26 chapter 4 g ross income from personal and

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Unformatted text preview: 275,000 punitive damages + $55,000 compensatory damages for harm to reputation) in his income. 26 CHAPTER 4: G ROSS INCOME FROM PERSONAL AND INVESTMENT ACTIVITIES 5. Brian had the following items of income this year. • • • • Salary - $22,000 Child support received - $6,000 Alimony received - $10,000 Personal Injury award from an auto accident. He lost the use of his left hand and was awarded compensatory damages of $200,000. He also received $50,000 in punitive damages. Calculate Brian’s gross income for the current year. a. $82,000. b. $90,000. c. $282,000. d. $288,000. The correct answer is a. Salary of $22,000 + Alimony of $10,000 + $50,000 in punitive damages = $82,000. The child support is not taxable. The personal injury award is for bodily injuries and therefore is not taxable; however, the punitive damages are. 6. Jeremy and Juliet were recently divorced. Jeremy has been ordered by the court to pay alimony to Juliet. In the first year after the divorce, Jeremy pays Juliet $100,000. In the second year after the divorce, he pays her $50,000. In the third year, Jeremy pays Juliet $20,000. How much alimony recapture must Juliet report in the third year? a. Juliet is not subject to alimony recapture. b. Juliet must report $45,000 in alimony recapture. c. Juliet must report $72,500 in alimony recapture. d. Juliet must report $170,000 in alimony recapture. The correct answer is c. The recapture shortcut formula is R3 = P1 + P2 - 2(P3) – $37,500. Therefore R3 = $100,000 + $50,000 – $40,000 – $37,500 = $72,500 MULTIPLE CHOICE P ROBLEMS 27 7. Which of the following statements regarding community-property is not correct? a. If two married taxpayers file married filing separately, the community-property income is divided equally, but the separate property income is reported by the spouse owning the separate property. b. In community-property states, half of the income earned (wages, salaries, etc.) by a spouse is deemed to be earned by each spouse and half of the income earned from community-property is deemed to be the income of each spouse. c. The community-property regime survives divorce with regard to property. d. Property acquired before marriage or acquired by gift or inheritance before or after marriage is normally considered to be the separate property of the spouse. The correct answer is c. The community-property regime does not survive divorce. 8. Which of the following must be included in Pete’s income? 1. 2. 3. 4. Short-term capital gains of $10,000 from the sale of stock. Long-term capital gains of $80,000 from the sale of real property. Interest income from Pete’s savings account. A gift from Pete’s brother of $15,000. a. 1 and 2. b. 3 and 4. c. 1, 2, and 3. d. 1, 2, 3, and 4. The correct answer is c. Gifts are not included in the income of the recipient. All of the other items must be included in Pete’s income. 9. Addison pays $15,000 for an annuity that will pay $1,000 a year, starting this year. If the annuity is for a term of 20 years, how much taxable...
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