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Exam 5: Gross Income and Exclusions

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Question 31

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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?

A) Brenda can exclude the interest if she uses the proceeds to pay for college tuition.
B) Brenda's modified AGI must be below a phase-out range for the exclusion.
C) The proceeds must be used for higher education expenses of Brenda, her spouse, or Brenda's dependent.
D) All of these are necessary conditions for Brenda to exclude the interest.
E) None of these are correct - the interest is always included in gross income.

F) A) and E)
G) B) and E)

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Question 32

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Wilma has a $42,500 certificate of deposit (CD) at the local bank. The interest on this certificate, $2,550, 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?

A) Wilma must include the $2,550 of interest in her income this year.
B) Wilma must include the $2,550 of interest in her income when she cashes the CD.
C) Wilma must include the $2,550 of interest in her income this year only if the bank waives the early withdrawal penalty.
D) Wilma must include the $2,550 of interest in her income next year if she does not pay the early withdrawal penalty.
E) All of the choices are correct.

F) B) and E)
G) A) and B)

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Question 33

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Jack and Jill are married. This year Jack earned $90,500, Jill earned $99,250, and they received $12,200 of interest income from a joint savings account. How much gross income would Jack report if he files married filing separately from Jill?

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

Bernie is a former executive who is retired. This year Bernie received $180,000 in pension payments and $10,600 of Social Security payments. What amount must Bernie include in his gross income?

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?

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?

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.

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?

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

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?

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 $140,800. How much of her salary will she be allowed to exclude from gross income in the United States?

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.

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?

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?

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

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?

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

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.

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