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Survey Of Taxation > Chapter 4: Exclusions From Gross Income > Flashcards

Chapter 4: Exclusions From Gross Income Flashcards

1
Q

Loans

A

Not income because of obligation to repay

Not statutory, considered obvious

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2
Q

Scholarships

A

Not income. Specifically excluded (section 117)

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3
Q

Source of income exclusions

A
  • specific items contained in IRC (enacted by Congress)
  • administrative exclusions (allowed by provision in IRC as interpreted by the IRS)
  • judicial exclusions (IRC statute as interpreted by the court)
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4
Q

Items that are not income

A
  • unrealized income (unrealized appreciation/gain)
  • self-help income
  • rental value of personal use property (economic benefits of living in own home)
  • gross selling price of property (recovery of capital)
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5
Q

Ordinary stock dividends

A

Excluded from gross income as do not fit definition of income (no value realized)

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6
Q

Self-Help income

A

Benefits (savings) arising from work the taxpayer does for themselves (if hired someone else would have to pay for) are not income per taxes

Also does not change basis of property

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7
Q

Major statutory exclusions: social policy reasoning

A
  • gifts and inheritances
  • life insurance proceeds
  • public assistance payments
  • qualified adoption expenses
  • payments for personal sickness or injury
  • discharge of indebtedness during bankruptcy or insolvency
  • gain on sale of personal residence
  • partial exclusion on social security benefits
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8
Q

Major statutory exclusions: economic incentive reasoning

A
  • awards for meritorious achievement
  • certain employee fringe benefits
  • partial exclusions for scholarships
  • foreign earned income
  • interest on state and local obligation
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9
Q

Gifts and inheritances

A

Not taxable for receiver

May be taxable to donor (gift tax)

Income received after transfer from property that was gifted is taxable

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10
Q

Gifts vs prices/ additional compensation

A

Depends on the intent of the donorn

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11
Q

Transfer of property in family business: gift vs salary/wages

A

Depends on the FMV of services actually preformed by person receiving payment. Amounts that exceed fair value of services excess is a gift

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12
Q

Life insurance proceeds

A

Proceeds paid to beneficiary on death are not taxable whether paid in lump sum or in installments

Any amounts received in excess of face amount of policy usually ARE taxable as interest

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13
Q

Exception to complete exclusion of life insurance from income

A

If insurance policy is obtained by the beneficiary in exchange for valuable consideration from a person other than the insurance company. (Selling life insurance policy for cash)

Exclusion then limited to consideration paid (+ premiums/ other sums subsequently paid by the buyer)

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14
Q

Under what circumstances are the proceeds fro a transferred life insurance policy still excludable from gross income?

A

if the beneficiary’s basis is found by reference to the transferor’s basis (gift) of if transferred to the insured, the insured’s partner, a partnership that includes the insured or a corporation in which the insured is a shareholder or officer

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15
Q

Tax consequences if life insurance policy is surrendered or sold

A

if the policy is sold or surrendered before death any excess of the proceeds over net premiums paid is taxable (no loss recognized if premiums higher than proceeds)

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16
Q

Accelerated death benefits

A

payments made to a terminally ill person or periodic payments made to a chronically ill person

payments excluded from gross income if
- terminally ill person likely to die within 24 months
- for chronically ill persons exclusions limited to greater of $400/day or actual daily cost of care

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17
Q

dividends on life insurance and endowment policies

A

normally not taxable

considered partial return of premiums paid

if exceed total of premiums paid are taxable.

if left with the insurance company to earn interest, the interest is taxable

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18
Q

Awards for meritorious achievement non-taxable IF

A
  • award and prize for religious, charitable, scientific, educational, artistic, literary, or civic achievement
  • recipient was selected without action on their part to enter into the contest/ proceeding
  • recipient does not have to perform substantial future services as a condition to receiving award
    AND: they designate that the payor pay the amount of the award to either a government unit or charitable org

becomes an exclusion from AGI (rather than deduction from)

