Tax

Annuities thru Group-term Life Insurance

Richard Brown, who retired on May 31, 2009, receives a monthly pension benefit of $700 payable for life. His life expectancy at the date of retirement is ten years. The first pension check was received on June 15, 2009. During his years of employment, Brown contributed $12,000 to the cost of his company’s pension plan. How much of the pension amounts received may Brown exclude from taxable income for the years 2009, 2010, and 2011?

2009 2010 2011

a) $0 $0 $0

b) $4,900 $4,900 $4,900

c) $ 700 $1,200 $1,200

d) $4,900 $8,400 $8,400Hide Feedback

(c) The requirement is to determine the pension (annuity) amounts excluded from income for 2009, 2010, and 2011. Brown’s contribution of $12,000 will be recovered pro rata over the life of the annuity. Under this rule, $100 per month (12,000 ÷ 120 months) is excluded from income.

Received Excluded Included

2009 $4,900 $ 700 $4,2002010 8,400 1,200 7,2002011 8,400 1,200 7,200

Question 2 1 / 1 point

David Autrey was covered by an $80,000 group-term life insurance policy of which his wife was the beneficiary. Autrey’s employer paid the entire cost of the policy, for which the uniform annual premium was $8 per $1,000 of coverage. Autrey died during 2010, and his wife was paid the $80,000 proceeds of the insurance policy. What amount of group-term life insurance proceeds must be included in gross income by Autrey’s widow?

a) $0

b) $30,000

c) $50,000

d) $80,000Hide Feedback

(a) The requirement is to determine the amount of group-term life insurance proceeds that must be included in gross income by Autrey’s widow. Life insurance proceeds paid by reason of death are generally excluded from gross income. Note that although only

the cost of the first $50,000 of group-term insurance coverage can be excluded from gross income during the employee’s life, the entire amount of insurance proceeds paid by reason of death will be excluded from the beneficiary’s income.


John Budd files a joint return with his wife. Budd’s employer pays 100% of the cost of all employees’ group-term life insurance under a qualified plan. Under this plan, the maximum amount of tax-free coverage that may be provided for Budd by his employer is

a) $100,000

b) $ 50,000

c) $ 10,000

d) $ 5,000Hide Feedback

(b) The requirement is to determine the maximum amount of tax-free group-term life insurance coverage that can be provided to an employee by an employer. The cost of the first $50,000 of group-term life insurance coverage provided by an employer will be excluded from an employee’s income.


In 2010, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her 2010 adjusted gross income in connection with this award?

a) $0

b) $ 4,000

c) $ 5,000


(d) The requirement is to determine the amount of a $10,000 award for outstanding civic achievement that Joan should include in her 2010 adjusted gross income. An award for civic achievement can be excluded from gross income only if the recipient was selected without any action on his/her part, is not required to render substantial future services as a condition of receiving the award, and designates that the award is to be directly transferred by the payer to a governmental unit or a tax-exempt charitable, educational, or religious organization. Here, since Joan accepted and actually received the award, the $10,000 must be included in her adjusted gross income.

Unemployment Compensation thru Health Insurance

Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums. Upon the death of the parent, what amount must Decker include in gross income?

a) $0

b) $135,000

c) $160,000


(b) The requirement is to determine the amount of life insurance proceeds that must be included in gross income by Decker, on the death of Fuller’s parent. Life insurance proceeds paid because of the insured person’s death are generally excluded from gross income. However, the exclusion generally does not apply if the insurance policy was obtained by the beneficiary in exchange for valuable consideration from a person other than the insurance company. Here, Decker purchased the policy from Fuller for $25,000 and paid an additional $40,000 in premiums, so Decker must include in gross income the excess of insurance proceeds over his investment in the policy [$200,000 – ($25,000 + $40,000) = $135,000.


Howard O’Brien, an employee of Ogden Corporation, died on June 30, 2010. During July, Ogden made employee death payments (which do not represent the proceeds of life insurance) of $10,000 to his widow, and $10,000 to his fifteen-year-old son. What amounts should be included in gross income by the widow and son in their respective tax returns for 2010?

Widow Son

a) $ 5,000 $ 5,000

b) $ 5,000 $10,000

c) $ 7,500 $ 7,500

d) $10,000 $10,000View Feedback

(d) The requirement is to determine the amount of employee death payments to be included in gross income by the widow and the son. The $5,000 employee death benefit exclusion was repealed for decedents dying after August 20, 1996.


