1. Award: 1.

00 point

Gross income includes all income realized during the year.

 True

 False

Deferred and excluded income is not included in gross income.

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

2. Award: 1.00 point

Excluded income will never be subject to the federal income tax.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
3. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

4. Award: 1.00 point

A taxpayer who borrows money will include that amount borrowed in their gross income under the all-inclusive
definition of income.

 True

 False

Debt does not generate economic benefit.

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

5. Award: 1.00 point

Realized income is included in gross income unless a tax provision specifies that it can be deferred or excluded.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
6. Award: 1.00 point

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting
purposes.

 True

 False

Realization is similar for both tax and financial accounting.

References

True / False Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

7. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

8. Award: 1.00 point

Barter clubs are an effective means of avoiding realization for tax purposes.

 True

 False

References

True / False Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.
9. Award: 1.00 point

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

10. Award: 1.00 point

When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of
income.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

11. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.
12. Award: 1.00 point

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.

 True

 False

Gross income only includes the net of sales proceeds less related selling expenses and tax basis in the asset sold.

References

True / False Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

13. Award: 1.00 point

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for
$1,400.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

14. Award: 1.00 point

When an asset is sold, the taxpayer calculates the gain or loss on the sale of the asset by subtracting the tax basis of
the asset from the proceeds of the sale.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
15. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

16. Award: 1.00 point

Jim received a $500 refund of state income taxes this year. Jim will not need to include the $500 in his gross
income this year if he did not deduct state income taxes last year.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

17. Award: 1.00 point

Constructive receipt represents the principle that cash-basis taxpayers will be taxed on income when it is made
available to them without substantial restrictions.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.
18. Award: 1.00 point

Claim of right states that income has been realized if a taxpayer receives income and there are substantial
restrictions on the taxpayer's use of the income.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

19. Award: 1.00 point

Community property laws dictate that income earned by one spouse is treated as though it were earned equally by
both spouses.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

20. Award: 1.00 point

Interest income is taxed in the year in which it is received by the taxpayer or credited to the bank account.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
21. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

22. Award: 1.00 point

For tax purposes, unearned income is income that has not yet been realized.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

23. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
24. Award: 1.00 point

The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

25. Award: 1.00 point

Rental income generated by a partnership is reported by the partners as dividend income on their own individual tax
returns.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

26. Award: 1.00 point

The tax law defines alimony to include transfers of property (but not cash) between former spouses.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
27. Award: 1.00 point

Regardless of when a divorce agreement is executed, alimony is included in gross income of the recipient and is
deductible for AGI by the payer.

 True

 False

For any divorce or separation agreement executed after December 31, 2018, alimony payments are not included in
the gross income of the person receiving the payments and are not deductible by the person paying the alimony.

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

28. Award: 1.00 point

The receipt of prizes and awards is generally taxable.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
29. Award: 1.00 point

Gambling winnings are included in gross income only to the extent that the winnings exceed gambling losses
incurred during the same period.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

30. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

31. Award: 1.00 point

Unemployment benefits are excluded from gross income.

 True

 False

References

True / False Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
32. Award: 1.00 point

A taxpayer generally includes in gross income the amount of debt forgiven by a lender.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

33. Award: 1.00 point

An employee may exclude up to a 40 percent employer-provided discount on services received by the employee.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

34. Award: 1.00 point

A below-market loan (e.g., from an employer to an employee) is a common example of a transaction that generates
taxable imputed income.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
35. Award: 1.00 point

Interest earned on a federal Treasury bond is excluded from gross income (for federal tax purposes).

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

36. Award: 1.00 point

Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

37. Award: 1.00 point

Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of
realized gain on the sale of their principal residence.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
38. Award: 1.00 point

Qualified fringe benefits received by an employee can be excluded from gross income.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

39. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

40. Award: 1.00 point

Earnings from Internal Revenue Code Section 529 plans and Coverdell education savings accounts are excluded
from gross income if the earnings are used to pay for qualifying educational expenditures for college students (and
not for elementary or secondary education).

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
41. Award: 1.00 point

Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must include $15,000 of this gift in his gross
income this year.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

42. Award: 1.00 point

Anna received $15,000 from life insurance paid upon the death of her grandmother. Anna can exclude the entire
amount of the life insurance from her gross income.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

43. Award: 1.00 point

U.S. citizens generally are subject to tax on all income whether it is generated in the United States or in foreign
countries.

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
44. Award: 1.00 point

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

 True

 False

References

True / False Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

45. Award: 1.00 point

Workers' compensation benefits are excluded from gross income.

 True

 False

References

True / False Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

46. Award: 1.00 point

Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred for the
emotional distress he suffered when his neighbor accidentally ran over his dog.

 True

 False

References

True / False Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
47. Award: 1.00 point

Loretta received $6,200 from a disability insurance policy that she purchased directly this year. Loretta must include
all $6,200 in her gross income.

 True

 False

References

True / False Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

48. Award: 1.00 point

Brad was disabled for part of the year, and he received $11,500 of benefits from a disability insurance policy
purchased by his employer. Assume that Brad was not previously taxed on the disability insurance premiums paid by
his employer. Brad must include all $11,500 of benefits in his gross income because he was not taxed on the
disability insurance premiums paid by his employer.

 True

 False

References

True / False Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
49. Award: 1.00 point

Gross income includes:

 all income from whatever source derived unless excluded by law.

 excluded income.

 deferred income.

 all realized income.

 All of these choices are correct.

This is the all-inclusive definition of gross income.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

50. Award: 1.00 point

Which of the following is not a necessary condition for income to be included in gross income?

 Income must be realized.

 Income must be paid in cash.

 Income cannot be excluded by law.

 Income must be made available to a taxpayer on the cash basis.

 All of these choices are correct.

Income can be paid in cash, property, or services.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
51. Award: 1.00 point

Sally is a cash-basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hours of sewing
services to the barter club in exchange for two football playoff tickets. Which of the following is a true statement?

 Sally need not recognize any gross income unless she sells the football tickets.

 Sally's exchange does not result in taxable income.

 Sally is taxed on the value of the football tickets even if she cannot attend the game.

 Sally is taxed on the value of her sewing services only if she is a professional seamstress.

 None of the choices are correct.

Gross income includes the value of property received in exchange for services.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.

52. Award: 1.00 point

This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were
only worth $2 per share. What amount can Barney deduct as a loss this year?

 $10,000

 $9,000

 $1,000

 Barney can deduct $10,000 only if he includes $1,000 in his taxable income.

 None of the choices are correct – Barney is not entitled to a loss deduction.

No realization occurs until the stock is sold or becomes worthless.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
53. Award: 1.00 point

This year Barney purchased 260 shares of Bell common stock for $33.60 per share. At year-end the Bell shares
were only worth $4.20 per share. What amount can Barney deduct as a loss this year?

 $8,736

 $7,644

 $1,092

 Barney can deduct $8,736 only if he includes $1,092 in his taxable income

 None of the choices are correct – Barney is not entitled to a loss deduction

No realization occurs until the stock is sold or becomes worthless.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

54. Award: 1.00 point

Hillary is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a
$5,000 check for services rendered. Which of the following is a true statement?

 Hillary is taxed on the $5,000 of service income in the year she cashes the check.

 Hillary is taxed on the $5,000 of service income in the year the check was mailed.

 Hillary is taxed on the $5,000 of service income in the year she receives the check.

 Hillary is taxed on the $5,000 of service income in the year she provides the services.

 None of the choices are correct.

Under constructive receipt Hillary is taxed on income when property is received or made available to her.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.
55. Award: 1.00 point

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

 Tax refund rule

 Constructive receipt

 Return of capital principle

 Tax benefit rule

 None of the choices are correct.

