CIA Tax Planning & Compliance 3 — Questions and Answers
Question 1: When an insured property has accumulated depreciation deducted on prior tax returns and is destroyed, the insurance settlement may trigger which additional tax?
- Net investment income tax
- Depreciation recapture under Section 1245 or 1250 (Correct answer)
- Alternative minimum tax only
- Self-employment tax
Correct answer: Depreciation recapture under Section 1245 or 1250
Section 1245/1250 recapture applies when insurance proceeds exceed the property's adjusted basis, converting part of the gain to ordinary income.
Question 2: Self-employed individuals may deduct 100% of health insurance premiums paid for themselves and their families on which tax form line?
- Schedule C, as a business expense
- Schedule A, as a medical expense
- Form 1040, as an above-the-line deduction (Correct answer)
- Schedule E, as a rental expense
Correct answer: Form 1040, as an above-the-line deduction
Self-employed health insurance premiums are deducted as an above-the-line adjustment to income on Form 1040, reducing AGI directly.
Question 3: Under IRC Section 79, employer-provided group term life insurance coverage exceeding what face amount creates taxable income for the employee?
- $25,000
- $50,000 (Correct answer)
- $100,000
- $250,000
Correct answer: $50,000
Coverage above $50,000 of employer-paid group term life insurance results in taxable imputed income to the employee based on IRS Table I rates.
Question 4: An appraisal used to support a charitable contribution deduction of property valued above $5,000 must be completed by a qualified appraiser and filed on which IRS form?
- Form 8283 (Correct answer)
- Form 4684
- Schedule A
- Form 1098-C
Correct answer: Form 8283
Form 8283 (Noncash Charitable Contributions) is required for donated property valued over $5,000 and must include the qualified appraisal summary.
Question 5: When a business replaces destroyed equipment with like-kind property under Section 1033, the replacement property's tax basis is:
- The fair market value of the new property
- The cost of the new property minus any deferred gain (Correct answer)
- The same as the original property's original cost
- Zero
Correct answer: The cost of the new property minus any deferred gain
The replacement property's basis equals its cost minus the deferred gain, preserving the embedded gain for future recognition.
Question 6: Disability insurance premiums paid by an employer on behalf of an employee affect the taxability of disability benefits received in which way?
- Benefits are always tax-free regardless of who pays premiums
- Benefits are taxable to the employee if the employer paid premiums (Correct answer)
- Benefits are taxable only if the disability lasts more than 6 months
- Benefits are taxable only for highly compensated employees
Correct answer: Benefits are taxable to the employee if the employer paid premiums
When an employer pays disability insurance premiums and does not include them in the employee's taxable income, disability benefits received are fully taxable.
Question 7: A commercial property owner receives insurance proceeds in excess of the building's adjusted basis after a total loss. The excess is primarily taxable as what type of income?
- Qualified dividend income
- Long-term capital gain or ordinary income (Section 1250 recapture) (Correct answer)
- Tax-exempt income
- Passive activity income
Correct answer: Long-term capital gain or ordinary income (Section 1250 recapture)
Gain on a commercial building triggers Section 1250 unrecaptured depreciation taxed at up to 25%, with any remaining gain potentially treated as long-term capital gain.
CIA Tax Planning & Compliance 3
When an insured property has accumulated depreciation deducted on prior tax returns and is destroyed, the insurance settlement may trigger which additional tax?