Question

2. For each of the following situations, determine the amount of gross income that the taxpayers Explain why any amounts are excluded from gross income. a. Harvey is injured in an automobile accident. The driver of the other car is found to be judge awards Harvey $10,000 for pain and suffering, $20,000 in punitive damages, and so,000 for medical expenses. Harvey's total medical costs are $25,000 and his employer-provided insurance policy pays $8,000 of the medical costs. He also receives $800 of workers compensation while he was unable to work. In addition, his employer-provided insurance pays im $450 of disability pay while he recuperated and a separate plan that Harvey purchased paid $300 of disability payments. b. Heather owes $35,000 of credit card debt to First City Bank. Heather is having financial difficulties during the current year and First City Bank agrees to reduce her debt to $20,000 to help her to get her financial affairs in order and avoid bankruptcy. Heather's assets were $100,000, and her liabilities were $110,000 before the discharge. On May 1, Ernie receives 1,000 shares of Glimmer Company stock as a graduation present from his uncle. The shares have a fair market value of $5 per share on May 1. Ernie receives an additional 100 shares on July 25 as a result of a 10% stock dividend that Glimmer had declared on July 1. On December 1, Glimmer declares and distributes a $0.50 per share cash dividend. d Garry works as a reservations clerk for Big Apple Hotels, Big Apple Hotels also owns Mideastern Airlines. Big Apple allows all employees to fly on Mideastern Airlines and to stay in Big Apple Hotels free, on a space available basis. Garry takes advantage of Big Apple's generosity and took a trip to Reno to visit the casinos. The cost of the airfare would have been $480 and the lodging would have cost $600 if he had not been an employee of Big Apple.

Answer 1

1. The $450 of disability pay from the employer provided plan and the $20,000 in punitive damages is included in Harvey' gross income. The pain and suffering, and the medical expense judgement are excluded as damages for personal physical injuries. The medical expenses from the employer's plan are excluded because they are less than actual expenses. Worker's compensation payments are specifically excluded as a return or human capital. The $300 of disability payments are not taxable because they came from a plan that Harvey purchased.
2. Heather has $5,000 of gross income from the discharge. Because she was insolvent before the discharge, she can exclude the discharge from income. However, if the discharge makes her solvent, she must include in income the extent that the discharge makes her solvent. The $15,000 debt reduction makes her solvent by $5,000 [$100,000 - ($110,000 - $15,000)].
3. Ernie has $550 of gross income. The receipt of the shares from his Uncle is a gift that is excluded from income. The stock dividend shares are not subject to tax. The cash dividend received on the 1,100 shares of stock he owns on December 1 is included in gross income.
4. Garry has gross income of $480 from the free airfare. Employee's can exclude the value of no additional cost services provided by an employer as long as the services are offered on a non-discriminatory basis and they are in the same line of business as that of the employee. Both services are non-discriminatory, but the free airfare does not qualify for exclusion because Garry does not work in the airline portion of Big Apple's business.