Question

Arnie was the beneficiary of his wife's life insurance policy. He received $100,000 in June from the policy after his wife's death. He also sold some land that he had purchased a couple of years earlier. He sold the land for $6,000. He only paid $3,500 for the land when he bought it. Arnie is self-employed and earned a profit in his business of $55,000 (ignoring the self-employment tax deduction). What is the amount of Arnie's gross income for the current year?

a. $61,000

b. $157,500

c. $57,500

d. $161,000

Answer 1

Arnie's gross income for the current year includes his business profit and the profit from the sale of land, totaling $57,500, which is option (c). The life insurance payout is not taxable and is not included in the gross income calculation.

Step-by-step explanation:

The question is asking us to calculate Arnie's gross income for the current year by considering three different financial events: the life insurance payout, the sale of land, and his business profit. Life insurance proceeds received upon the death of a spouse are typically not taxable income, so we don't include the $100,000 insurance payout in Arnie's gross income.

However, the profit from the sale of land, which is the difference between the selling price ($6,000) and the purchase price ($3,500), adds $2,500 to Arnie's gross income. We also include the profit from his self-employed business, which is $55,000.

The amount of Arnie's gross income for the current year can be calculated by adding up his income from three different sources:

Life insurance policy payout: $100,000

Sale of land: $6,000 - $3,500 (cost basis) = $2,500

Profit from business: $55,000

Adding up these numbers, Arnie's gross income for the current year is $100,000 + $2,500 + $55,000 = $157,500.