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REG CPA Practice Questions: Gifts Received, Life Insurance Proceeds, and Gross Income
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on how to calculate the amount from gifts received and life insurance proceeds that should be excluded from an individual's gross income. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-calculate-gifts-and-life-insurance-proceeds-excluded-from-gross-income/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 01:00 Question 1: Learning About Gifts Received 02:49 Question 2: Remembering that Gifts Received are Excluded from Gross Income 04:24 Question 3: Learning the Basics of Life Insurance Proceeds and Gross Income 06:37 Question 4: Learning about the Trade-for-Value Rule 09:35 Question 5: Life Insurance Proceeds Over Time Instead of in a Lump Sum 11:58 Pillar Topics
View Video Transcript
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Hi, I'm Logan. Welcome to another reg walkthrough video. In this video, we're going to be going
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over calculating gifts and life insurance proceeds excluded from gross income. And we're going to do
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that in Superfast CPA fashion, which is going straight into questions to learn the material
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If you haven't heard much about our strategies, make sure you go to superfastcpa.com and watch
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our free one-hour webinar training. We go over the six key ingredients to passing the CPA exam
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The link will be in the description. It'll look like this. And if you like the idea of
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doing questions as your main learning material, make sure you check out the Super Fast CPA app
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where we have five question mini quizzes, audio notes, and review notes that you can access
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easily on your phone throughout the day. With that out of the way, let's dive straight into
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some questions. Now, as we're getting into these questions, I want to let you know that these two
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topics, gifts and life insurance proceeds that are excluded from gross income, specifically
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the gross income of an individual. These topics are pretty simple, very straightforward
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which is why we combined these two topics into one video. Okay, here's the first question
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Margaret received a gift of rental property from her aunt in the current tax year. The fair market
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value of the property at the time of the gift was $300,000. During the same year, Margaret
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collected $24,000 in rental income from that property. She also incurred $5,000 in various
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expenses related to the property. Margaret did not receive any other gifts or inheritances during
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the year. Which of the following amounts should be excluded when calculating Margaret's gross
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income. So it's important to note there that it's not asking what should be included, but what should
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be excluded from the gross income. So if you don't know much about this, that's okay. That's why you're
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here. So to learn how to do this, let's go ahead and dive straight into the answer to see how this works
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Okay, so she should exclude $300,000 or the gift. According to the tax code, gifts and
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inheritances themselves are not included in gross income, which means the fair market value of the
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rental property received as a gift, which was $300,000, should be excluded from Margaret's gross income
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However, any income generated from the property, such as the rental income, is taxable
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Therefore, the $24,000 in rental income minus the $5,000 in expenses related to the property
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would be included in Margaret's gross income. Okay, right there, that's how gifts work
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as far as being included or excluded in gross income. Gifts are excluded from gross income
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It's that simple. There are other things that talk about. about what's the basis of a gift that's received or how do you calculate the gain when you sell
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a gift that you received and different things like that as far as the gift itself which the person received
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that being included or excluded in their gross income it is just excluded that's the rule plain and
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simple so let's do one more question on gifts and you'll pretty much have all of it down that you
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need to know for the CPA exam let's go to the next question okay here's question two
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Carlos received several financial benefits throughout the year, including a gift from his grandmother
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a lottery winning, and an employer bonus. Here are the details of each
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His grandmother gave him $30,000 in cash as a birthday gift. That's awesome. He won $20,000 in state lottery
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His employer gave him a $5,000 cash bonus for exceptional performance. Considering the federal tax regulations, which are the following statements is correct
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regarding the amounts that should be excluded from Carlos' gross income. So should he only exclude the gift
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Should he exclude the bonus? Should he exclude the lottery Or should it all be included or should all be excluded Well you just learned that gifts are excluded from gross income So right away plain and simple is excluded from the gross income
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And as far as state lottery and things like that, we do go over that in a different video about things that should be included in
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a taxpayer's gross income. But as far as the gift, we already know that's going to be excluded
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So let's go ahead and click on the answer. And yep, only the $30,000 gift from his grandmother's ship
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be excluded. So it's that easy. We're only going to do two questions about gifts received being
