Individual Quiz Ch.

5 and 6 (participation credit) Name___________________________

Answer each question below on your own. Show all work.

1. Which of the following is not a necessary condition for income to be included in

gross income?
a. income must be realized.
b. income must be paid in cash.
c. income cannot be excluded by law.
d. income must be made available to a taxpayer on the cash basis.
e. All of the choices are correct.
Income can be paid in cash, property, or services.

2. Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally
provided 100 hours of sewing services to the barter club in exchange for two football
playoff tickets. Which of the following is a true statement?
a. Sally need not recognize any gross income unless she sells the football tickets.
b. Sally's exchange does not result in taxable income.
c. Sally is taxed on the value of the football tickets even if she cannot attend the
game.
d. Sally is taxed on the value of her sewing services only if she is a professional
seamstress.
e. None of the choices are correct.
Gross income includes the value of property received in exchange for services.

3. This year Barney purchased 500 shares of Bell common stock for $20 per share. At
year-end the Bell shares were only worth $2 per share. What amount can Barney
deduct as a loss this year?
a. $10,000
b. $9,000
c. $1,000
d. Barney can deduct $10,000 only if he includes $1,000 in his taxable income
e. None of the choices are correct – Barney is not entitled to a loss deduction.
No realization occurs until the stock is sold or becomes worthless.

4. Hillary is a cash-basis calendar-year taxpayer. During the last week of December she
received a letter containing a $5,000 check for services rendered. Which of the
following is a true statement?
a. Hillary is taxed on the $5,000 of service income in the year she cashes the check.
b. Hillary is taxed on the $5,000 of service income in the year the check was mailed.
c. Hillary is taxed on the $5,000 of service income in the year she receives the
check.
d. Hillary is taxed on the $5,000 of service income in the year she provides the
services.
e. None of the choices are correct
Under constructive receipt Hillary is taxed on income when property is received or made
available to her
.
5. Identify the rule that determines whether a taxpayer must include in income a refund
of an amount deducted in a previous year:
a. Tax refund rule.
b. Constructive receipt.
c. Return of capital principle.
d. Tax benefit rule.
e. None of the choices are correct.

6. Kevin provided services to several clients this year who paid with different types of
property. Which of the following payments is not included in Kevin's gross income?
a. Cash.
b. Shares of stock listed on the New York Stock Exchange.
c. A used car.
d. Gold coins.
e. All of these are included in gross income.
Property is included in gross income if it is capable of valuation.

7. Harold receives a life annuity from his qualified pension that pays him $5,000 per
year for as long as he lives. Later this year Harold will recover the remainder of his
cost of the annuity. Which of the following correctly describes how the annuity
payments are taxed after Harold has recovered the cost of the annuity?
a. Harold will continue to apply the annuity exclusion ratio to determine the amount
of each annuity payment includible in gross income.
b. Harold will include the entire amount of each annuity payment in gross
income after he recovers the cost of the annuity.
c. The entire amount of each annuity payment is excluded from gross income after
Harold recovers his cost of the annuity.
d. Harold must request that the IRS calculate his exclusion ratio based upon a
revised life expectancy.
e. All of the choices are correct.
The entire annuity payment is included in gross income once the cost of the annuity is recovered.

8. Hal Gore won a $1 million prize for special contributions to environmental research.
This prize is awarded for public achievement, and Hal directed the awarding
organization to transfer $400,000 of the award to the Environmental Protection
Agency. How much of the prize should Hal include in his gross income?
a. $400,000
b. $600,000
c. $1,000,000
d. None of the choices are correct because all prizes are excludible
e. None of the choices are correct because prizes from charities are excludible
Awards for scientific or public achievement are excluded only if the payor of the award transfers
the award to a governmental unit (e.g., EPA) or a public charity.
 9. Which of the following is a true statement?
a. Congress allows self-employed taxpayers to deduct the employer portion of
their self-employment tax.
b. To deduct expenses associated with any profit-motivated activity, taxpayers must
maintain a high level of involvement or effort in the activity throughout the year.
c. Business activities never require a relatively high level of involvement or effort
from the taxpayer.
d. All business expenses are deducted for AGI.
e. All of these choices are correct.

