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Exam 4: Gross Income: Concepts and Inclusions

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Question 61

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Betty purchased an annuity for $24,000 in 2014. Under the contract, Betty will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.

A) If Betty collects $3,000 in 2014, her gross income is $630 (.03 × $21,000) .
B) Betty has no gross income until she has collected $24,000.
C) If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be included in taxable income.
D) If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity [$24,000 - (60 × $300) = $6,000] on her final return.
E) None of the above.

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

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Question 62

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Lois, who is single, received $9,000 of Social Security benefits. She also received $25,000 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 more than $1,000.

A) True
B) False

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Question 63

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On January 1, 2014, 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 2015.

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Jake is the sole shareholder of an S corporation that earned $60,000 in 2014. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2014. Jake is required to recognize $60,000 of income from the S corporation in 2014.

Margaret made a $90,000 interest-free loan to her son, Adam, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit. Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit. The relevant Federal interest rate is 8% compounded semiannually. The loan is outstanding for the entire year. a. Based on the above information, what is the effect of the loan on Margaret's gross income for the year? b. The facts are the same as above, except you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year. Adam used the funds to pay his child's private school tuition. What are the effects of the loans on Margaret's gross income?

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization, then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2014. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2015. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

The alimony rules:

Under the formula for taxing Social Security benefits, low income taxpayers are not required to include any of the Social Security benefits in gross income. But as income increases, 50% of the Social Security benefits may be included in gross income. Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax. Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

Rhonda has a 30% interest in the capital and profits of the ABC Partnership. In the first year of the partnership, 2014, it earned $150,000. However, the partners agreed that nothing would be distributed until after the end of March 2015, before Rhonda filed her 2014 tax return. The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2015. Things were going well in 2015 and therefore the partnership distributed $30,000 to Rhonda at the end of March, as a portion of her share of the partnership's 2014 earnings. The partnership's income for 2015 was $60,000. As a result, Rhonda must recognize $30,000 of gross income in 2014 and $18,000 in 2015.

Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income) :

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

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.

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2013. The dividend checks were mailed on December 31, 2013. Ed, a cash basis shareholder, received the dividend check on January 2, 2014. Ed cannot delay reporting the income from the dividend until 2014.

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 2013. However, in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2013, José received $40,000 as his share of distributed 2012 profits. The partnership earnings before partners' withdrawals for 2013 totaled $1 million. Compute José's gross income from the partnership for 2013.

Daniel purchased a bond on July 1, 2014, at par of $10,000 plus accrued interest of $300. On December 31, 2014, Daniel collected the $600 interest for the year. On January 1, 2015, Daniel sold the bond for $10,200.