CPA Quiz: Determine Items Included In Gross Income
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Determine Items Included In Gross IncomeQuestion 1 of 20

Creditor cancels $20,000 debt; taxpayer's liabilities exceed assets by $15,000 before cancellation. Gross income?

$20,000
$0.00
$5,000
$15,000
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CPA Quiz: Determine Items Included In Gross Income

Practice Determine Items Included In Gross Income in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Determine Items Included In Gross Income, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

Creditor cancels $20,000 debt; taxpayer's liabilities exceed assets by $15,000 before cancellation. Gross income?

  1. $20,000
  2. $0.00
  3. $5,000 (correct answer)
  4. $15,000
Explanation: Under tax law, discharged debt is gross income, but if you are insolvent immediately before the cancellation, you exclude debt only up to the amount your liabilities exceed your assets. Your insolvency is $15,000, so $20,000 - $15,000 = $5,000 is taxable. Treating the full $20,000 as income ignores this insolvency exclusion.

Question 2

Physical injury lawsuit: $6,000 compensatory damages, $4,000 punitive damages. Gross income?

  1. $0.00
  2. $4,000 (correct answer)
  3. $6,000
  4. $10,000
Explanation: Compensatory damages for physical injury are excluded from gross income. Punitive damages are always taxable, even when tied to a physical injury. So only the $4,000 punitive portion is included. The tempting $10,000 total is wrong because it counts the excluded compensatory award.

Question 3

$50,000 policy sold to unrelated investor for $30,000; investor paid $5,000 premiums, collects $50,000. Gross income?

  1. $15,000 (correct answer)
  2. $20,000
  3. $50,000
  4. $0.00
Explanation: Your basis is the $30,000 purchase price plus the $5,000 premiums you paid: 30,000 + 5,000 = 35,000. The $50,000 proceeds minus that 35,000 basis gives 15,000 taxable income. The tempting $20,000 figure is wrong because it ignores the premiums you paid, which increase your basis.

Question 4

2019 divorce agreement pays recipient $18,000 alimony and $6,000 child support. Gross income?

  1. $24,000
  2. $18,000
  3. $6,000
  4. $0.00 (correct answer)
Explanation: For a 2019 divorce agreement, alimony is no longer included in the recipient's gross income, and child support is never taxable. So neither the $18,000 alimony nor the $6,000 child support counts as gross income. You would report $0.00. The tempting $18,000 is wrong because it treats alimony as taxable under pre-2019 rules.

Question 5

A taxpayer receives $15,000 from the sale of a principal residence that has been owned and used as a principal residence for 3 of the last 5 years. The taxpayer is single. Is any gain excluded from gross income?

  1. No, all gain from the sale of a principal residence is taxable.
  2. Up to $125,000 is excluded for single filers.
  3. Up to $500,000 is excluded for single filers.
  4. Up to $250,000 of gain is excluded for a single taxpayer who meets the ownership and use tests. (correct answer)
Explanation: Under Section 121, a single taxpayer who has owned and used a property as a principal residence for at least 2 of the 5 years preceding the sale may exclude up to 250,000ofgain(250,000 of gain (500,000 for married filing jointly). The taxpayer owned and used the home for 3 of the last 5 years, meeting the requirements. If the gain is $15,000, the full amount is excluded (well within the 250,000limit).AnswerAisincorrectbecauseSection121providesasignificantexclusion.AnswerB(250,000 limit). Answer A is incorrect because Section 121 provides a significant exclusion. Answer B (125,000) was the exclusion under prior law (one-time exclusion for taxpayers over 55), now replaced by Section 121. Answer C ($500,000) is the MFJ exclusion, not the single filer amount.

Question 6

Under Section 117, qualified scholarships received by degree candidates are excluded from gross income. Which of the following scholarship amounts is excluded?

  1. All scholarship funds received, including amounts used for room and board.
  2. Scholarship amounts used for tuition, fees, books, and required course supplies - amounts used for room, board, or personal living expenses are taxable. (correct answer)
  3. All scholarship amounts are taxable as compensation for future services.
  4. Scholarship amounts are excluded only for students attending accredited four-year universities.
Explanation: Under Section 117, a qualified scholarship for a degree candidate is excluded from gross income to the extent used for qualified tuition and related expenses (tuition, fees, books, supplies, and equipment required for courses). Amounts used for room and board, personal living expenses, or travel are not qualified expenses and are taxable. Answer A incorrectly includes room and board. Answer C is incorrect because scholarships are not compensation (unless tied to required services). Answer D is incorrect because the exclusion applies to degree candidates at eligible educational institutions generally, not only four-year universities.

