Items excluded
For 2021, which of the following must the recipient include in gross income?
Alimony under a pre-2019 divorce.
Neither gifts nor child support are taxable to the recipient. Gross income does include, however, alimony received during the taxable year.
Payments of alimony and separate maintenance during 2021 but paid under pre-2019 alimony rules are deductible by the payor spouse and includible in income by the recipient spouse.
TCJA: The payment of alimony and separate maintenance under a divorce or separate maintenance agreement (or modifications to prior agreements that account for the new TCJA provision) executed after December 31, 2018, will no longer be deductible by the payor spouse and will no longer be includible in income by the payee spouse.
Alimony is deductible by the payor and includible in the recipient's income for a divorce or separation instrument executed on or before 12/31/2018, even when payments are made after 2018. A modification after 12/31/2018 of such an instrument could have implications for the tax treatment of future payments.
Section 121 excludes gain from the sale of ______?
A main home.
A taxpayer who meets certain qualifications may exclude gain on the sale of a principal residence. This is a Section 121 Exclusion.
Ben Green received three employee achievement awards during the year: a non-qualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. How much of the awards he received must he include in his income?
$150.
The total value of the awards Ben receives ($1,750) is more than the $1,600 maximum. Ben must include $150 ($1,750 – $1,600) in his income.
If an employee receives tangible personal property, other than cash, a gift certificate, or an equivalent item, as an award for length of service or safety achievement, she generally can exclude its value from her income. But the excludable amount is limited to the employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards the employee receives during the year.
If during the year an employee receives awards not made under a qualified plan and also receives awards under a qualified plan, the exclusion for the total cost of all awards to that employee cannot be more than $1,600. The $400 and $1,600 limits cannot be added together to exclude more than $1,600 for the cost of awards to any one employee during the year. The employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay.
Which of the following compensation types for sickness or injury may NOT be excluded from gross income?
Punitive damages awarded in a lawsuit as punishment.
Punitive damages (damages awarded as punishment to the payor) are taxable income to the recipient.
Compensatory damages for physical injury or sickness are exempt from income. Also exempt are benefits paid for the loss of a part or function of the body, and disability benefits paid from plans when plan premiums were paid with already-taxed income.
ack invests in a bond issued by his city to raise capital for a local bridge expansion. Jack receives an interest check for $1,600. Mid-year, Jack invests in a private activity bond to construct a for-profit hospital in his town’s center. His interest earnings on that bond are $800. Jack also receives $365 in interest from his bank earned on his savings account. How much, if any, of the interest is exempt from federal income tax?
$1,600.
Interest earned from municipal bonds is generally exempt from tax. The bond issued by Jack’s city for the bridge expansion is a municipal bond and is the only interest that is tax-exempt.
Interest earned on private activity bonds is usually taxable (unless specified as a qualified private activity bond). Private activity bonds are often used to build a sports facility, industrial park, airport, for-profit hospital, etc.
Mark is an engineer for the Peterson LTD Partnership. Peterson has an accountable travel expense plan. Mark incurred $375 in travel expenses on a two-day business trip. When he returned to his tax home, he worked late and incurred $90 for meals. Mark gave his employer an adequate accounting for all of these expenses within a reasonable time and did not have any excess reimbursement. What amount, if any, must be included in Mark's W-2?
$90
Under an accountable plan, the amount paid as reimbursement for deductible expenses is not included on the employee's W-2.
In this case, Mark incurs $90 of nondeductible expenses, which his employer must treat as reimbursed under a nonaccountable plan and must be included in Mark's W-2. Meals are not deductible as a travel expense if a taxpayer is within his tax home. A tax home includes the entire city or general area in which a taxpayer's business or work is located.
A taxpayer may be reimbursed under an employer's accountable plan for expenses related to that employer's business, some of which are deductible by the company as employee business expenses and some of which are not deductible. The reimbursements for the nondeductible expenses do not meet the accountable plan rules, and they are treated as paid under a nonaccountable plan.
To be an accountable plan, the employer's reimbursement or allowance arrangement must include all of the following rules:
When determining gain on the sale of a main home, a taxpayer must meet certain ownership and use tests. Which of the following is NOT a consideration?
Owner occupancy must be consecutive.
All of the options included are true, except the requirement for consecutive occupancy. As long as the taxpayer (and spouse) live in the home for 24 months out of 5 years, the time there does not have to be consecutive.
Andy's employer provides life insurance for each employee that is equal to the employee's annual salary (under a qualified plan). If Andy makes $60,000 per year, how much of the premium paid by the employer to the insurance company is taxable to Andy as income?
