# SM02 - Solutions for Questions and Problems Chapter 2 37...

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Solutions for Questions and Problems – Chapter 2 37 CHAPTER 2 GROSS INCOME AND EXCLUSIONS Group 1 - Multiple Choice Questions 1. B (Section 2.1) 7. C (Section 2.6) 2. B (Section 2.1) 8. B (Section 2.7) 3. A (Section 2.2) 9. C (Sections 2.1, 2.2, 2.9, 2.10) 4. A (Section 2.1) 10. A (Sections 2.12) 5. E (Section 2.4) 11. E (Section 2.12) 6. D (\$75,000/(\$10,000 x 20) x \$4,000 = \$1,500. (Section 2.5) Group 2 - Problems 1. a. Excluded (Section 2.1) b. Included (Section 2.1) c. Included (Section 2.1) d. Included (Sections 2.1, 2.8) e. Excluded (Sections 2.1, 2.4) f. Included (Section 2.1) g. Included (Sections 2.1, 2.2) h. Excluded (Sections 2.1, 2.9) i. Excluded (Sections 2.1, 2.7) j. Excluded (Sections 2.1, 2.7) k. Included (Section 2.1) 2. See Schedule B on page 39. (Section 2.2) 3. a. (1) \$500. (2) \$500. b. (1) \$0. (2) \$400,000. (Section 2.3) 4. a. \$4,000. b. \$14,500. c. \$3,500. (Sections 2.4, 2.8) 5. \$13,333 = (\$200,000/(\$18,000 x 15 years)) x \$18,000. (Section 2.5) 6. \$5,833 = \$7,000 – \$1,167 (exclusion). The \$1,167 exclusion is calculated as (\$28,000/(\$1,400 x 12 months x 10 years)) x \$7,000. (Section 2.5) 7. \$56,000 = \$100,000 – 30,000 – 14,000. Since the policy was transferred for valuable consideration, the proceeds are taxable to the extent that they exceed the sum of the cash value at the time of transfer plus the premiums paid. (Section 2.6) 37

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38 Chapter 2 – Gross Income and Exclusions 8. \$1,200 . A beneficiary, who is a surviving spouse and whose spouse died after October 22, 1986 must include the entire amount of interest received with respect to the policy proceeds in gross income; the \$5,000 principal amount may be excluded from gross income. (Section 2.6) 9. \$7,500 . Inheritances are excluded from taxable income; however, subsequent earnings on inherited property must be included in income. (Section 2.7) 10. \$0 . Taxpayers may exclude the total amount received for payment or reimbursement of medical expenses. Premiums for health insurance paid by the taxpayer's employer are also excluded from the taxpayer's gross income. In addition, the \$1,500 (\$3,500 – 2,000) not paid by the insurance company is deductible as an itemized deduction on Ellen's return, subject to the medical expense deduction limitations. (Section 2.9) 11. \$3,250 . Unemployment compensation is fully taxable. (Section 2.13) 12. a. No. The meals are furnished by the employer on the business premises of the employer during working hours because the employer limits the employee to short meal periods. b. No. The meals are furnished by the employer on the business premises of the employer during working hours because the taxpayer must be available for emergency calls. (Section 2.10) 13. 8.33% = 6%/(100% – 28%). (Section 2.11) 14. \$5,100 . The lesser of (1) or (2): (1) \$5,100 = 85% of \$6,000 or (2) \$17,450 = \$14,450, 85% of [\$48,000 + (50% x \$6,000) – \$34,000], plus the lesser of (a) or (b): (a) The lesser of \$3,000 = 50% x \$6,000, or \$13,000 = 50% x [\$48,000 + (50% x \$6,000) – \$25,000] (b) \$4,500, the statutory amount 15. \$1,750 = \$750 + 1,000. The value of the airline tickets is excluded from gross income under the no-additional-cost services rule for employees and their families. The \$30 of personal typing is excluded under the de minimis fringe benefits rule. The \$750 worth of employee discount coupons for hotel rooms is included in gross income since the hotel division is a different line of business than that in which Linda is employed. The \$1,000 tuition payment must be included in gross income since Richard is working on a graduate degree. (Section 2.14)
Problem 2 D r a f t s o 0 6 / 8 2 Page 2 OMB No. 1545-0074

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SM02 - Solutions for Questions and Problems Chapter 2 37...

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