During the current year Hal Leff sustained a serious injury in the course of his employment. As a result of this injury, Hal received the following payments during the year:

Workers’ compensation $2,400Reimbursement from his 1,800

employer’s accident and health plan for medical expenses paid by Hal and not deducted by himDamages for physical injuries 8,000

The amount to be included in Hal’s gross income for the current year should be

a) $12,200

b) $ 8,000

c) $ 1,800

d) $0Hide Feedback

(d) The requirement is to determine the amount to be included in Hal’s gross income for the current year. All three amounts that Hal received as a result of his injury are excluded from gross income. Benefits received as workers’ compensation and compensation for damages for physical injuries are always excluded from gross income. Amounts received from an employer’s accident and health plan as reimbursement for medical expenses are excluded so long as the medical expenses are not deducted as itemized deduc tions.


During 2010 Kay received interest income as follows:

On US Treasury certificates $4,000On refund of 2008 federal income tax

500

The total amount of interest subject to tax in Kay’s 2010 tax return is

a) $4,500

b) $4,000

c) $ 500

d) $0Hide Feedback

(a) The requirement is to determine the amount of interest subject to tax in Kay’s 2010 tax return. Interest must generally be included in gross income, unless a specific statutory provision provides for its exclusion (e.g., interest on municipal bonds). Interest on US Treasury certificates and on a refund of federal income tax would be subject to tax on Kay’s 2010 tax return.


Charles and Marcia are married cash-basis taxpayers. In 2010, they had interest income as follows:

• $500 interest on federal income tax refund.

• $600 interest on state income tax refund.

• $800 interest on federal government obligations.

• $1,000 interest on state government obligations.

What amount of interest income is taxable on Charles and Marcia’s 2010 joint income tax return?

a) $ 500

b) $1,100

c) $1,900


(c) The requirement is to determine the amount of interest income taxable on Charles and Marcia’s joint income tax return. A taxpayer’s income includes interest on state and federal income tax refunds and interest on federal obligations, but excludes interest on state obligations. Here, their joint taxable income must include the $500 interest on federal income tax refund, $600 interest on state income tax refund, and $800 interest on federal government obligations, but will exclude the $1,000 tax-exempt interest on state government obligations. Although a refund of federal income tax would be excluded from gross income, any interest on a refund must be included in gross income.


Daniel Kelly received interest income from the following sources in 2010:

New York Port Authority bonds $1,000Puerto Rico Commonwealth bonds 1,800

What portion of such interest is tax exempt?

a) $0

b) $1,000

c) $1,800


(d) The requirement is to determine the amount of tax-exempt interest. Interest on obligations of a state or one of its political subdivisions (e.g., New York Port Authority bonds), or a possession of the US (e.g., Puerto Rico Commonwealth bonds) is tax-exempt.

Discharge of Indebtedness thru Dependent Care Assistance Programs

Under a “cafeteria plan” maintained by an employer,

a) Participation must be restricted to employees, and their spouses and minor children.

b) At least three years of service are required before an employee can participate in the plan.

c) Participants may select their own menu of benefits.

d) Provision may be made for deferred compensation other than 401(k) plans.

Cafeteria plans are employer-sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits (e.g., accident and health insurance, group-term life insurance, coverage under a de pendent care or group legal services program). Thus, employees “may select their own menu of benefits.” If an employee chooses qualified benefits, they are excluded from the employee’s gross income to the extent allowed by law. If an employee chooses cash, it is includible in the employee’s gross income as compensation.


In 2010, Gail Judd received the following dividends from

Benefit Life Insurance Co., on Gail’s life insurance policy (Total dividends received have not yet exceeded accumulated premiums paid)

$100

Safe National Bank, on bank’s common stock

300

Roe Mfg. Corp., a Delaware corporation, on preferred stock

500

What amount of dividend income should Gail report in her 2010 income tax return?

a) $900

b) $800

c) $500

d) $300The $100 dividend on Gail’s life insurance policy is treated as a reduction of the cost of insurance (because total dividends have not yet exceeded accumulated premiums paid) and is excluded from gross income.

Thus, Gail will report the $300 dividend on common stock and the $500 dividend on preferred stock, a total of $800 as dividend income for 2010.


Amy Finch had the following cash receipts during 2010:

Dividend from a mutual insurance company on a life insurance policy

$500

Dividend on listed corporation stock;

payment date by corporation was 12/30/09, but Amy received the dividend in the mail on 1/2/10

875

Total dividends received to date on the life insurance policy do not exceed the aggregated premiums paid by Amy. How much should Amy report for dividend income for 2010?

a) $1,375

b) $ 875

c) $ 500

d) $0

Dividends are included in income at earlier of actual or constructive receipt. When corporate dividends are paid by mail, they are included in income for the year in which received. Thus, the $875 dividend received 1/2/10 is included in income for 2010. The $500 dividend on a life insurance policy from a mutual insurance company is treated as a reduction of the cost of insurance and is excluded from gross income.


