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Exam 5: Gross Income: Exclusions

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Question 31

Multiple Choice

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Kristen's employer owns its building and provides parking space for its employees. The value of the free parking is $150 per month. Karen's employer does not have parking facilities, but reimburses its employee for the cost of parking in a nearby garage, up to $150 per month.

A) Kristen and Karen must recognize gross income from the parking services.
B) Kristen can exclude the employer provided parking from gross income, but Karen must include her reimbursement in gross income.
C) Kristen must include the value of the employer provided parking from her gross income, but Karen can exclude her reimbursement from gross income.
D) Neither Kristen nor Karen is required to include the cost of parking in gross income.
E) None of the above.

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

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Question 32

True/False

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A U.S.citizen who works in France from February 1, 2011 until January 31, 2012 is not eligible for the foreign earned income exclusion in 2011 but is eligible for it in 2012.

A) True
B) False

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Question 33

Multiple Choice

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The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime, approximately 25 days each year.The supper money received:

Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence, she received her regular salary of $4,000 from her employer.For the next 60 days, she received $6,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $2,000 on an income replacement policy she had purchased. Of the $12,000 she received, Julie must include in gross income:

Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000, but she already owned more jewelry than she desired.

What Federal income tax benefits are provided for college students?

Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return. As an alternative, Juan can purchase a state bond (a "double-exempt bond") yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Hazel, a solvent individual but a recovering alcoholic, embezzled $6,000 from her employer.In the same year that she embezzled the funds, her employer discovered the theft.Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous.Hazel met the conditions and her employer canceled the debt.

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

Evaluate the following statements:

Beverly died during the current year.At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments.In the year of death, he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?

The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel.All employees are allowed to obtain food from the restaurant at no charge during working hours.In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casino's employees, the meals are provided for the convenience of the Casino.However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work.Which of the following is correct?

Iris collected $100,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy. Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $12,500 each.

Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company.She must include in gross income:

Sandy is married, files a joint return, and expects to be in the 28% marginal tax bracket for the foreseeable future.All of his income is from salary and all of it is used to maintain the household.He has a paid-up life insurance policy with a cash surrender value of $100,000.He paid $60,000 of premiums on the policy.His gain from cashing in the life insurance policy would be ordinary income.If he retains the policy, the insurance company will pay him $3,000 (3%) interest each year.Sandy thinks he can earn a higher return if he cashes in the policy and invests the proceeds.

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor.Albert had a life insurance policy with a face amount of $100,000.Albert had paid $10,000 of premiums on the policy.The insurance company has offered to pay him $75,000 to cancel the policy, although its cash surrender value was only $60,000.Albert accepted the $75,000.Albert used $5,000 to pay his medical expenses.Albert made a miraculous recovery and lived another 20 years.As a result of cashing in the policy:

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year. Mel's Federal gross income from the above is $2,500.

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance.If a customer dies, the company receives from the insurance company the balance due on the customer's loan.Ali, a customer, died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company, Swan:

Theresa sued her former employer for age, race, and gender discrimination.She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages.She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:

Barbara was injured in an automobile accident.She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: The defendant's insurance company is reluctant to pay punitive damages.Also, the company disputes the amount of her loss of wages amount.Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses.Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?