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Exam 5: Gross Income and Exclusions

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Question 81

True/False

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The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

A) True
B) False

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Question 82

Multiple Choice

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Identify the rule that states that income has been realized when a taxpayer receives the income and there are no restrictions on the taxpayer's use of the income (e.g.,no obligation to repay the amount) :

A) Claim of right
B) Constructive receipt
C) Return of capital principle
D) Wherewithal to pay
E) None of the choices are true

F) B) and C)
G) A) and B)

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Question 83

Multiple Choice

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When selling stocks,which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?

Alex is 63 years old and retired.This year Alex won $212,200 in the state lottery.Alex also received $20,000 from an annuity he purchased eight years ago.He purchased the annuity,to be paid annually for 15 years,for $157,500.Alex received $10,000 in Social Security benefits for the year.Calculate Alex's gross income.

Identify the rule that determines whether a taxpayer must include in income a refund of an amount deducted in a previous year:

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

Which of the following is true regarding stock options?

George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives.Based on IRS tables,George's life expectancy is 100 months.How much of the first $80 payment will George include in his gross income?

Qualified retirement plans include defined benefit plans but not defined contribution plans.

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?

Both employers and employees may contribute to defined contribution plans.However,the amount that employees may contribute to the plan in a given year is limited by the tax law while the amount that employers may contribute is not.

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?

Generally,85 percent of Social Security benefits are included in income of high income taxpayers.

A portion of each payment from a purchased annuity represents income.

Recognized income may be in the form of cash or property received (but not services received).

Which of the following statements regarding contributions to defined contribution plans is true?

Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.

This year,Barney and Betty sold their home (sales price $750,000; cost $200,000) .All closing costs were paid by the buyer.Barney and Betty owned and lived in their home for 18 months.How much of the gain is included in gross income?

The date on which stock options are given to the employee is called the exercise date.

This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year.Mary included a total of $4,000 of state income taxes when she itemized deductions last year.What amount of the refund,if any,should Mary include in her gross income this year?