Jack and Joan Mitchell, married taxpayers and residents of a separate property state, elect to file a joint return for 2010 during which they received the following dividends:

Received byJack Joan

Alert Corporation (a qualified, domestic corporation)

$400 $ 50Canadian Mines, Inc. (a 300

Canadian company)Eternal Life Mutual Insurance Company (dividends on life insurance policy) 200

Total dividends received to date on the life insurance policy do not exceed cumulative premiums paid. For 2010, what amount should the Mitchells report on their joint return as dividend income?

a) $550

b) $600

c) $750

d) $800Hide Feedback

(c) The requirement is to determine the amount of dividends to be reported by the Mitchells on a joint return. The amount of dividends would be ($400 + $50 + $300) = $750. The $200 dividend on the life insurance policy is not gross income, but is considered a reduction of the cost of the policy.


Which payment(s) is(are) included in a recipient’s gross income?

I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.

II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

a) I only.

b) II only.

c) Both I and II.

d) Neither I nor II.

A candidate for a degree can exclude amounts received as a scholarship or fellowship if, according to the conditions of the grant, the amounts are used for the payment of tuition and fees, books, supplies, and equipment required for courses at an educational institution. All payments received for services must be included in income, even if the services are a condition of receiving the grant or are required of all candidates for the degree. Here, the payment to a graduate assistant for a part-time teaching assignment and the grant to a Ph.D. candidate for participation in research are payments for services and must be included in income.


Majors, a candidate for a graduate degree, received the following scholarship awards from the university in 2010:

• $10,000 for tuition, fees, books, and supplies required for courses.

• $2,000 stipend for research services required by the scholarship.

What amount of the scholarship awards should Majors include as taxable income in 2010?

a) $12,000

b) $10,000

c) $ 2,000

d) $0

Only a candidate for a degree can exclude amounts received as a scholarship award. The exclusion available to degree candidates is limited to amounts received for the payment of tuition and fees, books, supplies, and equipment required for courses at the educational institution. Since Majors is a candidate for a graduate degree, Majors can exclude the $10,000 received for tuition, fees, books, and supplies required for courses. However, the $2,000 stipend for research services required by the scholarship must be included in taxable income for 2010.


In July 1995, Dan Farley leased a building to Robert Shelter for a period of fifteen years at a monthly rental of $1,000 with no option to renew. At that time the building had a remaining estimated useful life of twenty years.

Prior to taking possession of the building, Shelter made improvements at a cost of $18,000. These improvements had an estimated useful life of twenty years at the commencement of the lease period. The lease expired on June 30, 2010, at which point the improvements had a fair market value of $2,000. The amount that Farley, the landlord, should include in his gross income for 2010 is

a) $ 6,000

b) $ 8,000

c) $10,000

d) $18,500

(a) The requirement is to determine a lessor’s 2010 gross income. A lessor excludes from income any increase in the value of property caused by improvements made by the lessee, unless the improvements were made in lieu of rent. In this case, there is no indication that the improvements were made in lieu of rent. Therefore, for 2010, Farley should only include the six rent payments in income: 6 × $1,000 = $6,000.


Darr, an employee of Sorce C corporation, is not a shareholder. Which of the following would be included in a taxpayer’s gross income?

a) Employer-provided medical insurance coverage under a health plan.

b) A $10,000 gift from the taxpayer’s grandparents.

c) The fair market value of land that the taxpayer inherited from an uncle.

d) The dividend income on shares of stock that the taxpayer received for services rendered.

(d) The requirement is to determine which of the following would be included in gross income by Darr who is an employee of Sorce C corporation. The definition of gross income includes income from whatever source derived and would include the dividend income on shares of stock that Darr received for services rendered. However, items specifically excluded from gross income include amounts received as a gift or inheritance, as well as employer-provided medical insurance coverage under a health plan.


Bristol, a cash-basis taxpayer, owns an apartment building. The following information was available for 2009:

• An analysis of the 2009 bank deposit slips showed recurring monthly rents received totaling $50,000.

• On March 1, 2009, the tenant in apartment 2B paid Bristol $2,000 to cancel the lease expiring on December 31, 2009.

• The lease of the tenant in apartment 3A expired on December 31, 2009, and the tenant left improvements valued at $1,000. The improvements were not in lieu of any rent required to have been paid.

In computing net income from that apartment building for 2009, Bristol should report gross income of

a) $50,000

b) $51,000

c) $52,000


(c) The requirement is to determine the amount to be reported as gross income. Gross income includes the $50,000 of recurring rents plus the $2,000 lease cancellation payment. The $1,000 of lease improvements are excluded from income since they were not required in lieu of rent.


