FiCEP Taxes and Insurance 4 — Questions and Answers
Question 1: A client receives a $5,000 settlement from a car accident for pain and suffering. How is this amount treated for federal income tax purposes?
- It is fully taxable as ordinary income
- It is excluded from gross income (Correct answer)
- It is taxable only if the client itemizes deductions
- It is subject to self-employment tax
Correct answer: It is excluded from gross income
Compensatory damages received for physical injury or physical sickness, including pain and suffering, are excluded from gross income under IRC Section 104.
Question 2: Which of the following best describes the 'coinsurance' provision in a health insurance policy?
- The fixed dollar amount the insured pays per visit
- The percentage of costs the insured shares with the insurer after the deductible (Correct answer)
- The maximum the insured pays out-of-pocket per year
- The monthly premium divided by the number of covered family members
Correct answer: The percentage of costs the insured shares with the insurer after the deductible
Coinsurance is the percentage of covered medical costs the insured pays after the deductible is met, with the insurer covering the remaining percentage.
Question 3: A client's employer pays $800 per month toward the employee's health insurance premium. How is this employer contribution treated for the employee's federal income taxes?
- Included in the employee's gross income as a fringe benefit
- Excluded from the employee's gross income (Correct answer)
- Deductible by the employee on Schedule A
- Treated as a taxable loan from the employer
Correct answer: Excluded from the employee's gross income
Employer-paid health insurance premiums are excluded from an employee's gross income under IRC Section 106.
Question 4: What is the primary purpose of an 'umbrella' liability insurance policy?
- To replace homeowners insurance with broader coverage
- To provide excess liability coverage beyond existing auto and homeowners policies (Correct answer)
- To insure high-value personal property items
- To cover business liability for self-employed clients
Correct answer: To provide excess liability coverage beyond existing auto and homeowners policies
An umbrella policy provides additional liability coverage that kicks in after the limits of underlying auto or homeowners policies are exhausted.
Question 5: A client is self-employed and pays $6,000 in health insurance premiums for herself and her family. Assuming she has a net profit, how may she deduct this expense?
- As a miscellaneous itemized deduction subject to the 2% AGI floor
- As a 100% above-the-line deduction on Schedule 1 (Correct answer)
- Only as a Schedule C business expense
- She cannot deduct self-paid health insurance premiums
Correct answer: As a 100% above-the-line deduction on Schedule 1
Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line deduction, reducing adjusted gross income.
Question 6: Which type of life insurance policy builds cash value and allows the policyholder to borrow against it tax-free?
- Term life insurance
- Permanent life insurance (e.g., whole life) (Correct answer)
- Group term life insurance
- Credit life insurance
Correct answer: Permanent life insurance (e.g., whole life)
Permanent life insurance policies accumulate cash value that policyholders can borrow against; these loans are generally not taxable income as long as the policy remains in force.
Question 7: A client works two jobs and has excess Social Security tax withheld by both employers. What should the client do to recover the overpayment?
- File an amended return with each employer
- Claim the excess as a credit on their federal income tax return (Form 1040) (Correct answer)
- Request a refund directly from the Social Security Administration
- Apply the overpayment to next year's estimated taxes only
Correct answer: Claim the excess as a credit on their federal income tax return (Form 1040)
Excess Social Security tax withheld due to multiple employers is claimed as a refundable credit on the taxpayer's Form 1040.
FiCEP Taxes and Insurance 4
A client receives a $5,000 settlement from a car accident for pain and suffering.
How is this amount treated for federal income tax purposes?