Question

the the succeeding year Spouse wall but fortunately they medical insurance and additionally Spouse had e benefits under a poliey provided by Employer medical expenses totalled $4.000 and they received of benefits under their policy and $2,000 of benefits Employer's policy. To what extent are the benefits Sed in their gross income? (See footnote 29 on page 196, In the carried med insurance ben Spouse's medie $3,000 of bi under Employ included in the supra.) Under the facts the medical expe Injured, who h sonal injury suit aris (a) What are are the facts of (b), above, may Injured and Spouse deduct medical expenses? (See $ 213(a).) who has a 20-year life expectancy, recovers $1 million in a suit arising out of a boating accident. at are the tax consequences to Injured if the $1 million is sited in a money market account paying 5% interest?

Please answer the following questions

Answer 1

(a)-The full $1 million excluded, but any interest earned is included.
-§104(a)(2) excludes the $1 million; excluded no matter the amount (no ceiling).
-Any interest you get is included as straight interest, nothing magical for interest earned on an amount that is otherwise not taxed. Same thing if this was inheritance.
(b) See §72
-The taxpayer receives $1 million, its excluded.
-Taxpayer then turns around and purchases annuity so that $1 million is the investment in the contract so we have our investment overt the expected return ($1million/$2million) .
-Remember that expected return is life expectancy x annual payout .
-The $1 million then becomes the taxpayers §1012 basis in the annuity contract.
-Anything above that is deemed interest and is taxable.
-Any interest payments above the prorated $1million is taxable.
(c)-Doesn’t matter if its damages or a settlement, full amount $1 million, excluded.
-This is just compensation for the physical injuries sustained.
-Entire amount excluded under
§104(a)(2).
-Revenue ruling 79-313:if you have a payout that is otherwise excluded, if you invest it, you pay on the interest.
_However, If the payout is an annuity, even though ordinarily a portion would be interest, the entire thing is excluded.
_If wrongdoer pays out over time, rather than lump sum, entire amount is excluded.
_But if you take the lump sum and turn around and buy an annuity on your own terms, that amount is taxable.