Q2 (Life Insurance Payments and Qualified Pension Plans). Problem #32 | Lucinda

[Hint: Determine the amount of gross income for Harvey. The $5,000 payment is called death benefit payment and is taxable. Dont write a letter to Harvey.]

32. LO2 Lucinda, a welder for Big Auto, Inc., dies in an automobile accident on March 14 of this year. Big Auto has a company policy of paying $5,000 to the spouse of any employee who dies. In addition to the $5,000 payment, Big Auto pays Harvey, Lucindas husband, $1,600 in salary and $1,100 in vacation pay Lucinda had earned before her death. Harvey also collects $120,000 from a group term life insurance policy Big Auto provided as part of Lucindas compensation package. Lucinda had contributed to a qualified employer-sponsored pension plan. Big Auto had matched Lucindas contributions to the plan. The plan lets the beneficiary of an employee who dies before payments begin take the plan balance as an annuity or in a lump sum. Harvey elects to take the $250,000 plan balance in a lump sum. Write a letter to Harvey explaining the tax consequences of each payment he receives.