Question 1 - Sue is age 73 and has a great deal of difficulty living independently as she suffers from severe rheumatoid arthritis. She is covered by a $400,000 life insurance policy, and her children are named as the beneficiaries. Because of her health, Sue decides to live in a nursing home, but she does not have enough income to pay her nursing home bills which are expected to total $42,000 per year. The insurance company offers disabled individuals the option of either a reduced settlement on their policies or an annuity. Given Sue's age and health she has the option of receiving $3,200 per month or a lump sum payment of $225,000. To date, Sue has paid $80,000 in premiums on the policy.
a. How much income must Sue report if she chooses the lump sum settlement?
b. How much income must Sue report if she elects the annuity?
c. How much income would Sue have to report If her nursing home bills amounted to only $36,000 per year?
Question 2 - Ursula is employed by USA Corporation. USA Corporation provides medical and health, disability, and group term life insurance coverage for its employees. Premiums attributable to Ursula were as follows:
Medical and health: $3,600
Disability: $300
Group term life (face amount is $40,000): $200
During the year, Ursula suffered a heart attack and subsequently died. Before her death, Ursula collected $14,000 as a reimbursement for medical expenses and $5,000 of disability income. Upon her death, Ursula's husband collected the $40,000 face value of the life insurance policy.
a. What amount can USA Corporation deduct for premiums attributable to Ursula?
b. How much must Ursula include in income relative to the premiums paid?
c. How much must Ursula include in income relative to the insurance benefits?
d. How much must Ursula's widower include in income?
Question 3 - Jangyoun is a married taxpayer with a dependent 4-year old daughter. His employer offers a flexible spending account under which he can choose to receive cash, or alternatively, choose from certain fringe benefits. These benefits include health insurance that costs $9,000 and child care that costs $2, 600. Assume Jangyoun is in the 28% tax bracket.
a. How much income tax will Jangyoun save if he chooses to participate in the employer's health insurance plan? Assume that he does not have sufficient medical expenses to itemize his deductions.
b. Would you recommend that Jangyoun participate in the employer's health insurance plan if his wife's employer already provides comparable health insurance coverage for the family?
c. Would you recommend that Jangyoun participate in the employer-provided child care option if he has the alternative option of claiming a child care credit of $480?