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excluded from gross income because it really is that simple. There's other things that has to do with
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gifts and a lot of gift tax is in TCP. But as far as a gift that you received being included or
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excluded in your gross income, it's excluded. That's the rule. So pretty simple. Now we're going to go on
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to life insurance proceeds that's also pretty straightforward, but there's a little bit more to it
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And we'll go over that for the remaining three questions. All right, let's go to the next question
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John is a beneficiary of a life insurance policy for his late father. The policy is not company owned, had a face value of $500,000
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and John received the entire amount upon his father's death. John also had the option to receive an additional $50,000 as a deferred payment
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accruing at a 2% interest rate annually. If he chooses to defer, he will receive the payout in two years
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Over the years, his father paid a total of $100,000 in premiums for this policy
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Which of the following amounts should be excluded from John's gross income? So we don't know much about life insurance proceeds
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This is how much the insurance was worth. He also has the option to get $50,000 of it deferred with a 2% interest rate
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and it also mentions the premiums that his father paid. What of that is going to be excluded or included in John's gross income
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We don't know. So let's go ahead and dive straight into the answer. So the answer is $500,000
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which is the face value of the life insurance policy. According to the tax code, life insurance proceeds received due to the death of the insured
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are generally excluded from gross income. So again, really simple rule. Most of the time, it's excluded from gross income
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This means that John can exclude the $500,000 face value of the life insurance policy from his gross income
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However, any interest income received from deferring the payout is fully taxable
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Since John has not yet received the deferred amount and the interest has not been realized
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Only the face value of the policy is excludable at this time. Therefore, the correct answer is the $500,000
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If John decides to defer the $50,000, the interest earned on that amount would be subject to tax
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and should be included in his gross income in the year it is received
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Okay, so again, very simple rule. Most of the time, the gross proceeds from a life insurance policy payout is non-taxable
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Now, in this video, we're not going to be diving into very many of the exceptions or the things
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that would make that not true because frankly, most of that you don't really need to know for the
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CPA exam. You just need to know that life insurance proceeds most of the time are excluded from
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gross income. Let's go ahead and go to the next couple questions that do go over a couple things
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that could be useful for you to know when it comes to life insurance proceeds. So let's go to
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question four. Here's question four. Samantha owns a life insurance policy on her life and designates
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her son, Derek, as the beneficiary. In the current year, she finds herself in financial hardship
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and decides to sell the policy to her friend Tina instead for So Derek is no longer the beneficiary The policy has a death benefit and Samantha had paid in premiums Tina started paying the premiums once she bought the
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policy, paying a total of $20,000. Later that year, Samantha passes away, and Tina collects the $300,000
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death benefit. What amount is Tina required to include in her gross income for the year? Okay, so a lot
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of different numbers in there. We just went over how life insurance proceeds most of the time are not
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taxable. But this is kind of a weird situation where it was sold to another person who bought it
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So is that going to affect if any of it's taxable or not? And that's what we want to learn
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Take a second. Read the question. Make sure you understand what's going on there. And when you're
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ready, come back and we will go over the answer. Okay, here's the answer. $180,000 will be included
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in her gross income. So $120,000 is excluded for some reason. Let's learn why. Under the transfer for
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value rule, so this is a rule for life insurance policies. Again, let's read it. under the Transfer for Value Rule, when a life insurance policy is sold to another person
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the death benefit less any consideration paid, and that includes any premiums paid by the recipient
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after the transfer, is taxable. In this case, Tina would have to include $180,000 in her gross income
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which is the $300,000 death benefit minus the $100,000 consideration she paid
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minus the $20,000 in premiums she paid after the transfer. The premiums paid by Samantha are not included
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in this calculation. So this is a kind of a strange rule. If Derek had stayed the beneficiary
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as in Samantha had not sold it, and then she still passed away, Derek would not have had any of this
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counted as taxable income for him. But since Tina bought it instead and paid $100,000 for it
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and also paid $20,000 of the premiums after she purchased it, then this is a different situation
