Question

Pam and Ray Smith need to exclude the appropriate amounts from gross income for each item listed below. Unless specifically stated otherwise, each item was received or paid during 2019. For each item, enter the appropriate amounts to be excluded from taxable income in the associated cells. If the amount is zero, enter a zero (0). Round all amounts to the nearest whole dollar. 1. Ray received $500 under a workers' compensation plan for physical injuries sustained in the course of his employment. 2. Under a jury award for damages to Ray's personal reputation for libel, 12 payments of $420 each were received. The total award was $12,000 for his personal reputation and $12,000 as punitive damages, payable in 60 equal monthly installments. Each monthly payment of $420 reflects an interest component. 3. Pam borrowed $5,000 from Local Bank to purchase a piano. She paid $300 of interest on the loan. Principal of $3,750 was still outstanding at year-end. 4. Pam received a pro rata stock dividend of 100 shares of the stock of Grubbs Corp. She requested a dividend of $5,000 cash instead (the fair market value of the stock dividend) but was told that Grubbs Corp. does not give that option to shareholders. 5. Ray, as beneficiary of the life insurance policy of his aunt who died 2 years ago, received the third $8,000 installment on a $100,000 life insurance policy, payable in annual installments of $8,000 over a 15-year period. 6. Ray was notified on December 27, 2019, that the principal amount of $1,000 due on a note secured by a computer he purchased in 2016 had been reduced to $700. The creditor had reduced the amount as to all accounts secured by computers more than a certain number of years old to discourage "walking away" from debt greater in amount than the cost of new updated equipment. 7. Seth, a tenant of Ray and Pam, having paid 2019 rent of $8,600 in December 2018, moved out in December 2019, leaving $3,300 of improvements to the leasehold premises.

Answer 1

Gross Income of Pam and Ray Smith

The below amounts to be excluded from the Gross Income of Pay and Ray Smith.

1. 500 dollars as the same were received for the physical damages sustained during the course of employment.

2. 0 dollars to be excluded as the court settlement said above invoulves the punitive damages, so the same is taxable.

3. 300 dollars can be excluded from the gross income as the same is considered as personal loan.

4. 100 shares received are taxable at the hands of Pam, as the above mentioned are stock dividend. Must be included in the taxable income. So nothing is exluded in this category.

5. 8000 dollars should be excluded, as the above said amount received from a life insurance policy. However if such amount includes any of the interest or any interest earned on such amount shall be reported in the income.

6. 0 dollars to be excluded as Ray was mentioned about the same at the end of the year.

7. Total rental income of 8600 dollars should be reported in the Income and the 3300 dollars can be adjusted to the same, resulting the net rental income of 5300 dollars.