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Unformatted text preview: LIFO
(last-in, first-out) approach in which the last dollars in the contract (the income) is deemed
to come out of the contract before the first dollars (the investment) in the contract.
11. What are the tax consequences of surrendering an life insurance contract?
When the owner of a life insurance policy surrenders a life insurance policy to the issuing
insurance company in exchange for the cash surrender value of the policy, the owner of the
policy must recognize gross income equal to the amount of money received minus the
owner’s adjusted basis (cost) for the policy. The gain is recognized as ordinary income. The
owner’s adjusted basis in the policy is equal to the total premiums paid on the policy less
any refunded premiums, rebates, dividends, or existing loans against the policy.
12. Under what circumstances are life insurance proceeds excluded from gross income?
Life insurance proceeds paid to a beneficiary because of the death of the insured person are
normally excluded from gross income. The entire death benefit is excludable regardless of
the amount. If the beneficiary chooses to receive the death benefit in periodic installment
payments, part of each payment is excludable as part of the death benefit and part is includible in gross income as interest income.
13. What are the requirements for a qualified savings bond?
Qualified savings bonds must meet the following requirements: (1) the bonds must be series
EE bonds issued after December 31, 1989; (2) the bonds must be issued in the name of the
taxpayer or the names of the taxpayer and the taxpayer’s spouse; and (3) the bond owner(s)
must be at least 24 years of age on the issue date of the bonds. DISCUSSION QUESTIONS 21 14. Compare and contrast prepaid tuition programs and college savings plans.
Prepaid tuition plans entitle a designated beneficiary (a student) to a waiver or a payment of
qualified education expenses. No benefits or distributions are taxable unless the amounts
distributed exceed the beneficiary’s qualified education expenses. College savings plans
allow taxpayers to earn income that will never be subject to income taxes if it is used to pay
for future qualified education expenses for designated account beneficiaries.
Prepaid tuition plans allow parents to prepay future tuition at state educational institutions
at today’s rates. Prepaid tuition plans can be sponsored by states, by a higher education
institution, or by a group of such institutions.
College savings plans offer greater variety and flexibility than prepaid tuition plans, but they
don’t offer guarantees. To enjoy the tax benefits of a college savings plan, a donor (often a
parent) invests after-tax dollars in a college savings plan account for a family member (often
the donor’s child) who is named as the account beneficiary. The donor selects from one of
the model portfolios available in the plan and the investment grows on a tax-deferred basis.
When distributions are made to fund the beneficiary’s postsecondary education, each distribution consists of a nontaxable return of investment a...
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This note was uploaded on 08/20/2013 for the course ACCT 330 taught by Professor Staff during the Spring '12 term at Western Kentucky University.
- Spring '12