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Donald was killed in an accident while he was on the job in 2015. Darlene, Donald's wife,...

Question:

Donald was killed in an accident while he was on the job in 2015. Darlene, Donald's wife, received several payments as a result on Donald's deaths. What is Darlene's gross income from the items listed below?

a. Donald's employer paid Darlene and amount equal to Donald's 3 months' salary ($60,000) which is what the employer does for all widows and widowers of deceased employees.

b. Donald had $20,000 in accrued salary that was paid to Darlene

c. Donald's employer had provided Donald with group term life insurance of $480,000 (twice his annual salary), which was payable to his widow in a lump sum. Premiums on his policy totaling $12,500 had been included in Donald's gross income under 79

d. Donald had purchased a life insurance policy (premiums totaled $250,000) that paid $60,000 in the even of accidental death. The proceeds were payable to Darlene, who elected to receive installment payment as an annuity of $30,000 each year for a 25 year period. She received her first installment this year.

Gross Income

Gross income is described as the income which is taken out before any adjustment of taxes. It is generally known as the before-tax income. In another concept, it is the sum of the individual's income, which includes salaries, wages, profits, and many other earnings before any deductions.

Answer and Explanation:

Details Amount Received Amount Taxable
a. Employment payments
b. Accrued salary, earned before death
c. Group term life insurance proceeds
d. Life insurance proceeds, annuity
$ 60,000
$ 20,000
$ 480,000
$ 30,000
$ 60,000
$ 20,000
-
$ 6,000(W.N)
Gross Income $ 590,000 $ 86,000

Darlene?s Gross Income is $ 85,000

Working Note:

Calculation of taxable amount of life insurance proceeds annuity

For that we first expected return

We have,

Payment as annuity is $ 30,000

Year is 25 years

{eq}\begin{align*} {\rm{Expected}}\;{\rm{return}} &= {\rm{30,000}} \times {\rm{25}}\\ &= {\rm{750,000}} \end{align*} {/eq}

Now we have to calculate recovery of capital

For that we have,

Investment in contract $ 60,000

Annual proceeds 30,000

Expected return 750,000

{eq}\begin{align*} {\rm{Recovery}}\;{\rm{of}}\;{\rm{capital}} &= \dfrac{{{\rm{Investment}}\;{\rm{in}}\;{\rm{contract}}}}{{{\rm{Expected}}\;{\rm{return}}}} \times {\rm{Annual}}\;{\rm{Proceeds}}\\ &= \dfrac{{60,000}}{{750,000}} \times 30,000\\ &= 24,000 \end{align*} {/eq}

Now we calculate taxable amount of life insurance proceeds, annuity

Details Amount
Annual Proceeds
Less: Recovery of capital
$ 30,000
($ 24,000)
Total $ 6,000

Learn more about this topic:

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Operations of an Income Statement

from Accounting 101: Financial Accounting

Chapter 8 / Lesson 5
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