Question 7

Under Section 61(a)(4), interest income is includible in gross income. Which of the following is an example of interest income that must be reported?

  1. Interest earned on a savings account at a bank. (correct answer)
  2. Interest on State of California general obligation bonds.
  3. Interest on Puerto Rico bonds.
  4. Imputed interest on below-market loans between close family members below the applicable threshold.
Explanation: Interest earned on a savings account at a bank is fully includible in gross income under Section 61(a)(4). There is no exclusion for ordinary bank interest. Answer B is incorrect because interest on state and local government bonds is excluded from federal gross income under Section 103. Answer C is incorrect because Puerto Rico is a U.S. territory and its bonds qualify for the Section 103 exclusion. Answer D is incorrect because below-market loans between family members below the $10,000 de minimis threshold may be exempt from imputed interest rules under Section 7872.

Question 8

A landlord receives a $3,000 security deposit from a tenant at the beginning of a lease. The landlord is required to return the deposit at the end of the lease. Is the security deposit included in the landlord's gross income when received?

  1. No, because a security deposit that must be returned to the tenant is not income; it is a liability. It becomes income only if the landlord applies it to unpaid rent or damages. (correct answer)
  2. Yes, because the landlord has complete dominion and control over the deposit.
  3. Yes, but it may be deducted in the year it is returned to the tenant.
  4. No, because security deposits are excluded from gross income under Section 132.
Explanation: A refundable security deposit is not income when received because it must be returned to the tenant - the landlord does not have an unrestricted right to the funds. The landlord holds the deposit as a trustee or creditor. If the landlord later applies the deposit to unpaid rent or damages, the amount applied becomes income at that time. Answer B is incorrect because mere control over funds does not create income if there is a corresponding obligation to repay. Answer C is incorrect because the deposit is not income on receipt; it does not need to be deducted when returned. Answer D is incorrect because Section 132 governs fringe benefits, not security deposits.

Question 9

A self-employed individual uses the cash method of accounting and receives $10,000 from a client in Year 1 for work to be performed in Year 2. In which year must the individual include this payment in gross income?

  1. Year 2, when the work is performed, because income is not earned until services are completed.
  2. Year 2, because advance payments for future services may always be deferred to the year the services are rendered.
  3. Year 1, because a cash-method taxpayer recognizes income when payment is actually or constructively received, regardless of when the services will be performed. (correct answer)
  4. The individual may elect to defer the income to Year 2 under the advance payment deferral rules of Rev. Proc. 2004-34.
Explanation: Under the cash method of accounting, income is recognized when actually or constructively received, regardless of when the services are performed or when the amount is earned. A cash-method taxpayer who receives a prepayment must include it in gross income in the year of receipt - Year 1. Answer C is correct. Answers A and B are incorrect because a cash-method taxpayer has no authority to defer recognition to the year services are performed; the receipt itself triggers inclusion. Answer D is incorrect because the one-year deferral available under Rev. Proc. 2004-34 applies only to accrual-method taxpayers who receive eligible advance payments; it is not available to cash-method taxpayers.

Question 10

Under the constructive receipt doctrine, when is income treated as received by a cash-method taxpayer even if not actually collected?

  1. When the taxpayer has earned the income by completing the services, even if payment has not been offered.
  2. When a check is placed in the mail to the taxpayer.
  3. When income is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available without restriction, such that the taxpayer could have received it but chose not to. (correct answer)
  4. When the taxpayer's employer records the compensation as an accrued liability.
Explanation: Under the constructive receipt doctrine (Reg. Section 1.451-2), income is constructively received when it is credited to a taxpayer's account, set apart, or otherwise made available without substantial limitation or restriction, even if not physically received. The taxpayer cannot defer recognition by turning their back on income readily available to them. Answer A describes the economic performance or accrual standard, not constructive receipt. Answer B is incorrect because a check in the mail is not yet available to the taxpayer. Answer D describes an accrual-method event, not constructive receipt for a cash-method taxpayer.

Question 11

Under Section 61, gross income is defined as all income from whatever source derived unless specifically excluded by the Code. Which of the following is included in gross income?

