Question

1. Alice has a life insurance policy with a cash surrender value of $200,000 on which she has paid $30,000 in premiums. She has decided to cash in the policy. Discuss the tax consequences if Alice is terminally ill and decides to use the proceeds to take a cruise around the world.

	a.	She must include all $200,000 received in gross income
	b.	She must include $30,000 in gross income
	c.	She must include all of the gain ($170,000) in gross income
	d.	She can exclude all of the gain in the policy ($200,000 less $30,000 of premiums paid) from gross income

2.

This year, John hires and pays an outside professional lobbying firm $2,500 to lobby against proposed legislation that John believes may hurt his business. How much, if any, of the lobbying expense may John's business deduct in the current year?

	a.	$0
	b.	$1,250
	c.	the maximum de minimis limit of $2,000
	d.	$2,500

Answer 1

1.

If you surrender your cash value life insurance policy, any gain on the policy will be subject to federal income tax. The gain on the surrender of a cash value policy is the difference between the gross cash value paid out (plus any loans outstanding) and your basis in the policy. Your basis is the total premiums that you paid in cash, minus any policy dividends and tax-free withdrawals that you made.

Since life insurance is considered a personal expense, you can't deduct the premiums you pay for life insurance coverage.

So the correct option is

a.	She must include all $200,000 received in gross income

2.

Lobbying expenses are not tax-deductible as business expenses, nor as personal expenses. The Internal Revenue Service makes this explicitly clear, covering every detail of political and lobbying costs that are defined as nondeductible.

Hence the correct option is

a.

$0