62. For divorces after 1984, which of the following statements about alimony payments is not correct?
63. In the tax law, the definition of gross income is:
64. Which of the following is not taxable income?
65. Tim receives $500 of qualified dividends from Exxon in 2011. He is in the 10 percent ordinary tax bracket.
66. Steve and Laura were divorced in 2007. Laura pays Steve alimony of $1,200 a month. The payment amount
was agreed upon in the decree of divorce. To save money, Steve and Laura still live together. Are the alimony
payments that Steve receives in 2011 includable in his income? Can Laura take a deduction for alimony paid?
67. Which of the following gifts would be considered taxable income to the person receiving the gift?
68. Nicole is a student at USB Law; she receives a $52,000 scholarship for 2011. Of the $52,000, $40,000 is
used for tuition, $5,000 is used for books and $7,000 is used for room and board. How much of the scholarship
is taxable income for Nicole in 2011?
69. Robert works for American Motors. American Motors pays a $1,200 premium on Robert’s health
insurance in 2011. Robert has an operation on his big toe in 2011 that cost $7,200. The insurance company paid
70. An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9
percent per year and a municipal bond which pays an interest rate of 7.9 percent per year. The investor is in the
15 percent tax bracket. Which bond will give the investor a higher after-tax interest rate and for which reason?
71. Steve worked as a tech supervisor for a computer company. In September of 2011, he was laid off. He was
paid unemployment compensation for the rest of the year totaling $7,000. Which of the following is true?
E. None of the above is true.
72. Toby transfers to Jim a life insurance policy with a face value of $25,000 and a cash value of $5,000 in
payment of a personal debt. Jim continues to make premium payments on the policy until Toby’s death. At that
time, Jim had paid $1,500 in premiums.
a.
How much income must Jim report when he receives the $25,000 in proceeds?
b.
Would your answer be different if Toby and Jim were partners in a partnership? Why?
b.
73. During the 2011 tax year, Thomas and Yolanda received $24,000 in Social Security benefits. The amount of
their adjusted gross income for the year was $2,000 and they received no tax-exempt interest income.
Calculate the amount of the Social Security benefits that Thomas and Yolanda must include in their gross
income for 2011.
74. A taxpayer in the 33 percent tax bracket invests in a New York City Bond paying 5 percent interest. What
taxable interest rate would provide the same after-tax return?
75. Martin retired in May, 2011. His pension is $1,000 per month from a qualified retirement plan to which he
contributed $48,000, and to which his employer contributed $12,000. Martin’s life expectancy from the IRS
mortality tables is 10 years, and during 2011 he received total payments of $8,000 from the plan.
a.
Using the general rule, calculate Martin’s taxable income for 2011 from the retirement plan distributions.
b.
If Martin’s contributions to the plan had been $25,000, instead of $48,000, how much taxable income would he have to report in 2011 from
the plan distributions?
76. William, a single taxpayer, works for the men’s clothing division of a large corporation. During 2011,
William received the following fringe benefits:
Value
20 percent discount on men’s clothing (the usual markup is 40 percent)
$350
15 percent discount on toys from the toy division of the company (the usual markup is 25 percent)
100
Personal copies on the company’s copier
15
A subscription to Men’s Clothing Weekly
35
Use of the company’s athletic facilities
50
As a result of receiving the above fringe benefits, what amount must William include in his 2011 gross income?
77. Under a divorce agreement executed in 2011, Bob is required to pay his ex-wife, Carol, $3,000 a month
until their youngest daughter is 21 years of age. At that time, the required payments are reduced to $2,000 per
month.
a.
How much of each $3,000 payment may be deducted as alimony by Bob?
b.
How much of each $3,000 payment must be included in Carol’s taxable income?
a.
b.
78. Under the terms of a property settlement executed during 2011, Cindy transferred a house worth $350,000
to her ex-husband, Carl. The property has a tax basis to Cindy of $300,000.
a.
How much taxable gain or loss must be recognized by Cindy at the time of the transfer?
b.
What is Carl’s tax basis in the property he received from Cindy?
a.
79. In June of 2011, a wealthy aunt gave Janie a stock portfolio worth $150,000. During the year, she collects
$4,000 in dividends. How much of these amounts, if any, should Janie include in gross income for 2011? Why?
80. Joey is a single taxpayer. Joey’s employer pays $1,800 per year for his health insurance. During the year,
Joey had medical expenses of $2,500 and the insurance company reimbursed him for the full $2,500. How
much of the above amounts, if any, must be included in Joey’s gross income? Why?
81. Rob is 8 years old and won a sports car valued at $30,000 in a drawing at Disneyland. How much income, if
any, must Rob report on his 2011 tax return? Why?
82. Bob is a machinist in a remote Alaskan crab-freezing plant. The plant is accessible only by boat or airplane
and has no available lodging for rent. Bob’s employer provides him with lodging at the plant and pays for all of
his electricity, gas, and other utilities, valued at $700 per month. Is the value of the lodging taxable to Bob?
Explain.
83. Jim, a single individual, was unemployed for a few months during 2011. During the year, he received
$3,600 in unemployment compensation payments. How much of his unemployment compensation payments
must be included in gross income?
84. Tracy transfers to Glen a life insurance policy with a face value of $40,000 and a cash value of $8,000 in
payment of a personal debt. Glen continues to make premium payments on the policy until Tracy’s death. At
that time, Glen had paid $3,500 in premiums.
a.
How much income must Glen report when he receives the $40,000 in proceeds?
b.
Would your answer be different if Tracy were a shareholder and CEO of a corporation to which the policy was transferred? Why?