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19
Q

Limitations of exclusion of scholarships from gross income

A

exclusion for scholarships is limited to the amount the scholarship is used for qualified tuition and related expenses

these expenses do NOT include costs of living (room/ board) or the value of those things if supplied

includes work-study earnings

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20
Q

Qualified tuition plans

A

QTP
section 529 plans - must be maintained by state government or private educational institution

contributions made after tax and the savings grow tax-free (but over a certain amount may be subject to gift tax)

withdrawals are tax free as long as the amounts are used for qualified education expenses (in this case cost of living is included)

donors may change beneficiary to another member of the original beneficiary’s family without tax consequences

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21
Q

Qualified Tuition plan exclusion limitations

A
  • if used for elementary or secondary education exclusion is ONLY for tuition and limited to $10,000 per student per year
  • amount of QTP withdrawal excluded from gross income is reduced by American Opportunity credit and lifetime learning credit
  • if not all used for education expenses the amount treated as income determined by annuity rules and may be subject to a 10% penalty
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22
Q

payments for injury and sickness: damages

A

Damages awarded for injury or sickness are excludable from gross income (even if award exceeds expense)

does not include: punitive damages, damages for non-physical injuries (though medical expenses related to nonphysical injuries are included, as are payments for emotional distress attributable to a physical injury) amounts awarded to compensate for lost income

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23
Q

payments for injury and sickness: accident and health insurance policy

A

If policy purchased by taxpayer: all benefits excluded from gross income (even if award exceeds expense)
- if long-term care the exclusion is limited to the greater of $400/day or the actual cost of care

If policy is purchased by the taxpayer’s employer: all benefits must be included in gross income

if cost of coverage is split: amount taxable is prorated proportionately

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24
Q

payments for injury and sickness:medical expense deduction

A

If medical expense reimbursements were excluded from gross income they cannot also be an itemized deduction

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25
Q

Employee fringe benefits that may be excluded from gross income

A

employer-paid insurance
section 132 benefits
meals and lodging
dependent care
cafeteria plans
certain employee awards
educational assistance
adoption expense assistance

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26
Q

Employee fringe benefits: employer-paid insurance

A

Premiums Generally: employers may deduct premiums paid and employee is except from having to include them in their gross income (not including some types of life insurance)

medical, health, group term life insurance coverage benefits : generally excludable
disability coverage benefits: generally taxable (but may qualify for credits)

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27
Q

Premiums paid by employee

A

If the premiums are paid by the employee the benefits are excluded from gross income but the premiums are not deductable (except for medical insurance as a medical expense. Subject to ago limitations)

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28
Q

Nondiscrimination requirements for employee insurance plans

A

Designed to ensure that requirements for insurance plans do not discriminate against lower paid workers

29
Q

Nondiscrimination requirements for employee insurance plans

A

Designed to ensure that requirements for insurance plans do not discriminate against lower paid workers

30
Q

Discrimination test for employee insurance plans

A
  • are a sufficient number of non-highly compensated employees covered
  • do non-highly compensated employees receive comparable benefits to the highly compensated employees
31
Q

Highly compensated employees

A

Five highest paid officers, greater than 10% shareholders, and highest paid 25% of other employees

32
Q

If insurance plan discriminates in favor of highly paid employees

A

Employees favored must include medical reimbursements not available to others in their gross income

33
Q

Life insurance premiums paid by employer on employee’s behalf

A

Generally deductable for employer, and employee must include in gross income

34
Q

Group term life insurance exception

A

Premiums attributable to first $50,000 of group term life insurance may be excluded from employee’s gross income

Policy must have broad coverage of employees and coverage must bear a uniform relationship to compensation

Coverage over $50k is included in gross income in AMOUNT ESTABLISHED BY REGULATION

35
Q

Determining amount of group term life insurance coverage to include in employee income

A
  • for coverage that exceeds $50,000

= (amount exceeding 50k/ 1000 x premium for employees age) x 12

Premium determines by table from IRS which are given per $1000 per month (hence divide by 1k x 12)

