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Exam 5: Gross Income: Exclusions

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Question 51

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Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis. They each were able to convince the mortgage holder to reduce the principal amount on the mortgage. Sally's mortgage is on her personal residence and Ed's mortgage is on rental property he owns. a. Explain whether each of these individuals has realized income from the reduction in the debt. b. Assume that under the current system of measuring income, each of these taxpayers realized income from the reductions in the mortgages. Should either of these taxpayers be permitted to exclude any of the debt reduction income?

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a. Each taxpayer's liabilities were redu...

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Question 52

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Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted.

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B) False

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Question 53

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Christie sued her former employer for a back injury she suffered on the job in 2014. As a result of the injury, she was partially disabled. In 2015, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2014 return, reducing her taxable income by $12,000. Christie's 2015gross income from the above is:

The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2014 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in2015. The taxpayer must add $5,000 to his 2015 gross income in accordance with the tax benefit rule to correct for the 2014 error.

Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA) . Matilda's employer made the contributions in 2014 and 2015, and the account earned $100 interest in 2015. At the end of 2015, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2015 gross income:

In December 2014, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2015 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2014 tax return. He had $150,000 of taxable income that year. On June 30, 2015, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:

Doug and Pattie received the following interest income in the current year: $\begin{array}{llr} \text { Savings account at Greenbacks Bank} &\$4,000\\ \text { United States Treasury bonds } &250\\ \text {Interest on State of Iowa bonds } &200\\ \text { Interest on Federal tax refund } &150\\\text { Interest nn state income tax refiud }&75\end{array}$ Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return?

Sam was unemployed for the first two months of 2014. During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers' compensation benefits. Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).

Evaluate the following statements:

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

In 2014, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by Ramon's negligence. In 2015, Theresa collected from his insurance company. She received $15,000 for loss of income, $10,000 for pain and suffering, $50,000 for punitive damages, and $6,000 for medical expenses which she had deducted on her 2014 tax return (the amount in excess of 10% of adjusted gross income). As a result of the above, Theresa's 2015 gross income is increased by $56,000.

Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed. Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing. Carla must include the housing supplement in her gross income.

Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: $\begin{array}{lr}\text { Damages for } 25 \% \text { loss of the use of her right arm } & \$ 200,000 \\\text { Medical expenses } & 30,000 \\\text { Loss of wages } & 10,000 \\\text { Punitive damages } & 100,000 \\&\$340,000\end{array}$ The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:

The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casino's employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct?

Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest. Zack must include $23,000 in his gross income.

Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wife's employer paid all of the premiums on the policy. Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year. Mel's Federal gross income from the above is $2,500.

What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk.