Question 1

If an annuitant,whose annuity starting date was January 1,2007,dies before recovering his or her investment in the annuity,any unrecovered investment is recognized as a loss on the annuitant's tax return for the year of death.

Accepted Answer

This is true according to IRS regulations. Any unrecovered investment in an annuity is recognized as a loss on the annuitant's tax return for the year of death, and can be claimed as a deduction by the beneficiary of the annuity.

Question 2

Sam died on January 15,2006 and left his wife,Terry,an insurance policy with a face value of $100,000.Terry elected to receive the proceeds over a 10-year period ($10,000 plus interest each year).This year Terry receives $11,500 ($10,000 proceeds plus $1,500 interest)from the insurance company.How much income must Terry report from this payment?

Accepted Answer

Terry must report the interest portion of the payment as income, which is $1,500 in this case. The proceeds from the insurance policy itself are not taxable income.

Question 3

Helga receives a $300,000 life insurance payment when her boyfriend Andy dies.How much of the payment is taxable to Helga?

Accepted Answer

The answer of Helga receives a $300,000 life insurance payment...

Question 4

In June of the current year,Rob's wealthy stepmother died and left him a stock portfolio worth $600,000.Before she died,she gave him a gift of $20,000 in cash.How much of these amounts,if any,are taxable to Rob? Why?

Accepted Answer

The answer of In June of the current year,Rob's wealthy...

Question 5

When calculating the exclusion ratio for an annuity,the ratio should be revised when there is a significant change in the taxpayer's status or health.

Accepted Answer

The exclusion ratio for an annuity is determined at the start of the annuity payments and remains fixed throughout the payment period; it does not change due to changes in the taxpayer's status or health.

Question 6

If a life insurance policy is transferred to the insured's partnership for valuable consideration,the insurance proceeds are taxable when received by the partnership.

Accepted Answer

The answer of If a life insurance policy is transferred...

Question 7

Dividend income arising from stock received as a gift is excluded from gross income since the dividends are considered part of the gift.

Accepted Answer

Dividend income from stock received as a gift is not excluded from gross income. It is taxable income and must be reported on the recipient's tax return. However, the value of the gifted stock itself may be subject to gift tax for the donor, depending on the amount and their lifetime giving.

Question 8

Rob is 8 years old and won a sports car valued at $30,000 in a drawing at Disneyland this year.How much income,if any,must Rob report on his tax return for this year? Why?

Accepted Answer

The answer of Rob is 8 years old and won...

Question 9

Van is sick and tired of his job.His doctor certifies that his health may be compromised if he continues to work at his current job.He sells his life insurance policy to Life Settlements,Inc.for $50,000 so he can take a break from work.He has paid $10,000 so far for the policy.How much of the $50,000 must Van include in his taxable income?

Accepted Answer

The answer of Van is sick and tired of his...

Question 10

Toby transfers to Jim a life insurance policy with a face value of $25,000 and a cash value of $5,000 in payment of a personal debt.Jim continues to make premium payments on the policy until Toby's death.At that time,Jim had paid $1,500 in premiums.
a.How much income must Jim report when he receives the $25,000 in proceeds?
b.Would your answer be different if Toby and Jim were partners in a partnership? Why?

Accepted Answer

The answer of Toby transfers to Jim a life insurance...

Question 11

Which of the following would result in life insurance proceeds that are taxable to the recipient?

Accepted Answer

When a life insurance policy is transferred to a creditor in payment of a debt, the proceeds become taxable to the recipient.

Question 12

State whether each of the following is taxable or nontaxable.
a.Susan won a jackpot of $50,000 gambling at a casino.
b.Sarah received a Christmas ham from her employer.
c.Jonathan won a car in a supermarket raffle valued at $25,000.
d.Gary received a scholarship for tuition of $5,000 a year.
e.Eric is given lodging valued at $1,000 a month on the oil rig where he is employed since it is impossible for Eric to go home during the period of time he is assigned to work on the rig.

Accepted Answer

The answer of State whether each of the following is...

Question 13

The receipt of an inheritance is excluded from the taxable income of the recipients.

Accepted Answer

In general, an inheritance is not considered taxable income and is therefore excluded from taxation. However, if the inheritance includes income-generating assets such as stocks or rental properties, the income generated by these assets may be subject to taxation. Additionally, any interest earned on the inheritance may also be subject to taxation.

Question 14

Which of the following gifts or prizes would be considered taxable income to the person receiving the gift?

Accepted Answer

Gifts from friends or family members, such as those described in options A, B, and D, are generally not considered taxable income for the recipient under U.S. tax law. However, prizes won in contests or game shows, like the ski boat in option C, are considered taxable income and must be reported to the IRS.

Question 15

Seymore named his wife,Penelope,the beneficiary of a $100,000 insurance policy on his life.The policy provided that,upon his death,the proceeds would be paid at a rate of $4,000 per year plus interest over a 25-year period.Seymore died June 25 of last year,and in the current year Penelope received a payment of $5,200 from the insurance company.What amount should she include in her gross income for the current year?

Accepted Answer

Penelope should include $1,200 in her gross income for the current year. ($5,200 received minus $4,000 annual payment = $1,200). The $4,000 annual payment is a return of principal and is not included in gross income, but any interest earned on the policy is taxable.

Question 16

To promote business activity,the tax rules generally are very liberal in treating business gifts as tax-free income to the recipient.

Accepted Answer

While business gifts may be deductible to the giver as a business expense, they are generally not tax-free income to the recipient. There are limits to the amount of deductible business gifts, and certain types of gifts (such as cash or near-cash items) may be subject to special rules or may not be deductible at all.

Question 17

Payments made to a qualified retirement plan by an employer are considered part of the employee's investment in the contract for calculation of the annuity exclusion ratio.

Accepted Answer

Payments made by an employer to a qualified retirement plan are not considered part of the employee's investment in the contract. The employee's investment typically includes only after-tax contributions made by the employee, not the employer contributions.

Question 18

Ordinarily life insurance proceeds are excluded from gross income.Why would they be taxable if the policy had been transferred for valuable consideration,prior to the death of the insured?

Accepted Answer

The answer of Ordinarily life insurance proceeds are excluded from...

Question 19

Tracy transfers to Glen a life insurance policy with a face value of $40,000 and a cash value of $8,000 in payment of a personal debt.Glen continues to make premium payments on the policy until Tracy's death.At that time,Glen had paid $3,500 in premiums.
a.How much income must Glen report when he receives the $40,000 in proceeds?
b.Would your answer be different if Tracy were a shareholder and CEO of a corporation to which the policy was transferred? Why?

Accepted Answer

The answer of Tracy transfers to Glen a life insurance...

Question 20

Richard,who retired on April 30,2017,receives a monthly employee annuity benefit of $1,400 payable for life,beginning May 1,2017.During his years of employment,Richard contributed $29,400 to the company's plan.Richard's age on May 1 is 66.Using the simplified method,how much of the $11,200 annuity payment received during 2017 may Richard exclude from gross income?

Accepted Answer

The simplified method allows Richard to exclude a portion of his annuity payments based on his contributions and life expectancy. His total annual annuity is $16,800 ($1,400 x 12 months). The exclusion amount is calculated by dividing his total contributions ($29,400) by the number of anticipated monthly payments based on his age (210 for age 66). This results in a monthly exclusion of $140 ($29,400 / 210). For 8 months in 2017, the exclusion is $1,120 ($140 x 8 months).

Quiz 2: Gross Income and Exclusions