 Hello and welcome to this session. This is Professor Farhad and this session we would look at a tax simulation, which you might see in an income tax course, the CPA exam regulation section and it will help you tremendously on the enrolled agent exam. If you haven't connected with me only then please do so. YouTube is where I house all my 1600 plus accounting, auditing, tax and finance lectures. This is a list of all the courses that I cover. If you like my lectures, if you like this recording, please like it, share it, put my recordings and playlist. If they're helping you, it might mean they might help others. So share the wealth on my website. You will have access to additional resources such as PowerPoint slides, true, false, multiple choice exercises. If you're studying for your CPA exam 2000 plus CPA questions. So if you are serious about your education, serious about passing the exam, check out my website. So this simulation is pretty straightforward. It's going to give you the scenarios for four taxpayers and it's going to ask you to compute what's their taxable income. So simply put, do you know what's included and what's not included in gross income? So let's look at taxpayer A and see what's included and what's excluded. Now the good thing about this simulation is it's independent. Each case is independent from the other, but bear in mind the simulation is no more than a multiple choice in a different format. Now some simulations are pretty intimidating. Others are not. I would say this is not an intimidating simulation, but you have to know the rules and a simulation like this you can save some time to answer the question. So let's go ahead and take a look at taxpayer A and find out how much we should include under gross income. So taxpayer A received a laptop with a fair market value of $400 for opening an interest bearing account at the local bank. Is that taxable? Of course, this is a form of interest. So that's $400. That's taxable. That's included in gross income. $1000 in prepaid rent received in November for the current year. It's a prepaid rent. Do I have to worry about whether I'm cash or a cruel? Not at all. If you receive a prepaid rent, prepaid rent is included whether you are using a cap, whether you are a cash basis or a cruel basis. A house with a fair market value of $100,000 was transferred to the taxpayer as a property settlement incident to a divorce executed in 2018. Not included. Divorce settlements are not included. $600 worth of stock dividend. Taxpayer A cannot elect to receive cash or property since they cannot. So they don't have the option. The company did not tell them whether you want to take the stock dividend or you want to take the cash. They did not give them this option. Therefore, it's not taxable because you cannot pay your taxes with stock dividend. So they gave you stock dividend, but you cannot pay your taxes with stock dividend. If they gave you option to get the cash and you still got stock dividend, you would include it. But here, the option is not giving. Therefore, it's not taxable. $500 unemployment benefit. Make sure the unemployment benefit is taxable. And simply put, for taxpayer A, $1900 is included. By the way, this question was sent to me from one of my viewers. She wanted me to go over this question, so I said I will share it with everybody else. Okay. So this is the answer for taxpayer A. For taxpayer B, the $5,000 scholarship received. $4,000 for tuition. We don't have to worry about this. $1,000 for room and board. You need room and board. Whether you are in college or not, therefore, the $1,000 is taxable. $800 in gambling winning from a recent trip to Las Vegas. Well, is gambling winning included? Sure it is. What about if you have losses? Well, if you have gambling losses, you can deduct them on schedule A up to gambling winnings. So you still have to include the winnings, whether you include the losses or not regardless. So the losses goes on schedule A. They don't net the winning. Okay. They net the winning indirectly if you itemized on schedule A. And the maximum losses you can take in this scenario is $800. So you can bring your winnings down to zero. $90,000 in life insurance proceeds received due to the death of a spouse, not included, not taxable. Let's look at this one. $2,000 gift from his employer for doing such a good job this year. Well, let me tell you something. Employer don't give you gift. Employer don't give you gift. Employer compensate you. Therefore, when they compensate you, it's taxable. That's included. Although it's called a gift, that will be nice. If that's the case, then all employers, what they do is they give gift. They don't give compensation to their employees. So none of them will be taxable. 300 dividend received in January of the following year. Well, we did not receive the dividend until January. Therefore, it's not included this year. Therefore, here we have $3,800 in gross income. Taxpayer C, $30,000 compensation for a consulting service provided. Of course, you are providing a service that's taxable. 500 interest on New York State bond. Be careful. When you see the name of a city, the name of the state, they're telling you it's a municipal bond. It's not included. So be careful because it's New York State bond. It's not included. $1,000 received an alimony payment from ex-spouse. Divorce agreement was executed in 2018. Be careful about the alimony. It has to be executed in 2018 and forward. If that's the case, it's included. 750 received from interest and a trust. Of course, I received interest from a trust. From anywhere, it's included. $2,000 reimbursement received from military for non-qualifying move and expense. You need to know that's included as well. Everything is included unless it's explicitly excluded. So this is $33,750. So the total gross income, $33,750. Let's look at taxpayer D. 600 interest on a state refund. Now, be careful here. It's interest on a state tax refund. What they're trying to confuse you with, they're trying to confuse you with interest on a state bond. It's not a state bond. You have a refund due from the state and the state was late to issue the refund. Therefore, they gave you interest. Well, that's interest. That's taxable. That's not municipal interest. Be careful. They're trying to confuse you with the word state. That's a state refund, state tax refund. $20,000 in commission from sales made in the current year. Of course, that's taxable. Child support, not taxable. Child support, not taxable. Not taxable, not deductible. $5,000 share of income from partnership, A, B, C, D. Of course, you're part of a partnership. You're going to receive income. It's taxable. $1,500 damages for lost profit in a business. Of course, this is a lost profit in a business. That's basically a business income, $1,500. So now we have $20,000, $25,000, $25,500, $27,100. $27,100. I would say this simulation is not bad, but this simulation, what they're testing is they're testing your knowledge about income inclusion and execution. What's included and what's executed. So you have to know the rules very well. Now I do cover those rules in my income tax course. Once again, I would like to invite you to visit my website if you'd like additional resources about preparing for the exam. I have plenty of resources. You study for your exam once, once in your lifetime. It's a lifetime investment. Do it properly. Subscribe, study hard and good luck.