Question 1

Linda was injured in an automobile accident caused by another driver.Her son,Matthew,was in the automobile but not physically injured.The other driver's insurance company was required by a court to pay Linda $75,000 to cover medical bills relating to her injuries,$30,000 to compensate her for emotional distress attributable to the injuries and $40,000 of punitive damages.Matthew was paid $15,000 to compensate him for emotional distress attributable to his witnessing his mother's injuries.What is the amount taxable to Linda?

Accepted Answer

The answer of Linda was injured in an automobile accident...

Question 2

Rebecca is the beneficiary of a $500,000 insurance policy on her husband's life.She elects to receive $52,000 per year for 10 years rather than receive the entire amount in a lump sum.Of the amount received each year

Accepted Answer

The answer of Rebecca is the beneficiary of a $500,000...

Question 3

Derrick was in an automobile accident while he was going to work.The doctor advised him to stay home for eight months due to his physical injuries.The resulting lawsuit was settled and Derrick received the following amounts:  How much of the settlement must Derrick include in ordinary income on his tax return?

Accepted Answer

The answer of Derrick was in an automobile accident while...

Question 4

Liza's employer purchased a disability income policy from an insurance company on behalf of all of its employees.The employer paid for two-thirds of the premiums,and the employees paid for the other one-third.Subsequently,Liza received $3,000 per month for 6 months she was unable to work.Liza will be taxed on

Accepted Answer

The answer of Liza's employer purchased a disability income policy...

Question 5

Greg is the owner and beneficiary of a $100,000 policy on the life of his mother.Greg gives the policy to his brother,Don.Don subsequently pays premiums of $40,000.Upon his mother's death,how much of the insurance proceeds must Don include in income?

Accepted Answer

When a life insurance policy is transferred for valuable consideration, the transferee must include in income the death benefit minus the consideration paid. In this case, Don paid $40,000 in premiums, but since he received the policy as a gift, he did not provide any valuable consideration. Therefore, he does not have to include any of the insurance proceeds in his income.

Question 6

Amanda,who lost her modeling job,sued her employer for age discrimination.She was awarded $75,000 in lost wages,$25,000 for emotional distress,and $150,000 punitive damages.The amount taxable is

Accepted Answer

The answer of Amanda,who lost her modeling job,sued her employer...

Question 7

Julia suffered a severe stroke and has been admitted to a private hospital where she is expected to remain for the rest of her life.She is certified by a licensed health care practitioner as being a "chronically ill individual." Her hospital expenses amount to $280 per day.She will receive $270 per day from a $500,000 life insurance policy as an accelerated death benefit.In 2015,she was in the hospital for 10 days and received $2,700.How much of this amount is taxable?

Accepted Answer

The accelerated death benefits from a life insurance policy are generally not taxable if the insured is certified as chronically ill and the benefits do not exceed the actual cost of care. Since Julia's daily hospital expenses are $280 and she received $270 per day, the benefits do not exceed her expenses, making the amount non-taxable.

Question 8

Over the years Rianna paid $65,000 in premiums on a life insurance policy with a face value of $100,000.Upon reaching 65,while still in good health,Rianna surrendered the policy and collected $95,000.In the year of collection,Rianna will report

Accepted Answer

Rianna will report taxable income of $30,000, which is calculated as the amount received ($95,000) minus her basis in the policy ($65,000). The basis is the total amount of premiums paid, which is not taxable. Therefore, only the amount received that exceeds the basis is subject to taxation.

Question 9

Britney is beneficiary of a $150,000 insurance policy on her father's life.Upon his death,she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum.She elects to take the lump sum payment.What are the tax consequences in year one?

Accepted Answer

Life insurance proceeds received due to the death of the insured are not taxable income to the beneficiary. Therefore, there are no tax consequences in year one for Britney receiving the lump sum payment of $150,000.

Question 10

Cameron is the owner and beneficiary of a $300,000 policy on the life of his mother.Cameron sells the policy to his brother,Parker,for $100,000.Parker subsequently pays premiums of $55,000.Upon his mother's death,how much of the insurance proceeds must Parker include in income?

Accepted Answer

Parker must include the full $300,000 of insurance proceeds in his income because he purchased the policy for less than the death benefit, thus creating a taxable event. However, he can reduce the taxable amount by the cost basis in the policy, which includes the premiums he paid ($55,000) and the purchase price ($100,000), for a total cost basis of $155,000. Therefore, the taxable amount would be $300,000 - $155,000 = $145,000.