This is the definition of tax benefit rule.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

56. Award: 1.00 point

Identify the rule dictating that on sale of an asset a taxpayer need only include the incremental gain in gross income
rather than the entire proceeds from the sale.

 Tax benefit rule

 Constructive receipt

 Return of capital principle

 Wherewithal to pay

 None of the choices are correct.

This is the definition of the return of capital principle.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
57. Award: 1.00 point

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).

 Claim of right

 Constructive receipt

 Return of capital principle

 Wherewithal to pay

 None of the choices are correct.

This is the definition of claim of right.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

58. Award: 1.00 point

Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clients make their
checks payable to his son, Steve. This year Steve received checks in the amount of $62,000 for Dave's plumbing
services. Which of the following is a true statement?

 Dave is taxed on $62,000 of plumbing income this year.

 Steve is taxed on $62,000 of plumbing income this year.

 Steve is taxed on $62,000 of income from gifts received this year.

 Dave may deduct the $62,000 received by Steve.

 None of the choices are correct.

The assignment of income is not effective for tax purposes.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
59. Award: 1.00 point

Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clients make their
checks payable to his son, Steve. This year Steve received checks in the amount of $115,500 for Dave's plumbing
services. Which of the following is a true statement?

 Dave is taxed on $115,500 of plumbing income this year.

 Steve is taxed on $115,500 of plumbing income this year.

 Steve is taxed on $115,500 of income from gifts received this year.

 Dave may deduct the $115,500 received by Steve.

 None of the choices are correct.

The assignment of income is not effective for tax purposes.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.

60. Award: 1.00 point

Jack and Jill are married. This year Jack earned $72,000, Jill earned $80,000, and they received $4,000 of interest
income from a joint savings account. How much gross income would Jack report if he files married filing separately
from Jill?

 $72,000 if they reside in a common law state.

 $74,000 if they reside in a community property law state.

 $76,000 if they reside in a common law state.

 $78,000 if they reside in a community property law state.

 None of the choices are correct.

In a community property state Jack is taxed on half of his separate income ($36,000) plus half of Jill's separate
income ($40,000) plus half of joint income ($2,000). In a common law state, Jack is taxed on his separate income
($72,000) plus half of joint income ($2,000).

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.
61. Award: 1.00 point

Jack and Jill are married. This year Jack earned $83,750, Jill earned $83,000, and they received $7,400 of interest
income from a joint savings account. How much gross income would Jack report if he files married filing separately
from Jill?

 $83,750 if they reside in a common law state.

 $83,375 if they reside in a community property law state.

 $90,400 if they reside in a common law state.

 $87,075 if they reside in a community property law state.

 None of the choices are correct.

In a community property state Jack is taxed on half of his separate income ($41,875) plus half of Jill's separate
income ($41,500) plus half of joint income ($3,700). In a common law state, Jack is taxed on his separate income
($83,750) plus half of joint income ($3,700).

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.

62. Award: 1.00 point

Identify the item below that helps determine which taxpayer must recognize earned income.

 Residence in a community property law state

 Assignment of income

 Residence in a common law state

 Both residence in a community property law state and residence in a common law state

 All of these choices are correct.

Both the residence and the person who earns the income dictate who recognizes income.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
63. Award: 1.00 point

This year Kevin provided services to several clients, each of whom paid with different types of property. Which of the
following payments is not included in Kevin’s gross income?

 Cash

 Shares of stock listed on the New York Stock Exchange.

 A used car

 Gold coins

 All of these are included in gross income

Property is included in gross income if it is capable of valuation.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

64. Award: 1.00 point

Emily is a cash-basis taxpayer, and she was an especially productive salesperson last year. In December of last year
her supervisor told Emily she had earned a $5,000 bonus. However, Emily received the bonus check after year-end.
Identify the principle that will determine when Emily is taxed on the bonus.

 Assignment of income

 Constructive receipt

 Return of capital principle

 Wherewithal to pay

 All of these choices are correct.

Emily is taxed in the year the bonus is made available to her.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of
realization.
65. Award: 1.00 point

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.

 Assignment of income

 Constructive receipt

 Return of capital principle

 Wherewithal to pay

 All of these choices are correct.

Ophra cannot assign earned income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

66. Award: 1.00 point

This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has
promised to pay Henry in installment payments over the next few years. Identify the principle that will determine
when Henry should be taxed on the gain from the sale.

 Assignment of income

 Constructive receipt

 Return of capital principle

 Wherewithal to pay

 All of these choices are true.

Wherewithal to pay dictates that gains from installment sales are generally recognized over the periods in which
payments are received.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.
67. Award: 1.00 point

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?

 $200 is included because Mary itemized her deductions last year.

 $200 is included if itemized deductions exceeded the standard deduction by $200.

 $200 is included because itemized deductions exceeded the standard deduction.

 $200 is included even if Mary claimed the standard deduction.

 None of the choices are correct - refunds of state income taxes are not included in gross income.

Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit.
The $4,000 of deduction produced a tax benefit of $200 if itemized deductions exceeded the standard deduction
by $200.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.

68. Award: 1.00 point

This year Mary received a $420 refund of state income taxes that she deducted on her tax return last year. Mary
included a total of $8,700 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?

 $420 is included because Mary itemized her deductions last year.

 $420 is included if itemized deductions exceeded the standard deduction by $420.

 $420 is included because itemized deductions exceeded the standard deduction.

 $420 is included even if Mary claimed the standard deduction.

 None of the choices are correct - refunds of state income taxes are not included in gross income.

Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit.
The $8,700 of deduction produced a tax benefit of $420 if itemized deductions exceeded the standard deduction by
$420.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of
realization.
69. Award: 1.00 point

Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a state income tax
refund of $170. What amount of the refund, if any, should Opal include in her gross income if last year her total
itemized deductions exceeded the standard deduction by $350?

 $2,050.

 $350.

 $180.

 $170.

 None of these – refunds of state income taxes are not included in gross income.

Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit.
The $2,400 of deduction produced a tax benefit of $350, so the entire $170 is included in income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

70. Award: 1.00 point

Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was
credited to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next
year. Which of the following is a true statement?

 Wilma must include the $1,000 of interest in her income this year.

 Wilma must include the $1,000 of interest in her income when she cashes the CD.

 Wilma must include the $1,000 of interest in her income this year only if the bank waives the early
withdrawal penalty.

 Wilma must include the $1,000 of interest in her income next year if she does not pay the early withdrawal
penalty.

 All of the choices are correct.

Interest is taxed when credited to the account.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.
71. Award: 1.00 point

Wilma has a $57,500 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,150, was credited
to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next year.
Which of the following is a true statement?

 Wilma must include the $1,150 of interest in her income this year.

 Wilma must include the $1,150 of interest in her income when she cashes the CD.

 Wilma must include the $1,150 of interest in her income this year only if the bank waives the early
withdrawal penalty.

 Wilma must include the $1,150 of interest in her income next year if she does not pay the early withdrawal
penalty.

 All of the choices are correct.

Interest is taxed when credited to the account.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of
realization.

72. Award: 1.00 point

Which of the following is a true statement about the first payment received from a purchased annuity?

 The payment is included in gross income.

 A portion of the payment is a return of capital.

 The payment can only be taxed in the year after the annuity was purchased.

 The payment is not taxed until the annuity payments cease altogether.

 None of these are true statements.

A portion of the first payment from a purchased annuity will be a return of capital depending upon the amount paid
for the investment and the expected number of payments to be received.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
73. Award: 1.00 point

Which of the following describes how the annuity exclusion ratio is calculated for an annuity paid over a fixed
period?

 The expected return is divided by the number of payments.

