Exam 3: Determining Gross Income

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Interest income on municipal bond

A nonresident alien can only file a joint return with a United States citizen or resident if they both agree to be taxed on their worldwide income.

Wilma purchased an annuity policy for $100,000 that will pay her $10,000 per year for life beginning on her 60th birthday in 5 years. At 60, her life expectancy is 25 years. How much of each annual payment can Wilma exclude from income?

Joseph's employer pays 70% of the premiums for a disability insurance policy and Joseph pays for the other 30%. The policy pays Joseph 60% of his normal salary in the event he is injured and cannot return to work for an extended period. Joseph was injured in an accident and was unable to work for several months. During the current year, Joseph collected $75,000 under his disability policy. How much does Joseph include in his gross income?

George can invest $10,000 in a tax-exempt bond paying 6 percent interest or a $10,000 corporate bond paying 8 percent interest. What is the lowest marginal tax rate at which George will be better off investing in the tax-exempt bond?

Blinder Corporation was having some cash flow problems. One of its creditors agreed to accept $25,000 in payment of a $40,000 debt to help the company out of the jam, even though it is not bankrupt. How does Blinder treat this debt repayment?

Jabo Corporation has its home office and manufacturing facilities in Peru. It sells products via the Internet in both Brazil and Chile, although it has a small sales and manufacturing facility in Santiago, Chile.

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Which of the following is an application of the wherewithal-to-pay concept?

Hannah has $20,000 invested in corporate bonds with a stated interest rate of 6 percent and $20,000 in tax-exempt municipal bonds issued for governmental activities with a stated interest rate of 5 percent. What is her annual after-tax cash flow from interest income for each investment if her marginal tax rate is 24%?

Windjammer Corporation, a cash-basis, calendar-year corporation sold $30,000 of merchandise to Jackpot Company in January, year 1. In November, Jackpot declared bankruptcy without paying Windjammer. In year 4, Jackpot had reorganized under a new owner and paid all its old debts including the $30,000 owed Windjammer. How does Windjammer treat these events?

Which of the following is not a government transfer payment?

Marylee and George divorced in 2017 after 20 years of marriage during which time George gave up his career and stayed home with their children. In 2018, Marylee, the CEO of a mail order company, transfers their home valued at $450,000 and held in joint tenancy to George as part of the divorce settlement. She also agreed to pay George $4,000 per month alimony and $6,000 per month in child support beginning in January of 2018. If George has no other income, what is his adjusted gross income for 2018?

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Sheryl sold 100 shares of ABC stock for $2,100 and 300 shares of XYZ stock for $8,900. She purchased the ABC stock four years ago for $1,200 and the XYZ stock two years ago for $9,100. What is the net effect of these sales on Sheryl's income?

Beginning in 2018, the cash method may be used by all taxpayers whose average annual gross receipts for the three prior years do not exceed $25 million.

Willy, who has no income and no investments, borrows $50,000 from his mother at no interest. The applicable federal rate is 4 percent. a. Explain the tax consequences of this loan if Willy uses the money for an exotic vacation. b. How would your answer change if Willy uses the money to invest in bonds paying 4 percent interest?

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Loan forgiven by father

Taylor Corporation, an accrual-basis calendar-year corporation, rented an office building to Austin for $3,000 per month. On December 28, 2017, Taylor received a deposit of $4,000 in addition to the first and last months' rent. Occupancy began on January 1, 2018. On August 15, 2018 Austin closed the business. In 2018, Taylor had collected rent for February, March, April and May, but collected no payments thereafter. Taylor withheld $1,100 from the deposit because of damage to the property and $1,500 for unpaid rent. Taylor refunded the balance of the deposit to Austin. What amount should Taylor report as gross income for 2018?

Debra owned City of Long Beach bonds that were issued several years ago to pay for basic government services. She received $3,800 of interest income from the bonds in the current year. Due to a change in the market interest rate, she was able to sell the bonds at a $2,100 gain. How much gross income should Debra report from these transactions?

Explain what is meant by the all events test.

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Income from employer-financed annuity