Gross Inc

Question 1

1) During all of 2022, 2023, and 2024, Una Dostres, a U.S. employee of Math Corporation, lived in Spain and worked in a Spanish subsidiary of Math. She spent no time in the United States during the 3 years in question. In 2024, Una received a $127,100 salary plus a housing allowance from her employer for her actual qualifying housing costs of $21,240. Una’s gross income to be reported on her U.S. tax return is
A. $20,840
B. $600
C. $21,840
D. $0FEIC

Answer 1

A. $20,840
Answer (A) is correct.
Under Sec. 911, a qualified individual may elect to exclude foreign earned income and a housing allowance. A qualified individual includes someone who is a citizen or resident alien of the U.S. who either is a bona fide resident of a foreign country for an entire tax year or is present in foreign countries for at least 330 days of a consecutive 12-month period. Una meets the second test.
The foreign earned income exclusion is limited to $126,500 in 2024, so Una must include $600 of her $127,100 salary. The housing allowance exclusion is limited to the qualifying housing costs ($21,240) less the base amount of $20,240, so Una’s exclusion is limited to $1,000 ($21,240 – $20,240). Therefore, she must include in gross income $20,840 ($20,240 of her housing allowance + $600 of earned income) for 2024.
B. $600
Answer (B) is incorrect.
U.S. gross income also includes the housing allowance base amount for 2024 of $20,240.
C. $21,840 My original answer
Answer (C) is incorrect.
A portion of the housing allowance may be excluded from gross income.
D. $0
Answer (D) is incorrect.
Una’s income and housing allowance exceed the exclusions.

Question 2

2) In Year 1, Lee was beginning his undergraduate education. In January of Year 1, Lee was awarded a scholarship of $500 per month from a tax-exempt educational foundation to continue as long as Lee was a full-time student until he received his degree. Lee remained a full-time student and graduated at the end of August of Year 5. Lee received the scholarship each month from January of Year 5 through August of Year 5, and spent $2,400 for tuition, fees, books, and supplies. How much must Lee include in gross income from the scholarship in Year 5?
A. $2,400
B. $0
C. $4,000
D. $1,600

Answer 2

A. $2,400 My original answer
Answer (A) is incorrect.
This amount is the portion of the scholarship that may be excluded from income.
B. $0
Answer (B) is incorrect.
A portion of the scholarship must be included in income.
C. $4,000
Answer (C) is incorrect.
This amount is the total amount received and all of it may not be excluded from income.
D. $1,600
Answer (D) is correct.
A candidate for a degree may exclude the amount received as a scholarship at an educational organization. There is no limit on the time for which the scholarship may be received. Only amounts actually used for tuition, course-related fees, books, supplies, and equipment required for instruction qualifies for this exclusion (Publication 17). Therefore, Lee needs to include $1,600 in gross income from the scholarship as calculated below.
Monthly payment
$ 500
Times: Number of payments
× 8
Amount received
$4,000
Less: Qualified expenditures
(2,400)
Gross income inclusion
$1,600

Question 3

20) Gewald enters into an agreement to lease a house to Dorschuk. Although the fair rental value of the house is $5,000 per year, Dorschuk is required to pay only $3,000 per year in return for building a patio, a sundeck, and a hot tub which will be left on the premises at the end of the lease. The lease is to last for 2 years. Dorschuk finishes all the improvements in the first year of the lease. How much and when must Gewald recognize rental income from this transaction?
A. $7,000 in the first year and $3,000 in the second year.
B. $5,000 in the first year and $5,000 in the second year.
C. $3,000 in the first year and $3,000 in the second year.
D. $3,000 in the first year and $7,000 in the second year.

Answer 3

A. $7,000 in the first year and $3,000 in the second year.
Answer (A) is correct.
Section 61(a)(5) includes rents in gross income whether received in cash, in property, or as services. Improvements made by a lessee on the lessor’s property are generally excluded from income under Sec. 109 unless they are made in lieu of rent (Publication 17). In this case, the improvements made by Dorschuk are made in lieu of $2,000 of rent in the first year of the lease and $2,000 of rent in the second year of the lease. Improvements in lieu of rent are included in the lessor’s income when the improvements are completed or placed on the property (the same as if cash rent had been received at that time). Since Dorschuk paid $3,000 in cash in the first year and completed the improvements in the first year, Gewald must recognize $7,000 of rental income in the first year. Gewald must also recognize $3,000 of rental income in the second year when it is received.
B. $5,000 in the first year and $5,000 in the second year.
Answer (B) is incorrect.
The improvements are recognized when received by the lessor.
C. $3,000 in the first year and $3,000 in the second year.
Answer (C) is incorrect.
The improvements are made in lieu of rent and are included in rental income.
D. $3,000 in the first year and $7,000 in the second year.
Answer (D) is incorrect.
The improvements are recognized when received by the lessor, not at the lease end.