 The original investment is divided by the prevailing interest rate.

 The original investment is divided by the number of payments.

 The expected return is divided by the prevailing interest rate.

 None of the choices are correct.

This is the definition of annuity exclusion ratio.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

74. Award: 1.00 point

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?

 $80

 $72

 $48

 $32

 None of the choices are correct.

The annuity exclusion ratio is ($3,200/100) = $32 return of capital per payment. Hence, $48 of the $80 is included in
gross income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
75. Award: 1.00 point

George purchased a life annuity for $7,000 that will provide him $175 monthly payments for as long as he lives.
Based on IRS tables, George's life expectancy is 100 months. How much of the first $175 payment will George
include in his gross income?

 $175

 $158

 $105

 $70

 None of the choices are correct.

The annuity exclusion ratio is ($7,000/100) = $70 return of capital per payment. Hence, $105 of the $175 is included
in gross income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

76. Award: 1.00 point

Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was
purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income?

 $7,500

 $4,500

 $12,000

 $32,400

 None of the choices are correct.

The annuity exclusion ratio is [$300,000/(4 × 10)] = $7,500 return of capital per payment. Hence, $4,500 of each
$12,000 payment is included in gross income.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
77. Award: 1.00 point

Fran purchased an annuity that provides $7,400 quarterly payments for the next 10 years. The annuity was
purchased at a cost of $185,000. How much of the first quarterly payment will Fran include in her gross income?

 $4,625

 $2,775

 $7,400

 $20,900

 None of the choices are correct

The annuity exclusion ratio is [$185,000/(4 × 10)] = $4,625 return of capital per payment. Hence, $2,775 of each
$7,400 payment is included in gross income.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

78. Award: 1.00 point

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?

 Harold will continue to apply the annuity exclusion ratio to determine the amount of each annuity payment
includible in gross income.

 Harold will include the entire amount of each annuity payment in gross income after he recovers the cost
of the annuity.

 The entire amount of each annuity payment is excluded from gross income after Harold recovers his cost
of the annuity.

 Harold must request that the IRS calculate his exclusion ratio based upon a revised life expectancy.

 All of these choices are correct.

The entire annuity payment is included in gross income once the cost of the annuity is recovered.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
79. Award: 1.00 point

To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following?

 Tax basis of the property

 Selling expenses

 Amount realized

 Tax basis of the property and selling expenses

 All of these choices are correct

Tax basis and selling expenses reduce proceeds for a "casual" sale of property.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

80. Award: 1.00 point

Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is
$1,000, and he should report this income on his individual return as:

 business income.

 income from a partnership.

 interest income.

 dividend income because the partnership intends to organize next year as a limited liability company.

 None of the choices are correct.

Income from flow-through entities retains its character when reported on individual returns.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
81. Award: 1.00 point

Which of the following statements about alimony payments is true for divorce agreements executed before 2019?

 To qualify as alimony, payments must be made in cash.

 Alimony payments are includible in the gross income of the recipient.

 To qualify as alimony, payments cannot continue after the death of the recipient.

 To qualify as alimony, payments must be made under a written agreement or divorce decree that does not
designate the payments as "nonalimony" or child support.

 All of the choices are correct.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

82. Award: 1.00 point

Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to pay Barney $24,000 per year for five
years (or until Barney's death or remarriage) and $10,000 per year until their daughter, Pebbles, turns 19 years old.
What amount (if any) is included in Barney's gross income in 2020?

 $10,000

 $24,000

 $34,000

 $39,000

 None of the payments are included in gross income.

Alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient. For divorce
agreements executed before 2019, alimony payments are included in the gross income of the recipient.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
83. Award: 1.00 point

Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to pay Barney $38,300 per year for five
years (or until Barney’s death or remarriage) and $11,800 per year until their daughter, Pebbles, turns 19 years old.
What amount (if any) is included in Barney’s gross income in 2020?

 $11,800

 $38,300

 $50,100

 $67,600

 None of the payments are included in gross income.

Alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient. For divorce
agreements executed before 2019, alimony payments are included in the gross income of the recipient.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

84. Award: 1.00 point

Charles and Camilla got divorced in 2018. Under the terms of the decree Charles pays Camilla $50,000 in cash in
each of the next five years (or until Camilla's death or remarriage). In addition, Charles transferred a castle worth
$2,000,000 to Camilla in 2018 and will pay $12,000 per year to support their son, Clyde, until he turns 19 years old.
What amount (if any) is included in Camilla's gross income in 2020?

 $2,062,000

 $12,000

 $50,000

 $2,050,000

 None of the payments are included in gross income.

for divorce agreements executed before 2019. Property settlements and child support are not included in gross
income, but alimony payments (cash) are includible for divorce agreements executed before 2019.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
85. Award: 1.00 point

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?

 $400,000

 $600,000

 $1,000,000

 None of the choices are correct because all prizes are excludable.

 None of the choices are correct because prizes from charities are excludable.

Awards for scientific or public achievement are excluded only if the payer of the award transfers the award to a
governmental unit (e.g., EPA) or a public charity.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

86. Award: 1.00 point

Hal Gore won a $1.85 million prize for special contributions to environmental research. This prize is awarded for
public achievement, and Hal directed the awarding organization to transfer $485,000 of the award to the
Environmental Protection Agency. How much of the prize should Hal include in his gross income?

 $485,000

 $1,365,000

 $1,850,000

 None of the choices are correct because all prizes are excludable.

 None of the choices are correct because prizes from charities are excludable.

Awards for scientific or public achievement are excluded only if the payer of the award transfers the award to a
governmental unit (e.g., EPA) or a public charity.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
87. Award: 1.00 point

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?

 $25,000

 $25,000 because all prizes are taxable

 $0 because prizes transferred to charities are excludable

 $0 because all prizes are excludable

 $0 because prizes from charities are excludable

To be excludable, the prize must be associated with scientific, literary, or charitable achievement or received by a
Team USA athlete from the U.S. Olympic Committee on account of their competition in the Olympic or Paralympic
games.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

88. Award: 1.00 point

This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and
loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed
include in his gross income?

 $2,250

 $2,000

 $250

 $0 if Ed offers to contribute his watch and bonus to a qualified charity

 $0—all employee awards are excluded from gross income

Cash bonus payments are includible in gross income but awards of tangible property to employees for length of
service or safety achievement are excluded up to $400 of value.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
89. Award: 1.00 point

This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and
loyal service, the company awarded Ed a gold watch worth $332 and a $2,280 cash bonus. What amount must Ed
include in his gross income?

 $2,612

 $2,280

 $332

 $0 if Ed offers to contribute his watch and bonus to a qualified charity

 $0 - all employee awards are excluded from gross income

Cash bonus payments are includible in gross income but awards of tangible property to employees for length of
service or safety achievement are excluded up to $400 of value.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

90. Award: 1.00 point

Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200 at poker.
Also this year, Rhett made several trips to the racetrack, but he lost $700 on his various wagers. What amount must
Rhett include in his gross income?

 $1,450

 $1,200

 $750

 $250

 $0—gambling winnings are not included in gross income

Taxpayers must include the gross amount of their gambling winnings for the year in gross income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
91. Award: 1.00 point

Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and $10,000 of
Social Security payments. What amount must Bernie include in his gross income?

 $250,000

 $255,000

 $258,500

 $260,000

 $0

High-income individuals include 85 percent of their Social Security benefits in gross income.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

92. Award: 1.00 point

Bernie is a former executive who is retired. This year Bernie received $235,000 in pension payments and $12,700 of
Social Security payments. What amount must Bernie include in his gross income?

