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Exam 5: Gross Income: Exclusions

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Question 21

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Barbara was injured in an automobile accident.She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: The defendant's insurance company is reluctant to pay punitive damages.Also,the company disputes the amount of her loss of wages amount.Instead,the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses.Assuming Barbara is in the 35% marginal tax bracket,will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

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Barbara's claim for punitive damages of ...

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Question 22

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The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses.At that time,the amount taken from the fund must be included in the gross income of the person who contributed to the account.

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B) False

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Question 23

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The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime,approximately 25 days each year.The supper money received:

The president of Silver Corporation is assigned a secretary.When the secretary has completed work on company matters,the secretary is available to do the president's personal matters (pick up laundry,buy groceries) so long as the privilege is not abused.No other employee has a personal secretary.

Juan,was considering purchasing an interest in a tax-exempt bond fund for $100,000,when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%,and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative,Juan can purchase a state bond (a "double-exempt bond")yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

All employees of United Company are covered by a group hospitalization insurance plan,but the employees must pay the premiums ($8,000 for each employee) .None of the employees has sufficient medical expenses to deduct the premiums.Instead of giving raises next year,United is considering paying the employee's hospitalization insurance premiums.If the change is made,the employee's after-tax and insurance pay will:

Ben was hospitalized for back problems.While he was away from the job,he collected his regular salary from an employer-sponsored income protection insurance policy.Ben's employer-sponsored hospitalization insurance policy also paid for 90% of his medical expenses.Ben also collected on an income protection policy that he purchased.Which of the above sources of income are taxable? Explain the basis for excluding any item or items.

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 5% interest,but she is interested in earning a higher return for comparable risk.

Sam was unemployed for the first two months of 2011.During that time,he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September,he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

Calvin's property was taken by the State of Louisiana to build a highway overpass.He disputed the amount of the condemnation award he was to receive and ultimately collected an amount for the property plus $15,000 interest on the award.Calvin can exclude from gross income the $15,000 interest he received from the State of Louisiana associated with the condemnation award.

In December 2012,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2013.However,she did not use the funds to pay the tuition until January 2013.Emily can exclude the $2,500 from her gross income in 2012.

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes,provided the privilege is not abused.Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings.The copies made during the year would have cost $150 at a local office supply.

Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence,she received her regular salary of $4,000 from her employer.For the next 60 days,she received $6,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days,Julie received $2,000 on an income replacement policy she had purchased.Of the $12,000 she received,Julie must include in gross income:

Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays,when the number of players on the course is at its lowest.Tom,an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round.

If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.

Sandy is married,files a joint return,and expects to be in the 28% marginal tax bracket for the foreseeable future.All of his income is from salary and all of it is used to maintain the household.He has a paid-up life insurance policy with a cash surrender value of $100,000.He paid $60,000 of premiums on the policy.His gain from cashing in the life insurance policy would be ordinary income.If he retains the policy,the insurance company will pay him $3,000 (3%)interest each year.Sandy thinks he can earn a higher return if he cashes in the policy and invests the proceeds.

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

Carin,a widow,elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy.In the first year,Carin collected $17,500 from the insurance company.She must include in gross income:

As an executive of Cherry,Inc.,Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children.The scholarships are paid by the company directly to each child's educational institution and are payable only if the student maintains a B average.