85. Elmore receives a rental property as an inheritance from his grandmother. The rental is worth $500,000 and
Elmore collected rental income of $24,000 during the year.
For the year, what is Elmore’s gross income from the inheritance?
86. In 2011, what rate would a taxpayer pay on qualified dividend income:
a.
If in the 33 percent bracket?
b.
If in the 10 percent bracket?
87. Bonnie receives salary income of $30,000, unemployment compensation of $5,400, and dividend income of
$1,000 and a gift of $7,000 in cash from her aunt. How much total income does Bonnie have?
88. In June of 2011, Rob’s wealthy stepmother died and left him a stock portfolio worth $600,000. Before she
died, she gave him a gift of $20,000 in cash. How much of these amounts, if any, are taxable to Rob? Why?
89. A taxpayer in the 28 percent tax bracket invests in a City of San Diego bond paying 8 percent interest. What
taxable interest rate would provide the same after-tax return?
90. Andy landscaped his friend’s house in return for a couch set and an HD television worth $8,000. How much
income must Andy report on his tax return for his services?
91. Jack is a lawyer and Jeri is a child psychologist. Jack prepares Jeri’s estate planning at no charge and Jeri
agrees to counsel Jack’s daughter six times at no charge in return for the estate planning. The value of the estate
planning is $1,000 and the value of the therapy sessions is $1,000.
a. How much income does Jack have? Why?
b. How much income does Jeri have? Why?
92. Barry has a successful methamphetamine laboratory. Producing methamphetamine is illegal under federal
law. Is Barry required by law to report the income from his lab on his tax return? Why?
93. Qualified dividends are given special tax treatment. Describe how they are taxed.
94. If a taxpayer holding EE bonds makes an election with respect to the taxation of the bonds, how is the
interest which accrues on the bonds, but is not paid, taxed each year?
95. Peter is required by his divorce agreement to pay alimony of $6,000 a month and child support of $4,000 a
month to his ex-wife Stella. What is the tax treatment of these two payments?
To Peter?
To Stella?
96. As part of the property settlement related to their divorce, Stella must give Peter the house that they have
been living in, while she gets 100 percent of their savings accounts. The house was purchased in Texas 15 years
ago for $100,000 and is now worth $110,000. How much gain must Stella recognize on the transfer of the house
to Peter? What is Peter’s tax basis in the house for calculating any future sale of the house?
97. State whether each of the following is taxable or nontaxable.
a. Susan won a jackpot of $50,000 gambling at a casino.
b. Sarah received a Christmas ham from her employer.
c. Jonathan won a car in a supermarket raffle valued at $25,000.
d. Gary received a scholarship for tuition of $5,000 a year.
e. Eric is given lodging valued at $1,000 a month on the oil rig where he works since it is impossible to go
home during the period of time he is assigned to work there.
98. Van is sick and tired of his job. His doctor certifies that his health may be compromised if he continues to
work at his current job. He sells his life insurance policy to Life Settlements, Inc. for $50,000 so he can take a
break from work. He has paid $10,000 so far for the policy. How much of the $50,000 must Van include in his
taxable income?
99. Helga receives a $300,000 life insurance payment when her boyfriend Andy dies. How much of the
payment is taxable to Helga?
100. Geoff is a company president who has had a very good year at work. The owner of the company is pleased
and gives him a gift of $50,000 at the end of the year. The owner writes “gift” in the memo section of the check.
How much of the gift is taxable to Geoff?
101. Tim receives a $25,000 gift from his parents for a down payment on a house. They know he can not buy a
house without their help. They write “gift” in the memo line of the check. How much of the gift is taxable to
Tim?
102. Karina receives a scholarship of $10,000 to a college. She is also given a job which pays $5,000 a year to
help with her expenses. $7,000 of the scholarship is earmarked for tuition and $3,000 is for room and board.
How much of the money from the scholarship and the job are taxable to Karina?
103. Marco and his family are covered by his company’s health insurance plan. The health insurance costs his
company $2,500 a year. During the year Marco’s daughter is diagnosed with a serious illness and the health
insurance pays $25,000 for treatment. How much of the insurance cost and the treatment are taxable to Marco?
104. Mable is a wealthy widow who has come to you for tax advice. She is in the 35 percent tax bracket. She
has a choice between investing in a high-quality municipal bond paying 3.5 percent or a high-quality corporate
bond paying 7 percent. From a tax standpoint, which investment would you advise her to make and why?
105. Answer the following questions regarding the taxability of Social Security payments.
a. Will a taxpayer with no income other than Social Security have to include the Social Security in taxable
income?
b. Will a taxpayer with a large amount of municipal bond income, but no taxable income, likely have to pay tax
on part of his or her Social Security?
c. What is the maximum amount of Social Security which may be subject to tax on an individual’s tax return?
106. Curt’s tax client is employed at a large company that offers medical flexible spending accounts to its
employees. Terry, the client, must decide at the beginning of the year whether he wants to put as much as
$5,000 of his salary into the medical spending account. Terry has excellent insurance through the company and
is very healthy. He does not expect to have any medical expenses during the year. Terry does not itemize
deductions. Should Curt recommend that Terry put the maximum in his medical flexible spending account?
Why or why not?
107. During 2011, Margaret and John received $24,000 in Social Security benefits. The amount of their
adjusted gross income for the year before any Social Security income was $140,000 and they received $19,000
in tax-exempt income.
Explain the treatment of their Social Security income for tax purposes and the likely percentage of the Social
Security income that will be taxable to Margaret and John.
108. Ordinarily life insurance proceeds are excluded from gross income. Why would they be taxable if earlier
the policy had been transferred for valuable consideration?