1. Mary’s husband Ben died during the current year. She was the beneficiary of his life...

1. Mary’s husband Ben died during the current year. She was the beneficiary of his life insurance policy in the face amount of $300,000. Because Mary likes to go on expensive vacations, she is concerned that she will spend all the money in a few months. She decides to leave the money with the insurance company and will take the money out over a period of ten years. In the current year, Mary receives a check for $34,000 from the insurance company. What are the tax consequences, if any, of this payment to Mary?

	a.	The entire amount of each payment is excluded from her gross income as life insurance proceeds
	b.	$30,000 of each payment is not taxable and $4,000 is taxable
	c.	The entire amount of each payment is excluded from her gross income as life insurance proceeds
	d.	$4,000 of each payment is not taxable and $30,000 is taxable

2. A single taxpayer pays $1,200 of state income taxes in 2018. He files his 2018 tax return and claims the standard deduction of $12,000. In 2019, he receives a state income tax refund of $700. How much, if any, of the $700 refund must he include in gross income on his 2019 return?

	a.	$0
	b.	$300
	c.	$1,200
	d.	$700

Expert Solution

Answer :-

1. Correct Option (b) :- $30,000 of each payment is not taxable and $4,000 is taxable

Reason :- As per law, you have option to choose that whether insurance company hold on these proceeds after your death and distribute them to your beneficiary at a later date or in series of installments. The funds that the insurer holds will earn interest, and when a payment is made to your beneficiary, it will include both principal and interest earned by that principal, or only interest. Although the principal portion of the payment is tax free, the interest portion is taxable to your beneficiary as normal income.

In our case 10 installments of 30000 of each payment are principal part and rest 4000 of each payment are interest portion.

2. Correct Option (a) $0

Reason :- As per law, You might have to report the state income tax refund you received last year on your federal income tax return if you itemized your deductions on your federal return last year. This means if you itemized, so you might have to report your state tax refund as income. But if Line 8 of your 2018 Form 1040 say that you have taken 12,000 or 18,000 or 24,000 then you probably claimed standard deduction and you have not itemized. So in this case state tax refund will not be taxable.

In our case he has taken 12000 standard deduction in 2018, so his state tax refund will not be taxable.

ekkarill92 answered 2 years ago

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