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Exam 10: Individuals: Income, Deductions, and Credits

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Question 41

Multiple Choice

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

A) Is gross income to the person who purchased the bond in the year the interest is earned.
B) Is gross income to the student in the year the interest is earned.
C) Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses.
D) Is not included in anyone's gross income if the proceeds are used to pay college tuition.
E) None of these.

F) A) and B)
G) None of the above

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Question 42

True/False

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After his divorce in 2015, Jeff was required to pay $18,000 per year to his former spouse, Darlene, who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year, Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

A) True
B) False

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Question 43

Multiple Choice

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A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

Pat gave 5,000 shares of stock in Coyote Corporation (a publicly traded corporation) to her church (a qualified charitable organization) in the current year.The stock was worth $180,000.She had acquired it as an investment four years ago at a cost of $120,000.She reported AGI of $300,000 for the year.In completing her current income tax return, how much is her current-year charitable contribution deduction?

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

Sadie mailed a check for $2,200 to a qualified charitable organization on December 31, 2019.The $2,200 contribution is deductible on Sadie's 2019 tax return if she itemizes her deductions.

Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2019.He prepaid all $3,600 of the interest on the loan on December 1, 2019.Joe can deduct only $300 of the prepaid interest in 2019.

Dan contributed stock worth $16,000 to his college alma mater, a qualified charity.He acquired the stock 11 months ago for $4,000.He may deduct $16,000 as a charitable contribution deduction (subject to percentage limitations).

Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence.The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project.Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.

This year Allison drove 800 miles to volunteer in a project sponsored by a qualified charitable organization in Utah.In addition, she spent $250 for meals while away from home.In total, Allison may take a charitable contribution deduction of $112 (800 miles × $0.14) relating to her volunteer work.

A taxpayer may not deduct the cost of new curbing (relative to a personal residence) even if the construction is required by the city and the curbing provides an incidental benefit to the public welfare.

The child tax credit is based on the number of the taxpayer's qualifying children under age 17.

In January 2020, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2019. The payment is deductible in 2019.

Tim and Janet divorced in 2018.Their only marital property was a personal residence with a value of $120,000 and cost of $50,000.Under the terms of the divorce agreement, Janet would receive the house and would pay Tim $15,000 each year for five years, or until Tim's death, whichever should occur first.Tim and Janet lived apart when the payments were made to Tim.The divorce agreement did not contain the word "alimony."

Roger is considering making a $6,000 investment in a venture that its promoter promises will generate immediate tax benefits for him.Roger, who does not anticipate itemizing his deductions, is in the 30% marginal income tax bracket.If the investment is of a type that produces a tax credit of 40% of the amount of the expenditure, by how much will Roger's tax liability decline because of the investment?

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:

The tax benefit received from a tax credit never is affected by the tax rate of the taxpayer.

During the year, Victor spent $300 on bingo games sponsored by his church.If all profits went to the church, Victor has a charitable contribution deduction of $300.

Both education tax credits are available for qualified tuition expenses, and in certain instances, also may be available for room and board.

Noah gave $750 to a good friend whose house was destroyed by an earthquake.In addition, Noah contributed his time, valued at $250, in the cleanup effort.Noah may claim a charitable deduction of $1,000 on his tax return for the current year.