 $235,000

 $241,350

 $245,795

 $247,700

 $0

High-income individuals include 85 percent of their Social Security benefits in gross income.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
93. Award: 1.00 point

Bart, a single taxpayer, has recently retired. This year, he received $24,000 in pension payments and $5,000 of
Social Security payments. What amount must Bart include in his gross income for the Social Security payments?

 $4,250

 $2,500

 $1,500

 $750

 $0

His modified AGI + 50 percent of Social Security benefits is $24,000 + $2,500 = $26,500, which is greater than
$25,000 but less than or equal to $34,000. His taxable Social Security benefits are the lesser of (a) $2,500 (50
percent of his Social Security benefits) or (b) 50 percent of [$24,000 modified AGI + $2,500 (50% of Social Security
benefits) − $25,000] = $750. Thus, his taxable Social Security benefits are $750.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

94. Award: 1.00 point

Karl works at Moe's grocery. This year Karl was paid $43,000 in salary, but he was allowed to purchase his groceries
at 10 percent below Moe's cost. This year Karl spent $3,600 to purchase groceries, costing Moe $4,000. The
groceries were worth $6,000. What amount must Karl include in his gross income?

 $46,600

 $47,000

 $49,000

 $43,400

 $45,500

Employees must recognize imputed income to the extent they are allowed to purchase goods from their employer at
a price below the employer's cost. [$43,000 + ($4,000 × 0.10)] = $43,400.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
95. Award: 1.00 point

Karl works at Moe's grocery. This year Karl was paid $40,000 in salary, but he was allowed to purchase his groceries
at 5 percent below Moe's cost. This year Karl spent $4,370 to purchase groceries, costing Moe $4,600. The
groceries were worth $6,900. What amount must Karl include in his gross income?

 $44,370

 $44,600

 $46,900

 $40,230

 $42,500

Employees must recognize imputed income to the extent they are allowed to purchase goods from their employer at
a price below the employer's cost. [$40,000 + ($4,600 × 0.05)] = $40,230.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

96. Award: 1.00 point

Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3
percent, which of the following is correct?

 Joyce recognizes $1,500 of taxable interest income.

 Joyce's employer recognizes $1,500 of deductible interest expense.

 Joyce recognizes $1,500 of imputed compensation income.

 Joyce recognizes $1,500 of imputed dividend income.

 None of the choices are correct.

Employees recognize compensation income on below-market loans from employers calculated using the federal
interest rate.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
97. Award: 1.00 point

Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4
percent, which of the following is correct?

 Janine recognizes $200 of taxable interest income.

 Janine's employer recognizes $200 of deductible interest expense.

 Janine recognizes $200 of imputed compensation income.

 Janine recognizes $200 of imputed dividend income.

 None of the choices are correct.

The imputed interest rules do not apply to loans of $10,000 or less.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

98. Award: 1.00 point

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 totaled $217,000. What amount must Deb include in her gross income?

 $15,000

 $45,000

 $30,000

 $28,000

 $0—Deb was not solvent when the loan was discharged

A discharge of indebtedness is not taxable if the taxpayer is insolvent before and after the debt forgiveness. If the
discharge of indebtedness makes the taxpayer solvent, the taxpayer recognizes taxable income to the extent of
his or her solvency.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
99. Award: 1.00 point

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 $72,000. After the loan was discharged, Deb had total assets of $298,000 and
her remaining loans totaled $229,000. What amount must Deb include in her gross income?

 $69,000

 $72,000

 $3,000

 $82,000

 $0 - Deb was not solvent when the loan was discharged.

A discharge of indebtedness is not taxable if the taxpayer is insolvent before and after the debt forgiveness. If the
discharge of indebtedness makes the taxpayer solvent, the taxpayer recognizes taxable income to the extent of his
or her solvency.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

100. Award: 1.00 point

Mike received the following interest payments this year. What amount must Mike include in his gross income (for
federal tax purposes)?

Bond Interest
General Motors $ 1,450
City of New York 900
State of New Jersey 1,200
U.S. Treasury 850

 $1,450

 $2,300

 $2,650

 $3,550

 $4,400

Interest on bonds issued by state and local governments is excluded from gross income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
101. Award: 1.00 point

This year, Fred and Wilma, married filing jointly, sold their home (sales price $750,000; cost $200,000). All closing
costs were paid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain is
included in gross income?

 $550,000

 $300,000

 $250,000

 $50,000

 None of the choices are correct.

Fred and Wilma may exclude $500,000 of their $550,000 gain ($750,000 sales price − $200,000 cost = $550,000
gain) because they meet the ownership and use tests. Thus, they only include $50,000 of the gain in their gross
income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

102. Award: 1.00 point

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. Assuming no unusual or hardship
circumstances apply, how much of the gain is included in gross income?

 $550,000

 $300,000

 $250,000

 $50,000

 None of the choices are correct.

All of the gain is included in gross income because Barney and Betty do not meet the two-year ownership and use
tests.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
103. Award: 1.00 point

This year, Barney and Betty sold their home (sales price $540,000; cost $148,000). All closing costs were paid by the
buyer. Barney and Betty owned and lived in their home for 18 months. Assuming no unusual or hardship
circumstances apply, how much of the gain is included in gross income?

 $392,000

 $194,000

 $180,000

 $32,000

 None of the choices are correct.

All of the gain is included in gross income because Barney and Betty do not meet the two-year ownership and use
tests.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

104. Award: 1.00 point

Frank received the following benefits from his employer this year. What amount must Frank include in his gross
income?

Benefits Received Amount

Salary $ 54,450
Health insurance 2,900
Group-term life insurance (face $50,000) 1,800

 $54,450

 $57,350

 $56,250

 $59,150

 $0—these benefits are excluded from gross income.

An employee may exclude from income the cost of medical and dental health insurance premiums and group-term
life insurance (face $50,000) premiums an employer pays on the employee's behalf.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
105. Award: 1.00 point

Frank received the following benefits from his employer this year. What amount must Frank include in his gross
income?

Benefits Received Amount

Salary $ 73,250
Health insurance 7,100
Group-term life insurance (face $50,000) 2,380

 $73,250

 $80,350

 $75,630

 $82,730

 $0 - these benefits are excluded from gross income

An employee may exclude from income the cost of medical and dental health insurance premiums and group-term
life insurance (face $50,000) premiums an employer pays on the employee's behalf.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
106. Award: 1.00 point

Ben received the following benefits from his employer this year. What amount must Ben include in his gross income?

Benefit Value
Health insurance coverage – paid by employer $ 5,800
Group-term life insurance premiums (face $50,000) – paid by employer 4,270
Disability insurance coverage (assume it is considered purchased by Ben) 3,600
Whole-life insurance premiums ($100,000) – paid by employer 7,000

 $9,400

 $11,070

 $10,600

 $7,000

 $0—none of these benefits are included in gross income.

If an employer pays disability premiums, and the employee chooses the premium as taxable compensation, it is
considered employee purchased and the benefits paid (if any) are excluded from the employee's gross income.
Employer-paid whole-life insurance premiums are included in gross income. Only premiums on up to $50,000 of
employer-paid group-term insurance are excluded from gross income.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
107. Award: 1.00 point

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for
tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500 were paid by the
university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross
income?

 $9,500

 $11,000

 $2,500

 $8,500

 $0—none of these benefits are included in gross income.

College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees,
books, supplies, and other equipment required for the student's courses. Any excess scholarship amounts (such as
for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform
services in exchange for receiving the scholarship.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

108. Award: 1.00 point

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $20,200 for
tuition, $3,100 for fees, and $1,950 for books. In addition, Shaun's dormitory fees of $12,200 were paid by the
university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross
income?

