Question

25. Your client received a gift from his boyfriend of expensive jewelry on her birthday. What is the tax consequence? a. The fair market value is excluded from income as a gift. b. The imputed value is included in income because gifts cannot be made between couples. c. The fair market value is income because there seems to be no donative intent. d. The imputed value is excluded from income because the jewelry was purchased at a thrift store. 26. Al works for ABC company and they provide $50,000 in group term life insurance to him. What is the tax consequence? a. Al has $2,000 in income because that is the premium the employer paid for the life insurance policy. b. Al has no income because the price of the premium is excluded for up to $50,000 worth of group term life insurance. c. Al has no income because it is a gift from his employer. d. Al has income of $50,000, the death benefit of the policy. 27. Your client has paid $180,000 for an annuity. According to IRS tables he has a 30- year life expectancy. His monthly payment is $1,000 ($12,000 per year). What amount of the $12,000 is excluded each year from income under the exclusion ratio? a. 0% b. 25% c. 33% d. 50%

Answer 1

Ans:

25. The correct option is (c) The fair market value is income because there seems to be no donative intent.

Explanation-

A gift occurs when a voluntary transfer for less than full consideration or compensation occurs from a donor to a donee. For gift tax purposes, the value of the gift is its fair market value on the date of its transfer to the donee.

26. The correct option is (b)- AI has no Income because the price of the premium is excluded for up to $50000 worth of group term life insurance.

Explanation-

Employers are allowed to provide $50000 of tax free group term life insurance coverage as a benefit to the employees. Any amount of coverage over and above $50000 that is paid for by an employer must be recognized as a taxable benefit and included in the income of employee.

Here, ABC Company provides $50000 group term life insurance to AI, its employee which is under tax free coverage limit and therefore, AI has no Income.

27. The correct option is (d) 50%

Explanation- Spreading initial payment of $180000 over 30 years i.e., 360 months (30 years * 12 months), $180000/360 = $500 per month. But the contract entitles $1000 a month.

Lumpsum premium- $180000

Monthly benefit- $1000

Life expectancy- 360 months

Exclusion Ratio: $180000/ ($1000* 360) = $180000/ $360000 = 50%