worked more than 330 days overseas
B) 102,000
C) 92,400
D) 99,200
E) None of his salary can be excluded from gross income because Hank must reside overseas for the entire year

F) A) and E)
G) B) and E)

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Question 2

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This year, Fred and Wilma sold their home (sales price $750,000; cost $200,000) . All closing costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is included in gross income?

A) $550,000
B) $300,000
C) $250,000
D) $50,000
E) None

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

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Question 3

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Teresa was married on November 1 of this year and on that day received numerous gifts from her extended family. Her grandfather presented Teresa with a check for $15,000; her uncle gave Teresa 1,000 shares of Ford stock worth $10 per share (the uncle purchased the shares for $25 each); and her aunt presented Teresa with $50,000 of corporate bonds (Teresa received $1,500 of semiannual interest from the bonds on December 31 of this year). Finally, Teresa's parents paid off $50,000 of her student loans debt including $2,000 of accrued interest. What amount, if any, must Teresa include in gross income this year?

Lisa and Collin are married. Lisa works as an engineer and earns a salary of $116,000. Collin works at a beauty salon and reported wages of $45,000. Lisa received $500 of interest from corporate bonds and $250 of interest from a municipal bond. Lisa acquired these bonds prior to her marriage to Collin. Collin's father passed away on April 14. He inherited cash of $50,000 and his baseball card collection, valued at $2,000. As beneficiary of his father's life insurance policy, Collin also received $150,000. The couple spent a weekend in Atlantic City in November and came home with gambling winnings of $1,200. Collin was injured in an accident at the salon. He was unable to work for a month, but during this time he received $5,000 from disability insurance he purchased several years ago. Collin also received $2,000 in workman's compensation, and $1,500 from the salon for the emotional trauma he suffered from the accident. Calculate Lisa and Collin's gross income for this year assuming they will file married joint.

Identify the rule dictating that on a sale of an asset a taxpayer need only include the incremental gain in gross income rather than the entire proceeds from the sale:

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?

Hal Gore won a $1 million prize for special contributions to environmental research. This prize is awarded for public achievement, and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency. How much of the prize should Hal include in his gross income?

Worker's compensation benefits are excluded from gross income.

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500 were paid by the University when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?

Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?

Interest income is earned in the year in which it is received by the taxpayer or credited to the bank account.

An employee may exclude up to a 40 percent employer-provided discount on services.

Helen is a U.S. citizen and CPA, who moved to London, England three years ago to work for a British company. This year, she spent the entire year in London and earned a salary of $110,000. How much of her salary will she be allowed to exclude from gross income in the U.S.?

The all-inclusive definition of income means that gross income is defined very broadly.

A below-market loan (e.g., from an employer to an employee) is a common example of a transaction that generates taxable imputed income.

Which of the following is a true statement about the first payment received from a purchased annuity?

Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must include $15,000 of this gift in his gross income this year.

Ophra is a cash basis taxpayer who is employed in the publishing industry. This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise. Ophra asked her employer to issue the cruise tickets to her parents, and he complied with this request. Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets:

The cash method of accounting requires taxpayers to recognize income only when that income is received as cash.

Gross income includes