FiCEP Taxes and Insurance 5 — Questions and Answers
Question 1: A client converts a traditional IRA to a Roth IRA. What is the primary tax consequence of this conversion?
- No taxes are owed since both are retirement accounts
- The converted amount is included in gross income in the year of conversion (Correct answer)
- A 10% early withdrawal penalty applies regardless of age
- The conversion amount is taxed at capital gains rates
Correct answer: The converted amount is included in gross income in the year of conversion
The pre-tax amount converted from a traditional IRA to a Roth IRA is included in the taxpayer's gross income for the year of conversion.
Question 2: What does 'guaranteed renewability' mean in the context of individual health insurance policies?
- The insurer must offer the policy at the same premium each renewal period
- The insurer cannot cancel or refuse to renew the policy as long as premiums are paid (Correct answer)
- The insured can switch plans without underwriting at each renewal
- The government guarantees repayment if the insurer becomes insolvent
Correct answer: The insurer cannot cancel or refuse to renew the policy as long as premiums are paid
Guaranteed renewability means the insurer is required to renew the policy as long as the insured pays premiums, though premiums can still increase.
Question 3: Under the Affordable Care Act, what is the income threshold (as a percentage of the federal poverty level) above which individuals are no longer eligible for premium tax credits on the Marketplace?
- 200% FPL
- 300% FPL
- 400% FPL (temporarily lifted through 2025) (Correct answer)
- 500% FPL
Correct answer: 400% FPL (temporarily lifted through 2025)
The ACA premium tax credit was originally capped at 400% FPL, but legislation temporarily eliminated the upper income cap through 2025, making credits available to more households.
Question 4: A client receives unemployment compensation of $4,200. How is this treated for federal income tax purposes?
- It is excluded from income because it replaces lost wages
- It is fully included in gross income and taxed as ordinary income (Correct answer)
- Only 50% is taxable
- It is tax-free up to $2,400 then fully taxable above that
Correct answer: It is fully included in gross income and taxed as ordinary income
Unemployment compensation is fully taxable as ordinary income at the federal level under IRC Section 85.
Question 5: Which insurance concept describes a situation where a policyholder has more insurance coverage on a property than the property's actual cash value?
- Subrogation
- Indemnification shortfall
- Over-insurance (moral hazard scenario) (Correct answer)
- Adverse selection
Correct answer: Over-insurance (moral hazard scenario)
Over-insurance occurs when coverage exceeds the property's actual value; insurers typically apply the principle of indemnity and will not pay more than actual loss.
Question 6: A married couple filing jointly sells their primary residence and realizes a $480,000 gain. They have lived in the home for 3 of the last 5 years. How much gain must they report as taxable income?
- $480,000 — the full gain is taxable
- $0 — the full gain is excluded under the $500,000 MFJ exclusion (Correct answer)
- $230,000 — only the amount above the single-filer exclusion is taxable
- $480,000 minus the adjusted basis is taxable
Correct answer: $0 — the full gain is excluded under the $500,000 MFJ exclusion
Married couples filing jointly may exclude up to $500,000 of gain from the sale of a primary residence if they meet ownership and use tests; the $480,000 gain is fully excluded.
Question 7: A client's disability insurance policy has an 'own-occupation' definition of disability. What does this mean?
- Benefits are paid only if the client cannot perform any occupation
- Benefits are paid if the client cannot perform the duties of their specific occupation (Correct answer)
- Benefits are limited to 60% of pre-disability income regardless of the occupation
- The policy only covers disabilities caused by on-the-job accidents
Correct answer: Benefits are paid if the client cannot perform the duties of their specific occupation
An own-occupation definition pays benefits if the insured cannot perform the material duties of their specific occupation, even if they could work in a different field.
FiCEP Taxes and Insurance 5
A client converts a traditional IRA to a Roth IRA.
What is the primary tax consequence of this conversion?