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Ch5Solutions - CHAPTER 5 GROSS INCOME EXCLUSIONS SOLUTIONS...

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CHAPTER 5 GROSS INCOME: EXCLUSIONS SOLUTIONS TO ASSIGNED PROBLEMS 2. Albert is the beneficiary of Hattie’s life insurance policy and therefore can exclude the life insurance proceeds of $50,000 from gross income. However, Albert must include the $2,000 interest in gross income. pp. 5-4 to 5-7 8. Ed must include his realized gain of $6,000 ($45,000 cash surrender value – $39,000 adjusted basis) in his gross income. However, Sarah can exclude from her gross income her realized gain of $6,000 ($45,000 cash surrender value – $39,000 adjusted basis) because she has a terminal illness (i.e., the accelerated death benefits exclusion). What the funds are used for is not relevant in determining the effect on the taxpayer’s gross income. pp. 5-6 to 5-8 10. Assuming the $160,000 is a defensible amount, Sarah should accept the counter-offer made by the company and its insurance company. Under Sarah’s offer (part compensatory and part punitive), she would receive $230,000 (with the $80,000 punitive damages included in her gross income) and would have a tax liability of $26,400 ($80,000 × 33%) on the punitive damages. Thus, her after-tax cash flow would be $203,600 ($230,000 – $26,400). Under the company’s proposal, Sarah would receive $210,000 (with none of the compensatory damages included in her gross income because they result from her physical personal injury) but would not have any tax liability. So her after-tax cash flow from the counter-offer would be $210,000. pp. 5-11 and 5-12 11. No. The $15 million amount that Wes received is excluded from his gross income as compensatory physical personal injury damages even though the amount received is based on the projected lost income. The $10 million of punitive damages that Wes receives must be included in his gross income. Sam’s salary of $25 million must be included in his gross income. pp. 5-11 and 5-12 13. Health Savings Accounts (HSAs) are an alternative to traditional health insurance. The employer provides a medical insurance plan with a high deductible. The high deductible reduces the cost of the insurance premiums to the employer. The employee is expected to pay part (or all) of the deductible by withdrawing from the employee savings account created with the employee’s tax deductible contributions or with the employer’s contributions to the account. Any employer contributions to the savings account are excluded from the employee’s gross income. Withdrawals used to pay medical expenses not covered by the medical insurance plan are excluded from the employee’s gross income. The employee can make taxable withdrawals for other purposes. The earnings on the HSA investments are exempt from tax. Deductibles under traditional health insurance plans are lower. The savings feature of an HSA is not present in a traditional plan. pp. 5-13 to 5-15 5-1
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5-2 2009 Individual Volume/Solutions Manual 15. With a cafeteria plan, the employee receives a salary and is also provided by the employer with a fixed amount that he or she can allocate among a range of possible nontaxable fringe benefits and taxable benefits. With a flexible spending plan, a portion of the
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