CHAPTER 5--GROSS INCOME: EXCLUSIONS 4 copy
For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent
to $1,350 of income that is subject to tax.
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.
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 $18,000 ($11,000 + $7,000) in gross income.
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.
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 $23,000 in his
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 as gross income the $46,000 she
Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill
wife’s medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the
insurance company. Gary is not required to include the gain of $18,000 ($30,000 – $12,000) in