Chapter 4 Gross Income: Exclusions Learnings Objective 1 Gifts and Inheritances 1 On March 1, this year, Lois Rice inherited 1,000 shares of Elin Corp. stock under the will of her uncle, Pat Prevor. Pat Prevor had paid $5,000 for the Elin stock in 2001. FMV of the Elin stock on March 1, this year, the date of Pat's death, was $8,000. How much should Lois include in her income on her individual income tax return for the inheritance? a. $0 b. $ 5,000 c. $ 8,000 d. $11,000 [CPA Exam] A Learnings Objective 2 Life Insurance Proceeds 2 Britney is beneficiary of a $150,000 insurance policy on her father's life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one? A) All $32,000 each year is taxable. B) $10,000 interest is taxable in the first year. C) There is no taxable income. D) The lump sum payment is taxable. Answer: C Explanation: C) Life insurance proceeds paid by reason of death are not taxable. 3 Jose is the beneficiary of a $100,000 insurance policy on his wife's life. Jose elects to receive $12,000 per year for 10 years rather than receive $100,000 in a lump sum. In effect, Jose is buying an annuity. Of the amount received each year a. $12,000 is tax free. b . $12,000 is taxable income. D c. $5,000 per year is tax free as a death benefit d . $2,000 is taxable Explanation: Life insurance proceeds are excluded from tax. The $100,000 face value of the policy is excluded as it is received. The earnings on the policy during the time it is held by the insurance company are not excludable. The total interest earned is $20,000 [($12,000 x 10) - $100,000]. As each payment on the policy is received, Bob will exclude $10,000 ($100,000 ÷ 10) and include $2,000 ($20,000 ÷ 10) in gross income. Learnings Objective 3 Scholarships and Fellowships 4 Sarah receives a $15,000 scholarship from City University. The university specifies that $8,000 is for tuition, books, supplies, and equipment for classes. The other $7,000 is for room and board. Sarah works ten hours per week as a grader, for which she is paid $7,500 for the year. Of the total amount received, Sarah must include the following amount in gross income:
A) $7,000. B) $7,500. C) $14,500. D) $22,500.
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