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Questions and Answers
Match the following tax treatments with life insurance premiums:
Match the following tax treatments with life insurance premiums:
Business-owned life insurance (BOLI) premiums = Can be deducted as a business expense Key person life insurance policies for small employers = Premiums not included in employees' gross income Charitable contributions using a life insurance policy = Can reduce taxable income Loans taken against a life insurance policy = Not considered additional taxable income
Match the following retirement plans with their tax advantages:
Match the following retirement plans with their tax advantages:
Traditional Individual Retirement Accounts (IRAs) = Tax-deductible contributions with tax-free growth Roth IRAs = After-tax contributions with tax-free withdrawals after age 59½ 401(k) accounts = Pre-tax contributions reducing taxable income with withdrawals subject to taxes Health Savings Accounts (HSAs) = Deductible contributions with tax-free withdrawals for medical expenses
Match the following types of retirement plans with their descriptions:
Match the following types of retirement plans with their descriptions:
Simplified Employee Pension (SEP) IRA = Similar to traditional IRAs but for self-employed or small businesses Simple retirement accounts = Designed for small businesses with fewer employees 401(k) accounts = Allows pre-tax contributions and may be subject to income taxes on withdrawals Health Savings Accounts (HSAs) = Allows deductible contributions for tax-free medical expense withdrawals
Match the following with their treatment in federal estate tax calculations:
Match the following with their treatment in federal estate tax calculations:
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Match the following statements with the correct scenario regarding the taxability of life insurance proceeds: 1) Life insurance payouts are tax-free when paid in a single sum 2) Each installment of death benefit payments could be subject to income taxation 3) Excess withdrawal amount from policy may be taxable 4) Cash value above original basis is taxed as regular income
Match the following statements with the correct scenario regarding the taxability of life insurance proceeds: 1) Life insurance payouts are tax-free when paid in a single sum 2) Each installment of death benefit payments could be subject to income taxation 3) Excess withdrawal amount from policy may be taxable 4) Cash value above original basis is taxed as regular income
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Match the following with their tax treatment: 1) Employer-paid group life plans with death benefits over $50,000 could potentially be taxable 2) Life insurance proceeds are generally tax-free when paid in a lump sum to beneficiary
Match the following with their tax treatment: 1) Employer-paid group life plans with death benefits over $50,000 could potentially be taxable 2) Life insurance proceeds are generally tax-free when paid in a lump sum to beneficiary
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Match the following scenarios with their tax implications: 1) Withdrawing funds from policy exceeding total premiums paid 2) Surrendering a life insurance policy for cash value
Match the following scenarios with their tax implications: 1) Withdrawing funds from policy exceeding total premiums paid 2) Surrendering a life insurance policy for cash value
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Match the following types of life insurance with their typical tax treatment: 1) Term life insurance 2) Whole life insurance
Match the following types of life insurance with their typical tax treatment: 1) Term life insurance 2) Whole life insurance
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Match the following scenarios with their potential tax consequences: 1) Annuity structured death benefit payments 2) Policyholder borrowing against the policy
Match the following scenarios with their potential tax consequences: 1) Annuity structured death benefit payments 2) Policyholder borrowing against the policy
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Match the following scenarios with their tax implications: 1) Surrendering a life insurance policy for cash value 2) Death benefit structured as annuity payments
Match the following scenarios with their tax implications: 1) Surrendering a life insurance policy for cash value 2) Death benefit structured as annuity payments
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Study Notes
Exclusions in Gross Income: Life Insurance Proceeds, Premiums, Retirement, and More
Gross income refers to the total income earned during a given period, which includes wages, salaries, tips, and other forms of compensation. However, certain sources of income are specifically excluded from gross income due to various tax laws and regulations. In this article, we will discuss these exclusions in detail, focusing on life insurance proceeds, premiums, retirement plans, and pensions.
Life Insurance Proceeds
Unless specified otherwise, life insurance proceeds received by the beneficiary are typically exempt from gross income taxation. Term, whole, and universal life insurance payouts are usually tax-free when they are paid in a single sum to the beneficiary. However, certain situations might lead to the taxability of life insurance proceeds:
- If the death benefit is structured to be paid in installments (for instance, through an annuity), each payment could be subject to income taxation.
- If the policyholder withdrew funds from the policy or took out a loan against the policy and the amount exceeds the total premiums paid, the excess may be considered taxable.
- When surrendering a life insurance policy for its cash value, any proceeds above the policy's original cash basis will be taxed as regular income.
- Employer-paid group life plans with death benefits over $50,000 could potentially be taxable according to the IRS.
- If the deceased person's estate, including life insurance proceeds, exceeds the federal estate threshold of $12.92 million (as of 2023), estate taxes might apply on the portion that exceeds this limit.
Premiums
While life insurance proceeds themselves are generally exempt from gross income taxes, some circumstances can affect the tax treatment of premiums paid for life insurance policies:
- Business-owned life insurance (BOLI) premiums paid by a company can sometimes be deducted as a business expense rather than being included in the employee's gross income.
- Some states allow small employers to purchase key person life insurance policies without including the premiums in their employees' gross income. Consult local tax codes for specific details.
- Certain charitable contributions made to qualifying organizations using a life insurance policy can reduce taxable income.
- When a policyholder takes loans against a life insurance policy, these loans are not considered additional taxable income.
Retirement Plans and Pension Exclusions
Retirement plans and pension contributions are often designed to encourage individuals to save for their future financial needs. As such, they offer significant tax advantages to help people prepare for retirement. Some common types of retirement plans that are excluded from gross income include:
- Traditional Individual Retirement Accounts (IRAs): Contributions to traditional IRAs are tax-deductible while earnings grow tax-free until withdrawn after age 59½.
- Roth IRAs: Contributions are made using after-tax dollars; withdrawals of contributions and earnings can usually be taken tax-free after age 59½ and a five-year holding period.
- 401(k) accounts: Contributions are made using pre-tax dollars, reducing taxable income. Withdrawals after age 59½ and a five-year holding period may be subject to ordinary income taxes.
- Simplified Employee Pension (SEP) IRA: Similar to traditional IRAs but designed for self-employed individuals or small businesses.
- Simple retirement accounts: A simpler version of SEPs that caters to small businesses with fewer employees.
- Health Savings Accounts (HSAs): Contributions can be deductible from gross income; funds grow and withdrawals used for qualified medical expenses during retirement are tax-free.
Inheritances as Exclusions in Gross Income
Inherited property is generally not considered part of the recipient's gross income for federal estate tax purposes. However, if the inherited property generates income, such as rental income or capital gains from selling it, this income might still be subject to taxation at ordinary rates but without any preferential long-term capital gain treatment.
Other Types of Gross Income Exclusions
Other types of income that are excluded from gross income include gifts received by an individual up to $15,000 per year from family members and friends; the first $2,500 of interest received; municipal bond income; and child support payments made for your children under age 18.
Implications for Social Security Benefits
For Social Security purposes, not everything an individual receives is considered income. Some items that are excluded include life insurance death benefit proceeds; gifts and inheritances (unless they generate income); education, scholarships, and other assistance payments; and certain disability benefits.
Educational Resources
For further information on specific exclusions in gross income, refer to the following resources:
- The IRS website provides detailed regulations on life insurance proceeds taxation at.
- The eCFR includes a section on items specifically excluded from gross income at.
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Description
Learn about the various exclusions in gross income, such as life insurance proceeds, premiums, retirement plans, pensions, and inheritances. Discover what types of income are not included in the calculation of gross income for tax purposes. Explore implications on Social Security benefits and educational resources for detailed information on exclusions.
