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Exam 5: Gross Income and Exclusions

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Question 71

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To provide relief from double taxation, Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.

A) True
B) False

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Question 72

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The assignment of income doctrine requires that to shift income from property to another person, the taxpayer must transfer only the income to the other person.

A) True
B) False

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Question 73

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Scholarships are excluded from gross income for degree candidates even if the scholarship pays for required fees and books in addition to tuition.

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 loan debt including $2,000 of accrued interest. What amount, if any, must Teresa include in 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:

Mr. and Mrs. Smith purchased 100 shares of stock for $45 per share on June 30, 2011. On March 30, 2016, the Smith family decides to sell these shares for $30 generating a loss of $15 per share. On April 15, 2016, the Smith family realized they made a mistake and repurchased 100 shares for $35 per share. Can the Smith family deduct a long-term or short-term capital loss from the sale on March 30, 2016? If not, will the Smiths ever receive a tax benefit for their loss?

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

Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she exercises all of her options. How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal tax rate is 25 percent?

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives. Later this year Harold will recover the remainder of his cost of the annuity. Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

Terri and Mike are seeking a divorce. Terri and Mike own an art collection worth $357,000 that would belong to Terri. Mike offered to make annual payments of cash to Terri each year for five years if Terry allows Mike to take possession of the art collection. Mike insists however, that the annual payments must cease in the event of Terri's death. What amount of annual payment must Terri demand to make her indifferent after taxes between taking possession of the ($357,000) art versus collecting the cash payments? Assume that Terri has a marginal tax rate of 15 percent and Mike's tax rate is 35 percent and ignore the time value of money.

The date on which stock options are no longer subject to forfeiture is called the vesting date.

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Ethan include in his gross income?

When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.

Barney and Betty got divorced this year. In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death or remarriage) . What amount (if any) is included in Barney's gross income this year?

Aubrey and Justin divorced on June 30 of this year. Through June 30 Aubrey earned $62,000 of salary, and Justin earned $45,000. For the year Aubrey reported a total salary of $130,000, and Justin earned a total salary of $88,000. Aubrey and Justin live in a community property state. How much income earned will Justin report on his tax return for this year?

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

Caroline is retired and receives income from a number of sources. The interest payments are from bonds that Caroline purchased over past years and a disability insurance policy that Caroline purchased after her retirement. Calculate Caroline's gross income. $\begin{array} { | l | r | } \hline \text { Distributions from qualitied pension plan } & \$ 5,400 \\\hline \text { Interest on bonds issued by City of Austin, Texas } & 2,500 \\\hline \text { Social Security benefits } & 8,200 \\\hline \text { Interest on U.S. Treasury Bills } & 2,300 \\\text { Interest on bonds issued by Ford Motor Company } & 1,900 \\\hline \text { Interest on bonds issued by City of Quebec, Canada } & 2,750 \\\hline \text { Disability insurance benefits } & 9,500 \\\hline\end{array}$

Which of the following best describes distributions from a defined benefit plan?

Deb has found it very difficult to repay her loans. Because of these difficulties, the bank decided to forgive one of her most recent loans, an amount of $45,000. After the loan was discharged, Deb had total assets of $232,000 and her remaining loans total $217,000. What amount must Deb include in her gross income?

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?