B addison will have 250 of taxable income from the

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Unformatted text preview: income will Addison have from the annuity each year? a. Addison will not ever have taxable income from the annuity. b. Addison will have $250 of taxable income from the annuity each year. c. Addison will have $750 of taxable income from the annuity each year. d. Addison will $1,000 of taxable income from the annuity each year. The correct answer is b. Addison’s exclusion ratio is 0.75 (amount paid of $15,000 divided by total payments to be received of $20,000). The exclusion ratio is then multiplied by the annual payment. Therefore, $750 of each annuity payment will be excluded from Addison’s income and $250 will be included in Addison’s gross income. 28 CHAPTER 4: G ROSS INCOME FROM PERSONAL AND INVESTMENT ACTIVITIES 10. Which of the following is true regarding the proceeds of a life insurance policy? a. Proceeds paid by reason of the death of the insured are always included in the income of the recipient. b. 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 is not required to recognize any gross income. c. Life insurance proceeds are not included in gross income of the new owner if the life insurance policy is sold (“transferred for value”) by the original owner of the policy. d. Accelerated death benefits paid by an insurance company under a life insurance policy before the death of the insured are excluded from gross income if the insured person is terminally ill. The correct answer is d. Option a is incorrect because proceeds of an insurance policy paid by reason of the death of the insured are generally excluded from the income of the recipient. Option b is incorrect because the owner of the policy is required to recognize gross income upon surrendering a life insurance policy in exchange for the cash surrender value of the policy. Option c is incorrect because the proceeds are included in the gross income of the new owner if the life insurance policy is transferred for value by the original owner. 11. After 1989, Patty purchased series EE savings bonds for $5,000 at the age of 25. This year she redeemed the bonds for $10,000 and paid qualified higher educational expenses in the amount of $7,000 for her daughter. Patty is a single taxpayer with a MAGI of $73,100. What are the tax consequences of this transaction? a. All $10,000 of the proceeds of the EE savings bonds must be included in Patty’s gross income. b. Only $5,000 of the proceeds of the EE savings bonds must be included in Patty’s gross income. c. Only $3,250 of the proceeds of the EE savings bonds must be included in Patty’s gross income. d. Only $1,500 of the proceeds of the EE savings bonds must be included in Patty’s gross income. The correct answer is c. Because Patty used the proceeds to pay for qualified higher education expenses, she is allowed to exclude part of the interest income. Without regard to her MAGI, Patty could exclude $3,50...
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