 $14,150

 $15,300

 $3,100

 $12,200

 $0—none of these benefits are included in gross income.

College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees,
books, supplies, and other equipment required for the student's courses. Any excess scholarship amounts (such as
for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform
services in exchange for receiving the scholarship.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
109. Award: 1.00 point

Graham has accepted an offer to do graduate work in the chemistry department at State University. The chemistry
department offered Graham a $5,000 tuition reduction and $3,500 toward the cost of room and meals. Under the
terms of the scholarship Graham must work in the chemistry labs during the summer as a research assistant. What
amount must Graham include in his gross income?

 $8,500

 $5,000

 $3,500

 $2,500

 $0—none of these benefits are included in gross income.

The scholarship exclusion applies to the tuition reduction but not the cost of room and board.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

110. Award: 1.00 point

Sam, age 45, saved diligently for his college education by putting part of his pay into U.S. Series EE savings bonds.
Sam purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200. He has no other income this
year. What amount must Sam include in his gross income?

 $7,200

 $6,500

 A maximum of $350 if Sam uses the proceeds to pay for his college tuition and fees.

 $700 unless Sam uses at least some portion of the proceeds to pay for his college tuition and fees.

 $0—proceeds from cashing bonds sold at a discount are not realized income.

Taxpayers using the bond redemption proceeds from Series EE bonds to pay for qualified higher educational
expenses of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer may be allowed to exclude the
interest from gross income. Qualified higher education expenses include the tuition and fees required for enrollment
or attendance at an eligible educational institution.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
111. Award: 1.00 point

Brenda has $15,000 in U.S. Series EE savings bonds and she is considering whether to cash in the bonds. Under
what conditions can Brenda exclude the interest on the savings bonds from her gross income?

 Brenda can exclude the interest if she uses the proceeds to pay for college tuition.

 Brenda's modified AGI must be below a phase-out range for the exclusion.

 The proceeds must be used for higher education expenses of Brenda, her spouse, or Brenda's dependent.

 All of these are necessary conditions for Brenda to exclude the interest.

 None of these are correct – the interest is always included in gross income.

Specifically, taxpayers using the bond redemption proceeds from Series EE bonds to pay for qualified higher
educational expenses of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer may be allowed to
exclude the interest from gross income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

112. Award: 1.00 point

In January of the current year, Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was
worth $15,000. Several months later in the same year after the gift, a $500 dividend was declared on the stock and
paid to Dora's granddaughter. What amount must Dora's granddaughter include in her gross income for the current
year?

 $2,000

 $15,000

 $15,500

 $2,500

 None of the choices are correct.

The gift of the stock is excluded but the dividend on the shares is taxable. Hence, the answer is $500.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
113. Award: 1.00 point

Irene's husband passed away this year. After his death, Irene received $250,000 of proceeds from life insurance on
her husband, and she inherited her husband's stock portfolio, worth $750,000. What amount must Irene include in
her gross income?

 $1 million

 $750,000

 $500,000

 $0, but only if Irene does not opt to receive the life insurance proceeds in a lump sum.

 $0—none of these benefits are included in gross income.

Taxpayers exclude inheritances and life insurance proceeds from gross income.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

114. Award: 1.00 point

Helen is a U.S. citizen and a CPA who moved to London, England, three years ago to work for a British company.
This year, she spent the entire year in London and earned a salary of $110,000. How much of her salary will she be
allowed to exclude from gross income in the United States?

 $82,000

 $107,600

 $107,000

 $100,000

 All of her salary is included in gross income.

Congress allows taxpayers to annually exclude a certain maximum amount, indexed for inflation, of foreign-earned
income from taxation. In 2020, the maximum exclusion is $107,600.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
115. Award: 1.00 point

Helen is a U.S. citizen and a CPA who moved to London, England, three years ago to work for a British company.
This year, she spent the entire year in London and earned a salary of $126,400. How much of her salary will she be
allowed to exclude from gross income in the United States?

 $110,400

 $107,600

 $123,400

 $116,400

 All of her salary is included in gross income.

Congress allows taxpayers to annually exclude a certain maximum amount, indexed for inflation, of foreign-earned
income from taxation. In 2020, the maximum exclusion is $107,600.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

116. Award: 1.00 point

Hank is a U.S. citizen and is doing a three to six-year assignment as a sales executive in Paris for a French company.
The assignment began this year. Hank earned $109,500 working for the French company this year but only lived in
France for 180 days (out of 365 days). He will live full time in France next year. What amount of Hank’s $109,500
salary this year will he be allowed to exclude from gross income in the United States (rounded to the nearest
hundred dollars)?

 Hank can exclude his entire salary because he worked more than 330 days overseas.

 $102,000

 $53,100

 $107,600

 None of his salary can be excluded from gross income because Hank must reside overseas for the entire
year.

$107,600 × [180/365] = $53,063.01 rounded to $53,100. Since Hank will have a tax home in a foreign country and
spend more than 330 days in the foreign country over 12 months, he is eligible to exclude foreign-earned income.
The exclusion is computed on a daily basis. The maximum exclusion is reduced pro rata for each day during the
calendar year the taxpayer is not considered to be a resident of the foreign country or does not actually live in the
foreign country.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
117. Award: 1.00 point

NeNe is an accountant and a U.S. citizen who has accepted a permanent position in Madrid, Spain, for a Spanish
financial services company. This year, NeNe spent the entire year working in Madrid. NeNe's employer paid $40,000
of her Madrid housing expenses this year. What amount of the $40,000 housing payments may NeNe exclude?

 NeNe can exclude all of the housing payment because she worked more than 330 days overseas.

 $17,216

 $22,784

 $15,064

 None of her salary can be excluded from gross income.

Since NeNe spent the entire year overseas, she may exclude the lesser of (a) $40,000 housing costs − $17,216
($107,600 × 0.16) = $22,784 or (b) $15,064 ($107,600 × 0.14). Thus, she may exclude $15,064 of the housing costs paid
by her employer.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

118. Award: 1.00 point

Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical
bills ($3,700), her emotional distress ($6,000—she now fears peanut butter), and punitive damages ($44,000). What
amount must Pam include in her gross income?

 $44,000

 $50,000

 $47,700

 $9,700

 $0—none of these benefits are included in gross income.

The tax laws specify that any payments (other than punitive damages) on account of a physical injury or physical
sickness are nontaxable. Damages taxpayers receive for emotional distress associated with a physical injury are also
excludable. Punitive damages are fully taxable, however, because they are intended to punish the harm-doer rather
than to compensate the taxpayer for injuries.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
119. Award: 1.00 point

Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical
bills ($4,370), her emotional distress ($7,500—she now fears peanut butter), and punitive damages ($60,250). What
amount must Pam include in her gross income?

 $60,250

 $67,750

 $64,620

 $11,870

 $0—none of these benefits are included in gross income.

The tax laws specify that any payments (other than punitive damages) on account of a physical injury or physical
sickness are nontaxable. Damages taxpayers receive for emotional distress associated with a physical injury are also
excludable. Punitive damages are fully taxable, however, because they are intended to punish the harm-doer rather
than to compensate the taxpayer for injuries.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
120. Award: 1.00 point

This year Zach was injured in an auto accident. As a result, he received the following payments.

Zach received $18,000 of disability pay. Zach has disability insurance provided by his employer as a nontaxable
fringe benefit. Zach's employer paid $4,300 in disability premiums for Zach this year.

Zach's hospital bills totaled $4,500 and were paid by his health insurance. Zach has health insurance provided by
his employer as a nontaxable fringe benefit. Zach's employer paid $6,250 in health insurance premiums for Zach this
year.

What amount must Zach include in his gross income?

