Chapter 2: Gross Income and Exclusions Key
1. Noncash items received as income must be included in income at their fair market value.
2. A gift received for opening a bank account is not taxable income to the recipient.
3. Interest income received by a cash basis taxpayer is generally reported in the tax year it is received.
4. When calculating the exclusion ratio for an annuity, the ratio should be revised when there is a significant
change in the taxpayer’s status or health.
5. Amounts received as scholarships for books and tuition may be excluded from the recipient’s taxable
income.
6. If a life insurance policy is transferred to the insured’s partnership for valuable consideration, the insurance
proceeds are taxable when received by the partnership.
7. The receipt of an inheritance is excluded from the taxable income of the recipients.
8. Cash allowances for meals or lodging generally must be included in the employee’s income.
9. An auto that is received as a prize should be included in the taxpayer’s income at its list price rather than its
fair market value.
10. Awards, bonuses, and gifts are all included in gross income.
11. Taxpayers must report interest income on Series EE savings bonds as the interest accrues.
12. The value of lodging provided to a professor to enable him to live near the campus is excluded from gross
income.
13. Under a divorce agreement executed in 2011, periodic payments of either cash or property must be made at
regular intervals to be deductible as alimony.
14. If a divorce agreement executed in 2011 specifies that a portion of the amount of an alimony payment is
contingent upon the status of a child, that portion is considered to be a child support payment.
15. Dr. J’s outstanding player award is not includible in income, since the award is in recognition of his
outstanding performance.
16. If an annuitant, whose annuity starting date was January 1, 2001, dies before recovering his or her
investment in the annuity, any unrecovered investment is recognized as a loss on the annuitant’s tax return for
17. Payments made by an employer for health insurance on behalf of an employee are considered income to the
employee at the time the payments are made.
18. Unemployment compensation is fully taxable to the individual receiving the compensation.
19. Dividend income arising from stock received as a gift is excluded from gross income since the dividends are
considered part of the gift.
20. To promote business activity, the tax rules generally are very liberal in allowing business gifts as
deductions.
21. Amounts received by an employee as reimbursement for medical expenses under a policy provided by the
taxpayer’s employer are excluded from gross income.
22. If an employer claims a business deduction for group health insurance premiums paid on behalf of his
employees, the amount must be included in the employees’ gross income.
23. In some cases, Social Security benefits may be partially taxable.
24. Payments made to a qualified retirement plan by an employer are considered part of the employee’s
investment in the contract for calculation of the annuity exclusion ratio.
25. Disability benefits are generally taxable to the individual receiving the amounts.
26. A scholarship for room and board granted in 2011 is fully taxable to the recipient.
27. Interest earned on bonds issued by a state government is fully taxable.
28. Child support payments are deductible by the spouse making the payments.
29. Interest on U. S. Treasury Bonds is not taxable.
30. Group term life insurance premiums paid by an employer for insurance amounts less than $50,000 must be
included in the employee’s income.
31. A “no-additional-cost” service includes only those services in the major line of business in which the
employee is employed.
32. All of the following amounts are taxable income to the recipient except:
33. Mary received the following items during 2011:
Christmas bonus from her employer
$500
Christmas gift from her father
35
Prize won in a radio show contest
100
What is the total amount of the above items that must be included in Mary’s 2011 gross income?
34. Which of the following amounts must be included in the gross income of the recipient?
35. All of the following amounts must be included in gross income, except:
36. All of the following amounts are excluded from gross income, except:
37. Which of the following is generally excluded from gross income?
38. As a Christmas thank-you for being a good employee, Ed’s TV Repair gave 62 year-old Edwina three shares
of its stock worth $20 per share. Edwina then received dividends of $1 per share related to the stock. How much
should be included in Edwina’s gross income?
39. Elmer received the following distributions from Virginiana Mutual Fund for the calendar year 2011:
Ordinary dividends (nonqualifying)
$250
Capital gain distributions
170
Nontaxable distributions
80
Elsie, Elmer’s wife, did not own any of the Virginiana Mutual Fund shares, but she did receive $1,600 in interest on a savings account at the Moss
National Bank. Elmer and Elsie filed a joint income tax return for 2011. What portion of the distributions from Virginiana Mutual Fund is taxable as
ordinary income on their 2011 individual income tax return?
40. Elmer received the following distributions from Virginiana Mutual Fund for the calendar year 2011:
Ordinary dividends
$250
Capital gain distributions
170
Nontaxable distributions
80
Elsie, Elmer’s wife, did not own any of the Virginiana Mutual Fund shares, but she did receive $175 in interest on a savings account at the Moss
National Bank and $1,475 in interest on California Municipal Bonds. Elmer and Elsie filed a joint income tax return for 2011. What amount is
reportable as taxable interest income?
