Chapter 5 Review Questions Flashcards
What is the basic income tax rule regarding alimony payments
They are taxable to the recipient and deductible for the payer. Alimory recaptured 3rd post separation year reverses the taxes its taxable for the payor
Can rent-free occupancy of a home by a former spouse and children be
treated as alimony?
No it can not be. Alimony must be cash or an equivalent
Can rent-free occupancy of a home by a former spouse and children be
treated as alimony?
3rd Post Separation year
How is the excess alimony payment determined?
A formula based on averages
Explain whether child support qualifies as alimony
No it is child support (Tax free receipt of income)
Explain the federal tax consequences of transferring a life insurance policy
pursuant to a separation agreement or divorce decree.
Tax consequences for most cases qualified domestic relations order splits a qualified plan monies ex wife gets husbands qualified money not applicable for IRA for qualified plans only.
a. Describe the general theory of annuity taxation.
LIFO in general earnings come out 1st except for prior to aug 13 1982 they were FIFO Annuitization = CB/Number of Payements = Tax free return of Principal
Mrs. McGinniss recently purchased a single-premium immediate annuity.
The premium was $13,000. She will receive payments of $100 a month
for life. Assume that government tables show her life expectancy multiple
to be 13.2 years.
a. What is her investment in the annuity contract? [2]
b. Calculate her expected return. [2]
c. Calculate the amount she may exclude annually from income until her
investment in the contract is recovered. [2]
d. Calculate the amount she must include in her income each year. [2]
A) CB = $13,000
B) 1200 X 13.2
13,000/13.2 x 12=$82
$82 is tax free 18 is taxable
How would your answer to question 8 be affected if there was a refund
feature included in Mrs. McGinniss’s annuity? Assume for purposes of this
question that the premium is still $13,000, the monthly payment is still $100,
and the actuarial present value of the refund feature is $2,000.
cost basis is reduced
Explain how the taxation of an annuity payment changes if the annuitant
lives beyond life expectancy.
cost basis is gone and its all gain unless you annuitized the contract prior to 1987
Is this tax treatment different for individuals whose annuity starting dates
were before January 1, 1987? Explain.
Yes prior to 1987 exclusion ratio is there
a. What is meant by a joint and survivor annuity?
Cost basis / # of payments
b. Explain how the expected return is calculated.
The expected return under a joint and survivor annuity can be calculated by
using the tables contained in the Treasury regulations pursuant to Code Sec.
72. These tables provide the joint life expectancy for two annuitants depending
on their individual ages.
Describe the tax treatment of variable annuities.
From an annuitization standpoint cost basis/# of payments In the case of a variable annuity, the “expected return” under the contract cannot be
accurately calculated for purposes of determining an exclusion ratio for the annuity
payments. Therefore the exclusion ratio calculation is not used to determine the taxation
of the annuity payments under a variable contract. Consequently, the investment in a
variable contract is divided by the number of years of the annuitant’s life expectancy to
determine the dollar amount of each payment that is excludible from the annuitant’s
gross income
Explain the adjustment procedure where the annuitant receives less than the
amount originally determined to be excludible in a variable annuity
You can carry over losses on your excludable amount
Because the variable annuity payments are subject to fluctuations, it is possible that the
amount of an annuity payment under a variable contract will be less than the amount of
each payment that was determined to be excludible. In such cases, the entire payment
will be excludible from gross income, and the “unused” portion of the excludible amount
53can be recovered later for income tax purposes by recomputing the annual dollar amount
of the annuity payment that is excludible from gross income. The recomputation of the
excludible amount can be made at the election of the annuitant and is accomplished by
the following steps:
• The dollar amount of the exclusion that was not utilized is determined.
• The annuitant’s life expectancy at the time of the recomputation is found by
consulting the appropriate table in the regulations.
• An additional excludible amount is determined by dividing the amount of the
unused exclusion by the life expectancy of the annuitant at the time of the
election to recompute.
• The additional amount is then added to the original excludible amount to
determine the adjusted excludible amount.
How will a partial withdrawal of cash from an annuity contract prior to the
annuity starting date be treated for income tax purposes?
LIFO unless issued prior to 82
What is the penalty tax on a premature distribution from a deferred annuity?
10% on anything you have in income
What are the basic requirements for treatment of a group life insurance plan
under Sec. 79?
Has to be fro a group. Policy is held by the employer you can not control it at all
Explain the tax treatment of group term insurance protection that provides
benefits in excess of $50,000.
Uniform premium table 1
Explain the nondiscrimination requirements with regard to key employees
that apply to the exclusion for group life insurance coverage
IF it is a discriminatory plan the key employees they dont get the $50,000 freebie
How are the death proceeds paid under a group term insurance contract
treated for income tax purposes?
Tax free
When is property that is transferred in connection with the performance of
services taxable to an employee?
when they are vested that is when it is taxable
As soon as it vests ex restricted stock 3 year vest
Explain what is meant by a substantial risk of forfeiture with respect to
restricted property
IF you dont meet the conditions you dont get the benefit
What is meant by an employee’s election with respect to restricted property?
YOu can elect to pay the taxes on the property today and pay ordinary income on it now 3 years from now when it vest you can pay cap gains 83 is one of the domestic things you can elect tot take it at issue
When is the employer entitled to a deduction for restricted property
transferred to an employee?
when it becomes vested taxable to the employee deductible to the employer
