Question 1

Richard, who retired on April 30, 2019, receives a monthly employee annuity benefit of $1,400 payable for life, beginning May 1, 2019. 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 2019 may Richard exclude from gross income?

Accepted Answer

Using the simplified method, Richard's total contributions are divided by the number of anticipated monthly payments based on his age at the annuity start date. At age 66, the IRS table provides 210 anticipated payments. $29,400 divided by 210 equals $140 per month. For 8 months in 2019, $140 x 8 = $1,120 can be excluded from gross income.

Question 2

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 3

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

Accepted Answer

Inheritances are generally not subject to income tax. However, any income earned on the inheritance after it is received, such as interest or stocks selling for a profit, may be subject to taxation. Additionally, certain states may have inheritance or estate taxes that apply.

Question 4

If an annuitant, whose annuity starting date was January 1, 2008, dies before recovering his or her investment in the annuity, any unrecovered investment is recognized as a miscellaneous itemized deduction on the annuitant's tax return for the year of death.

Accepted Answer

If the annuitant dies before recovering the investment in the annuity, the remaining investment amount is recognized as a miscellaneous itemized deduction on the final tax return of the annuitant for the year of death.

Question 5

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...

Question 6

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 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 received from stock is taxable income regardless of whether it was received as a gift or not. The value of the stock at the time it was gifted may be subject to gift tax rules, but the dividends received on the stock are taxable income to the recipient.

Question 8

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 9

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 received $5,200 in the current year, but the policy specified that only $4,000 per year was to be paid out, meaning the extra $1,200 is considered interest and is taxable income.

Question 10

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 11

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 12

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 13

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 may be taxable to the recipient. All other options listed are not typically subject to taxation of the life insurance proceeds.

Question 14

Cynthia, age 64, retired in June. Starting in July, Cynthia received $2,000 per month from an annuity. She has contributed $260,000 to the annuity. Her life expectancy is 20 years. How much is excluded from income using the simplified method? Use 260 as the factor to divide by.
 
1. Enter total amount received this year
2. Enter cost in plan at the annuity starting date
3. Factor at annuity starting date 260
4. Divide line 2 by line 3
5. Multiply line 4 by the number of monthly payments this year
6. Amount, if any, recovered tax free in prior years
7. Subtract line 6 from line 2
8. Enter the smaller of line 5 or 7
9. Taxable amount this year. Subtract line 8 from line 1

Accepted Answer

The answer of Cynthia, age 64, retired in June. Starting...

Question 15

In June of the current year, a wealthy aunt gave Janie a stock portfolio worth $150,000. During the year, she collects $4,000 in dividends. How much of these amounts, if any, should Janie include in gross income for the current year? Why?

Accepted Answer

The answer of In June of the current year, a...

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

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 18

Sam died on January 15, 2011 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 $1,500 interest as income, as the $10,000 is a return of the insurance proceeds and not taxable.

Question 19

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 20

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...

Quiz 2: Gross Income and Exclusions