  1. Gifts received from a family member.
  2. Life insurance proceeds paid to a beneficiary upon the death of the insured.
  3. Workers' compensation benefits received for a work-related injury.
  4. Income from the illegal sale of goods. (correct answer)
Explanation: Under Section 61 and the principle established in James v. United States, all income - including income from illegal activities - is included in gross income. The source of income, whether legal or illegal, does not affect its taxability. Answer A is incorrect because gifts are excluded from gross income under Section 102. Answer B is incorrect because life insurance proceeds paid by reason of death are excluded under Section 101(a). Answer C is incorrect because workers' compensation benefits are excluded under Section 104(a)(1).

Question 12

Under Section 104, which of the following amounts received on account of personal injuries is NOT excluded from gross income?

  1. Compensatory damages for lost wages arising from a physical injury.
  2. Damages for pain and suffering caused by a physical injury.
  3. Compensation for medical expenses paid for a physical injury.
  4. Punitive damages awarded in a physical injury lawsuit. (correct answer)
Explanation: Under Section 104(a)(2), amounts received on account of physical injuries or physical sickness are excluded from gross income. This includes compensatory damages for lost wages, pain and suffering, and medical expenses related to the physical injury. However, punitive damages are specifically excluded from this exclusion - they are taxable even when received in connection with a physical injury lawsuit, per the parenthetical in Section 104(a)(2). Answer A, B, and C all describe compensatory damages related to physical injury that are excluded from gross income.

Question 13

Under Section 108, which of the following correctly describes when discharge of indebtedness income is excluded from gross income?

  1. Cancellation of debt (COD) income is excluded when the taxpayer is insolvent at the time of the discharge, to the extent of the insolvency, or when the debt is discharged in a Title 11 bankruptcy case. (correct answer)
  2. All COD income is permanently excluded from gross income.
  3. COD income is excluded only for non-recourse debt.
  4. COD income is excluded only when the creditor voluntarily forgives the debt.
Explanation: Section 108 provides several exclusions for COD income, including: (1) discharge in a Title 11 bankruptcy case, (2) discharge while the taxpayer is insolvent (to the extent of insolvency), (3) discharge of qualified farm indebtedness, (4) discharge of qualified real property business indebtedness, and (5) discharge of qualified principal residence indebtedness (temporarily). When COD income is excluded, the taxpayer must reduce certain tax attributes (such as NOLs, basis of property) by the excluded amount. Answer B is incorrect because most COD income is taxable unless a specific exception applies. Answer C is incorrect because the exclusions do not depend on recourse vs. non-recourse status. Answer D is incorrect because the voluntariness of the forgiveness is not the determining factor.

Question 14

Which of the following Social Security benefits are included in gross income?

  1. No Social Security benefits are ever taxable.
  2. All Social Security benefits are always fully taxable.
  3. Up to 50% of Social Security benefits are taxable if combined income is between $25,000 and $34,000 for single filers.
  4. Up to 85% of Social Security benefits are taxable if combined income (AGI plus non-taxable interest plus half of Social Security benefits) exceeds $34,000 for single filers or $44,000 for married filing jointly. (correct answer)
Explanation: Under Section 86, up to 85% of Social Security benefits are includible in gross income for taxpayers whose 'combined income' (AGI plus tax-exempt interest plus 50% of Social Security benefits) exceeds $34,000 (single) or 44,000(MFJ).Betweenthelowerthresholds(44,000 (MFJ). Between the lower thresholds (25,000 single / $32,000 MFJ) and the upper thresholds, up to 50% is taxable. Below the lower thresholds, no benefits are taxable. Answer A is incorrect because Social Security is potentially taxable. Answer B is incorrect because the maximum inclusion rate is 85%, not 100%. Answer C is partially correct but incomplete; it describes only the 50% tier without noting the 85% tier.

Question 15

Under Section 79, employer-provided group-term life insurance is excluded from gross income up to what coverage amount?

  1. $25,000
  2. $50,000 (correct answer)
  3. $100,000
  4. Unlimited; all group-term life insurance provided by an employer is excluded.
Explanation: Under Section 79, the cost of the first $50,000 of employer-provided group-term life insurance coverage is excluded from the employee's gross income. Coverage in excess of 50,000resultsinataxablebenefitcomputedusingIRSTableIrates(uniformpremiumtable),whichareincludedintheemployee′swages.AnswerA(50,000 results in a taxable benefit computed using IRS Table I rates (uniform premium table), which are included in the employee's wages. Answer A (25,000) is below the statutory threshold. Answer C ($100,000) exceeds the $50,000 exclusion. Answer D is incorrect because only the first $50,000 of coverage is excluded.

