Injury or sickness punitive payments are taxable

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injury or sickness; punitive payments are taxable Payments from employee- purchased health/accident plan All health and accident insurance payments are excluded Payments from employer-provided health/accident insurance for medical expenses Limited to medical care and loss of body parts INCOME EXCLUSIONS BY CATEGORY TABLE 4-2
Exclusions Major Problems Investment- Related Exclusions Municipal bond interest Exclude bonds issued by state and local governments Stock dividends If option to receive cash, dividend is taxed Discharge of indebtedness— Insolvent debtor Determine solvency after debt discharge Discharge of indebtedness— Qualified principal residence indebtedness $2M acquisition indebtedness Improvements by a lessee Payments in lieu of rent is taxable INCOME EXCLUSIONS BY CATEGORY TABLE 4-2
HOMEWORK
Allison dies during the current year. She is covered by a $1,000,000 life insurance policy payable to her husband Bob. Bob elects to receive the policy proceeds in 10 annual installments of $120,000. Write a letter to Bob explaining the tax consequences of the receipt of each installment. #26
¡ Life insurance proceeds are excluded from tax ¡ $1,000,000 face value of the policy is excluded as it is received ¡ the earnings on the policy during the time it is held by the insurance company are not excludable ¡ The total interest earned is $200,000 [($120,000 x 10) - $1,000,000] ¡ As each payment on the policy is received, Bob will exclude $100,000 ($1,000,000 ÷ 10) and include $20,000 ($200,000 ÷ 10) in gross income #26 Exclusion Ratio = Cost of the contract Number of Payments
Lucinda, a welder for Big Auto Inc. dies in an automobile accident on March 14 of this year. Big Auto has a company policy of paying $5,000 to the spouse of any employee who dies. In addition to the $5,000 payment, Big Auto pays Harvey, Lucinda’s husband, $1,600 in salary and $1,100 in vacation pay Lucinda had earned before her death. Harvey also collects $120,000 from a group-term life insurance policy Big Auto provided as part of Lucinda’s compensation package. Lucinda had contributed to a qualified employer sponsored pension plan Big Auto had matched Lucinda’s contributions to the plan. The plan lets the beneficiary of an employee who dies before payments begin take the plan balance as an annuity or in a lump-sum. Harvey elects to take the $250,000 plan balance in a lump-sum. Write a letter to Harvey explaining the tax consequences of each payment he receives. #32 .
¡ Payment due to death - the $5,000 payment to Lucinda’s spouse is included in gross income. Death benefits are fully taxable. ¡ Salary and vacation pay - the $1,600 salary and $1,100 of vacation pay were earned prior to Lucinda’s death and must be included in gross income. ¡ Life insurance proceeds - the $120,000 life insurance proceeds are excludable. ¡ Pension plan payment - because the $250,000 is from a qualified plan, none of the amounts contributed to the plan or the earnings on the contributions have been subject to tax.

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