#13. Melbaâ€™s employer provides a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2011, but by the end of December 2011, she still had $300 remaining in the account. Melba intended to get new eyeglasses, but was too busy during the holiday season. Is Melba required to forfeit the balance in her flexible spending account?
#23. In 2011, Montgomery County experienced a budget surplus. The County is considering using a portion of the surplus to rebate part of the real estate taxes paid by county real estate owners. What would be the income tax consequences to the real estate owners of receiving the rebate in 2012?
#25. Molly is a cash basis taxpayer. In 2011, she earned only $6,500, which was less than the standard deduction and personal exemption. In January 2012, Mollyâ€™s employer determined that he had miscalculated her December 2011 bonus and that she should have received an additional $1,000 of compensation in 2011. The employer paid Molly the $1,000 in 2012. If Molly had received the $1,000 in 2011, it would not have resulted in any tax liability because her gross income would still have been less than her standard deduction and personal exemption. In 2012, Molly had over $30,000 in taxable income. Does the tax benefit rule apply to Mollyâ€™s situation? Explain.
#28. Ed, an employee of the Natural Color Company, suffered from a rare disease that was very expensive to treat. The local media ran several stories about Ed’s problems, and the family received more than $10,000 in gifts from individuals to help pay the medical bills. Edâ€™s employer provided hospital and medical insurance for its employees, but the policy did not cover Edâ€™s illness. When it became apparent that Ed could not pay all of his medical expenses, the hospital canceled the $25,000 Ed owed at the time of his death. After Edâ€™s death, his former employer paid Edâ€™s widow $12,000 in â€œher time of need.â€ Edâ€™s widow also collected $50,000 on a group term life insurance policy paid for by Edâ€™s employer. What are Edâ€™s and his wifeâ€™s gross income?
#31. What is the taxpayerâ€™s gross income in each of the following situations?
a) Darrin received a salary of $50,000 in 2011 from his employer, Green Construction Associates, Inc. In July 2011, Green gave each employee $2,500 as a bonus for exceeding the monthly sales goals.
b) Megan received $10,000 from her employer to help her pay the college expenses of her daughter.
c) Blake received $15,000 from his deceased wifeâ€™s employer in â€œrecognition of her 30 years of faithful service to the company.â€
d) Clint collected $50,000 as the beneficiary of a group term life insurance policy for which his deceased wifeâ€™s employer had paid the premiums.
#33. Ray and Carin are partners in an accounting firm. The partners have entered into an armâ€™s length agreement requiring Ray to purchase Carinâ€™s partnership interest from Carinâ€™s estate if she dies before Ray. The price is set at 120% of the book value of Carinâ€™s partnership interest at the time of her death. Ray purchased an insurance policy on Carinâ€™s life to fund this agreement. After Ray had paid $45,000 in premiums, Carin was killed in an automobile accident, and Ray collected $800,000 of life insurance proceeds. Ray used the life insurance proceeds to purchase Carinâ€™s partnership interest.
a) What amount should Ray include in his gross income from receiving the life insurance proceeds?
b) The insurance company paid Ray $16,000 interest on the life insurance proceeds during the period Carinâ€™s estate was in administration. During this period, Ray had left the insurance proceeds with the insurance company. Is this interest taxable?
c) When Ray paid $800,000 for Carinâ€™s partnership interest, priced as specified in the agreement, the fair market value of Carinâ€™s interest was $1 million. How much should Ray include in his gross income from this bargain purchase?
#36. Leigh sued an overzealous bill collector and received the following settlement:
Damage to her automobile the collector attempted to repossess $ 3,300
Physical damage to her arm caused by the collector 15,000
Loss of income while her arm was healing 6,000
Punitive damages 80,000
a) What effect does the settlement have on Leighâ€™s gross income?
b) Assume Leigh also collected $25,000 of damages for slander to her personal reputation caused by the bill collector misrepresenting the facts to Leighâ€™s employer and other creditors. Is this $25,000 included in Leighâ€™s gross income?
#39. The UVW Union and HON Corporation are negotiating contract terms. Assume the union members are in the 28% marginal tax bracket and all benefits are provided on a nondiscriminatory basis. Write a letter to the UVW Union members explaining the tax consequences of the options discussed below. The unionâ€™s address is 905 Spruce Street, Washington, DC 20227.
a) The company would impose a $100 deductible on medical insurance benefits. Most employees incur more than $100 each year in medical expenses.
b) Employees would get an additional paid holiday with the same annual income (the same pay but less work).
c) An employee who did not need health insurance (because the employerâ€™s spouse works and receives family coverage) would be allowed to receive the cash value of the coverage.
#52. Tonya, who lives in Virginia, inherited a $10,000 State of Virginia bond in 2011. Her marginal Federal tax rate is 35%, and her marginal state tax rate is 5%. The Virginia bond pays 4% interest, which is not subject to Virginia income tax. She can purchase a corporate bond of comparable risk that will yield 6% or a U.S. government bond that pays 5.6% interest. Tonya does not itemize her deductions. Which investment will provide the greatest after-tax yield?