Question 1

An individual owns a life insurance policy on their own life with a face value of $500,000. They have paid $40,000 in premiums. The cash surrender value is $60,000. They surrender the policy for cash. What is the taxable amount?

Accepted Answer

1. Calculate Basis: Premiums paid = $40,000.
2. Calculate Proceeds: Cash surrender value = $60,000.
3. Calculate Gain: $60,000 - $40,000 = $20,000.
4. Determine Character: Gain on surrender of life insurance is Ordinary Income (interest/earnings component).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Treating the gain as capital gain.

An individual owns a life insurance policy on their own life with a face value of $500,000. They have paid $40,000 in premiums. The cash surrender value is $60,000. They surrender the policy for cash. What is the taxable amount?

How to approach this question

Full Answer

Common mistakes

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