CPA Exam — REG (Regulation)Federal Taxation of IndividualsEasy
A client, single, age 35, reports the following income for the tax year: W-2 wages of $70,000, interest income from a corporate bond of $500, and municipal bond interest of $300. The client also received a $1,000 gift from their grandmother. What is the client's gross income for federal income tax purposes?
- A$70,500
- B$70,800
- C$70,000
- D$71,800
Show answer & explanationAnswer & explanation
Correct answer: A. $70,500
Gross income includes all income from whatever source derived, unless specifically excluded. W-2 wages and corporate bond interest are taxable. Municipal bond interest and gifts are generally excluded.
Why the other options are wrong
- B. This option incorrectly includes municipal bond interest, which is generally tax-exempt.
- C. This option incorrectly excludes the corporate bond interest.
- D. This option incorrectly includes both municipal bond interest and the gift, both of which are generally excluded from gross income.
Gross Income
Gross income for federal income tax purposes includes all income from whatever source derived, unless specifically excluded by law.
- Includes wages, salaries, business income, interest, dividends, rents, royalties.
- Excludes certain items like municipal bond interest, gifts, inheritances, and some fringe benefits.
- It is the starting point for calculating taxable income.
Memory trick: Gross Income is your 'total take' before exclusions, like a money funnel.