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and this is one of the few situations where some of it can be included in her gross income
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So basically the transfer for value rule, not super common, but if it does happen, whoever purchased the life insurance policy from the person who originally owned it, they have the potential to have some of that included in their gross income once the person who originally owned the policy passes away
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Now, again, there can be some different nuances if there's businesses involved and different things like that or if the consideration is only equal to what the original owner purchased it for, different things
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things like that. But again, we're not going to dive super deep into that on this video because, again
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mostly the most important thing that you know is that typically it is not included in gross income
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But I wanted to point this rule out to you just in case. So let's go ahead and go to the last question
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All right, here's the last question. Rachel is the beneficiary of a life insurance policy on her
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husband's life. The policy has a $500,000 death benefit. Over the course of the policy, her husband paid
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$150,000 in premiums. Instead of taking a life, the policy, she was a life. lump sum, Rachel chose a settlement option that pays out $25,000 annually for 30 years, with an
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interest rate of 3% compounded annually. The total amount Rachel will receive over the course of
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30 years is $750,000, which includes the death benefit and the interest generated by the
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settlement option. For the first year, how much of the life insurance proceeds should Rachel
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exclude from her gross income? So if you remember right, we learned about this in question three
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but take a second pause the video try to calculate this and see if you can get the right answer Again we have already gone over this rule So when you ready come back and we will look at the answer Okay so the portion of the that represents a return of the death
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benefit. So however much of the money is the actual life insurance proceed, that will not
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be taxed. But the interest received will be taxed. So let's read a little bit more about it
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Life insurance proceeds paid out due to the death of the insured are generally excluded from gross
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income. However, if the beneficiary receives the proceeds in installments that include interest
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as in a settlement option, the portion of the payments that is attributable to the interest
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is taxable. The original death benefit portion is excluded from gross income, but the interest
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is taxable. For the first year, Rachel should exclude the part of the $25,000 that represents
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the death benefit. To find this amount, you would need to differentiate the principal portion of the
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annuity from the interest portion using the exclusion ratio. Only the interest portion is taxable
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and would be included in gross income. Since the exact portion of the $25,000 payment that is from the death benefit is not given
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Rachel would have to calculate that herself, essentially. But the idea is that the interest is taxable
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but the actual principle like the actual proceed is not taxable. All right, those are the two topics that we wanted to go over today
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Again, very simple, gifts received, excluded from gross income. Life insurance proceeds almost always excluded from gross income
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there are a few situations where, like in this instance, where interest received on top of the
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proceed is taxed, or if there's a transfer for value that can also make some of it taxable
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but the majority of the time it is excluded from gross income. Let's go ahead and finish the video by doing one more part of the Superfast CPA strategy
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which is called Pillar Topics. Now, if you don't know much about our strategies, again, we dive straight into the questions
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as our main learning material, and once you've gone through the questions, or even while you're
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going through the questions, you can make pillar topics, which is basically the things that are the
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most important, the concepts that are obviously what you're supposed to be learning according to
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your review course. So let's make a few pillar topics shouldn't take very long. Gifts received are
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excluded from gross income. Life insurance proceeds are excluded from gross income in most cases
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However, if there is a transfer or value of the life insurance policy, then some of it may be taxable to the recipient
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Or if there is interest received from the policy, because the recipient didn't want to receive it in a lump sum, the interest will be taxed
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Okay, so like I said, this is a very simple topic, and for the most part for the CPA exam
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this is what you're going to need to know, these very basic principles. With that said, that's the end of the video there
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I hope you found this helpful. If you want to learn more about our strategies, make sure you go to superfast cpa.com to sign up
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for our free one-hour webinar training where we go over the six key ingredients to passing the CPA exam
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Also, if you liked going through questions to learn the material, make sure you check out our super fast CPA app where we have five question mini quizzes
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review notes and audio notes that you can access on your phone very easily
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and be continually studying throughout the day. Thanks for watching and I'll see you in the next video