IRS Income and Assets 3

Question 1

A taxpayer receives a life insurance death benefit of $200,000 as the named beneficiary. How is the death benefit treated?

Accepted Answer

Excluded from gross income

Answer

Life insurance death benefits paid to a beneficiary are generally excluded from gross income under IRC §101(a).

Question 2

Which method of accounting requires income to be reported when earned and expenses deducted when incurred, regardless of cash flow?

Accepted Answer

Accrual method

Answer

The accrual method recognizes income when earned and expenses when incurred, not when cash is actually received or paid.

Question 3

A taxpayer sells a principal residence with a realized gain of $400,000. They are married filing jointly and meet all ownership and use tests. How much gain is excluded?

Accepted Answer

$500,000 limit applies, so the entire $400,000 is excluded

Answer

Married filing jointly taxpayers may exclude up to $500,000 of gain on the sale of a qualifying principal residence; the $400,000 gain falls entirely within this limit.

Question 4

What is the basis of property received as a gift if the fair market value at the time of the gift is LESS than the donor's adjusted basis?

Accepted Answer

The donor's basis for gain purposes; FMV for loss purposes

Answer

When FMV is less than the donor's basis, the donee uses FMV to determine a loss and the donor's basis to determine a gain (the 'dual basis' rule).

Question 5

A taxpayer receives alimony payments under a divorce agreement executed in 2020. How does the recipient treat these payments?

Accepted Answer

Excluded from income because the agreement was post-2018

Answer

Under the Tax Cuts and Jobs Act, alimony received under agreements executed after December 31, 2018 is excluded from the recipient's gross income.

(IRS) Internal Revenue Service Certified Practice Test

(IRS) Internal Revenue Service Certified Practice Test

IRS Income and Assets 3