Question 1

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 entire death benefit of $300,000 in income since he did not have an insurable interest in Cameron's mother's life when he initially bought the policy from Cameron. However, he may deduct the premiums he paid of $55,000, resulting in taxable income of $245,000 ($300,000 - $55,000).

Question 2

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 3

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 $8,500 in accumulated dividends were not taxable income for Bret because he left them with the insurance company. However, the $800 credited in interest and $600 in dividends added in the current year are taxable income for Bret. Therefore, his taxable income for the current year is $800 + $600 = $1,400.

Question 4

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 scholarship amount that is not used for qualified education expenses in her gross income. Since $8,000 is used for tuition, books, supplies, and equipment, it is not taxable. However, the $7,000 for room and board is not a qualified education expense and must be included in her gross income. Additionally, her income from working as a grader, $7,500, must also be included in her gross income. Therefore, the total amount she must include is $7,000+$7,500 = $14,500. Option C is the correct choice. Option A, B, and D are incorrect.

Question 5

Tonya's employer pays the full premium on a disability income policy from an insurance company on behalf of all employees. After a skiing accident, Tonya was out of work for three months and collected $2,000 per month ($6,000 total) of disability benefits from this policy. In addition, Tonya received another $1,000 per month ($3,000 total) from a disability policy she had purchased herself. Tonya had paid a total of $1,300 in premiums on her policy. How much of the $9,000 total received is taxable?

Accepted Answer

The answer of Tonya's employer pays the full premium on...

Question 6

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 need to subtract the total premiums paid ($65,000) from the amount collected ($95,000) to find the taxable portion of the surrender value ($95,000 - $65,000 = $30,000). This $30,000 will be considered taxable income in the year of collection. Therefore, the correct answer is B) $30,000 of taxable income.

Question 7

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

Accepted Answer

B)The exclusion for the QTP distribution must be reduced by any amounts used to claim the American Opportunity credit or lifetime learning credit.

Question 8

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 9

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...

Question 10

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 $300 per day. She will receive $290 per day from a $500,000 life insurance policy as an accelerated death benefit. In 2016, she was in the hospital for 10 days and received $2,900. How much of this amount is taxable?

Accepted Answer

The answer of Julia suffered a severe stroke and has...

Question 11

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....

Question 12

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 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

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

The answer of Greg is the owner and beneficiary of...

Question 15

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: $\begin{array}{|l|r|}
\hline\text { Compensatory damages for physical injury } & \$ 80,000 \
\hline \text { Punitive damages } & 95,000 \
\hline
\end{array}$ How much of the settlement must Derrick include in ordinary income on his tax return?

Accepted Answer

Punitive damages are taxable and must be included in ordinary income, while compensatory damages for physical injury are not taxable.

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

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 paid to a beneficiary are generally not taxable income. Therefore, there is no taxable income in this case.

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

When receiving insurance proceeds in installments, only the interest portion of each payment is taxable. To calculate this, divide the total interest earned on the policy by the number of installments.

In this case, Mae Li will receive $16,000 per year for five years, totaling $80,000. If the policy earned 3% interest, the total interest earned would be $2,100 ($70,000 * 0.03). Dividing this by five years gives an interest portion of $420 per year ($2,100 / 5).

Therefore, Mae Li will have taxable income of $2,000 per year ($16,000 - $420 = $15,580, rounded to $16,000 - $2,000).

Question 19

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 20

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's employer paid 75% of the disability policy premiums, therefore John paid the remaining 25% or $4,000. Since John paid $4,000 of the premiums, he must include 25% of the benefits in income, which is $4,000 of the $16,000 received.

For the health policy, John's employer paid all of the premiums so he does not need to include any of the benefits received from that policy in income.

Thus, the total benefits John must include in income is $4,000 from the disability policy. Adding this to the $0 from the health policy, John must include a total of $4,000 in income.

Quiz 19: Gross Income: Exclusions