Chapter 15 Federal Tax Considerations For Life Insurance And Annuities

A lump sum death benefit received by the beneficiary is not taxable. This is because life insurance proceeds paid out as a death benefit are generally not considered taxable income. The purpose of life insurance is to provide financial support to the beneficiary after the insured person's death, and taxing the death benefit would go against this purpose. Therefore, the lump sum death benefit received by the beneficiary is not subject to income tax.

The $540,000 lump sum proceeds will be received income tax free because life insurance proceeds are generally not subject to income tax.

Medical expense premiums paid by an individual policyholder are deductible as a medical expense. However, the deduction is limited to the extent that when added to all other unreimbursed medical expenses, the total exceeds a certain percentage of the taxpayer's adjusted gross income. In this case, the correct answer is 7.5%, meaning that the total of all unreimbursed medical expenses, including medical expense premiums, must exceed 7.5% of the taxpayer's adjusted gross income in order for the deduction to apply.

The correct answer is TSA. TSA stands for Tax-Sheltered Annuity, which is a type of retirement plan available for certain employees of public schools, non-profit organizations, and some government organizations. In this case, Richard's employer has agreed to reduce his pay by a specified amount and invest it in a TSA for him. This allows Richard to save for retirement in a tax-efficient manner, as contributions to a TSA are made on a pre-tax basis, and any earnings on the investments grow tax-deferred until withdrawn.

All of the options mentioned in the question are advantages of gifting with life insurance. The fact that the entire gift is guaranteed even if only one premium is paid, the IRS requiring very little documentation, and the size of the gift being determined by the size of the death benefit are all advantages of using life insurance as a gifting method. Therefore, all of these options are indeed advantages.

An inheritance tax is a tax imposed on the right of heirs to receive property from a deceased person. This tax is specifically levied on the transfer of assets from the deceased's estate to the beneficiaries. Unlike estate tax, which is based on the total value of the deceased's estate, an inheritance tax is based on the value of the individual inheritances received by the beneficiaries. Therefore, the correct answer is Inheritance Tax.

If there is a material change in a Modified Endowment Contract, a new 7-pay test is required. This means that the policyholder will need to undergo a new test to determine if the premiums paid within the first 7 years of the policy exceed certain limits set by the IRS. This test is necessary to ensure that the policy retains its tax advantages. If the premiums paid within the first 7 years exceed these limits, the policy will lose its tax-favored status and be treated as a taxable investment.

The HR-10 Plan, also known as a Keogh Plan, is a qualified retirement plan designed for self-employed individuals or small business owners like Kacie. It allows her to contribute a percentage of her self-employment income to the plan, up to a certain limit, and receive tax advantages. The contributions made to the HR-10 Plan are tax-deductible, and the earnings on the contributions grow tax-deferred until retirement. This plan offers Kacie the opportunity to maximize her tax advantages while planning for her retirement.

The payment of an accelerated death benefit is not taxable income if the accelerated death benefit payment is qualified. The benefit qualifiers include the ratio of the policy cash value before and after the benefit payment being at least equal to the ratio of the death benefit before and after the benefit payment, the amount of benefit being at least equal to the present value of the reduced death benefit remaining after payment of the accelerated benefit, and the benefit amount being determined similarly to that of an annuity, taking into consideration the amount of months remaining for the insured. However, the prognosis of a physician must be less than 12 months for the benefit to be qualified.

The 1035 Exchange allows for the tax-free exchange of certain insurance contracts. However, in this case, an Endowment Policy is being exchanged for a Whole Life policy. Since these are two different types of policies, the exchange does not meet the requirements of the 1035 Exchange and would therefore result in the recognition of gain or loss.

A sheltered plan is not a 401(k) arrangement. A 401(k) arrangement refers to a retirement savings plan offered by employers, where employees can contribute a portion of their salary to a tax-advantaged investment account. Pure salary, bonus plan, and thrift plan are all types of 401(k) arrangements commonly offered by employers. However, a sheltered plan is not a recognized type of 401(k) arrangement.

An advantage of a 403(b) Annuity is that all the money invested and the accumulation of interest is tax-deferred until received. This means that individuals do not have to pay taxes on the money they invest or any interest earned until they start receiving distributions. This can provide a significant advantage as it allows the invested funds to grow without being diminished by taxes, potentially resulting in higher returns over time.

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During the accumulation period of an annuity, any interest earned is typically not taxable. This means that the annuitant does not have to pay taxes on the interest that is accumulating in the annuity account. However, it is important to note that once the annuity payments begin, the annuitant may be required to pay taxes on the income received.

Employers are allowed to take a tax deduction for premium contributions to a group medical expense plan if the contributions represent responsible business expenses. This means that the contributions must be considered necessary and reasonable expenses related to the operation of the business. This requirement ensures that employers are not taking advantage of the tax deduction for personal or unrelated expenses. By meeting this criterion, employers can reduce their taxable income by deducting the premium contributions made to the group medical expense plan.