10. Which of the following is a true statement?

a. Employee business expenses are deducted for AGI.
b. Investment expenses are typically deducted for AGI.
c. Tax preparation fees are deducted for AGI.
d. Rental and royalty expenses are deducted for AGI.
e. All of these choices are correct.

11. Han is a self-employed carpenter and his wife, Christine, works full time as a grade
school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid
$3,600 as her share of health insurance premiums (not with pretax dollars) for Han
and herself in a qualified plan provided by the school district (not through an
exchange). Which of the following is a true statement?
a. The tools and supplies are deductible for AGI while the health insurance is
an itemized deduction.
b. Both expenditures are deductible for AGI.
c. The tools and supplies are an itemized deduction but the health insurance is
deductible for AGI.
d. Both expenditures are itemized deductions.
e. Neither of the expenditures is deductible.
Business expenses for self-employed individuals are Schedule C deductions but health insurance
premiums are itemized deductions if the taxpayers are eligible to participate in an employer-
provided health plan.

12. Lewis is an unmarried law student at State University, a qualified educational

institution. Last year Lewis borrowed $30,000 and used the proceeds to pay his
university tuition. This year Lewis paid $1,500 of interest on the loan. Which of the
following is a true statement if Lewis reports $40,000 of salary and no other items of
income or expense?
a. Lewis can deduct all the interest on his student loan for AGI.
b. Lewis can deduct all the interest on his student loan as an itemized deduction.
c. Lewis can only deduct $1,000 of the interest on his student loan for AGI.
d. Lewis can only deduct $1,000 of the interest on his student loan as an itemized
deduction.
e. All of these choices are false.
Up to $2,500 of interest on student loans is deductible for AGI. The interest deduction is phased
out for single taxpayers with AGI exceeding $70,000.

13. Which of the following is a true statement?

a. A taxpayer can deduct medical expenses incurred for members of his family who
are dependents.
b. A taxpayer can deduct medical expenses incurred for a qualified relative even if
the relative does not meet the gross income test.
c. A divorced taxpayer can deduct medical expenses incurred for a child even if the
child is claimed as a dependent by the former spouse.
d. Deductible medical expenses include long-term care services for disabled spouses
and dependents.
e. All of these choices are true.

14. Which of the following costs are deductible as an itemized medical expense?
a. The cost of prescription medicine and over-the-counter drugs.
b. Medical expenses incurred to prevent disease.
c. The cost of elective cosmetic surgery.
d. Medical expenses reimbursed by health insurance.
e. None of these costs are deductible.

15. Which of the following taxes will not qualify as an itemized deduction?
a. Personal property taxes assessed on the value of specific property.
b. State, local, and foreign income taxes.
c. Real estate taxes on a residence.
d. Gasoline taxes on personal travel.
e. None of the choices qualify as itemized deductions.

16. This year Amanda paid $749 in federal gift taxes on a gratuitous transfer to her
nephew. Amanda lives in Texas and does not pay any state or local income taxes.
Which of the following is a true statement?
a. Amanda cannot deduct federal gift taxes.
b. Amanda can deduct federal gift taxes for AGI.
c. Amanda can deduct federal gift taxes paid as an itemized deduction.
d. Amanda must include federal gift taxes with other miscellaneous itemized
deductions.
e. None of the choices are true.

17. This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal
residence and $9,500 of state income taxes. Which of the following is true?
a. Norma can deduct $11,200 of real estate taxes as an itemized deduction.
b. Norma can deduct $9,500 of state income taxes as a for AGI deduction.
c. Norma can deduct $10,000 of taxes as an itemized deduction.
d. Even if Norma has no other itemized deductions, she should claim the standard
deduction.
e. None of the choices are correct.
The itemized deduction for taxes is limited to $10,000 for single taxpayers