CHAPTER 5 GROSS INCOME: EXCLUSIONS

1. A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

a. Only tuition.

b. Tuition, books, and supplies.

c. Tuition, books, supplies, meals, and lodging.

d. Meals and lodging.

e. None of the above.

2. Ron, age 19, is a full-time graduate student at City University. During 2014, he received the following payments:

Cash award for being the outstanding resident adviser	$ 1,500
Resident adviser housing	2,500
State scholarship for ten months (tuition and books)	6,000
State scholarship (meals allowance)	2,400
Loan from college financial aid office	3,000
Cash support from parents	2,000
	$17,400

Ron served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron’s adjusted gross income for 2014?

a. $1,500.

b. $3,900.

c. $9,000.

d. $15,400.

e. None of the above.

3. Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barney’s gross income from the above is:

a. $0.

b. $6,300.

c. $11,300.

d. $12,800.

e. None of the above.

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4. Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jena’s gross income for the year is:

a. $10,000.

b. $4,000.

c. $3,000.

d. $500.

e. None of the above.

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5. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child’s educational institution and are payable only if the student maintains a B average.

a. The tuition payments of $30,000 may be excluded from Ollie’s gross income as a scholarship.

b. The tuition payments of $10,000 each must be included in the child’s gross income.

c. The tuition payments of $30,000 may be excluded from Ollie’s gross income because the payments are for the academic achievements of the children.

d. The tuition payments of $30,000 must be included in Ollie’s gross income.

e. None of the above.

6. The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500.

a. The $13,500 is excludible if the money is used to pay for tuition and books.

b. The $13,500 is taxable compensation.

c. The $13,500 is considered a scholarship and, therefore, is excluded.

d. The $13,500 is excluded because the total amount received for the year is less than her standard deduction and personal exemption.

e. None of the above.

7. During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad’s negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad’s employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages. Amber’s insurance company will not pay punitive damages? therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the after­tax difference to Khalid between Khalid’s original claim and Amber’s offer?

a. Amber’s offer is $20,000 less. ($50,000 + $90,000 + $70,000 – $100,000 – $90,000).

b. Amber’s offer is $7,000 less. [($50,000 + $90,000 + $70,000 – $100,000 – $90,000) × .35)].

c. Amber’s offer is $4,500 more. {$190,000 – ($50,000 + $90,000) + [$70,000 × (1 – .35)]}.

d. Amber’s offer is $22,000 more. [($190,000 – $210,000) + ($120,000 × .35)].

e. None of the above.

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8. Christie sued her former employer for a back injury she suffered on the job in 2014. As a result of the injury, she was partially disabled. In 2015, 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 2014 return, reducing her taxable income by $12,000. Christie’s 2015gross income from the above is:

a. $415,000.

b. $412,000.

c. $255,000.

d. $175,000.

e. $172,000.

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9. Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year:

Reimbursement of medical expenses Marion paid by a medical insurance

policy he purchased $10,000

Damage settlement to replace his lost salary 15,000

What is the amount that Marion must include in gross income for the current year?

a. $25,000.

b. $15,000.

c. $12,500.

d. $10,000.

e. $0.

10.Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:

a. $700,000.

b. $500,000.

c. $490,000 [($700,000/$1,000,000) × $700,000].

d. $0.

e. None of the above.

11.Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:

a. $0.

b. $100,000.

c. $120,000.

d. $270,000.

e. None of the above.

12.Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is:

a. $10,000.

b. $50,000.

c. $60,000.

d. $85,000.

e. None of the above.

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

a. Only current employees and their spouses.

b. Only current employees and their spouses and dependents.

c. Only current employees and their disabled spouses.

d. Present employees, retired former employees, and their spouses and dependents.

e. None of the above.

14.Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:

a. $0.

b. $6,000.

c. $8,000.

d. $14,000.

e. $20,000.