Question

27. LO.2 Ed, an employee of the Natural Color Company, suffered from a rare disease that was very expensive to treat. The local media ran several stories about Ed’s problems, and the family created a website that generated more than $10,000 in gifts from individuals to help pay the medical bills. Ed’s employer provided hospital and medical insurance for its employees, but the policy did not cover Ed’s illness. When it became apparent that Ed could not pay all of his medical expenses, the hospital canceled the $25,000 Ed owed at the time of his death. After Ed’s death, his former employer paid Ed’s widow $12,000 in “her time of need.” Ed’s widow also collected $50,000 on a group term life insurance policy paid for by Ed’s employer. What are Ed’s and his widow’s gross income?

Answer 1

1) Gift is not taxable so $10,000 will not be Taxable.
2) Cancellation of medical expenses = $25000 will be included in Gross Income.
3) Some welfare payments will not be included in Gross Income = Former employer paid Ed’s widow $12,000 in “her time of need.”
4) Group term life insurance policy is not included in Gross Income exclusion allows $50,000 for protection
So, Ed’s and his widow’s gross income = $25,000 (Cancellation of medical expenses)