Carin,a widow,elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased husband in 10 installments of $15,000 each.Her husband had paid premiums of $75,000 on the policy.In the first year,Carin collected $15,000 from the insurance company.She must include in gross income:

Question

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Carin must include in gross income the amount received that exceeds the cost basis of the policy. The cost basis is $75,000, and the total proceeds are $150,000 (10 installments of $15,000). The taxable portion is the excess over the cost basis, which is $75,000. Therefore, each installment includes $5,000 of taxable income ($150,000 total proceeds - $75,000 cost basis = $75,000 taxable portion; $75,000 taxable portion / 10 installments = $7,500 per installment).

Carin,a Widow,elected to Receive the Proceeds of a $100,000 Life