For the year ended December 31, 2012, Don Raff earned
$1,000 interest at Ridge Savings Bank on a certificate of deposit
scheduled to mature in 2013. In January 2013, before filing his
2012 income tax return, Raff incurred a forfeiture penalty of $500
for premature withdrawal of the funds. Raff should treat this
$500 forfeiture penalty as a
(d) The requirement is to determine how Don Raff’s
$500 interest forfeiture penalty should be reported. An interest
forfeiture penalty for making a premature withdrawal from a
certificate of deposit should be deducted from gross income in
arriving at adjusted gross income in the year in which the penalty
is incurred, which in this case is 2013.
Which payment(s) is (are) included in a recipient’s gross
I. Payment to a graduate assistant for a part-time teaching
assignment at a university. Teaching is not a requirement
toward obtaining the degree.
II. A grant to a Ph.D. candidate for his participation in a
university-sponsored research project for the benefit of the
(c) The requirement is to determine which payment(s)
must be included in a recipient’s gross income. A candidate for a
degree can exclude amounts received as a scholarship or fellowship
if, according to the conditions of the grant, the amounts are
used for the payment of tuition and fees, books, supplies, and
equipment required for courses at an educational institution. All
payments received for services must be included in income, even
if the services are a condition of receiving the grant or are required
of all candidates for the degree. Here, the payment to a
graduate assistant for a part-time teaching assignment and the
grant to a Ph.D. candidate for participation in research are payments
for services and must be included in income.
Majors, a candidate for a graduate degree, received the following
scholarship awards from the university in 2013:
• $10,000 for tuition, fees, books, and supplies required
• $2,000 stipend for research services required by the
What amount of the scholarship awards should Majors include as
taxable income in 2013?
(c) The requirement is to determine the amount of
scholarship awards that Majors should include as taxable income
in 2013. Only a candidate for a degree can exclude amounts
received as a scholarship award. The exclusion available to degree
candidates is limited to amounts received for the payment of
tuition and fees, books, supplies, and equipment required for
courses at the educational institution. Since Majors is a candidate
for a graduate degree, Majors can exclude the $10,000 received
for tuition, fees, books, and supplies required for courses.
However, the $2,000 stipend for research services required by the
scholarship must be included in taxable income for 2013.
In July 1997, Dan Farley leased a building to Robert Shelter
for a period of fifteen years at a monthly rental of $1,000 with no
option to renew. At that time the building had a remaining estimated
useful life of twenty years.
Prior to taking possession of the building, Shelter made improvements
at a cost of $18,000. These improvements had an
estimated useful life of twenty years at the commencement of the
lease period. The lease expired on June 30, 2012, at which point
the improvements had a fair market value of $2,000. The amount
that Farley, the landlord, should include in his gross income for
(a) The requirement is to determine a lessor’s 2012
gross income. A lessor excludes from income any increase in the
value of property caused by improvements made by the lessee,
unless the improvements were made in lieu of rent. In this case,
there is no indication that the improvements were made in lieu of
rent. Therefore, for 2012, Farley should only include the six rent
payments in income: 6 × $1,000 = $6,000.
Bob and Sue Stewart were divorced in 2010. Under the
terms of their divorce decree, Bob paid alimony to Sue at the rate
of $50,000 in 2010, $20,000 in 2011, and nothing in 2012. What
amount of alimony recapture must be included in Bob’s gross
income for 2012?
(d) The requirement is to determine the amount of
alimony recapture that must be included in Bob’s gross income
for 2012. Alimony recapture may occur if alimony payments
sharply decline in the second and third years that payments are
made. The payor must report the recaptured alimony as gross
income in the third year, and the payee is allowed a deduction for
the same amount. Recapture for the second year (2011) occurs
to the extent that the alimony paid in the second year ($20,000)
exceeds the alimony paid in the third year ($0) by more than
$15,000 [i.e., $20,000 – ($0 + $15,000) = $5,000 of recapture].
