Federal Taxation of Individuals

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CPA Auditing and Attestation (AUD) › Federal Taxation of Individuals

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Charlie Smith is filing a joint tax return with his wife. Charlie Smith's employer pays the entire cost of all the employee's group-term life insurance under a qualified plan. Under this plan, which of the following choices identifies the maximum amount of tax-free coverage that may be provided for Mr. Smith by his employer?

$\$50,000$

CORRECT

$\$2,500$

$\$25,000$

$\$15,000$

Cannot be determined

Explanation

This question asks us to identify the maximum amount of tax-free group-term life insurance that can be provided to an employee by an employer. The cost of the first $\$50,000$ of employer provided group-term life insurance coverage can be excluded from an employee's income.

Jack Snell named his wife—Angelica—the beneficiary of a $\$150,000$ (face amount) life insurance policy. According to this policy, upon Jack's death, the proceeds would be paid to Angelica with interest over her current life expectancy. If Angelica's life expectancy was was calculated to be thirty years and she received a payment of $\$6,100$ from the insurance company, then what amount should she include in her gross income for that year?

$\$1,100$

CORRECT

$\$1,400$

$\$1,500$

$\$6,100$

Cannot be determined

Explanation

We need to find the amount of the life insurance payments that need to be included in Angelica's gross income. It is important to note that life insurance payments paid by reason of death are excluded from income if they are paid in lump sums or installments. If the payments are received in installments, then then the principle amount of the policy divided by the number of annual payments is excluded each year.

Let's start by calculating the principle amount of the policy to be received every year.

$\frac{\textup{Principle amount of the policy}}{\textup{Number of annual payments}}$