Chapter 5 MC Flashcards
An employer maintains a group term life insurance plan for its employees. A nonkey employee, aged 60, is provided with $100,000 worth of coverage. Using the Uniform Premium Table I, the cost of $1,000 of protection per month in his age bracket is $.66. If the employee contributes $200 annually toward the cost of the coverage, what amount will be included in the employee’s gross income?
The answer is (B). Premiums for the first $50,000 of coverage are tax free to the employee. The Table I cost for the excess coverage ($50,000) is taxable to the extent that it exceeds the employee’s contribution. Here, this Table I cost is $396 per year (.66 x 12 x 50). Therefore $196 is taxable to the employee ($396 - $200).
An executive bought 100 shares of his employer’s stock for $2,000 on July 1 of this year. These shares are nontransferable and he must return them if he leaves the corporation. However, for each year he remains, 20 shares do not have to be returned. If the fair market value is $40 per share on July 1 of next year, the executive will have ordinary income next year of
the answer is (A). The executive has a basis of $20 per share ($2,000 / 100). Their value when the restriction lapses is $40 per share. Therefore the executive has income of $20 per share ($40 - $20), for a total of $400 ($20 x 20 shares).
Robert and Susan were just divorced. In accordance with the decree, he is paying her $1,000 per month as alimony and $600 per month for support of their twins, aged 5. How much of each monthly payment of $1,600 is allowed as a deduction from Robert’s gross income?
he answer is (C). Only the $1,000 alimony portion of Robert’s payments is deductible.
Which of the following statements correctly describes the option available to an annuitant if, in a given year, the annual payment from a variable annuity is $400 less than the annuitant’s annual excludible amount?
In the case of a variable annuity, the annuitant may recalculate the exclusion ratio with respect to future payments if he or she receives a payment that is less than the currently excludible amount.
Which of the following statements concerning the tax implications of a divorce is (are) correct? I. Excess alimony payments are fully taxable to the recipient. II. Cash payments for child support provided in the divorce decree are tax deductible.
The answer is (D). I is incorrect because the recipient of excess alimony payments receives a deduction for such payments in the third postseparation year. II is incorrect because child support payments are not deductible.
All the following statements concerning the use of life insurance in the context of a divorce settlement are correct EXCEPT
(A) An existing cash value policy transferred by one spouse to the other results in taxable income to the recipient spouse.
