17 jay a single taxpayer retired from his job as a

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17. Jay, a single taxpayer, retired from his job as a public school teacher in 2012. He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months. He contributed $36,000 to the pension plan during his 35-year career; so his adjusted basis is $36,000. Jay collected 192 payments before he died. What is the correct method for reporting the pension income? a. Since Jay is no longer working, none of the pension payments must be included in his gross income. b. The first $36,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable. c. The first $180,000 he receives is taxable and the last $36,000 is a nontaxable recovery of capital. d. All of the last 12 payments he received ($14,400) are taxable.
e. None of the above. ANS: D Jay is collecting under an annuity contract and the cost must be allocated among the payments received on the basis of the cost/expected return, until the total cost has been recovered. Thus, for each annuity payment received for the 180-month period, $200 [$36,000/($1,200 × 180) × $1,200] is excluded from gross income and $1,000 is included in gross income. Any payments received after the 180-month period are included in his gross income. 18. Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordon’s age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2012 gross income which of the following amounts? 19. Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest
and $20,000 of Social Security benefits. Debbie’s adjusted gross income for the year is:
20. Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years,
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