CPA Exam — REG (Regulation)Federal Taxation of IndividualsEasy
A client, single, age 45, is preparing their tax return. They received $5,000 in unemployment benefits and $2,000 from a state lottery prize. They also sold stock for a $1,500 capital gain. What is the total amount of these items that must be included in their gross income?
- A$8,500
- B$7,000
- C$2,000
- D$3,500
Show answer & explanationAnswer & explanation
Correct answer: A. $8,500
Unemployment benefits, lottery winnings, and capital gains are all generally taxable and included in gross income. Therefore, the sum of these amounts is the total included.
Why the other options are wrong
- B. This generally excludes the capital gain or miscalculates the sum.
- C. This only includes the lottery prize, ignoring unemployment benefits and capital gains.
- D. This incorrectly sums only the lottery prize and capital gain, or an arbitrary partial sum.
Gross Income Inclusions
Gross income includes all income from whatever source derived, unless specifically excluded by law.
- Unemployment compensation is fully taxable.
- Gambling winnings (including lottery prizes) are fully taxable.
- Capital gains are generally taxable.
Memory trick: Many sources of cash flow into your taxable bucket.