CLU Income Taxation Principles 3

Question 1

Under the annuity exclusion ratio, which formula correctly determines the tax-free portion of each annuity payment?

Accepted Answer

Investment in the contract ÷ expected return

Answer

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.

Question 2

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?

Accepted Answer

As ordinary income in the year received

Answer

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.

Question 3

Which of the following is a correct statement about the income tax treatment of disability income benefits?

Accepted Answer

Employer-paid premiums cause benefits to be fully taxable to the employee

Answer

When an employer pays disability insurance premiums, benefits received by the employee are fully includable in the employee's gross income.

Question 4

For income tax purposes, contributions to a Health Savings Account (HSA) made by an eligible individual are:

Accepted Answer

Deductible above-the-line regardless of whether the taxpayer itemizes

Answer

HSA contributions by eligible individuals are deductible above-the-line (for AGI), making them available even to non-itemizers.

Question 5

A business owner takes a Section 162 deduction for life insurance premiums paid on a key employee. What is the tax consequence?

Accepted Answer

The premium is generally not deductible when the business is the beneficiary

Answer

IRC Section 264 disallows premium deductions when the business is directly or indirectly a beneficiary of the policy.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Income Taxation Principles 3