Question & Answer

Helaina was just hired by Acme Corporation and has decided to purchase disability insurance. This insurance promises to pay her weekly benefits to replace her salary should she be unable to work because of disability. Disability insurance is also available through Acme as part of its compensation plan. Acme pays these premiums as a nontaxable fringe benefit, but the plan promises to pay about 10 percent less in benefits. If Helaina elects to have Acme pay the premiums, then her compensation will be reduced by an equivalent amount. Should tax considerations play a role in Helaina's choice to buy disability insurance through Acme or on her own? Explain.

Jim was injured in an accident and his surgeon botched the medical procedure. Jim recovered $5,000 from the doctor for pain and suffering and $2,000 for emotional distress. Determine the taxability of these payments and briefly explain to Jim the apparent rationale for including or excluding these payments from gross income.

How are state-sponsored 529 educational savings plans taxed if investment returns are used for educational purposes? Are the returns taxed differently if they are not ultimately used to pay for education costs?

Describe the kinds of insurance premiums an employer can pay on behalf of an employee without triggering includible compensation to the employee.

Explain why taxpayers are allowed to exclude gifts and inheritances from gross income even though these payments are realized and clearly provide taxpayers with the wherewithal to pay.

Explain how state and local governments benefit from the provisions that allow taxpayers to exclude interest on state and local bonds from their gross income.

What are some common examples of taxable and tax-free fringe benefits?

] Cassie works in an office and has access to several professional color printers. Her employer allows Cassie and her fellow employees to use the printers to print color postcards for the holidays. This year Cassie printed out two dozen postcards worth almost $76. Must Cassie include this amount in her gross income this year? Explain your answer.

Explain why an employee should be concerned about whether their employer reimburses business expenses using an “accountable” plan.

What are the basic requirements to exclude the gain on the sale of a personal residence?

] Explain why an insolvent taxpayer is allowed to exclude income from the discharge of indebtedness if the taxpayer remains insolvent after receiving debt relief.

When an employer makes a below-market loan to an employee, what are tax consequences to the employer and employee?

Rolando purchases a golf cart from his employer, E-Z-Go Golf Carts, for a sizable discount. Explain the rules for determining if Rolando’s purchase results in taxable income for him.

Rory and Nicholi, single taxpayers, each annually receives Social Security benefits of $15,000. Rory’s taxable income from sources other than Social Security exceeds $200,000. In contrast, the Social Security benefits are Nicholi’s only source of income. What percentage of the Social Security benefits must Rory include in his gross income? What percentage of Social Security benefits is Nicholi required to include in his gross income?

Larry Bounds has won the Gold Bat Award for hitting the longest home run in Major League Baseball this year. The bat is worth almost $35,000. Under what conditions can Larry exclude the award from his gross income? Explain.

Ida and Clem were married for several years, but in 2018 they finalized their divorce. In the divorce decree, Ida agreed to deed their car to Clem and pay Clem $10,000 per year for twenty years (but not beyond his death). Did these transfers qualify as alimony for tax purposes? Explain.

Tomiko is a 50 percent owner (partner) in the Tanaka partnership. During the year, the partnership reported $1,000 of interest income and $2,000 of dividends. How much of this income must Tomiko include in their gross income?

What is a “wash sale”? What is the purpose of the wash sale tax rules?

What is the deciding factor in determining whether a capital gain is a short-term or long-term capital gain?

Brad purchased land for $45,000 this year. At year-end Brad sold the land for $51,700 and paid a sales commission of $450. What effect does this transaction have on Brad’s gross income? Explain.

George purchased a life annuity to provide him monthly payments for as long as he lives. Based on IRS tables, George’s life expectancy is 100 months. Is George able to recover his cost of the annuity if he dies before he receives 100 monthly payments? Explain. What happens for tax purposes if George receives more than 100 payments?

Conceptually, when taxpayers receive annuity payments, how do they determine the amount of the payment they must include in gross income?

Geri has a certificate of deposit at the local bank. The interest on this certificate was credited to their account on December 31 of last year but they didn’t withdraw the interest until January of this year. When is the interest income taxed?

Jim purchased 100 shares of stock this year and elected to participate in a dividend reinvestment program. This program automatically uses dividends to purchase additional shares of stock. This year Jim’s shares paid $350 of dividends, and these funds were used to purchase additional shares of stock. These additional shares are worth $375 at year-end. What amount of dividends, if any, should Jim declare as income this year? Explain.

From an employee perspective, how are ISOs treated differently from NQOs for tax purposes? In general, for a given number of options, which type of stock options should employees prefer?