Question

1. Pam earned a salary of $89,438 working as a CPA for a small firm. Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($4380), her emotional distress ($8700—she now fears peanut butter), and punitive damages ($51,000). What amount must Pam include in her gross income? (Do not use commas or dollar signs.)

2. This year Ed celebrated his 25th year as an employee of Designer Jeans Company. He earned a salary of $150,000. Also, in recognition of his long and loyal service, the company awarded Ed a gold watch worth $238 and a $2540 cash bonus. What is Ed's gross income? (Do not use commas or dollar signs.)

3. Helen is a U.S. citizen and a CPA who moved to London, England, three years ago to work for a British company. This year, she spent the entire year in London and earned a salary of $141,600. Because she was required to live in London for her job, which has very high housing costs, Helen was paid a housing allowance equal to $36,153 for 2020 by the British company she worked for. She spent the entire housing allowance on a London apartment. What is Helen’s gross income for U.S. taxes? (See pp. 5-28 to 5-29) (Do not use commas or dollar signs.)

Answer 1

1. Salary, receipts from emotional distress , punitive damages must consider in Gross Salary

Personal physical injuries or physical sickness

• If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized

deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do

not include the settlement proceeds in your income.

BUT

• If you receive a settlement for personal physical injuries or physical sickness, you must include in income

that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the

deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you paid in more than one

year, you must allocate on a pro rata basis the part of the proceeds for medical expenses to each of the years you

paid medical expenses. See Recoveries in Publication 525 for details on how to calculate the amount to report.

The tax benefit amount should be reported as “Other Income” on line 21 of Form 1040, Schedule 1.

Emotional distress or mental anguish

• The proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or

physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness

above.

BUT

• If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical

injury or physical sickness, you must include them in your income. However, the amount you must include is

reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not

previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not

provide a tax benefit. Attach to your return a statement showing the entire settlement amount less related medical

costs not previously deducted and medical costs deducted for which there was no tax benefit. The net taxable

amount should be reported as “Other Income” on line 21 of Form 1040, Schedule 1.

2. Salary and cash bonus should consider.

According to the law, tangible property offered as a reward to employees are tax exempt up to $400. However, cash bonus is taxable.

3.salary and partially House Rent Allowance (HRA)

The exemption for HRA benefit is the minimum of:

i) Actual HRA received

ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and

iii) Excess of rent paid annually over 10% of annual salary