Tax Treatment of Individuals and Property Transactions
Chapter 5 – Gross Income:
In his will, John named his nephew Steve as executor of the estate. Steve is to receive a fee of $12,000 for
serving as executor. When John died, Steve performed the executorial services and received the fee. Steve
can exclude the $12,000 from gross income as an inheritance from his uncle’s estate.
Marvin was the beneficiary of a $50,000 group term life insurance policy on his wife.
His wife’s employer
paid all of the premiums on the policy. Marvin used the life insurance proceeds to purchase a United States
Government bond, which paid him $2,000 interest during the current year.
Marvin’s Federal gross income
from the above is $2,000.
When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance
Purchase, Inc., a company that is licensed to invest in these types of contracts. Betty sold the policy for
$32,000 and Insurance Purchase, Inc., became the beneficiary. She had paid total premiums of $19,000.
Betty died 8 months after the sale. Insurance Purchase, Inc., collected $50,000 on the policy. The company
had paid additional premiums of $4,000 on the policy. Insurance Purchase, Inc., is required to recognize
income from the above transactions, but Betty is not required to include her gain in gross income.
If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross
Because graduate teaching assistantships are awarded on the basis of academic achievement, the payments
are generally scholarships and therefore are excluded from gross income.
In 2010, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by
Ramon’s negligence. In 2011, Theresa collected from his insurance company. She received $15,000 for
loss of income, $25,000 punitive damages, and $8,000 for medical expenses which she had deducted on her
2010 tax return (the amount in excess of 7.5% of adjusted gross income). As a result of the above,
Theresa’s 2011 gross income is increased by $33,000.
Meg’s employer carries insurance on its employees that will pay an employee his or her regular salary
while the employee is away from work due to illness. The premiums for Meg’s coverage were $1,200. Meg
was absent from work for two months as a result of a kidney infection. Meg’s employer’s insurance
company paid Meg’s regular salary of $8,000 while she was away from work. Meg also collected $2,000
on a wage continuation policy she had purchased.
Meg is not taxed on any of the above amounts.