1. For a person who is in the 35% marginal tax bracket, $1,000 of tax-
exempt income is equivalent to over $1,500 of income that is subject to
2. John told his nephew, Steve, “if you maintain my house when I cannot,
I will leave the house to you when I die. Steve maintained the house and
when John died Steve inherited the house. The value of the residence
must be included in Steve’s gross income.
3. Brooke works part-time as a waitress in a restaurant. For groups of
7 or more customers, the customer is charged 15% of the bill for
Brooke’s services. For parties of less than 7, the tips are voluntary.
Brooke received $11,000 from the groups of 7 or more and $7,000 in
voluntary tips from all other customers. Using the customary 15% rate,
her voluntary tips would have been only $6,000. Brooke must include
$17,000 ($11,000 + $6,000) in gross income.
4. Mel was the beneficiary of a $45,000 group term life insurance
policy on his wife. His wife’s employer paid all of the premiums on the
policy. Mel used the life insurance proceeds to purchase a United States
Government bond, which paid him $2,500 interest during the current year.
Mel’s Federal gross income from the above is $2,500.
5. Zack was the beneficiary of a life insurance policy on his wife. Zack
had paid $20,000 in premiums on the policy. He collected $50,000 on the
policy when his wife died from a terminal illness. Because it took
several months to process the claim, the insurance company paid Zack
$53,000, the face amount of the policy plus $3,000 interest. Zack must
include $53,000 in his gross income.
6. Ed died while employed by Violet Company. His wife collected $40,000
on a group term life insurance policy that Violet provided its
employees, and $6,000 of accrued salary Ed had earned prior to his
death. All of the premiums on the group term life insurance policy were
excluded from the Ed’s gross income. Ed’s wife is required to recognize