 $22,500

 $18,000

 $4,500

 $10,550

 $0—none of these benefits are included in gross income.

Any payment a taxpayer receives from a health and accident insurance policy for medical or dental expenses paid
by the taxpayer is excluded from the taxpayer's income. If the employer pays the disability premiums for an
employee as a nontaxable fringe benefit, the employee must include all disability benefits in gross income.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
121. Award: 1.00 point

Samantha was ill for four months this year. Samantha missed work during this period, but disability insurance paid
$18,000 of disability pay to replace her missed salary. Samantha shares the cost of the insurance with her employer.
This year Samantha's employer paid $2,200 in disability premiums for Samantha as a nontaxable fringe benefit and
Samantha paid the remaining $1,100 of premiums from her salary. What amount of the disability pay must Samantha
include in her gross income (Rounded to the nearest whole dollar)?

 $18,000

 $12,000

 $7,000

 $1,100

 $0—none of these disability pay is included in gross income.

The portion of disability benefits that represents premium paid as a nontaxable fringe benefit is included in gross
income. The employer paid two-thirds of the cost and so two-thirds of the pay is includible [$2,200/ ($2,200 +
$1,100)] × $18,000 = $12,000. The remaining portion (one-third) of the disability benefits is excluded from gross
income because the premiums were paid by the taxpayer.

References

Multiple Choice Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

122. Award: 1.00 point

Acme published a story about Paul, and as a result Paul sued Acme for damage to his reputation, emotional distress,
and punitive damages. Paul won an award of $20,000 for damages, $5,500 for emotional distress, and $50,000 for
punitive damages. What amount must Paul include in his gross income?

 $5,500

 $20,000

 $50,000

 $70,000

 All of these benefits are included in gross income.

The tax laws specify that only payments on account of a physical injury or physical sickness are nontaxable.
Damages taxpayers receive for emotional distress that are not associated with a physical injury are taxable, as are
punitive damages and damages to reputation.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.
123. Award: 1.00 point

Acme published a story about Paul, and as a result Paul sued Acme for damage to his reputation, emotional distress,
and punitive damages. Paul won an award of $41,500 for damages, $11,100 for emotional distress, and $64,000 for
punitive damages. What amount must Paul include in his gross income?

 $11,100

 $41,500

 $64,000

 $105,500

 All of these benefits are included in gross income

The tax laws specify that only payments on account of a physical injury or physical sickness are nontaxable.
Damages taxpayers receive for emotional distress that are not associated with a physical injury are taxable, as are
punitive damages and damages to reputation.

References

Multiple Choice Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income
exclusion provisions to compute gross income.

124. Award: 1.00 point

This year Ann has the following stock transactions. What amount is included in her gross income if Ann paid a $200
selling commission for each sale?

Total Purchase Value at year-

Shares Firm price Sales price end
100 IBM $ 5,000 $ 7,000
200 ATT 7,500 $ 9,500
500 Dell 12,500 13,000

$2,100. ATT: ($9,500 − $200) − $7,500 = $1,800. Dell: ($13,000 − $200) − $12,500 = $300.

The increase in value in the (IBM) stock is not yet realized.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.
125. Award: 1.00 point

This year Ann has the following stock transactions. What amount is included in her gross income if Ann paid a $610
selling commission for each sale?

Total Purchase Value at year-

Shares Firm price Sales price end
100 IBM $ 7,200 $ 9,200
200 ATT 12,200 $ 14,200
500 Dell 17,000 18,100

$1,880. ATT: ($14,200 − $610) − $12,200 = $1,390. Dell: ($18,100 − $610) − $17,000 = $490.

The increase in value in the (IBM) stock is not yet realized.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.

126. Award: 1.00 point

Blake is a limited partner in Kling-On Partners. This year Kling-On reported that Blake's share of dividend income was
$3,700 and his share of municipal interest was $2,750. Early this year Blake found a bundle of $100 bills in the alley
outside his apartment. When no one claimed the money, the cash (a total of $2,400) was returned to Blake. Finally,
Blake earned salary of $42,000 but almost $6,500 was withheld for income taxes and FICA tax. Compute Blake's
realized income and gross income.

$3,700 + $2,750 + $2,400 + $42,000 = $50,850 realized − $2,750 = $48,100 gross income

Realized income is $50,850 but gross income excludes municipal interest.

References

Essay Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of

realization.
127. Award: 1.00 point

Henry works part time on auto repairs and restoration projects. This year Henry was paid $5,400 for repairs he
made to his neighbor's auto. Henry's neighbor promised to pay Henry another $2,200 in cash next year. Henry's
brother borrowed $4,100 in cash in December of this year and gave him a negotiable promissory note for $4,300,
due in three months with interest. Henry sold the note in January of next year for $3,500. Finally, Henry restored a
car for the football coach. The coach paid him this year with a pass to next year's football games. The pass is worth
$750. Compute Henry's gross income for this tax year, assuming that he uses the cash basis of accounting.

$5,400 + $750 = $6,150

Gross income includes all income unless specifically excluded or deferred, and cash-basis taxpayers realize income
when valuable property is received.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.

128. Award: 1.00 point

Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange for
property. This year Juan provided lawn-mowing services in exchange for $1,275 of car repair services, $3,570 of
groceries, and a certificate of deposit (CD) for $4,050. The CD matures next year with interest. Finally, Juan received
a gift card that can only be applied for $850 of clothing at a local mall. Juan has only applied the gift card to
purchase $100 of clothing. Compute Juan's gross income, assuming that he uses the cash basis of accounting.

$1,275 + $3,570 + $4,050 + $850 = $9,745

Gross income includes all income unless specifically excluded or deferred, and cash-basis taxpayers realize income
when valuable property is received.

References

Essay Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of

realization.
129. Award: 1.00 point

Juan works as a landscaper for local businesses on weekends, and he often provides services in exchange for
property. This year Juan provided lawn-mowing services in exchange for $1,340 of car repair services, $3,600 of
groceries, and a certificate of deposit (CD) for $6,940. The CD matures next year with interest. Finally, Juan received
a gift card that can only be applied for $1,160 of clothing at a local mall. Juan has only applied the gift card to
purchase $205 of clothing. Compute Juan's gross income, assuming that he uses the cash basis of accounting.

$1,340 + $3,600 + $6,940 + $1,160 = $13,040

Gross income includes all income unless specifically excluded or deferred, and cash-basis taxpayers realize income
when valuable property is received.

References

Essay Difficulty: 1 Easy Learning Objective: 05-01 Apply the concept of

realization.

130. Award: 1.00 point

This year Kelsi received a $1,900 refund of state income taxes that she paid last year. Last year Kelsi claimed
itemized deductions of $13,300, including $2,800 of state income taxes. How much of the refund, if any, must Kelsi
include in gross income if the standard deduction last year was $12,200?

$1,100

The tax benefit is the lesser of the refund ($1,900) or the excess of the itemized deductions above the standard
deduction ($13,300 − $12,200 = $1,100). Hence, Kelsi must include $1,100 of the $1,900 refund in gross income.

References

Essay Difficulty: 3 Hard Learning Objective: 05-01 Apply the concept of

realization.
131. Award: 1.00 point

In April of this year Victoria received a $1,400 refund of state income taxes that she paid last year. Last year Victoria
claimed itemized deductions of $14,790. Victoria's itemized deductions included state income taxes paid of $3,750.
How much of the refund, if any, must Victoria include in gross income if the standard deduction last year was
$12,200?

$1,400

The tax benefit is the lesser of the refund ($1,400) or the excess of the itemized deductions above the standard
deduction ($14,790 − $12,200 = $2,590). Hence, Victoria must include the entire $1,400 refund in gross income.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.