Clark filed Form 1040EZ for the 2009 taxable year. In July 2010, Clark received a state income tax refund of $900, plus interest of $10, for overpayment of 2009 state income tax. What amount of the state tax refund and interest is taxable in Clark’s 2010 federal income tax return?

a) $0

b) $ 10

c) $900

d) $910Hide Feedback

(b) The requirement is to determine the amount of interest for overpayment of 2009 state income tax and state income tax refund that is taxable in Clark’s 2010 federal income tax return. The $10 of interest income on the tax refund is taxable and must be included in gross income. On the other hand, a state income tax refund is included in gross income under the “tax benefit rule” only if the refunded amount was deducted in a prior year and the deduction provided a benefit because it reduced the taxpayer’s federal income tax. The payment of state income taxes will not result in a “benefit” if an individual does not itemize deductions, or is subject to the alternative minimum tax for the year the taxes are paid. Individuals who file Form 1040EZ are not allowed to itemize deductions and must use the standard deduction. Since state income taxes are only allowed as an itemized deduction and Clark did not itemize for 2009 (he used Form 1040EZ), his $900 state income tax refund is nontaxable and is excluded from gross income.

Foster Care thru US Savings Bonds for Higher EducationJames Martin received the following compensation and fringe benefits from his employer during 2009:

Salary $50,000Year-end bonus 10,000Medical insurance premiums paid by employer

1,000

Reimbursement of qualified moving expenses

5,000

What amount of the preceding payments should be included in Martin’s 2009 gross income?

a) $60,000

b) $61,000

c) $65,000


(a) James Martin’s gross income consists of

Salary$50,000

Bonus 10,000$60,000

Medical insurance premiums paid by an employer are ex cluded from an employee’s gross income. Additionally, qualified moving expense reimbursements are an employee fringe benefit and can be excluded from gross income. This means that an employee can exclude an amount paid by an employer as payment for (or reimbursement of) expenses that would be deductible as moving expenses if directly paid or incurred by the employee.


In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified US Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is(are) true?

I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer’s spouse, or any person whom the taxpayer may claim as a dependent for the year.

II. “Otherwise qualified higher education expenses” must be reduced by qualified scholarships not includible in gross income.

a) I only.

b) II only.

c) Both I and II.

d) Neither I nor II.Hide Feedback

(c) The requirement is to determine whether two statements are true concerning the exclusion of interest in come on US Series EE Bonds that are redeemed to pay for higher education. The accrued interest on US Series EE savings bonds that are redeemed by a taxpayer is excluded from gross income to the extent that the aggregate redemp tion proceeds (principal plus interest) are used to finance the higher education of the taxpayer, taxpayer’s spouse, or de pendents. Qualified higher educational expenses include tuition and fees, but not room and board or the cost of courses involving sports, games, or hobbies that are not part of a degree program. In determining the amount of available exclusion, qualified educational expenses must be reduced by qualified scholarships that are exempt from tax, and any other nontaxable payments such as veteran’s educational assistance and employer-provided educational assistance.


Clark bought Series EE US Savings Bonds in 2010. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the

a) Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

b) Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.

c) Bonds must be bought by the owner of the bonds before the owner reaches the age of twenty-four.

d) Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Hide Feedback

(a) The requirement is to determine the condition that must be met for tax exemption of accumulated interest on Series EE US Savings Bonds. An individual may be able to exclude from income all or a part of the interest received on the redemption of Series EE US Savings Bonds. To qualify, the bonds must be issued after December 31, 1989, the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse), and the owner(s) must be at least twenty-four years old before the bond’s issue date. To exclude the interest the redemption proceeds must be used to pay the tuition and fees incurred by the taxpayer, spouse, or dependents to attend a college or university or certain vocational schools.


Mr. and Mrs. Alvin Charak took a foster child, Robert, into their home in 2010. A state welfare agency paid the Charaks $3,900 during the year for related expenses. Actual expenses incurred by the Charaks during 2010 in caring for Robert amounted to $3,000. The remaining $900 was spent by the Charaks in 2010 towards their own personal ex-penses. How much of the foster child payments is taxable income to the Charaks in 2010?

a) $0

b) $900

c) $2,900


(b) The requirement is to determine the amount of foster child payments to be included in income by the Charaks. Foster child payments are excluded from income to the extent they represent reimbursement for expenses incurred for care of the foster child. Since the payments ($3,900) exceeded the expenses ($3,000), the $900 excess used for the Charaks’ personal expenses must be included in their gross income.

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