FiCEP Taxes and Insurance 4

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?

Accepted Answer

It is excluded from gross income

Answer

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?

Accepted Answer

The percentage of costs the insured shares with the insurer after the deductible

Answer

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?

Accepted Answer

Excluded from the employee's gross income

Answer

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?

Accepted Answer

To provide excess liability coverage beyond existing auto and homeowners policies

Answer

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?

Accepted Answer

As a 100% above-the-line deduction on Schedule 1

Answer

Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line deduction, reducing adjusted gross income.

FiCEP - Financial Counseling Certification Program Practice Test

FiCEP - Financial Counseling Certification Program Practice Test

FiCEP Taxes and Insurance 4