ExpertMedium1 markMultiple Choice
CPA · Question 39 · Area I: Individual Compliance and Planning
A taxpayer owns a life insurance policy with a cash surrender value of $50,000 and a face value of $500,000. They have paid $20,000 in premiums. They surrender the policy for cash. What is the taxable amount?
A taxpayer owns a life insurance policy with a cash surrender value of $50,000 and a face value of $500,000. They have paid $20,000 in premiums. They surrender the policy for cash. What is the taxable amount?
Answer options:
A.
$50,000 ordinary income.
B.
$30,000 capital gain.
C.
$30,000 ordinary income.
D.
$0
How to approach this question
1. Calculate Gain = Cash Received - Premiums Paid. 2. Character = Ordinary (not sale or exchange of a capital asset).
Full Answer
C.$30,000 ordinary income.✓ Correct
$30,000 ordinary income.
IRC §72(e). Amounts received upon surrender of a life insurance contract are included in gross income to the extent they exceed the investment in the contract (premiums paid). $50,000 - $20,000 = $30,000. The character is ordinary income.
Common mistakes
Treating the gain as capital gain.
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