ExpertMedium1 markMultiple Choice
CPA · Question 49 · Area I: Individual Compliance and Planning
A taxpayer owns a life insurance policy with a cash surrender value of $50,000 and a basis (premiums paid) of $20,000. The taxpayer surrenders the policy for cash. What is the taxable income?
A taxpayer owns a life insurance policy with a cash surrender value of $50,000 and a basis (premiums paid) of $20,000. The taxpayer surrenders the policy for cash. What is the taxable income?
Answer options:
A.
$0
B.
$50,000
C.
$30,000 Ordinary Income
D.
$30,000 Capital Gain
How to approach this question
1. Gain = Cash Value - Premiums Paid. 2. Character = Ordinary (not sale/exchange of capital asset).
Full Answer
C.$30,000 Ordinary Income✓ Correct
C
IRC §72(e). The excess of cash surrender value over investment in the contract is ordinary income.
Common mistakes
Treating as capital gain; thinking it's tax-free (only death benefits are tax-free).
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