Tax Planning Ch 4 & 5 Exam
Nick and Kim are married and are trying to calculate their gross income for the current year.
Which of the following items should they include in gross income?
1. Child support payments in the amount of $15,000 received from Kim's ex-husband for the
support of their minor child.
2. $1,200 in dividends received.
3. Unemployment benefits received in the amount of $800.
4. $3,000 that Kim earned selling homemade soaps. - ANS 2, 3, and 4
Addison pays $15,000 for an annuity that will pay $1,000 a year, starting this year. If the annuity
is for a term of 20 years, how much taxable income will Addison have from the annuity each
year. - ANS Addison will have $250 of taxable income from the annuity each year.
Why: Addison's exclusion ratio is 0.75 (amount paid of $15,000 divided by total payments to be
received of $20,000). The exclusion ratio is then multiplied by the annual payment. Therefore,
$750 of each annuity payment will be excluded from Addison's income and $250 will be
included in Addison's gross income.
George is awarded $55,000 in compensatory damages for harm to his reputation and $30,000
in compensatory damages for bodily injury. In addition, George is awarded $275,000 in punitive
damages. How much of these awards must George recognize in taxable income? - ANS
$330,000
($275,000 punitive damages + $55,000 compensatory damages for harm to reputation)
Which of the following must be included in Pete's income?
1.Short-term capital gains of $10,000 from the sale of stock.
2. Long-term capital gains of $80,000 from the sale of real property.
3. Interest income from Pete's savings account.
4. A gift from Pete's brother of $15,000. - ANS 1, 2, and 3
Gibbs has an account at First Maryland Bank. $10,000 of his account balance is invested in a
certificate of deposit (CD). When must interest paid on the CD be included in Jonas' income? -
ANS The interest is included in Gibbs' income when it is added to his account balance.
Which of the following statements concerning the proceeds of a life insurance policy is correct?
- ANS Accelerated death benefits paid by an insurance company under a life insurance policy
, before the death of the insured are excluded from gross income if the insured person is
terminally ill.
Patrick owns 100 shares of Darling Company stock. On December 29, 2018, Darling Company
prepared the dividend checks for its shareholders. On December 31, 2018, Darling Company
mailed dividend checks to all of its shareholders. Patrick did not receive his dividend check until
January 3, 2019. On what date must Patrick include the dividends in his income? - ANS Patrick
must include the dividends in his income on December 31, 2018.
Trish invested $100,000 in an annuity contract. Years later, she annuitized the contract. The
insurance company agreed to pay her $1,666.67 per month for 20 year. How much of each
payment is taxable? - ANS $1250.00
100,,000 = 25% exclusion ratio
1 - 0.25 = 0.75 inclusion x $1,666.67 = $1,250
Ron and Bonnie were divorced. Their only marital property was a personal residence with a
value of $300,000 and cost of $125,000. Under the terms of the divorce agreement, which did
not include the word "alimony," Bonnie would receive the house. She would pay Ron $20,000
each year for five years. If Ron died before the end of the five years, the payments were to be
made to his estate. Bonnie and Ron lived apart when Ron received the payments. - ANS Ron
does not recognize any income from the above transaction.
On January 1, Donald loaned his daughter, Ivanka, $90,000 to purchase a new personal
residence. There were no other loans outstanding between Donald and Ivanka. Ivanka's only
income was $30,000 salary and $4,000 interest income. Donald had an investment income of
$200,000. Donald did not charge Ivanka interest. The relevant federal rate was 9%. For the
current year: - ANS Donald must recognize imputed interest income of $4,000.
Cate was recently diagnosed with lung cancer and has been certified by her doctor, on June 1st
of the current year, as terminally ill. On July 1st of the current year, Cate sold her life insurance
policy with a face value of $500,000 to a viatical settlement provider for $340,000. Assuming
she paid $50,000 in premiums, how much of the $340,000 proceeds must she include in her
gross income for the current year? - ANS $0
Twenty-five years ago, Derek paid $11,000 for an annuity that paid $625 a year for life. At the
time he purchased the annuity, Derek's life expectancy was 22 years. How much taxable
income will Derek have from the annuity this year? - ANS Derek will have $625 of taxable
income from the annuity this year
Assume the following payments meet the tax requirements for deductible alimony. Which of the
following alimony payment streams will result in alimony recapture to the payor?