The amount of the premium paid on coverage in excess of $50,000.
If the employer offers life insurance as part of a qualified plan, the premium on the first $50,000 of coverage is not included in the employee's gross income. That amount is viewed as a nontaxable fringe benefit. However, the employer must include in the employee's taxable wages the amount of premium attributable to the life insurance coverage in excess of $50,000. Here, that is the cost of the last $10,000 ($60,000 life insurance equal to employee's salary minus $50,000 limit).
ll of the following are calculated as gross income, EXCEPT:
Workers' compensation.
Workers' compensation is excluded from gross income.
In which of the following scenarios is municipal bond interest included in taxable income?
Interest received on a private activity bond
A bond is generally considered a private activity bond if the amount of the proceeds to finance loans to persons other than government units is more than 5% of the proceeds or $5 million (whichever is less). Private activity bonds are often used to build sports facilities, airports, industrial parks, for-profit hospitals, etc.
Adrian has the following income during the tax year. Calculate the amount Adrian can exclude from gross income:
$25,000
Of the items listed, debt forgiven in bankruptcy ($12,000), child support ($6,000) and the cash gift ($7,000) are excluded from gross income.
$12,000 + $6,000 + $7,000 = $25,000
Income earned for services provided as a contractor ($5,200), as well as wages ($24,000) are included in gross income.
Ray sold his main home in 2021 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2020 and claimed $500 depreciation. What is the taxable amount of Ray's gain, and where must he report it?
$500 Schedule D.
Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797. But since Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. He reports his gain, exclusion, and the taxable gain of $500 on Schedule D (Form 1040).
Alexander is single. His salary is $100,000. In 2021, he contributed $19,500 as an elective deferral to his employer-sponsored 401(k) plan. His employer contributed an additional $1,000. What are Alex's 2021 social security wages from this job?
$100,000
An employer's contributions to an employee's account in an employer-sponsored qualified retirement plan are not included in income at the time contributed. Likewise, an employee's contribution to his own account is not included in income up to the annual deferral limit.
An elective deferral, other than a designated Roth contribution, is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to Social Security and Medicare taxes.
What amount from the following items is NOT included in gross income in determining an individual's taxable income: Unemployment compensation of $8,800 and Workers' compensation benefits of $24,000?
$24,000
According to current tax laws, unemployment compensation benefits are included in taxable income but workers' compensation benefits are not. Other items that would be included in taxable income are breach of contract damages, compensation for services, debts forgiven and jury duty fees. Employer-provided health insurance, gifts, and inheritances are all examples of other items that are excluded from net income because they are clearly not earned income.
Warren's investments in municipal bonds earned $500 of interest. He is required to file a federal income tax return because of his other sources of income. Is he required to report the interest on the municipal bonds?
Yes, but municipal bond interest is generally not taxable.
Interest earned on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions. If a taxpayer is required to file a tax return, he is required to report any municipal bond interest he received.
Gene and Claire, a married couple filing jointly are partners in a consulting business. The partnership had gross receipts of $60,000 and a net profit of $45,000. In addition, Gene had wages of $25,000. They also received dividends of $2,000 from stock investments, City of Birmingham Bond interest of $4,000 and savings account interest of $1,000. Ignoring any SE tax adjustments, what is their adjusted gross income?
$73,000
Net profit from a partnership is included in each partner's individual income tax return. Bond interest from a municipality is exempt from federal income tax.
Gene and Claire's adjusted gross income equals $73,000 ($45,000 partnership income + $25,000 wages + $2,000 dividends + $1,000 savings account interest).
Ray sold his main home in 2021 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office the prior year and claimed $500 depreciation. Which of the following statements is incorrect?
He does not report the $29,500 portion of excluded gain on Form 8949.
Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797. But since Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain.
He reports his gain of $30,000 as a long-term capital gain on Form 8949. In column (f) he enters code "H" and enters the exclusion amount of ($29,500) as a negative number in column (g). He reports the $500 portion of his gain as Unrecaptured Section 1250 gain on Schedule D, page 2.
This question asks which statement is incorrect. The statement "He does not report the $29,500 portion of excluded gain on Form 8949" is an incorrect statement.
Group term life insurance is provided to all the employees of the ABC Corporation. The CEO of the company has a policy with a benefit of $95,000. The annual premium on this policy is $8.50 per thousand. What is the taxable income for the CEO?
$382.50
Employer provided group-term life insurance with benefits up to $50,000 is a tax-free benefit. When the benefit exceeds this amount, the premium on the amount of the policy over the limit is taxable to the recipient. Here, the excess benefit is $45,000 so the taxable amount is $382.50. That is 45 thousands times $8.50 per thousand.