132. Award: 1.00 point

In April of this year Victoria received a $2,040 refund of state income taxes that she paid last year. Last year Victoria
claimed itemized deductions of $19,250. Victoria's itemized deductions included state income taxes paid of $6,300.
How much of the refund, if any, must Victoria include in gross income if the standard deduction last year was
$12,200?

$2,040
The tax benefit is the lesser of the refund ($2,040) or the excess of the itemized deductions above the standard
deduction ($19,250 − $12,200 = $7,050). Hence, Victoria must include the entire $2,040 refund in gross income.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.
133. Award: 1.00 point

Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned
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?

$109,000 = [1/2 × ($130,000 + $88,000)]

Under community property systems, the income earned from services by one spouse is treated as though it were
earned equally by both spouses.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.

134. Award: 1.00 point

Aubrey and Justin file married filing separately. This year, Aubrey earned salary of $130,000, and Justin earned
salary of $88,000. Aubrey and Justin live in a common law state. How much income earned will Justin report on his
tax return for this year?

$88,000

Under common law systems, the income earned from the services of one spouse is included in the gross income of
the spouse who earned it.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.
135. Award: 1.00 point

Cyrus is a cash method taxpayer who reports on a calendar-year basis. Last year Cyrus received salary of $88,000
and at year-end his employer announced that Cyrus would receive an additional year-end bonus of $10,000 in cash
and a new TV worth $2,000. Cyrus didn't receive his bonus check until January of this year and the TV didn't arrive
until March of this year. Determine the amount Cyrus should include in his gross income for last year.

$88,000

Under constructive receipt, the bonus and the TV are not included in gross income until the year received.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.

136. Award: 1.00 point

Cyrus is a cash method taxpayer who reports on a calendar-year basis. Last year Cyrus received salary of $89,250
and at year-end his employer announced that Cyrus would receive an additional year-end bonus of $12,200 in cash
and a new TV worth $3,950. Cyrus didn't receive his bonus check until January of this year and the TV didn't arrive
until March of this year. Determine the amount Cyrus should include in his gross income for last year.

$89,250

Under constructive receipt, the bonus and the TV are not included in gross income until the year received.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.
137. Award: 1.00 point

Kathryn is employed by Acme and they have been very pleased with her performance this year. In December
Kathryn was granted an extra week off with pay (pay for the week totaled $2,000). In addition, Kathryn was given
tickets to a football bowl game worth $800. (Kathryn didn’t use the tickets—she hates football.) Right before year-
end Kathryn was allowed to order new office furniture and Acme told her to take the old office furniture home. The
office furniture was originally purchased for $7,000, but it was fully depreciated and only worth about $1,000.
Determine the amount Kathryn should include in her gross income.

$2,000 + $800 + $1,000 = $3,800

Gross income includes the value of property received.

References

Essay Difficulty: 2 Medium Learning Objective: 05-01 Apply the concept of

realization.

138. Award: 1.00 point

Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12
years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment should Charles include in
gross income?

$5,000

A part of each payment represents a return of the original $180,000 investment and the remainder ($60,000) is
income. The original investment ($180,000) divided by the number of years indicates that $15,000 of each payment
is a return of capital, so the remaining $5,000 is income.

References

Essay Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
139. Award: 1.00 point

This year Larry received the first payment from an annuity that promises to pay him $3,000 per month for the rest of
his life. The IRS tables indicate that given Larry's age, he should expect to receive 310 monthly payments. The cost of
the annuity to Larry was $620,000. How much of the first $3,000 payment should Larry include in gross income?

$3,000 − [$620,000/310] = $1,000

A part of each payment represents a return of the original $620,000 investment. The return of capital is prorated
over the expected payment period so that each $3,000 monthly payment is composed of $2,000 of return of capital
($620,000/310 payments) and $1,000 of income.

References

Essay Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

140. Award: 1.00 point

Desai and Lucy divorced in 2018. Lucy has custody of their child, Andrea, and under the divorce decree Desai pays
Lucy $120,000 per year. The payments must be made in cash and will cease if Lucy dies or remarries. The payments
drop to $100,000 per year once Andrea reaches the age of 18. How much of the payments should Lucy include in
gross income this year?

$100,000

The constant payments qualify as "alimony" and should be included in Lucy's gross income. The drop in payments is
treated as child support because these payments cease upon the happening of a specific contingency related to the
child.

References

Essay Difficulty: 1 Easy Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.
141. Award: 1.00 point

J.Z. (single taxpayer) is retired and received $10,000 of Social Security benefits this year. How much of the $10,000
Social Security benefits are taxable if his only other income was $28,000 of pension income?

$4,000

J.Z.'s modified AGI + 50 percent of his Social Security benefits equals $28,000 + $5,000 (50% × $10,000) = $33,000.
Thus, his taxable Social Security benefits are the lesser of (a) $5,000 (50 percent of his Social Security benefits) or
(b) 50 percent of [$28,000 modified AGI + $5,000 (50 percent of Social Security benefits) − $25,000] = $4,000.
Thus, his taxable Social Security benefits are $4,000.

References

Essay Difficulty: 2 Medium Learning Objective: 05-02 Discuss the

distinctions between the various sources of
income, including income from services and
property.

142. Award: 1.00 point

Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an
interest rate of 1 percent. Wendell would have paid interest of $2,500 this year if the interest rate on the loan had
been set at the prevailing federal interest rate. Wendell used the funds as a down payment on a vacation home, and
during the year he paid $500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest.
What amount of gross income does Wendell recognize from the loan this year?

$52,000

Wendell must include $2,000 in gross income from the discounted interest rate he received on the loan ($2,500
interest at federal rate minus $500 he actually was required to pay). Also, Wendell must include the $50,000 in
gross income because the discharge of the debt is additional compensation.

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.
143. Award: 1.00 point

Bobby and Sissy got married two and a half years ago. Since that time, they have lived in Bobby's home. Sissy sold
her previous home three years ago and excluded her entire gain ($80,000) at that time. Bobby and Sissy decided to
move to a bigger home this year. As a result, they sold Bobby's home for $500,000 (original cost $150,000). How
much of the gain from the sale is taxable?

$0.

Because Bobby meets the ownership test, Bobby and Sissy meet the use test, and Sissy did not claim her exclusion
within the previous two years, they may exclude the entire gain up to $500,000.

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.

144. Award: 1.00 point

Robert will be working overseas on a permanent assignment for an international company beginning on March 1 of
this year (306 days this year). His salary is $11,000 per month while Robert is overseas, but only $9,200 per month
otherwise. What is the minimum amount of Robert's salary that he must include in gross income this year? (Round
your final answer to the nearest whole dollar amount and assume that there are 365 days in this year.)

$38,193

The maximum foreign-earned income exclusion for the year is $107,600. Robert will earn $18,400 during January
and February and $110,000 during the remainder of the year. Since he will be spending a total of more than 330
days abroad over a 12-month consecutive period, he is eligible to exclude foreign earned income. However, he will
be able to claim only a partial exclusion based upon his time abroad this year [$107,600 full exclusion × 306/365
(days in foreign country/days in year)] and thus he will report gross income of $38,193 ($128,400 − 90,207).

References

Essay Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.
145. Award: 1.00 point

Simon was awarded a scholarship to attend State Law School from Gary Harris & Associates, Attorneys at Law. The
scholarship pays Simon's tuition ($7,000 per semester) and fees ($500 per semester) and provides a $4,500 per-
semester stipend to pay for food and housing. In order to qualify for the stipend, Simon must work 10 hours per
week at Gary Harris & Associates during the term. How much of the scholarship is Simon required to include in gross
income?

