CHAPTER
2
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GROSS INCOME AND EXCLUSIONS
Group 1 - Multiple Choice Questions
1. C (LO 2.1) 8. C (LO 2.6)
2. C (LO 2.1) 9. B (LO 2.7)
3. B (LO 2.1) 10.
C (LO
2.7, 2.9, 2.10, 2.11)
4. A (LO 2.1) 11. A (LO
2.14)
5. D (LO 2.1) 12. E (LO
2.14)
6. E (LO 2.4)
7. D ($75,000/($10,000 x 20) x $4,000 = $1,500.
(LO 2.5)
Group 2 - Problems
1. a. Excluded (LO
2.1)
b. Included (LO 2.1)
c. Included (LO 2.1)
d. Included (LO 2.1)
e. Excluded (LO 2.1)
f. Included (LO 2.1)
g. Included (LO 2.1)
h. Excluded (LO 2.1)
i. Excluded (LO 2.1)
j. Excluded (LO 2.1)
k. Included (LO 2.1)
2. The non-cash payment of $8,000 for services
performed is includable income to John. The tax law states that gross income is
“all income from whatever source derived.” There is no exception in the law for
non-cash items received in exchange for services. (LO 2.1)
3. a. $300. Gross income
includes “all income from whatever source derived.” The value of the hair
styling is income to him for the performance of services. There is no gross
income exception in the tax law for “barter” income.
b. $300. Gross income
includes “all income from whatever source derived.” The value of the tax return
is income to her for the performance of services. There is no gross income
exception in the tax law for “barter” income.
(LO 2.1)
4. Illegal income is still taxable since there is
no exception excluding it in the tax code. When there is not an explicit
exception, gross income is “all income from whatever source derived.” (LO 2.1)
5. Qualified dividends are taxed at either 0% or
15%. The 0% rate applies for taxpayers in the ordinary income tax brackets of
10% and 15%. The 15% rate applies for taxpayers in the ordinary income tax
brackets of 25% and above. (LO 2.2)
6. If no
election is made, the interest is not included in income until the EE bond is
converted to cash by the taxpayer. If the taxpayer makes an election, however,
the income which increases the redemption value but is not paid in cash on the
EE bond each year is included in the taxpayer's gross income. (LO 2.2)
7. See Schedule B on page 40.
(LO 2.2)
8. a. (1) $500.
(2) $500.
b. (1) $0.
(2) $400,000. (LO 2.3)
9. Arlen may deduct the alimony of $2,000 per month on his tax return.
He cannot deduct the child support.
Jane must report the alimony
as income on her tax return. The child support is not taxable income to
her. (LO
2.3)
10. No gain is taxable to Cindy on the transfer of
the house since it is part of a property settlement related to a divorce. Allen
has a basis of $100,000 in the house for calculating tax on any future sale of
the house. (LO
2.3)
11. a. $50,000.
b. Nothing
is taxable since this is an employee achievement award of $400 or less.
c. $1,000,000.
d. $50,000. (LO 2.4)
12. a. $4,000.
b. $14,500.
c. $3,500. (LO 2.4, 2.8)
13. $13,333 =
($200,000/($18,000 x 15 years)) x $18,000.
(LO 2.5)
14. $5,833 = $7,000 – $1,167
(exclusion). The $1,167 exclusion is
calculated as ($28,000/($1,400 x 12 months x 10 years)) x $7,000. (LO 2.5)
15. SIMPLIFIED METHOD
WORKSHEET
1) Enter total amount received this year. 1) $16,000
2) Enter cost in the plan at the annuity starting date. 2) $40,000
3) Age at annuity starting date
Enter
55 and under 360
56–60 310
61–65 260 3) 260
66–70 210
71 and older 160
4) Divide line 2 by line 3. 4) $
154
5) Multiply line 4 by the
number of monthly payments
this year. If the annuity starting date was before 1987,
also enter this amount on line 8; and skip lines 6 and 7.
Otherwise go to line
6. 5) $
1,232
6) Enter
the amount, if any, recovered tax‑free in prior years 6) $ 0
7) Subtract line 6 from line 2. 7) $ 40,000
8) Enter the smaller of line 5 or 7. 8)
$
1,232
9) Taxable amount this year: Subtract line 8 from
line 1.
Do not enter less than zero. 9) $ 14,768
(LO 2.5)
16. $56,000 = $100,000 –
30,000 – 14,000. Since the policy was
transferred for valuable consideration, the proceeds are taxable to the extent
that they exceed the sum of the cash value at the time of transfer plus the
premiums paid. (LO 2.6)
1. CHAPTER 1 INTERNET
QUESTIONS Question MC #1
Which of the
following taxpayers does not have to
file a tax return for 2011?
a. A student, age 25, with unearned income of $1,400 who is claimed as
a dependent by his parents
*b. A qualifying widow (age 67) with a dependent child and income of $14,950
c. A single taxpayer who is under age 65, with income of $10,000
d. Married taxpayers (ages 45 and 50 years), filing jointly, with income of $20,000
e. All of the above taxpayers must file a return
*b. A qualifying widow (age 67) with a dependent child and income of $14,950
c. A single taxpayer who is under age 65, with income of $10,000
d. Married taxpayers (ages 45 and 50 years), filing jointly, with income of $20,000
e. All of the above taxpayers must file a return
2. CHAPTER 1 INTERNET
QUESTIONS Question MC #2
Wilhelmina is a
divorced taxpayer who provides a home for her dependent child, Eloise. What
filing status should Wilhelmina indicate on her tax return?
a. Single
b. Qualifying widow(er)
*c. Head of household
d. Married, filing separately
e. None of the above
b. Qualifying widow(er)
*c. Head of household
d. Married, filing separately
e. None of the above
3. CHAPTER 1 INTERNET
QUESTIONS Question MC #3
Martina, a single
taxpayer, paid the full cost of maintaining her dependent father in a home for
the aged for the entire year. What is the amount of Martina's standard
deduction for 2011?
*a. $8,500
b. $11,600
c. $0
d. $5,800
e. None of the above
b. $11,600
c. $0
d. $5,800
e. None of the above
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