Exam 3: Determining Gross Income

The completed contract method allows the taxpayer to defer taxes on the contract income.

Explain the difference in tax treatment of child support and alimony.

Scholarship funds used to pay room and board

In 2018, Willy gave his son 4,000 shares of ABC stock valued at $10 per share. Two weeks after the gift, ABC declared a $1 per share dividend. Willy also gave his son some municipal bonds the morning of June 30. On July 3, Willy received a check for $400 for the interest on the bonds. Finally, Willy gave his son five coupons from other bonds that he owned. On August 2, the son exchanged the coupons at a bank receiving the $200 interest due on the coupons. What is the son's taxable income from these events?

Naomi was the beneficiary of a $100,000 insurance policy on her mother who died in January 2018. It took the insurance company several months to make the payment so she received $100,206 in May 2018. She was a joint tenant on a bank account with her mother. She inherited the $14,000 in the account that had all been deposited by her mother. After a long battle with her medical insurance company, Naomi received a $7,000 reimbursement in 2018 for an operation that she underwent in 2016. As a result of her high medical expenses, she was able to claim $7,000 in itemized deductions on her 2016 tax return rather than taking the $6,300 standard deduction. What are Naomi's taxable income items from these events for 2018?

Income must be realized before it can be recognized.

State tax refund of a nonitemzer.

Carbon Corporation had a $2,000,000 contract to build a small hospital with total costs estimated at $1,600,000. It received the following payments and incurred the following expenses over the three-year contract period: Year Payments Expenses 1 $ 400,000 $300,000 2 $1,200,000 $900,000 3 $ 400,000 $550,000 Under the percentage-of-completion method, how much profit should Carbon recognize in year 1?

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

All of the following are allowable tax years except:

The installment method of income recognition is an application of the wherewithal to pay concept.

Up to 85 percent of a person's Social Security benefits may be included in gross income.

Explain what is meant by the all events test.

Marbella is the beneficiary of a $700,000 insurance policy on her husband's life. Marbella elects to receive $150,000 per year for 5 years rather than receive the entire $700,000 in a lump sum. How much is included in income in the first year.

Explain the two acceptable methods for recognizing income on long-term contracts.

James ran a stop sign and smashed into Mary's automobile. Mary was seriously injured and sued James and his insurance company. She was awarded the following: -$12,000 for lost income -$60,000 for hospital costs -$10,000 for therapy to overcome her fear of driving -$100,000 for the loss of function in her right hand -$50,000 punitive damages Mary's actual hospital costs were $62,000 and her therapy cost $7,000. How much must Mary include in income?

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%?

A calendar year always ends on December 31.

Teddy, a single man, has $5,000 of taxable dividends, $3,000 of interest income from State of Oregon bonds, a $5,000 long-term capital gain, and $9,000 of Social Security benefits. What is Teddy's adjusted gross income?

Which of the following explain why it is important to determine the period in which income is recognized?