IRS Income and Assets 2 — Questions and Answers
Question 1: A taxpayer receives a cash inheritance of $50,000 from a deceased relative. How is this treated for federal income tax purposes?
- It is fully taxable as ordinary income
- It is excluded from gross income (Correct answer)
- It is taxable only above $10,000
- It is reported as a capital gain
Correct answer: It is excluded from gross income
Inherited cash is excluded from the beneficiary's gross income under IRC §102; the estate may owe estate tax, but the recipient does not report it as income.
Question 2: Which of the following is considered 'constructive receipt' of income?
- A check received on January 3 for December services
- A bonus check mailed December 31 that the taxpayer could have picked up but did not (Correct answer)
- Wages earned but not yet paid by year-end
- Deferred compensation that cannot be accessed until retirement
Correct answer: A bonus check mailed December 31 that the taxpayer could have picked up but did not
Constructive receipt occurs when funds are available to the taxpayer without restriction, even if not physically received.
Question 3: A taxpayer sells stock for $15,000 that was purchased for $10,000 two years ago. What is the character of the $5,000 gain?
- Ordinary income
- Short-term capital gain
- Long-term capital gain (Correct answer)
- Section 1231 gain
Correct answer: Long-term capital gain
Stock held more than one year generates a long-term capital gain taxed at preferential rates.
Question 4: Under the claim of right doctrine, when must income be reported if received under a claim of right?
- When the right to retain it becomes certain
- In the year received, even if it may have to be repaid (Correct answer)
- Only after any obligation to repay has expired
- When the dispute is resolved by a court
Correct answer: In the year received, even if it may have to be repaid
Under the claim of right doctrine, income is taxable in the year received if the taxpayer has unrestricted use of it, even if repayment is later required.
Question 5: What is the tax treatment of municipal bond interest received by a US taxpayer?
- Taxable as ordinary income at all levels
- Exempt from federal income tax but may be subject to state tax (Correct answer)
- Subject to the alternative minimum tax only
- Taxable as a capital gain
Correct answer: Exempt from federal income tax but may be subject to state tax
Interest on most state and local (municipal) bonds is excluded from federal gross income under IRC §103, though it may be taxable by the issuing state.
Question 6: A taxpayer wins $5,000 at a casino. How should this be reported?
- Not reported if winnings are under $10,000
- As other income on Schedule 1, fully taxable (Correct answer)
- As a capital gain
- Only reported if a Form W-2G is received
Correct answer: As other income on Schedule 1, fully taxable
All gambling winnings are fully includible in gross income regardless of amount or whether a W-2G is issued.
Question 7: A self-employed consultant receives payment in the form of services (barter) rather than cash. How is this treated for tax purposes?
- Not taxable because no cash changed hands
- Taxable at the fair market value of the services received (Correct answer)
- Taxable only if the services exceed $600 in value
- Deferred until the services are resold
Correct answer: Taxable at the fair market value of the services received
Barter income is includible in gross income at the fair market value of goods or services received in exchange.
IRS Income and Assets 2
A taxpayer receives a cash inheritance of $50,000 from a deceased relative.
How is this treated for federal income tax purposes?