Year 1 Year 2 Year 3
Nick and Kim are married and are trying to calculate their gross income for the current year.
Which of the following items should they include in gross income?
1. Child support payments in the amount of $15,000 received from Kim's ex-husband for the
support of their minor child.
2. $1,200 in dividends received.
3. Unemployment benefits received in the amount of $800.
4. $3,000 that Kim earned selling homemade soaps. - ANS 2, 3, and 4
Addison pays $15,000 for an annuity that will pay $1,000 a year, starting this year. If the annuity
is for a term of 20 years, how much taxable income will Addison have from the annuity each
year. - ANS Addison will have $250 of taxable income from the annuity each year.
Why: Addison's exclusion ratio is 0.75 (amount paid of $15,000 divided by total payments to be
received of $20,000). The exclusion ratio is then multiplied by the annual payment. Therefore,
$750 of each annuity payment will be excluded from Addison's income and $250 will be
included in Addison's gross income.
George is awarded $55,000 in compensatory damages for harm to his reputation and $30,000
in compensatory damages for bodily injury. In addition, George is awarded $275,000 in punitive
damages. How much of these awards must George recognize in taxable income? - ANS
$330,000
($275,000 punitive damages + $55,000 compensatory damages for harm to reputation)
Which of the following must be included in Pete's income?
1.Short-term capital gains of $10,000 from the sale of stock.
2. Long-term capital gains of $80,000 from the sale of real property.
3. Interest income from Pete's savings account.
4. A gift from Pete's brother of $15,000. - ANS 1, 2, and 3
Gibbs has an account at First Maryland Bank. $10,000 of his account balance is invested in a
certificate of deposit (CD). When must interest paid on the CD be included in Jonas' income? -
ANS The interest is included in Gibbs' income when it is added to his account balance.
Which of the following statements concerning the proceeds of a life insurance policy is correct?
- ANS Accelerated death benefits paid by an insurance company under a life insurance policy
, before the death of the insured are excluded from gross income if the insured person is
terminally ill.
Patrick owns 100 shares of Darling Company stock. On December 29, 2018, Darling Company
prepared the dividend checks for its shareholders. On December 31, 2018, Darling Company
mailed dividend checks to all of its shareholders. Patrick did not receive his dividend check until
January 3, 2019. On what date must Patrick include the dividends in his income? - ANS Patrick
must include the dividends in his income on December 31, 2018.
Trish invested $100,000 in an annuity contract. Years later, she annuitized the contract. The
insurance company agreed to pay her $1,666.67 per month for 20 year. How much of each
payment is taxable? - ANS $1250.00
100,,000 = 25% exclusion ratio
1 - 0.25 = 0.75 inclusion x $1,666.67 = $1,250
Ron and Bonnie were divorced. Their only marital property was a personal residence with a
value of $300,000 and cost of $125,000. Under the terms of the divorce agreement, which did
not include the word "alimony," Bonnie would receive the house. She would pay Ron $20,000
each year for five years. If Ron died before the end of the five years, the payments were to be
made to his estate. Bonnie and Ron lived apart when Ron received the payments. - ANS Ron
does not recognize any income from the above transaction.
On January 1, Donald loaned his daughter, Ivanka, $90,000 to purchase a new personal
residence. There were no other loans outstanding between Donald and Ivanka. Ivanka's only
income was $30,000 salary and $4,000 interest income. Donald had an investment income of
$200,000. Donald did not charge Ivanka interest. The relevant federal rate was 9%. For the
current year: - ANS Donald must recognize imputed interest income of $4,000.
Cate was recently diagnosed with lung cancer and has been certified by her doctor, on June 1st
of the current year, as terminally ill. On July 1st of the current year, Cate sold her life insurance
policy with a face value of $500,000 to a viatical settlement provider for $340,000. Assuming
she paid $50,000 in premiums, how much of the $340,000 proceeds must she include in her
gross income for the current year? - ANS $0
Twenty-five years ago, Derek paid $11,000 for an annuity that paid $625 a year for life. At the
time he purchased the annuity, Derek's life expectancy was 22 years. How much taxable
income will Derek have from the annuity this year? - ANS Derek will have $625 of taxable
income from the annuity this year
Assume the following payments meet the tax requirements for deductible alimony. Which of the
following alimony payment streams will result in alimony recapture to the payor?
Year 1 Year 2 Year 3