41. Which of the following is excluded from gross income?
42. Laura and Leon were granted a divorce in 2004. In accordance with the decree, Leon made the following
payments to Laura in 2011:
Child support payments contingent on the age of the child
Annual cash payments, other than child support, specified as alimony in the divorce agreement
How much should Laura include in her 2011 taxable income as alimony?
43. Laura and Leon were granted a divorce in 2004. In accordance with the decree, Leon made the following
payments to Laura in 2011:
Child support payments contingent on the age of the child
$4,000
Indefinite periodic payments terminating on Laura’s death
$6,000
Assuming that Leon does not itemize his deductions, how much of the payments can he deduct as alimony in 2011?
44. Sam died on January 15, 2003 and left his wife, Terry, an insurance policy with a face value of $100,000.
Terry elected to receive the proceeds over a 10-year period ($10,000 plus interest each year). This year Terry
receives $11,500 ($10,000 proceeds plus $1,500 interest) from the insurance company. How much income must
Terry report from this payment?
A. $0
45. Roger is required under a 2003 divorce decree to pay $500 of alimony and $200 of child support per month
for 12 years. In addition, Roger makes a voluntary payment of $100 per month. How much of the total monthly
payment is deductible by Roger?
46. Sam, a calendar year taxpayer, purchased an annuity contract for $3,600 that would pay him $120 a month
beginning on January 1, 2011. His expected return under the contract based on his life expectancy is $10,800.
Assuming Sam received a total of $1,440 in payments during 2011, how much of this annuity income is
included in Sam’s gross income for 2011, using the general rule?
47. Richard, who retired on April 30, 2011, receives a monthly employee annuity benefit of $1,400 payable for
life, beginning May 1, 2011. During his years of employment, Richard contributed $29,400 to the company’s
plan. Richard’s life expectancy from the IRS tables is 10 years. Using the general rule, how much of the annuity
payment amounts received during 2011 ($11,200) may Richard exclude from gross income?
48. In 2011, Uriah received the following interest payments:
Interest of $400 on an overpayment of 2009 Federal income taxes
Interest of $300 from his bank certificate of deposit.
Interest of $1,500 on municipal bonds
Interest of $1,000 on United States savings bonds (Series HH)
What amount, if any, should Uriah report as taxable interest income on his 2011 individual income tax return?
49. Seymore named his wife, Penelope, the beneficiary of a $100,000 insurance policy on his life. The policy
provided that, upon his death, the proceeds would be paid at a rate of $4,000 per year plus interest over a 25-
year period. Seymore died June 25, 2010, and in 2011 Penelope received a payment of $5,200 from the
insurance company. What amount should she include in her gross income for 2011?
50. Arthur, age 19, is a full-time student at Gordon College and is a candidate for a bachelor’s degree. During
2011, he received the following amounts:
Tuition scholarship
$2,400
Loan from college financial aid office
1,000
Cash support from parents
2,000
Ordinary cash dividend
500
Cash prize awarded in contest
300
What is his adjusted gross income for 2011?
E. None of the above
51. Jerry and Sally were divorced under an agreement executed July 1, 2011. The terms of the agreement
provide that Jerry will transfer to Sally his interest in a rental house worth $250,000 with a tax basis to Jerry of
$80,000. What is the amount of the gain that must be recognized by Jerry on the transfer of the property and
what is Sally’s tax basis in the property after the transfer, respectively?
A. $170,000 and $250,000
52. Richard and Alice are divorced and under the terms of their written divorce agreement signed on December
30, 2006, Richard was required to pay Alice $1,500 per month of which $600 was designated as child support.
He made 12 such payments in 2011. Additionally, Richard voluntarily paid Alice $1,200 per month for 12
months of 2011, no portion of which was designated as child support. Assuming that Alice has no other income,
her tax return for 2011 should show gross income of:
A. $0
53. Terry receives $3,000 annually from an annuity contract which she purchased in 2002 for $15,000. Her total
expected return under the contract is $45,000 and payments under the contract began in 2003. For the years
2003 through 2011, Terry received $3,000 per year. Of the $3,000 received during 2011, what amount must
Terry include in her gross income for 2011 under the general rule?
A. $3,000
54. Which of the following fringe benefits is taxable to the employee receiving the benefit?
A. A subscription to a tax journal provided by the employer to a corporation’s tax accountant
55. Which of the following is nontaxable income to the recipient for tax purposes?
56. Which of the following is classified as nontaxable income?
57. Which of the following would result in life insurance proceeds that are taxable to the recipient?
58. For 2011, the maximum percentage of Social Security benefits which must be included in a taxpayer’s gross
income is?
59. Employer-provided spending accounts:
60. Indicate which of the following statements is true.
A. Dependent care plans can only be used to cover the costs of caring for a dependent child.
61. Which of the following is correct?