$12,000 per semester

The entire scholarship is included in gross income because the terms of the scholarship require Simon to perform
services.

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.

146. Award: 1.00 point

This fall Angelina, age 35, plans to attend college. To fund her tuition she cashed in Series EE savings bonds with a
redemption value of $24,000 and an original cost of $16,800. Angelina plans on spending $7,200 of the proceeds to
pay tuition. The redemption proceeds are Angelina's only source of income. What amount of interest must Angelina
include in gross income this year?

$5,040

Angelina has realized interest of $7,200 but she is only eligible to exclude 30 percent of the interest income since
she is only using 30 percent of the proceeds for a qualified purpose ($7,200/$24,000). Angelina is not required to
phase out the amount of the exclusion because her modified gross income is below the threshold for the phase-out
of the exclusion.

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.
147. Award: 1.00 point

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?

$500 (two months of six months' interest received)

All of the gifts are excludable except for the interest that accrued on the corporate bonds after the date of the
transfer.

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.

148. Award: 1.00 point

Andres has received the following benefits this year.

Salary $ 92,000
Contribution to qualified pension plan 10,200
Qualified health insurance premiums 8,400
Year-end bonus 15,000
Group-term life insurance premiums (face = $40,000) 1,750
Whole-life insurance premiums (face = $100,000) 2,420
Disability insurance premiums 1,800

Besides these benefits Andres missed work for two months due to an illness. During his illness Andres received
$6,500 in sick pay from a disability insurance policy. Assume Andres has disability insurance provided by his
employer as a nontaxable fringe benefit. What amount, if any, must Andres include in gross income this year?

$115,920 = $92,000 + $15,000 + $2,420 + $6,500

The disability pay of $6,500 is included in gross income because the insurance premiums were paid as a nontaxable
fringe benefit.

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.
149. Award: 1.00 point

Andres has received the following benefits this year.

Salary $ 108,000
Contribution to qualified pension plan 17,900
Qualified health insurance premiums 9,500
Year-end bonus 24,600
Group-term life insurance premiums (face = $40,000) 1,955
Whole-life insurance premiums (face = $100,000) 2,905
Disability insurance premiums 2,220

Besides these benefits Andres missed work for two months due to an illness. During his illness Andres received
$7,290 in sick pay from a disability insurance policy. Assume Andres has disability insurance provided by his
employer as a nontaxable fringe benefit. What amount, if any, must Andres include in gross income this year?

$142,795 = $108,000 + $24,600 + $2,905 + $7,290

The disability pay of $7,290 is included in gross income because the insurance premiums were paid as a nontaxable
fringe benefit.

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.

150. Award: 1.00 point

This year Joseph joined the board of directors for a company. Besides his director's fees, Joseph received the
following employee benefits:

Salary $ 204,000
Contributions to qualified pension plan 25,000
Qualified health insurance premiums 8,000
Stock bonus 20,000
Annual director’s fee 15,000
Group-term life insurance premiums (face = $40,000) 1,800

The stock bonus consisted of 5,000 shares of Bell stock given to Joseph as compensation. At the time of the
transfer the stock was listed at $4 per share. What amounts, if any, should Joseph include in gross income this year?

$239,000 = $204,000 + $20,000 + $15,000

Joseph would report the value of the stock ($20,000) as compensation.

References

Essay Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.
151. Award: 1.00 point

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. Calculate Caroline's
gross income.

Distributions from qualified pension plan $ 5,400

Interest on bonds issued by city of Austin, Texas 2,500
Social Security benefits 8,200
Interest on U.S. Treasury bills 2,300
Interest on bonds issued by Ford Motor Company 1,900
Interest on bonds issued by city of Quebec, Canada 2,750
Disability insurance benefits 9,500

$12,350 = $5,400 + $2,300 + $1,900 + $2,750

Caroline is not taxed on the disability payments because she purchased the insurance. In addition, Caroline's gross
income is clearly below the Social Security phase-in threshold, so the Social Security benefits are also excluded.

References

Essay Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.

152. Award: 1.00 point

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.

$230,200 = $212,200 + $9,500 + $8,500

The annuity return of capital is ($157,500/15) = $10,500; thus, the taxable portion is $9,500. Given Alex's income, his
Social Security benefits are 85 percent taxable (i.e., $10,000 × 85 percent).

References

Essay Difficulty: 2 Medium Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.
153. Award: 1.00 point

Vincent is a writer and a U.S. citizen. After being out of work for the first half of the year, Vincent moved permanently
to Ireland on July 4. He worked for an Irish magazine and earned $110,000 in salary from July 4th to December 31st.
Earlier in April of this year Vincent received a $1,500 refund of the $3,600 in state income taxes his previous
employer withheld from his pay last year. Vincent claimed $13,000 in itemized deductions last year (the standard
deduction for a single filer was 12,200). Vincent wants to elect to use the foreign-earned income exclusion to the
extent he is eligible. Calculate Vincent’s gross income for this year. (Round your final answer to the nearest whole
dollar amount and assume there are 365 days in the year.)

$57,442 = $110,000 − $53,358 + $800

$107,600 × 181/365 = $53,358 maximum exclusion. The tax benefit is the lesser of the refund ($1,500) or the excess
of the itemized deductions above the standard deduction ($13,000 − $12,200 = $800). Hence, Vincent must include
$800 of the $1,500 refund in gross income.

References

Essay Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.

154. Award: 1.00 point

Lisa and Collin are married. Lisa works as an engineer and earns a salary of $116,000. Collin works at a beauty salon
and reported wages of $45,000. Lisa received $500 of interest from corporate bonds and $250 of interest from a
municipal bond. Lisa acquired these bonds prior to her marriage to Collin. Collin's father passed away on April 14. He
inherited cash of $50,000 and his baseball card collection, valued at $2,000. As beneficiary of his father's life
insurance policy, Collin also received $150,000. The couple spent a weekend in Atlantic City in November and came
home with gambling winnings of $1,200. Collin was injured in an accident at the salon. He was unable to work for a
month, but during this time he received $5,000 from disability insurance he purchased several years ago. Collin also
received $2,000 in workers’ compensation, and $1,500 from the salon for the emotional trauma he suffered from the
accident. Calculate Lisa and Collin's gross income for this year, assuming they will file married filing jointly.

$162,700 = $116,000 + $45,000 + $500 + $1,200

The municipal interest, inheritance and life insurance, disability pay, workers’ compensation, and damages are all
excluded from gross income.

References

Essay Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.
155. Award: 1.00 point

Lisa and Collin are married. Lisa works as an engineer and earns a salary of $140,000. Collin works at a beauty salon
and reported wages of $83,500. Lisa received $680 of interest from corporate bonds and $620 of interest from a
municipal bond. Lisa acquired these bonds prior to her marriage to Collin. Collin's father passed away on April 14. He
inherited cash of $92,000 and his baseball card collection, valued at $2,600. As beneficiary of his father's life
insurance policy, Collin also received $191,000. The couple spent a weekend in Atlantic City in November and came
home with gambling winnings of $2,120. Collin was injured in an accident at the salon. He was unable to work for a
month, but during this time he received $5,750 from disability insurance he purchased several years ago. Collin also
received $2,440 in workers' compensation, and $1,790 from the salon for the emotional trauma he suffered from the
accident. Calculate Lisa and Collin's gross income for this year, assuming they will file married filing jointly.

$226,300 = $140,000 + $83,500 + $680 + $2,120

The municipal interest, inheritance and life insurance, disability pay, workers’ compensation, and damages are all
excluded from gross income.

References

Essay Difficulty: 3 Hard Learning Objective: 05-03 Apply basic income

exclusion provisions to compute gross income.