Tax Treatment of Individual Retirement Arrangements
Q: Helen, age 60, made total contributions of $60,000 to a Roth IRA she established 15 years ago. Five years ago she withdrew $10,000 tax-free. How much income must she recognize if she takes a complete distribution from the Roth IRA this year when its value is $90,000?
A: The correct answer is C. Except in the case of a spousal IRA, a taxpayer may not contribute an amount to an IRA in excess of his or her earned income for the year. For purposes of the IRA rules, earned income includes salary, fees, tips, bonuses, commissions, and alimony. Since the taxpayer’s earned income, including alimony, exceeds the maximum IRA contribution, she may make a contribution not exceeding $5,500.
Tax Treatment of Life Insurance Proceeds
Q: Bob has owned his participating life insurance policy for many years and receives substantial policy dividends each year that he takes in cash. What tax treatment would be given to the dividend he receives this year, if his total policy premiums were $10,000 and his total dividends were $12,000?
A. The dividend would be tax-free as a return of premium
B. The dividend would be taxable at capital gains rates
C. The dividend would be considered ordinary income
D. Taxation of the dividend would be deferred until policy surrender
A: The correct answer is C. Bob’s dividend this year would be considered ordinary income. Dividends received under a life insurance policy are generally income tax-free until the total amount received or credited exceeds the aggregate premiums paid for the policy. Any dividends paid or credited in excess of the total gross premiums paid for the life insurance policy are considered taxable income in the year in which received.
Tax Treatment of Sickness & Injury Plans
Q: An Archer MSA rollover may be made no more frequently than once every _____ months.
A: The correct answer is B. An Archer MSA rollover may not be made more frequently than every 12 months. The applicable rollover rules are much like those that apply to IRA rollovers and rollovers from qualified plans. Accordingly, an Archer MSA rollover must follow the rules below:
- The rollover must be made within 60 days of the individual’s receipt of the Archer MSA distribution; and
- Only one MSA rollover may be made each year. (The “year” in the case of an Archer MSA rollover is a rolling 12-month period, rather than a calendar or tax year.)
Q: For which of the following individuals would qualified long term care insurance premiums NOT be deductible without reference to adjusted gross income?
A. A partner in a law firm
B. An owner of an S corporation
C. A sole owner of a regular corporation
D. An owner of a limited liability company
A: The correct answer is C. An owner of a regular corporation is not considered self-employed for purposes of long term care insurance premium deductibility. A self-employed person, for purposes of long term care insurance premium tax-deductibility, includes sole proprietors, partners, and owners of S corporations, limited liability partnerships and limited liability companies. Thus, a sole owner of a regular corporation could not deduct premiums for qualified long term care insurance premiums without reference to his or her adjusted gross income.
These questions were pulled from Paul Winn’s Tax Treatment of Health Plans, IRAs, and Life Insurance Proceeds courses.