Detailed Answer
(b) The requirement is to determine the amount of life
insurance payments to be included in a widow’s gross income.
Life insurance proceeds paid by reason of death are excluded
from income if paid in a lump sum or in installments. If the payments
are received in installments, the principal amount of the
policy divided by the number of annual payments is excluded
each year. Therefore, $1,200 of the $5,200 insurance payment is
included in Penelope’s gross income.
Annual installment $ 5,200
Principal amount ($100,000 ÷ 25) – 4,000
Gross income $ 1,200