Question 16

A taxpayer finds $5,000 in cash on the street and keeps it. Is this amount included in gross income?

  1. No, because the money was found, not earned.
  2. No, because the taxpayer has not received a Form 1099 reporting the income.
  3. Yes, because found money constitutes gross income under Section 61; income from any source is taxable. (correct answer)
  4. Yes, but only if the rightful owner comes forward and demands return of the money.
Explanation: Under Section 61 and the broad scope of gross income, found money is includible in gross income in the year it is retained by the finder. The Supreme Court has held that gross income encompasses all accessions to wealth, clearly realized, over which the taxpayer has complete dominion. Keeping found money satisfies all of these elements. Answer A is incorrect because earning is not required; accession to wealth is sufficient. Answer B is incorrect because Form 1099 reporting is irrelevant to whether income exists. Answer D is incorrect because the income is recognized when the money is kept, not contingent on whether the owner claims it.

Question 17

Under Section 103, which of the following types of interest income is excluded from federal gross income?

  1. Interest on bonds issued by state and local governments (municipal bonds), provided the bonds qualify under applicable rules. (correct answer)
  2. Interest earned on U.S. Treasury bonds.
  3. Interest earned on corporate bonds rated AAA.
  4. Interest on bonds issued by foreign governments.
Explanation: Under Section 103, interest on obligations of a state, territory, political subdivision, or the District of Columbia (commonly called municipal bonds or tax-exempt bonds) is excluded from federal gross income. This exclusion encourages state and local borrowing at lower interest rates. Answer B is incorrect because U.S. Treasury bond interest is subject to federal income tax (though exempt from state tax). Answer C is incorrect because corporate bond interest is fully taxable regardless of credit rating. Answer D is incorrect because foreign government bond interest is taxable for U.S. federal income tax purposes.

Question 18

Under Section 74, prizes and awards are generally includible in gross income. Which of the following prizes or awards is excluded from gross income?

  1. A prize transferred to a qualifying charitable organization by direction of the recipient, where the recipient did not use the prize personally, under Section 74(b). (correct answer)
  2. A $500 cash prize won in a local raffle.
  3. A Nobel Prize accepted by the recipient.
  4. A prize won in a sales contest sponsored by the recipient's employer.
Explanation: Under Section 74(b), certain prizes and awards that the recipient did not seek, are given in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, and are transferred directly to a governmental unit or qualifying tax-exempt organization (with no services required by the recipient) may be excluded. Answer B ($500 raffle prize) is includible. Answer C (Nobel Prize) is normally includible if accepted by the recipient; the exclusion under Section 74(b) requires that the prize be assigned to charity. Answer D (employer sales contest prize) is compensation included in gross income.

Question 19

Under Section 85, how are unemployment compensation benefits treated for federal income tax purposes?

  1. Unemployment compensation is always excluded from gross income.
  2. Unemployment compensation is fully included in gross income. (correct answer)
  3. Only the amount of unemployment compensation exceeding 50% of prior wages is included in gross income.
  4. Up to $10,200 of unemployment compensation is excluded from gross income each year.
Explanation: Under Section 85, unemployment compensation received under the laws of the United States or any state is included in gross income in full. Unlike Social Security benefits, there is no partial exclusion or income threshold; the full amount is taxable. Answer A is incorrect because unemployment compensation is taxable. Answer C is incorrect; there is no percentage-of-prior-wages threshold. Answer D describes a temporary ARPA provision that applied only to 2020 returns (for the first $10,200), which expired and is no longer in effect for subsequent years.

Question 20

A taxpayer borrows $20,000 from a bank. Is the $20,000 loan proceeds included in gross income?

  1. Yes, because the taxpayer has received $20,000 in cash.
  2. Yes, but only if the loan is used for personal rather than business purposes.
  3. Yes, but only the interest paid on the loan is excluded.
  4. No, because loan proceeds are not income; the taxpayer has an offsetting obligation to repay the debt, so there is no accession to wealth. (correct answer)
Explanation: Loan proceeds are not included in gross income because borrowing is not an accession to wealth - every dollar received creates a corresponding obligation to repay. The taxpayer's net worth does not increase when they borrow money. This is the foundational principle from Commissioner v. Glenshaw Glass, which requires a clear accession to wealth. Answer A is incorrect because the offsetting liability means there is no net accession to wealth. Answer B is incorrect because the characterization of loan use does not affect the taxability of proceeds. Answer C is incorrect and confused; loan proceeds are not income regardless of interest.