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Exam 5: Gross Income: Exclusions

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Question 61

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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 2015 and 2016,and the account earned $100 interest in 2016.At the end of 2016,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 2016 gross income:

A) $0.
B) $100.
C) $1,600.
D) $3,100.
E) None of these.

F) B) and E)
G) B) and C)

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Question 62

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Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.

A) True
B) False

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Question 63

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The taxpayer incorrectly took a $5,000 deduction (e.g. ,incorrectly calculated depreciation) in 2015 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2016.The taxpayer must add $5,000 to his 2016 gross income in accordance with the tax benefit rule to correct for the 2015 error.

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. )

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?

Iris collected $150,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $18,000 each.

Doug and Pattie received the following interest income in the current year: Savings account at Greenbacks Bank $4,000 United States Treasury bonds 250 Interest on State of Iowa bonds 200 Interest on Federal tax refund 150 Interest on state income tax refund 75 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?

Heather's interest and gains on investments for the current year are as follows: Interest on Madison County school bonds $600 Interest on U.S.government bonds 700 Interest on a Federal income tax refund 200 Gain on the sale of Madison County school bonds 500 Heather's gross income from the above is:

Christie sued her former employer for a back injury she suffered on the job in 2015.As a result of the injury,she was partially disabled.In 2016,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 2015 return,reducing her taxable income by $12,000.Christie's 2016 gross income from the above is:

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.

The exclusion for health insurance premiums paid by the employer applies to:

When Betty was diagnosed as having a terminal illness,she sold her life insurance policy to Insurance Purchase,Inc. ,a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000 and Insurance Purchase,Inc. ,became the beneficiary.She had paid total premiums of $19,000.Betty died 8 months after the sale.Insurance Purchase,Inc. ,collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase,Inc. ,is required to recognize a $14,000 gain from the insurance policy.

The Royal Motor Company manufactures automobiles.Non-management employees of the company can buy a new automobile for Royal's cost plus 2%.The automobiles are sold to dealers at cost plus 20%.Generally,management employees of Local Dealer,Inc. ,are allowed to buy a new automobile from the company at the dealer's cost.Which of the following statements is correct?