Federal Tax Considerations Chapter 7 Quiz

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Questions and Answers

Life insurance proceeds are generally taxed as which of the following?

Taxed as ordinary income

Taxed as capital gain

Generally not taxed as income (correct)

Taxable to the extent that they exceed 7.5% of the beneficiaries adjusted gross income

A 60-year-old participant in a 401k plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true?

No taxes are due since the plan participant is over age 59 1/2

The amount distributed is subject to ordinary income tax

The amount of distributions is reduced by the amount of a 20% withholding tax (correct)

There is a 10 percent early withdrawal penalty

Which of the following is not true regarding policy loans?

Money borrowed from the cash value is taxable (correct)

Policy loans can be repaid at death

An insurer can charge interest on outstanding policy loans

A policy loan may be repaid after the policy is surrendered

An insured decides to surrender his $100,000 whole life policy. The premium paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?

$3,000 Signup and view all the answers

In a direct rollover, how is the money transferred from one plan to the new one?

From trustee to trustee Signup and view all the answers

Which of the following is incorrect regarding whole life insurance?

Policy loans are tax deductible Signup and view all the answers

What method is used to determine the taxable portion of each annuity payment?

The exclusion ratio Signup and view all the answers

Death benefits payable to a beneficiary under a life insurance policy are generally described as?

Not subject to income taxation by the federal government Signup and view all the answers

When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?

Interest only Signup and view all the answers

Who can make a fully deductible contribution to a traditional IRA?

An individual not covered by an employer-sponsored plan who has earned income Signup and view all the answers

A policy owner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. What is this nontaxable transaction called?

1035 exchange Signup and view all the answers

Which of the following is not an allowable 1035 exchange?

A whole life insurance policy is exchanged for a term policy Signup and view all the answers

In life insurance policies, cash value increases are taxed in which manner?

Grow tax deferred Signup and view all the answers

An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to rollover her plan to a traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover?

$8,000 60 days Signup and view all the answers

What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?

Section 1035 policy exchange Signup and view all the answers

Study Notes

Life Insurance Proceeds

Life insurance proceeds are generally not taxed as income.

401k Plan Distribution

A 60-year-old taking a distribution and rolling it over to an IRA may face a 20% withholding tax; the distribution amount is reduced by this amount.

Policy Loans

Money borrowed from the cash value of a life insurance policy is not taxable.
A policy loan may be repaid after policy surrender and can be settled at death.
Insurers can charge interest on outstanding policy loans.

Whole Life Policy Surrender

Upon surrendering a whole life policy with a cash value of $18,000 and total premiums of $15,000, taxable income is $3,000.

Direct Rollover Process

In a direct rollover, funds are transferred from trustee to trustee, ensuring tax advantages.

Whole Life Insurance Facts

Cash value exceeding premiums paid is taxable, while premiums are not tax-deductible.
Dividend interest received from whole life insurance policies is taxable.
Policy loans are not tax-deductible.

Annuity Payment Taxation

The taxable portion of each annuity payment is determined using the exclusion ratio.

Death Benefits and Taxation

Death benefits payable under a life insurance policy are not subject to federal income taxation.

Taxability of Payments to Beneficiaries

Payments to beneficiaries that consist of both principal and interest are only taxable on the interest portion.

Traditional IRA Contributions

Fully deductible contributions to a traditional IRA can be made by individuals not covered by an employer-sponsored plan who have earned income.

1035 Exchange

A nontaxable transaction involving the transfer of cash value from a life insurance policy to an annuity is known as a 1035 exchange.

Allowable 1035 Exchanges

A whole life policy cannot be exchanged for a term policy under a 1035 exchange.

Cash Value Increases in Life Insurance Policies

Cash value increases in life insurance policies grow tax-deferred and are only taxed when the policy is surrendered or cashed out.

Qualified Plan Balances

If a qualified plan balance is directly paid out, the amount received may be $8,000 after withholding taxes, and the individual has 60 days to complete a tax-free rollover to a traditional IRA.

Internal Revenue Code Section 1035

Section 1035 of the Internal Revenue Code allows life insurance or annuity policy owners to exchange contracts without adverse tax consequences.

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Description

Test your knowledge on federal tax considerations with this quiz based on Chapter 7. It covers topics like life insurance proceeds and 401k distributions. Perfect for students and professionals looking to refresh their understanding of tax implications.