Chapter 5 T/F

Question 1

If alimony payments are deductible by one spouse under the alimony rules, the corresponding amount of income must be reported by the other spouse.

Answer 1

True

Question 2

Payments of alimony may be made in either property or cash

Answer 2

False. Alimony payments must be made in cash.

Question 3

Payments constituting alimony made by a husband to a former spouse for her support are deductible by the husband and taxable to the wife.

Answer 3

True

Question 4

Excess alimony payments attributable to the first year of a divorce will be included in the payer’s taxable income for the third post-separation year.

Answer 4

True

Question 5

The value of rent-free occupancy of a home by the former spouse and children of the taxpayer is deductible by the taxpayer as alimony and taxable to the former spouse as income

Answer 5

False. Although a divorce decree sometimes allows the custodial spouse and children rent-free occupancy of the family home, the value of a similar rental is not treated as alimony.

Question 6

When a former husband is obligated to pay child support for a minor child, he may deduct those amounts as alimony.

Answer 6

False. Child support does not constitute alimony for tax purposes and is not deductible to the payer-spouse.

Question 7

When a former husband names his wife revocable beneficiary of a life insurance policy on his life but retains ownership of the policy and pays the premiums, the value of the premiums is tax deductible by him and includible in the wife’s income as additional alimony.

Answer 7

False. When a former husband retains a life insurance policy and merely names his wife revocable beneficiary, he has retained all economic rights and benefits of the policy. Therefore, although he pays the premiums, the premium payments are neither deductible by him nor taxable to the wife as alimony.

Question 8

An annuity provides for a systematic liquidation of a sum of money, including both principal and interest, over a period of time.

Answer 8

True

Question 9

The exclusion ratio for either an annuity or “partial annuity” is calculated by dividing the investment in the contract by the expected return under the contract.

Answer 9

True

Question 10

The amount of each annuity payment is multiplied by the applicable exclusion ratio to determine the portion of the payment that is not taxable.

Answer 10

True

Question 11

A refund feature in an annuity allows the annuitant to receive back his or her full investment in the contract before any portion of the annuity payments is taxed.

Answer 11

False. A refund feature provides that, if the annuitant dies before receiving a stated number of payments or a specified amount of payments, remaining payments will be made to a specified beneficiary.

Question 12

The actuarial value of a refund feature in a life annuity must be subtracted from the taxpayer’s investment in the contract before the exclusion ratio can be computed.

Answer 12

True

Question 13

For a taxpayer who owns a deferred annuity, all amounts withdrawn before the starting date are received tax free.

Answer 13

False. A withdrawal of investment amounts from deferred-annuity contracts prior to the annuity starting date will generally cause immediate income taxation to the extent the cash surrender value exceeds the investment in the contract. (Different rules apply to annuities funded before August 14, 1982.) There is also a 10 percent penalty tax on any taxable amount withdrawn prior to the annuity starting date if the taxpayer has not reached age 59 1/2, subject to certain exceptions.

Question 14

In general, an employer’s contributions for employee group term insurance coverage are not deductible by the employer.

Answer 14

False. Employer contributions for employee group term coverage are generally deductible by the employer.

Question 15

When group term life insurance is provided as part of an employer plan of group insurance, the cost of coverage up to $75,000 is not taxable to an insured employee.

Answer 15

False. An insured employee may exclude the value of premiums representing the first $50,000 of coverage if certain nondiscrimination rules are met.

Question 16

A group life insurance plan might be found to be discriminatory in favor of key employees with regard to either eligibility or benefits.

Answer 16

True

Question 17

A group insurance plan that covers fewer than 10 full-time employees must provide a flat amount of coverage to each employee.

Answer 17

False. A group plan that covers fewer than 10 employees may provide either a flat amount of coverage, a uniform percentage of salary, or an amount based on certain employee classifications

Question 18

Restricted stock is stock that a corporation sets aside for a key employee who cannot receive it before age 65, or age 55 if he or she takes early retirement.

Answer 18

False. Restricted stock is stock that is given or sold at a reduced price to an employee and is subject to provisions which involve a substantial risk of forfeiture.

Question 19

An employee who has been given restricted stock is generally required to include the value of the stock in gross income when the restrictions are no longer in effect

Answer 19

True

Question 20

An employee who receives restricted stock may elect to have the value of the restricted property taxed immediately, even though the property is subject to a substantial risk of forfeiture.

Answer 20

True

Question 21

When restricted property becomes taxable, the employee will recognize income to the extent of the fair market value of the property reduced by the amount the employee paid for the property, if any.

Answer 21

True