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Exam 5: Gross Income: Exclusions

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Question 51

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Martha invested $6,000 in a qualified tuition program for the benefit of her son.Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition.

A) Martha is not required to include the $2,000 ($8,000 - $6,000) in her gross income when the funds are used to pay the tuition.
B) Martha's son must include the $2,000 ($8,000 - $6,000) in his gross income when the funds are used to pay the tuition.
C) Martha must include $8,000 in her gross income.
D) Martha's son must include $8,000 in his gross income.
E) None of these.

F) B) and D)
G) All of the above

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Question 52

True/False

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Mia participated in a qualified state tuition program for the benefit of her son Michael.She contributed $15,000. When Michael entered college, the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for Michael, neither Mia nor Michael must include $5,000 ($20,000 - $15,000) in gross income.

A) True
B) False

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Question 53

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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: $\begin{array}{lr}\text { Damages for } 25 \% \text { loss of the use of her right arm } & \$ 200,000 \\\text { Medical expenses } & 30,000 \\\text { Loss of wages } & 10,000 \\\text { Punitive damages } & 100,000\\&\underline{\underline{\$340,000}}\end{array}$ The defendant's insurance company is reluctant to pay punitive damages.Also, the company disputes the amount of her loss of wages.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)?

Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work, so they occasionally use the machine.However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use the copier.The use of the copy machine may not be excluded from gross income because the benefit is discriminatory.

Peggy is an executive for the Tan Furniture Manufacturing Company.She purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items.The retail price of the furniture was $12,500, and Tan's cost was $9,000.The company also paid for Peggy's parking space in a garage near the office.The parking fee was $600 for the year.All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy.However, the company does not pay other employees' parking fees.Peggy's gross income from the above is:

Sam was unemployed for the first two months of 2019.During that time, he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September, he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from this is $18,000 ($4,000 + $14,000).

George, an unmarried cash basis taxpayer, received the following amounts this year: $\begin{array} { l r } \text { Interest on savings accounts } & \$ 2,000 \\\text { Interest on a state tax refund } & 600 \\\text { Interest on City of Salem school bonds } & 350 \\\text { Interest portion of proceeds of a 5\% bank certificate of deposit } & \\\quad \text { purchased last year on July 1 and matured on June 30 of this year } & 250 \\\text { Dividends on USG common stock } & 300\end{array}$ What amount should George report as gross income from dividends and interest this year?

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 for punitive damages.As a result of the award, the amount Olaf must include in gross income is:

Roger is in the 35% marginal tax bracket.Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However, Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan, he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.

Carmen had worked for Sparrow Corporation for 30 years when she died of a heart attack at age 60.She was practically penniless at the time of her death, owed a $12,000 hospital bill, and had a disabled spouse.The company was very concerned about its public image, and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means, the board of directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life.Discuss both sides of the question of whether Carmen (or her estate) and her spouse realize any taxable income from these transactions.

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

In December 2019, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2020 on a building he held for rental income.Todd deducted the $1,200 of insurance premiums on his 2019 tax return.He had $150,000 of taxable income that year.On June 30, 2020, he sold the building and, as a result, received a $500 refund on his fire insurance premiums.As a result of the above:

A U.S.citizen is always required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.

In the case of interest income from state and Federal bonds:

During the current year, Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy.Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:

The taxpayer is a Ph.D.student in accounting at City University.The student is paid $1,500 per month for teaching two classes.The total amount received for the year is $13,500.

Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement.The payments must be included in her gross income.

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?