CHAPTER 4 GROSS INCOME: CONCEPTS AND INCLUSIONS

1. The amount of Social Security benefits received by an individual that he or she must include in gross income:

a. Is computed in the same manner as an annuity [exclusion = (cost/expected return) × amount received].

b. May not exceed the portion contributed by the employer.

c. May not exceed 50% of the Social Security benefits received.

d. May be zero or as much as 85% of the Social Security benefits received, depending upon the taxpayer’s Social Security benefits and other income.

e. None of the above.

2. The taxable portion of Social Security benefits may be affected by:

a. The taxpayer’s itemized deductions.

b. The individual’s tax­exempt interest income.

c. The number of quarters the individual worked.

d. The individual’s standard deduction.

e. None of the above.

3. Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie’s adjusted gross income for the year is:

a. $220,000.

b. $217,000.

c. $203,000.

d. $200,000.

e. None of the above.

4. Our tax laws encourage taxpayers to assets that have appreciated in value and assets that have declined in value.

a. sell; keep

b. sell; sell

c. keep; sell

d. keep; keep

e. None of the above.

5. Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years,

a. Margaret and Ralph will have accumulated the same after-tax amounts.

b. Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt.

c. Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt.

d. Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%.

e. Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.

6. Ted was shopping for a new automobile. He found one that met his needs and agreed to purchase it for $23,000. He had shopped around and concluded that he could not get a better price from another dealer. After he had paid for the automobile, the dealer called to notify Ted that he was entitled to a manufacturer’s rebate of $1,500. The next week he received a $1,500 check from the manufacturer. How much should Ted include in gross income?