The $50,000 in medical bills paid by Ed’s employer cannot qualify as a nontaxable gift.
(However, medical expenses subject to the 7.5% floor may qualify as an itemized
deduction for Ed.) The $10,000 received from the general public is an excludible gift.
The $12,000 that Ed’s widow received in her “time of need” may be excluded from gross
income if the company has a general policy of making such payments. Otherwise, the
IRS may challenge the payment as a taxable payment for Ed’s prior services. The life
insurance proceeds are excluded from gross income since they were paid to the
beneficiary of the life insurance policy. pp. 5-5 to 5-7 and Chapter 14
Josh must include the $10,000 in gross income.
Because the payment is from his
employer, it cannot be treated as a gift.
Joe is not required to include the worker’s compensation of $12,000 in gross
income because these benefits are specifically excluded from gross income. The
amount collected of $1,500 on the replacement insurance policy is excluded from
gross income because he paid the premiums on the policy.
The life insurance proceeds of $1 million are excluded from gross income because
the recipient (Pearl Corporation) was the beneficiary who collected the insurance
proceeds upon death of the insured.
The life insurance proceeds of $50,000 received by Juan are excluded from gross
income, even though the premiums were never included in Leona’s gross income.
Juan must include his wife’s accrued vacation pay of $5,000 in his gross income
because it would have been taxable to Juan’s wife if she had collected it (“income
respect of a decedent”).
pp. 5-5 to 5-8
The sale of the stock by Laura will result in a $15,000 ($50,000 amount realized –
$35,000 adjusted basis) capital gain. However, Laura’s capital gain rate may be
0% if she is in the 10% or 15% marginal tax brackets. If she is in the 25% or
greater marginal tax brackets, her alternative tax rate will be 15%. So her tax
liability on the $15,000 capital gain could be either $2,250 ($15,000 × 15%) or $0
($15,000 × 0%). If Laura is diagnosed as “terminally ill,” the realized gain on the
life insurance policy of $20,000 ($50,000 – $30,000) is excluded from her gross
Capital gain treatment would apply to the sale of the stock by Laura’s mother.
The $20,000 realized gain on the life insurance policy will be included in the
gross income of Laura’s mother. Laura’s mother cannot qualify for the exclusion
because she is not terminally ill. The mother’s recognized gain of $20,000 will
not be eligible for capital gain treatment because cashing in the life insurance
policy is not considered a “sale or exchange,” which is a requisite for capital gain
treatment. Regardless of how the medical bills are financed, Laura’s mother will
be allowed to take an itemized deduction for the medical expenses paid (less the
7.5% floor) for her dependent daughter assuming she itemizes her deductions.