Tax Exam 1 UPDATED Study Guide
ACTUAL QUESTIONS AND CORRECT
ANSWERS
The all-inclusive definition of income means that gross income is defined very broadly. -
CORRECT ANSWER T
Wherewithal to pay represents the principle that a realized transaction should require a
taxpayer to sell other assets in order to pay income taxes. - CORRECT ANSWER F
Barter clubs are an effective means of avoiding realization for tax purposes. - CORRECT
ANSWER F
Jim received a $500 refund of state income taxes this year. Jim will not need to include the
$500 in his gross income this year if he did not deduct state income taxes last year. -
CORRECT ANSWER T
Constructive receipt represents the principle that cash-basis taxpayers will be taxed on
income when it is made available to them without substantial restrictions. - CORRECT
ANSWER T
The assignment of income doctrine requires that in order to shift income from the property
producing the income to another person, the taxpayer must transfer only the income to the
other person. - CORRECT ANSWER F
Gambling winnings are included in gross income only to the extent that the winnings exceed
gambling losses incurred during the same period. - CORRECT ANSWER F
A below-market loan (e.g., from an employer to an employee) is a common example of a
transaction that generates taxable imputed income. - CORRECT ANSWER T
, Barney and Betty got divorced in 2018. In the divorce decree, Betty agreed to pay Barney
$24,000 per year for five years (or until Barney's death or remarriage) and $10,000 per year
until their daughter, Pebbles, turns 19 years old. What amount (if any) is included in Barney's
gross income in 2023? - CORRECT ANSWER 24,000
This year Ed celebrated his 25th25th year as an employee of Designer Jeans Company. In
recognition of his long and loyal service, the company awarded Ed a gold watch worth $250
and a $2,000 cash bonus. What amount must Ed include in his gross income? - CORRECT
ANSWER 2000
Cash bonus payments are includible in gross income but awards of tangible property to
employees for length of service or safety achievement are excluded up to $400 of value
Rhett made his annual gambling trip to Uwin Casino. On this trip, Rhett won $250 at the slots
and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700
on his various wagers. What amount must Rhett include in his gross income? - CORRECT
ANSWER 1450
Taxpayers must include the gross amount of their gambling winnings for the year in gross
income.
This year, Fred and Wilma, married filing jointly, sold their home (sales price $750,000; cost
$200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their
home for 20 years. How much of the gain is included in gross income? - CORRECT
ANSWER Fred and Wilma may exclude $500,000 of their $550,000 gain ($750,000
sales price − $200,000 cost = $550,000 gain) because they meet the ownership and use tests.
Thus, they only include $50,000 of the gain in their gross income.
DORM FEES ARE INCLUDED IN GROSS INCOME - CORRECT ANSWER T
Taxpayers exclude inheritances and life insurance proceeds from gross income. - CORRECT
ANSWER T
The 16th16th amendment removed all doubt that a federal income tax was allowed under the
U.S. Constitution and was ratified in February 1913. - CORRECT ANSWER T
ACTUAL QUESTIONS AND CORRECT
ANSWERS
The all-inclusive definition of income means that gross income is defined very broadly. -
CORRECT ANSWER T
Wherewithal to pay represents the principle that a realized transaction should require a
taxpayer to sell other assets in order to pay income taxes. - CORRECT ANSWER F
Barter clubs are an effective means of avoiding realization for tax purposes. - CORRECT
ANSWER F
Jim received a $500 refund of state income taxes this year. Jim will not need to include the
$500 in his gross income this year if he did not deduct state income taxes last year. -
CORRECT ANSWER T
Constructive receipt represents the principle that cash-basis taxpayers will be taxed on
income when it is made available to them without substantial restrictions. - CORRECT
ANSWER T
The assignment of income doctrine requires that in order to shift income from the property
producing the income to another person, the taxpayer must transfer only the income to the
other person. - CORRECT ANSWER F
Gambling winnings are included in gross income only to the extent that the winnings exceed
gambling losses incurred during the same period. - CORRECT ANSWER F
A below-market loan (e.g., from an employer to an employee) is a common example of a
transaction that generates taxable imputed income. - CORRECT ANSWER T
, Barney and Betty got divorced in 2018. In the divorce decree, Betty agreed to pay Barney
$24,000 per year for five years (or until Barney's death or remarriage) and $10,000 per year
until their daughter, Pebbles, turns 19 years old. What amount (if any) is included in Barney's
gross income in 2023? - CORRECT ANSWER 24,000
This year Ed celebrated his 25th25th year as an employee of Designer Jeans Company. In
recognition of his long and loyal service, the company awarded Ed a gold watch worth $250
and a $2,000 cash bonus. What amount must Ed include in his gross income? - CORRECT
ANSWER 2000
Cash bonus payments are includible in gross income but awards of tangible property to
employees for length of service or safety achievement are excluded up to $400 of value
Rhett made his annual gambling trip to Uwin Casino. On this trip, Rhett won $250 at the slots
and $1,200 at poker. Also this year, Rhett made several trips to the racetrack, but he lost $700
on his various wagers. What amount must Rhett include in his gross income? - CORRECT
ANSWER 1450
Taxpayers must include the gross amount of their gambling winnings for the year in gross
income.
This year, Fred and Wilma, married filing jointly, sold their home (sales price $750,000; cost
$200,000). All closing costs were paid by the buyer. Fred and Wilma owned and lived in their
home for 20 years. How much of the gain is included in gross income? - CORRECT
ANSWER Fred and Wilma may exclude $500,000 of their $550,000 gain ($750,000
sales price − $200,000 cost = $550,000 gain) because they meet the ownership and use tests.
Thus, they only include $50,000 of the gain in their gross income.
DORM FEES ARE INCLUDED IN GROSS INCOME - CORRECT ANSWER T
Taxpayers exclude inheritances and life insurance proceeds from gross income. - CORRECT
ANSWER T
The 16th16th amendment removed all doubt that a federal income tax was allowed under the
U.S. Constitution and was ratified in February 1913. - CORRECT ANSWER T
