Bart's spouse, Carla, dies during the current year. Carla's life insurance policy names Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from the CD. What are the tax effects of these events for Bart?
I.The $2 million is excluded from gross income.
II.Bart has no taxable income from these transactions.

Question

Bart's spouse, Carla, dies during the current year. Carla's life insurance policy names Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from the CD. What are the tax effects of these events for Bart?
I.The $2 million is excluded from gross income.
II.Bart has no taxable income from these transactions.
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Quizplus · Accepted Answer

Life insurance proceeds paid out because of the death of the insured are generally not taxable income, so the $2 million is excluded from Bart's gross income. However, the interest earned from investing those proceeds, in this case, $98,000 from the CD, is taxable. Therefore, statement II is incorrect because Bart does have taxable income from the interest earned on the CD investment.

Bart's Spouse, Carla, Dies During the Current Year