Income Taxation Principles Flashcards
7 cards from real CLU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Income Taxation Principles flashcards as text
Under the annuity exclusion ratio, which formula correctly determines the tax-free portion of each annuity payment?
Answer: Investment in the contract ÷ expected return
The exclusion ratio is the investment in the contract (cost basis) divided by the expected return, applied to each payment to determine the tax-free portion.
When a nonqualified annuity owner dies before annuitization, how are gains in the contract taxed to a non-spouse beneficiary who takes a lump sum?
Answer: As ordinary income in the year received
Gains in a nonqualified annuity paid as a lump sum to a non-spouse beneficiary at death are taxed as ordinary income in the year received.
Which of the following is a correct statement about the income tax treatment of disability income benefits?
Answer: Employer-paid premiums cause benefits to be fully taxable to the employee
When an employer pays disability insurance premiums, benefits received by the employee are fully includable in the employee's gross income.
For income tax purposes, contributions to a Health Savings Account (HSA) made by an eligible individual are:
Answer: Deductible above-the-line regardless of whether the taxpayer itemizes
HSA contributions by eligible individuals are deductible above-the-line (for AGI), making them available even to non-itemizers.
A business owner takes a Section 162 deduction for life insurance premiums paid on a key employee. What is the tax consequence?
Answer: The premium is generally not deductible when the business is the beneficiary
IRC Section 264 disallows premium deductions when the business is directly or indirectly a beneficiary of the policy.
The 'inside buildup' of cash value in a life insurance policy is best described as:
Answer: Tax-deferred growth not subject to current income tax
Cash value increases inside a life insurance policy accumulate on a tax-deferred basis, meaning they are not subject to current income tax.
Under IRC Section 1035, a tax-free exchange can be made from a life insurance policy into which of the following?
Answer: An annuity contract
Section 1035 permits a tax-free exchange from a life insurance policy to an annuity contract, preserving the cost basis.