Question 1. Beverly died during the current year. At the time of h

1. Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband. The employer also paid the husband $35,000 which represented an amount equal to Beverly’s salary for the year prior to her death. The employer had a policy of making the salary payments to “help out the family in the time of its greatest need.” Beverly’s spouse collected her interest in the employer’s qualified profit sharing plan amounting to $30,000. As beneficiary of his wife’s life insurance policy, Beverly’s spouse elected to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest income. Which of these items are subject to income tax for Beverly’s spouse?

2. Sandy is married, files a joint return, and expects to be in the 28% marginal tax bracket for the foreseeable future. All of his income is from salary and all of it is used to maintain the household. He has a paid-up life insurance policy with a cash surrender value of $100,000. He paid $60,000 of premiums on the policy. His gain from cashing in the life insurance policy would be ordinary income. If he retains the policy, the insurance company will pay him $3,000 (3%) interest each year. Sandy thinks he can earn a higher return if he cashes in the policy and invests the proceeds.

a. What before-tax rate of return would Sandy be required to earn on the proceeds from cashing in the policy to equal the return earned with the insurance company?

b. Assume Sandy estimates he can earn a 6% before-tax rate of return on the proceeds from cashing in the policy. Assume he can earn a 6% return for the remainder of his life and that he will reinvest all earnings at the same 6% before-tax rate of return. If Sandy expects to live 10 more years, which alternative will yield the greater amount to his beneficiaries upon Sandy’s death? (Given: The future value of an annuity in 10 years assuming a 4.32% after­ tax return is 12.19. The future value of an annuity in 10 years assuming a 2.16% return is 11.03).

3. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement:

The defendant’s insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

4. George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the company’s cost plus 10%. The employee also is given, at no cost, a 1­year service contract on all the goods purchased from the company. George purchased a refrigerator for $500. The company’s normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $150. During the year, George was required to have his refrigerator serviced once. The cost of the call would have been $75 if he had not had the service contract. Is George required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call?

5. Sonja is a United States citizen who has worked in Spain for the past 10 months. She received $8,000 a month as compensation. Her employer has offered to extend Sonja’s contract to work in Spain for another 6 months at the same rate of pay. If she rejects the offer, she can return to the United States and receive a salary of $10,000 per month. While working in Spain, she is subject to the Spain income tax, which is approximately 11% of her gross pay. The marginal tax rate on her income taxed in the United States is 25%. Compare Sonja’s after­tax income assuming she remains in Spain with her after-tax income if she returns to the United States.

6. Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the interest must be included on his state income tax return. The interest rate is 5%. His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return. As an alternative, Juan can purchase a state bond (a “double­exempt bond”) yielding 4.9% interest that is exempt from both Federal and state income tax. Which investment would yield the greater after-tax return?

7. Margaret is trying to decide whether to place funds in a qualified tuition program. Her son will be attending college in 4 years. She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 years. Her son will be in the 15% marginal

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