Which amount received as workers’ compensation for an occupational sickness or injury is fully exempt from tax?
D. Both A and B are correct.
An amount received as workers’ compensation for an occupational sickness or injury is fully exempt from tax if paid under a workers’ compensation act or similar statute. The exemption also applies to the victim’s survivors. The exemption does not apply to retirement plan benefits received based on age, length of service, or prior contributions to the plan, even if an occupational sickness or injury caused retirement.
Interest from private activity bonds is tax-exempt when:
It is designated as a qualified private activity bond
Interest from private activity bonds is generally taxable, unless the bond is designated as a qualified private activity bond.
A bond is a private activity bond when the amount of the proceeds to finance loans to persons other than government units is more than 5% of the proceeds or $5 million. Private activity bonds are often used to build sports facilities, industrial parks, airports, for-profit hospitals, etc. Sometimes these offerings are structured to as qualified private activity bonds exempt from federal tax.
Lucinda enjoys water sports and owns a jet ski with an FMV of $4,600. Her AGI is $40,000. While away on business her jet ski is stolen. The insurance company issues Lucinda a check for $4,600. Which of the following statements is true about treatment of the insurance reimbursement?
Lucinda may exclude the entire $4,600 from income because insurance settlements that compensate for damaged or stolen property are excluded from income when they don’t exceed the value of the property
Insurance reimbursements for property that is damaged or stolen are excluded from taxable income to the extent they do not exceed the value of the property stolen or damaged.
The $100 rule and 10% of AGI rule apply when calculating deductible casualty losses from a federally declared disaster.
Ray sold his main home at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. He used part of the home as a business office but is not entitled to claim depreciation for the business use of his home. How does Ray report this gain?
He does not report it since he qualifies for the full exclusion.
Since Ray was not entitled to claim any depreciation, he can exclude the entire $30,000 gain. He does not need to report it because he is able to exclude the entire amount.
You need to report the gain from your home if ANY of the following is true:
You have taxable gain on your home sale (or on the residential portion of your property if you made separate calculations for home and business) and don’t qualify to exclude all of the gain.
You received a Form 1099-S, you must report the sale even if you have no taxable gain to report (even if the entire gain from the sale is excludable).
You wish to report your gain as a taxable gain even though some or all of it is eligible for exclusion. You may wish to do this if, for example, you plan to sell another main home within the next two years and are likely to receive a larger gain from the sale of that property.
Loss from the sale or exchange of a capital asset held for personal use isn't deductible. But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, you must report the transaction even though the loss isn't deductible. You need to report the loss from your home if you received a Form 1099-S, even though the loss isn't deductible.
What is the total amount of the following that an employee should include in gross income?
$21,000
Employer-provided health insurance is not included in income. That is viewed by the government as a tax-free fringe benefit.
Debt forgiven by an employer is viewed as the same as a cash payment to the employee and is taxable income.
Other items included in income are breach of contract damages, compensation for services, jury duty fees and unemployment compensation. Other items that would be excluded include gifts, inheritance, and workers' compensation. None of these final three are viewed as compensation for work done.
Mr. and Mrs. Stremble were married at the age of 30 and lived together until the current year when Mrs. Stremble died at the age of 70. Mr. Stremble received $100,000 in cash from a life insurance policy. They had paid, as a couple, a total of $40,000 in premiums over the years on this policy. What amount of income must he include in his current tax return as a result of receiving the $100,000 payment?
Zero
Life insurance premiums paid by the couple were never deductible but the proceeds, when received at the time of death, are not taxable. Money from a life insurance policy is not viewed as “income” and, therefore, is not taxed as taxable income.
The Wagners finalize their divorce during the tax year. Mrs. Wagner transfers her half of the ownership in the family home to Mr. Wagner as part of the divorce agreement. The home is paid off and the current value is $175,000. Additionally, Mrs. Wagner will pay $600 per month in child support to Mr. Wagner beginning August 1. Due to financial hardship from the divorce, Mr. Wagner declares bankruptcy the same year and has $15,000 in debt discharged. How much of the amounts shown may be excluded from Mr. Wagner's gross income for the year?
$105,500
No gain or loss is recognized on the transfer of property from an individual or spouse. The amount of the property transfer that is excluded from income is $87,500. The property is valued at $175,000 and Mrs. Wagner is transferring her 1/2 interest.
Child support is excluded from income. Child support paid is $3,000 from August – December.
Debt discharged in bankruptcy ($15,000) is also excluded from gross income.
Total exclusions: $87,500 + $3,000 + $15,000 = $105,500.