Chapter 5 - Individual Income
Taxation latest updates!!! 2026-
2027 | correct solutions with
qualified quiz & answers | verified |
highly graded a+
Fred specified in his will that his nephew John should serve as executor of Fred's
estate. John received $10,000 for serving as executor. John inherited $100,000 of cash
from his uncle as well. He also borrowed $5,000 when he bought a new car this year. -
CORRECT ANSWERS-$10,000 = Compensation for duties performed. (T - Income).
$100,000 = Inheritance (Gift) (NT - Income, Excluded)
$5,000 = Loan/Expense (NT - Not Income, has a Liability attached).
Leonard's home was damaged by a fire. He also had to be absent from work for several
days to make his home habitable. Leonard's employer paid Leonard his regular salary,
$2,500, while he was absent from work. In Leonard's pay envelope was the following
note from the employer "To help you in your time of need" and $900, a collection from
Leonard's fellow employees. Leonard spent over $4,000 repairing the fire damage. -
CORRECT ANSWERS-Salary ($2,500) = Compensation (T)
$900 = Gift (NT, Excluded).
*The $900 was an act of charity for someone in a qualified disaster
Megan is a college student who works as a part-time server in a restaurant. Her usual
tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he
would appreciate prompt service. Megan abided by the customer's request. The
customer's bill was $8, but the customer left a $100 bill on the table and did not ask for
a receipt. Megan gave the cashier $8 and pocketed the $100 bill (so Megan ends up
with $92). Megan concludes that the customer thought that he had left a $10 bill,
although the customer did not return to correct the apparent mistake. The customer had
commented about how much he appreciated Megan's prompt service. Megan thinks
that a $2 tip would be sufficient and that the excess is like "found money". - CORRECT
ANSWERS-Employees don't get the choose what they 'think' would be a reasonable tip
- this is too open to interpretation. Nor can Megan prove the customer's state of mind.
, Megan was given this money in regards to her employment and past services, it's
income.
$92 - (T)
Carey is a waiter at a restaurant that pays a small hourly amount plus tips. Customers
are not required to tip the waiter. Carey is especially attentive and friendly, and her tips
average 25% of the restaurant charges. - CORRECT ANSWERS-Casey will still report
her tips as income / compensation - it is related to her work.
If she reports them to the employer, they'll go on her W-2. If not, they have to be
reported on the return by Casey herself and she'll owe FICA on them.
Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three
months. He sued the bar owner and collected $100,000 for the physical injury and
$50,000 for the loss of income. Billy also collected $15,000 from an income replacement
insurance policy he purchased. Amber was away from work for three months following
heart bypass surgery. Amber collected $30,000 under an income replacement
insurance policy purchased by her employer. - CORRECT ANSWERS-$100,000 =
Damages for Physical Injury (NT)
$50,000 = Loss of Income for Physical Injury (NT)
$15,000 = income replacement SELF-PURCHASED | Recovery for the cost of the
policy = (NT)
$30,000 = income replacement EMPLOYER PURCHASED | She had no cost for the
insurance policy so it's all gain = (T)
Note:
Employee-Paid for insurance = (NT) proceeds
Employer Pai for insurance = (T) proceeds
Wes was a major league baseball pitcher who earned $10,000,000 for his 20 wins this
year. Sam was also a major league baseball pitcher before a career-ending injury
caused by a negligent driver. Sam sued the driver and collected $6,000,000 as
compensation for lost estimated future income as a pitcher and $4,000,000 as punitive
damages. - CORRECT ANSWERS-$10,000,000 = Compensation (T)
$6,000,000 = Damages for physical injury (NT)
$4,000,000 = Punitive Damages (T)
Taxation latest updates!!! 2026-
2027 | correct solutions with
qualified quiz & answers | verified |
highly graded a+
Fred specified in his will that his nephew John should serve as executor of Fred's
estate. John received $10,000 for serving as executor. John inherited $100,000 of cash
from his uncle as well. He also borrowed $5,000 when he bought a new car this year. -
CORRECT ANSWERS-$10,000 = Compensation for duties performed. (T - Income).
$100,000 = Inheritance (Gift) (NT - Income, Excluded)
$5,000 = Loan/Expense (NT - Not Income, has a Liability attached).
Leonard's home was damaged by a fire. He also had to be absent from work for several
days to make his home habitable. Leonard's employer paid Leonard his regular salary,
$2,500, while he was absent from work. In Leonard's pay envelope was the following
note from the employer "To help you in your time of need" and $900, a collection from
Leonard's fellow employees. Leonard spent over $4,000 repairing the fire damage. -
CORRECT ANSWERS-Salary ($2,500) = Compensation (T)
$900 = Gift (NT, Excluded).
*The $900 was an act of charity for someone in a qualified disaster
Megan is a college student who works as a part-time server in a restaurant. Her usual
tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he
would appreciate prompt service. Megan abided by the customer's request. The
customer's bill was $8, but the customer left a $100 bill on the table and did not ask for
a receipt. Megan gave the cashier $8 and pocketed the $100 bill (so Megan ends up
with $92). Megan concludes that the customer thought that he had left a $10 bill,
although the customer did not return to correct the apparent mistake. The customer had
commented about how much he appreciated Megan's prompt service. Megan thinks
that a $2 tip would be sufficient and that the excess is like "found money". - CORRECT
ANSWERS-Employees don't get the choose what they 'think' would be a reasonable tip
- this is too open to interpretation. Nor can Megan prove the customer's state of mind.
, Megan was given this money in regards to her employment and past services, it's
income.
$92 - (T)
Carey is a waiter at a restaurant that pays a small hourly amount plus tips. Customers
are not required to tip the waiter. Carey is especially attentive and friendly, and her tips
average 25% of the restaurant charges. - CORRECT ANSWERS-Casey will still report
her tips as income / compensation - it is related to her work.
If she reports them to the employer, they'll go on her W-2. If not, they have to be
reported on the return by Casey herself and she'll owe FICA on them.
Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three
months. He sued the bar owner and collected $100,000 for the physical injury and
$50,000 for the loss of income. Billy also collected $15,000 from an income replacement
insurance policy he purchased. Amber was away from work for three months following
heart bypass surgery. Amber collected $30,000 under an income replacement
insurance policy purchased by her employer. - CORRECT ANSWERS-$100,000 =
Damages for Physical Injury (NT)
$50,000 = Loss of Income for Physical Injury (NT)
$15,000 = income replacement SELF-PURCHASED | Recovery for the cost of the
policy = (NT)
$30,000 = income replacement EMPLOYER PURCHASED | She had no cost for the
insurance policy so it's all gain = (T)
Note:
Employee-Paid for insurance = (NT) proceeds
Employer Pai for insurance = (T) proceeds
Wes was a major league baseball pitcher who earned $10,000,000 for his 20 wins this
year. Sam was also a major league baseball pitcher before a career-ending injury
caused by a negligent driver. Sam sued the driver and collected $6,000,000 as
compensation for lost estimated future income as a pitcher and $4,000,000 as punitive
damages. - CORRECT ANSWERS-$10,000,000 = Compensation (T)
$6,000,000 = Damages for physical injury (NT)
$4,000,000 = Punitive Damages (T)