Question 11

Which of the following statements regarding qualified tuition programs is incorrect?

Accepted Answer

B)Distributions of income from a qualified tuition program are taxed to the beneficiary if not used for higher education expenses.

Question 12

Which of the following statements regarding the qualified tuition plans (QTP)is incorrect?

Accepted Answer

The answer of Which of the following statements regarding the...

Question 13

Hope receives an $18,500 scholarship from State University.The university specifies that $8,500 is for tuition,books,supplies,and equipment,while $10,000 is for room and board.In addition,Hope works part-time at the campus library and earns $5,000.Hope's gross income is

Accepted Answer

The answer of Hope receives an $18,500 scholarship from State...

Question 14

Sarah receives a $15,000 scholarship from City University.The university specifies that $8,000 is for tuition,books,supplies,and equipment for classes.The other $7,000 is for room and board.Sarah works ten hours per week as a grader,for which she is paid $7,500 for the year.Of the total amount received,Sarah must include the following amount in gross income

Accepted Answer

Sarah must include the $7,500 she earned from working as a grader in her gross income. She does not need to include the scholarship funds because they were used for qualified education expenses, as specified by the university. Therefore, the total amount she needs to include in her gross income is $7,500, which is the amount she earned from working.

Question 15

Bret carries a $200,000 insurance policy on his life and has paid premiums of $10,000 over the years.Dividends on the policy have totaled $8,500.Each year Bret has left the dividends with the insurance company.In the current year,the insurance company credited $800 of interest on the accumulated dividends to Bret's account.In addition,$600 of dividends was added by the insurance company.In the current year,Bret must report income of

Accepted Answer

The $600 of dividends added by the insurance company is not taxable income to Bret, as it is a return of his premiums. However, the $800 of interest credited on the accumulated dividends is taxable income to Bret. Therefore, he must report income of $800.

Question 16

David has been diagnosed with cancer and is expected to live less than 18 months.David is covered by a life insurance policy with a $400,000 face amount.David cashes in the policy early under a special option and receives 80% of the face amount or $320,000.In the year of collection,David will report

Accepted Answer

The answer of David has been diagnosed with cancer and...

Question 17

Brad suffers from congestive heart failure and has been admitted to a nursing home where he is expected to spend the remainder of his life.His doctor has certified him as chronically ill.Brad receives $320 per day from his life insurance policy for 100 days ($32,000)as accelerated death benefits.Brad's nursing home care costs $300 per day ($30,000 for the 100 days of care).Brad will be allowed to exclude

Accepted Answer

The answer of Brad suffers from congestive heart failure and...

Question 18

Mae Li is beneficiary of a $70,000 insurance policy on her father's life.Upon his death,she elects to receive the proceeds in installments from the insurance company that carries the policy.She will receive $16,000 per year for five years.What are the tax consequences each year?

Accepted Answer

The $70,000 insurance benefit is not subject to income tax, as it is considered a death benefit. However, any interest earned on the benefit while it is being paid out in installments is taxable. Mae Li will receive $16,000 per year for five years, and the interest portion of each payment will be taxable. The amount of interest each year depends on prevailing interest rates, but assuming an interest rate of 2.86%, $2,000 of each $16,000 payment would be taxable. Therefore, the correct answer is D.

Question 19

John is injured and receives $16,000 of income from a disability policy.John's employer paid 75% of the disability policy premiums and John paid the remainder.In addition,John's employer has paid all the $3,000 of premiums on a health policy that paid John's doctor bills of $10,000.How much of the benefits must John include in income?

Accepted Answer

John must include a portion of the disability benefits in his income because his employer paid 75% of the premiums, making the benefits partially taxable. To determine the taxable portion of the benefits, we use the formula:
Employer's contributions / Total premiums paid x Benefit received = Taxable amount
$12,000 / $16,000 x $16,000 = $12,000 taxable
Therefore, John must include $12,000 of the disability benefits in his income. The $3,000 of premiums paid on John's health policy and the $10,000 of doctor bills paid by the policy are not taxable.

Question 20

Elisa sued her former employer for discrimination.She was awarded $200,000 for lost wages,$30,000 for medical expenses related to emotional distress resulting from the discrimination,and $300,000 in punitive damages.The amount taxable is

Accepted Answer

The answer of Elisa sued her former employer for discrimination.She...

Quiz 8: Gross Income: Exclusions