Recapture for the first year (2010) occurs to the extent that
the alimony paid in the first year ($50,000) exceeds the average
alimony paid in the second and third years by more than $15,000.
For this purpose, the alimony paid in the second year ($20,000)
must be reduced by the amount of recapture for that year
First year (2010) payment $50,000
Second year (2011) payment
($20,000 – $5,000) $15,000
Third year (2012) payment + 0
÷ 2 (7,500)
Recapture for first year (2010) $ 27,500
Thus, the total recapture to be included in Bob’s gross income for
2012 is $5,000 + $27,500 = $32,500.
Which of the following conditions must be present in a
divorce agreement for a payment to qualify as deductible alimony?
I. Payments must be in cash.
II. The payment must end at the recipient’s death
(c) The requirement is to determine which conditions
must be present in a divorce agreement for a payment to qualify
as deductible alimony. In order for a payment to be deductible
by the payor as alimony, the payment must be made in cash or its
equivalent, the payment must be received by or on behalf of a
spouse under a divorce or separation instrument, the payments
must terminate at the recipient’s death, and must not be designated
as other than alimony (e.g., child support).
Darr, an employee of Sorce C corporation, is not a shareholder.
Which of the following would be included in a taxpayer’s
(d) The requirement is to determine which of the
following would be included in gross income by Darr who is an
employee of Sorce C corporation. The definition of gross income
includes income from whatever source derived and would
include the dividend income on shares of stock that Darr received
for services rendered. However, items specifically excluded
from gross income include amounts received as a gift or
inheritance, as well as employer-provided medical insurance
coverage under a health plan.
With regard to the inclusion of social security benefits in
gross income for the 2013 tax year, which of the following statements
(c) The requirement is to determine the correct statement
regarding the inclusion of social security benefits in gross
income for 2013. A maximum of 85% of social security benefits
may be included in gross income for high-income taxpayers.
Thus, no matter how high a taxpayer’s income, 85% of the social
security benefits is the maximum amount of benefits to be included
in gross income.
Perle, a dentist, billed Wood $600 for dental services. Wood
paid Perle $200 cash and built a bookcase for Perle’s office in full
settlement of the bill. Wood sells comparable bookcases for
$350. What amount should Perle include in taxable income as a
result of this transaction?
(c) The requirement is to determine the amount that
Perle should include in taxable income as a result of performing
dental services for Wood. An exchange of services for property or
services is sometimes called bartering. A taxpayer must include
in income the amount of cash and the fair market value of property
or services received in exchange for the performance of services.
Here, Perle’s taxable income should include the $200 cash
and the bookcase with a comparable value of $350, a total of
John and Mary were divorced in 2011. The divorce decree
provides that John pay alimony of $10,000 per year, to be reduced
by 20% on their child’s 18th birthday. During 2012, John
paid $7,000 directly to Mary and $3,000 to Spring College for
Mary’s tuition. What amount of these payments should be reported
as income in Mary’s 2012 income tax return?
(b) The requirement is to determine the amount of
payments to be included in Mary’s income tax return for 2012.
Alimony must be included in gross income by the payee and is
deductible by the payor. In order to be treated as alimony, a
payment must be made in cash and be received by or paid on
behalf of the former spouse. Amounts treated as child support
are not alimony; they are neither deductible by the payor, nor
taxable to the payee. Payments will be treated as child support to
the extent that payments will be reduced upon the happening of a
contingency relating to a child (e.g., the child attaining a specified
age, marrying, becoming employed). Here, since future payments
will be reduced by 20% on their child’s 18th birthday, the
total cash payments of $10,000 ($7,000 paid directly to Mary
plus the $3,000 of tuition paid on Mary’s behalf) must be reduced
by 20% and result in $8,000 of alimony income for Mary.
The remaining $2,000 is treated as child support and is not taxable.