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Exam 5: Gross Income: Exclusions

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Question 51

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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 When the funds were withdrawn to pay the college tuition for Michael, neither Mia nor Michael must include $5,000 ($20,000 - $15,000) in gross income.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 52

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If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.

A) True
B) False

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Question 53

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The Royal Motor Company manufactures automobiles. Nonmanagement employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Which of the following statements is correct?

Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest, which is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk. Which of the following is correct:

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.

Ashley received a scholarship to be used as follows: tuition, $6,000; room and board, $9,000; and books and laboratory supplies, $2,000. Ashley is required to include only $9,000 in her gross income.

Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2019. His total itemized deductions in 2019 were $18,000 and did not include any other state or local taxes. In 2020, he received a $900 refund of his 2019 state income tax. Sam must include the $900 refund in his 2020 Federal gross income in accordance with the tax benefit rule.

A company has a medical reimbursement plan for officers that covers all costs that the company's insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.

What Federal income tax benefits are provided for college students?

Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. The premiums for Meg's coverage were $1,800. Meg was absent from work for two months as a result of a kidney infection. Her employer's insurance company paid Meg's regular salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had purchased. Meg must include $11,800 in her gross income.

The exclusion of interest on educational savings bonds:

Ben was hospitalized for back problems. While he was away from the job, he collected his regular salary from an employer-sponsored income protection insurance policy. Ben's employer-sponsored hospitalization insurance policy also paid for 90% of his medical expenses. Ben also collected on an income protection policy that he had purchased. Which of these sources of income is/are taxable? Explain the basis for excluding any item or items.

Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:

Ron, age 19, is a full-time graduate student at City University. During 2019, he received the following payments: $\begin{array}{lr}\text { Cash award for being the outstanding resident adviser } & \$ 1,500 \\\text { Resident adviser housing } & 2,500 \\\text { State scholarship for ten months (tuition and books) } & 6,000 \\\text { State scholarship (meals allowance) } & 2,400 \\\text { Loan from college financial aid office } & 3,000 \\\text { Cash support from parents } & 2,000 \\&\$17,400\\\hline\end{array}$ Ron served as a resident adviser in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron's adjusted gross income for 2019?

The CEO of Cirtronics Inc., discovered that the company's competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining her talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.

Calvin miscalculated his income in 2017 and overpaid his state income tax by $10,000. In 2018, he amended his 2017 state income tax return and received a $10,000 refund and $900 interest. Calvin itemized his deductions in 2017, deducting $12,000 in state income tax and $30,000 total itemized deductions (in 2017, individuals were not limited to a $10,000 state tax deduction when they itemized deductions). As a result of the amended return in 2018, Calvin must recognize $10,900 of gross income.

Christie sued her former employer for a back injury she suffered on the job in 2019. As a result of the injury, she was partially disabled. In 2020, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2019 return, reducing her taxable income by $12,000. Christie's 2020 gross income from the above is:

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.

The de minimis fringe benefit: