Federal Taxation ch4

7/24/2019 Federal Taxation ch4

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Chapter 4: Gross Income:

ExclusionsPrentice Halls Federal Taxation 201:Indi!iduals

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Items That are 'ot Income

(nreali)ed

Income

*el+,Help

Income-ental

.alue o+Personal(se

Propert"

Gross*ales Priceo+ Propert"

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Exclusions

Gi+ts/i+e

Insuranceel+are

Certain*cholarship

s

Certain

Pmts +orInur"

Certain

Emplo"eeene3ts

Certain

Forei#nIncome

Tax,ExemptInterest

*eries EEond

Interest

/easeholdImpro!eme

nts

eritorious5chie!eme

nt 56ards

Certain7i!orce

Pa"ments

Gain +rom*ale o+Home

-oth I-57istri8ution

sC97 ** ene3ts

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Gi+ts and Inheritances

Generall"% #i+ts are not taxa8le tothe recipient&

5n" income deri!ed a+ter the donee

ta;es title to the propert" is taxa8leto the donee&

Pri)es are not considered #i+ts% 8utare income&

5n" 8onuses paid 8" an emplo"er toan emplo"ee are not considered a#i+t% 8ut are taxa8le 6a#es&



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/i+e Insurance Proceeds

Generall"% +ace !alue o+ li+einsurance proceeds paid upon deathare not taxa8le income to recipient&

Exception: i+ taxpa"er purchases apolic" insurin# another% then tax,+ree portion limited to purchaseprice plus additional premiums paid&

5lso% i+ amounts recd < +ace !alue%excess = taxa8le income&

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/i+e Insurance Proceeds?contd@Generall"% i+ li+e insurance is sold +or a

lump sum prior to death o+ insured%taxa8le income +or amount recei!ed 2K and JTPs@

L >2K plans A a+ter,tax contri8utions#ro6 and can 8e 6ithdra6n tax,+ree i+amounts are used to pa" +or Buali3edhi#her education expenses +or the8ene3ciar"&

Juali3ed Tuition Plans ?BJTP@ areoMered 8" states or pri!ate uni!ersities&

Indi!iduals either prepa" +or tuitioncredits or participate in a plan similar toa L >2K&



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Juali3ed Tuition Pro#rams ?L >2Kand JTPs@ A contd

Juali3ed expenses = tuition%8oo;s% +ees% supplies% euipment%and room and 8oard&

'o income limitations so e!en6ealth" taxpa"ers canparticipate&



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Juali3ed Tuition Pro#rams A9ther Issues96ner o+ account can chan#e

8ene3ciaries 6ithout tax impact&ene3ciaries must 8e a mem8er o+ori#inal 8ene3ciaries +amil"&

Education credits reduce an" exclusionunder L >2K&

Pa"ors can ma;e a lar#e #i+t into the

plans and can treat it as ha!in# paido!er > "ears ?ma;es it possi8le to #o8elo6 the D14%000 per person threshold+or tax,+ree #i+ts@&



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Pa"ments +or Inur" and *ic;ness?L 104?a@@

Pa"ments Bon account o+ personalph"sical inuries or ph"sical sic;nessare excluded +rom income&

This includes pa"ments +or personalinuries% pain and suMerin#% andemotional distress as lon# as the#enesis o+ the losses 6as ph"sical inur"

caused 8" the pa"or&-eim8ursements +or medical expenses

+or non,ph"sical inuries are alsoexcluda8le&



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Pa"ments +or Inur" and *ic;ness?L 104?a@@ A contd

Puniti!e dama#es are al6a"staxa8le e!en i+ ph"sical inur" isin!ol!ed&

5mounts recei!ed under accidentand health insurance policies areexcluda8le e!en i+ 8ene3ts

reim8urse +or lost 6a#es ?e&%short, or lon#,term disa8ilit"insurance paid 8" emplo"ee and6ith the premiums not excluded+rom 6a es &



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Pa"ments +or Inur" and *ic;ness?L 104?a@@ A contd

/on#,term care pa"ments areexcluda8le up to D0 per da"&

edical expenses paid 8" a

health insurance plan cannot 8ededucted 8" the taxpa"er&

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Emplo"ee ?BEE@ Frin#eene3tsGenerall"% an"thin# paid to A or on

8ehal+ o+ A an EE is includa8le inincome&

Exception: certain EE +rin#e 8ene3ts&

Emplo"er can deduct the expenses% 8utEE does not ha!e to include in income&

Examples o+ excluda8le +rin#e 8ene3ts

A emplo"er paid insurance% par;in#%pro+essional license +ees% trainin#% #"mmem8erships% etc&



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Frin#e ene3ts A Insurance

Generall"% emplo"er,paid insurancepremiums are not includa8le in EEsincome& 5n" 8ene3ts paid under themedical% health% and #roup term insurance

?limited@ are excluda8le to the EE&Exception A premiums +or emplo"er,

pro!ided term li+e insurance +or < D>0N o+co!era#e are includa8le in EEs income&

5n" 8ene3ts paid +or disa8ilit" areincluded in EEs income i+ the premiums6ere not includa8le&



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L 12 Frin#e ene3ts

Emplo"er ma" deduct expenses% EE#enerall" does not ha!e to include inincome&

Generall"% cannot Bdiscriminate ?e&%8ene3ts a!aila8le onl" to the hi#hl"compensated@ and still ;eepexcluda8le treatment&

Can discriminate on or;in#Condition and Juali3ed TransportationFrin#e ?descri8ed on next slide@&



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L 12 Frin#e ene3ts AT"pes'o,additional,cost A unused

emplo"ers ser!ices A hotel rooms%airplane seats&

Emplo"ee discounts A limited to 20Oon ser!ices% no discounts +or real orin!estment propert"&

or;in# condition A e&%

outplacement% compan" car&7e minimus A e&% emplo"ee a6ards

?L 4@% +ree coMee% Christmas part"&

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L 12 Frin#e ene3ts A T"pes?contd@

eals and entertainment A taxpa"ers6ho attend and pa" +or 8usiness meals6ith customers or collea#ues do notha!e to include cost o+ meal consumed

in hisher income& Expenditures cannot8e a8usi!e&

5doption expense A EE can exclude up

to D1%400 ?201>@ o+ uali3ed adoptionexpenses paid 8" emplo"er& Exclusionphased out 8et6een D201%010 andD241%010&



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Emplo"ee death 8ene3t A taxa8le6a#e or 8onus due to emplo"eeunless it is clear EE has 8een +ull"

compensated and amounts paidto +amil" are out o+ s"mpath" and#enerosit"&

7ependent care A Emplo"er canpro!ide up to D>%000"ear&Excluda8le 8" EE i+ expenditure6ould ha!e normall" uali3ed +orthe de endent care credit&



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Ca+eteria plans ?or Flexi8le *pendin#5ccounts@ A EE can elect to ta;ecompensation in cash or ha!e mone"set aside to pa" +or 8ene3ts& I+ EE

selects cash% then amount is taxa8le& I+EE selects statutor" non,taxa8le +rin#e8ene3ts ?e&% health insurance@% thenamounts are excluda8le&

Juali3ed transportation +rin#e A e&%8us passes ?ltd to D10mo&@% +reepar;in# ?ltd to D2>0mo&@&



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-ecreation and #"m mem8ershipsEducational assistance A limited too8,related education and trainin#&

EE can exclude up to D>%2>0 +ortuition% 8oo;s% and +ees +orunder#raduate or #raduate

classes&eals and lod#in# A see 8elo6 +oradditional explanation&



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eals and /od#in#

'ot includa8le i+ +urnished onemplo"ers premises and +orcon!enience o+ emplo"er&

/od#in# must 8e condition o+emplo"ment&

There must 8e a su8stantial

8usiness reason +or reuirin#emplo"ees presence&



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eals and /od#in#Examples5 3reman must li!e in and sta"close to the station durin# hishershi+t due to the need to 8e close to

necessar" euipment and torespond uic;l" to emer#encies&

5 hospital t"picall" pro!ides +ree orhi#hl" discounted meals topersonnel since the" need to 8e

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Forei#n,Earned Income Exclusion

Generall"% (* citi)ens are taxed on allincome e!en i+ earned in a +orei#ncountr"&

*ince the +orei#n countr" could alsotax the income% the (* citi)en could8e su8ect to t6o la"ers o+ tax&

(* tax s"stem pro!ides a relie+ to

dou8le taxation& Taxpa"er can selecteither a +orei#n tax credit ?BFTC@ or+orei#n,earned income exclusion&



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Forei#n,Earned Income Exclusion?contd@

Taxpa"er can elect to reduce their (*tax lia8ilit" dollar,+or,dollar 8" the+orei#n tax credit ?taxes paid to theother countr"@&

Taxpa"er could alternati!el" elect toexclude up to D100%00 ?201>@ o++orei#n,earned income +rom #rossincome reported on Form 1040&

Taxpa"er can increase exclusion +orhousin# costs < 1O x limitation o+D100%00 ?201> amount@&



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Forei#n,Earned Income Exclusion?contd@

To claim exclusion% taxpa"ermust:

e a 8ona 3de resident o+ one or

more +orei#n countries 5'7 e present in the +orei#n countries

+or 0 da"s 6ithin 12 consecuti!emonths&

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7ischar#e o+ 7e8t ?contd@

Intention o+ the parties controls 6hatt"pe o+ transaction occurred 6hende8t is dischar#ed&

I+ #i+t or 8euest% taxpa"er does notinclude in income&

I+ reduction in purchase price%taxpa"er does not include in income&

I+ cancellation o+ de8t ?BC97@% thentaxpa"er ma" ha!e to reco#ni)e+or#i!en amount in income&



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7ischar#e in an;ruptc" andInsol!enc"

Generall"% C97 results in incomeinclusion +or taxpa"er ?L 1@&

Exceptions ?L 10@:

7ischar#e occurs in 8an;ruptc" 9-Taxpa"er is insol!ent at time o+

dischar#e&



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For#i!eness o+ *tudent/oans*tudent /oans A +or#i!en

amounts not includa8le i+taxpa"er 6or;s in certain

pro+essions in speci3ed pu8licser!ice sectors&

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Tax Plannin#Considerations

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Federal Taxation ch4

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