Indiviual Taxation - MULTIPLE CHOICE 1. The taxpayers...

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MULTIPLE CHOICE 1. The taxpayer’s marginal tax bracket is 40% (combined Federal and state rates). Which would the taxpayer prefer? a. $1.41 taxable income rather than $1.00 tax-exempt income. b. $.59 tax-exempt income rather than $1.00 taxable income. c. $1.75 taxable income rather than $1.00 tax-exempt income. d. $1.60 taxable income rather than $1.00 tax-exempt income. e. None of the above. ANS: C The $1.75 of taxable income is worth $1.05 [(1 – .40)($1.75)] after taxes. PTS: 1 REF: p. 5-2 3. Sharon’s automobile slid into a ditch. A stranger pulled her out. Sharon offered to pay $25, but the stranger refused. Sharon slipped the $25 in the stranger’s truck when he was not looking. a. The $25 is a nontaxable gift received by the stranger because Sharon was not legally required to pay him. b. The $25 is a nontaxable gift because the stranger did not ask to receive it. c. The $25 is taxable compensation for services rendered. d. The $25 is a nontaxable service award. e. None of the above. ANS: C The $25 Sharon paid the stranger compensated the stranger for services rendered. The fact that Sharon was not legally obligated to make the payment does not affect the outcome in this case. PTS: 1 REF: p. 5-5 4. Carin, a widow, elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased husband in 10 installments of $15,000 each. Her husband had paid premiums of $75,000 on the policy. Over the life of the installment contract, Carin must include in gross income: a. $0. b. $50,000. c. $75,000. d. $100,000. e. None of the above. ANS: B The interest element of $50,000 ($150,000 – $100,000) is included in Carin’s gross income. PTS: 1 REF: p. 5-6 to 5-9
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5. Iris collected $100,000 on her deceased husband’s life insurance policy. The policy was purchased by the husband’s employer under a group policy. Iris’s husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $12,500 each. a. None of the payments must be included in Iris’s gross income. b. The first 8 payments are a return of her capital and thus Iris is not required to recognize any income from the policy until she receives the ninth payment. c. For each $12,500 payment that Iris receives, she can exclude $10,000 ($100,000/$125,000 × $12,500) from gross income. d. For each $12,500 that Iris receives, she can exclude from gross income $500 ($5,000/$125,000 × $12,500). e. None of the above. ANS: C The life insurance proceeds of $100,000 are excluded from Iris’s gross income. The income portion of each annuity payment is $2,500 ($12,500 – $10,000 recovery of capital). The recovery of capital is ($100,000/$125,000) × $12,500 = $10,000. PTS:
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This note was uploaded on 03/06/2011 for the course ACCT 4304 taught by Professor Smith during the Spring '11 term at University of Houston.

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Indiviual Taxation - MULTIPLE CHOICE 1. The taxpayers...

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