36
Q

Cases of discrimination in group term life insurance

A

Employees favored must include in gross income the greater of the premiums paid on their behalf or the amount determined based on IRS table without $50k exclusion

37
Q

Section 132 fringe benefits excluded from income

A
  • no additional cost benefits (available to employee / spouse / dependents, limited to services)
  • what qualified employee discounts (service discounts limited to 20%, property to gross profit percent. Not permitted on real or investment property)
  • Working condition benefits (professional membership fees)
    -de minimus benefits
  • qualified transportation benefits (limited to $270/ month in 2021)
  • recreation and athletic facilities
  • job-related education assistance
38
Q

Discrimination and section 132 benefits

A

Discrimination on availability of benefits prohibited except for:
- working condition benefits
- qualified transportation benefits

39
Q

Employer deductible for section 132 benefits

A
  • employer can only deduct 50% of net cost of de minimis benefits
  • employer cannot deduct qualified transportation fringe benefits or recreation/athletic benefits
40
Q

Employee achievement awards and qualified awarda

A

May be excluded by employee and deducted by employer as long as
- award is not cash or cash equivalents
- must be for safety record or length of service
- limited to $400/ employee/year
- must be given in a meaningful presentation/ not create a significant likelihood of being disguised compensation
-length of service awards cannot be within 1st five year of employment or if employee has received such an award in the preceding four years
- no more than 10% of an employers eligible employees may receive an excludable safety achievement award in one year. Their positions must involve safety concerns

41
Q

Meal and lodging exclusions

A

May be excluded from employee’s income if furnished on the employer’s premises, for the convenience of the employer and if the lodging is a condition of employment

Lodging cannot be excluded if employee has choice between lodging and cash allowance

Meal must be provided by employer (supper money excludable if de minimis)

Employer may only deduct 50%

42
Q

Employee reimbursements for meals and entertainment

A

Generally not required to include a reimbursement in gross income for job related expenses where employee is required to provide an accounting to employer

Taxable if considered compensation for services

Unclear in book example

43
Q

Employee death benefits

A

Payments for deceased employee’s past services are taxable to recipient

Other amounts are taxable depending on circumstances. No tax if a gift (but then not deductible by employer) (if taxable then deductible)

Intention matters

44
Q

Dependent care assistance programs

A

Employer financed programs that provide care for an employees children/dependents

Upto $5000 excludable each year by employee

Care must be such that if employee had paid for it it would be eligible for dependent care credit

Program cannot discriminate

45
Q

Adoption expenses

A

Exclusion of amounts paid pursuant to an employer’s written adoption assistance plan

2021: exclusions of up to $14,400 qualified expenses paid by employer connected with child under 18

Exclusion phased out for modified AGI between 216,660 and 256,660

46
Q

Educational assistance from emploter

A

Employee may exclude annual payments of up to $5,250

Also per COVID relief student loan repayments made by employer before 2026 are eligible for this exclusion

47
Q

Cafeteria plans

A

Plans that offer employees the option of choosing cash or statutory nontaxable fringe benefits

Cash is taxable but value of nontaxable benefit excluded from gross income

Cannot discriminate

48
Q

Flexible spending accounts

A

On a cafeteria plan an employee elects to set aside pre-tax (?) funds for medical expenses

Only $550 can roll from one year to next so amount unused may be lost

Employers required to pay expenses up to agreed upon amount even if employee hasn’t had full amount withheld yet

Max amount of employee contribution in 2021; $2,750 (does not apply to share of insurance premiums)

49
Q

Tax favored fringe benefits and business owners

A

Owners, including shareholders, mostly not eligible for tax favored benefits

Owners can deduct health insurance premiums and retirement contributions from AGI

Employees of c corps can get tax favored fringe benefits if hold stock but not s corp shareholders with more than 2% ownership

50
Q

Foreign tax credit

A

While income (foreign or domestically earned) of citizens outside the U.S. is generally subject to U.S income tax, U S. citizens may subtract income taxes paid to foreign countries from their U.S. income tax liability

51
Q

Foreign earned income exclusion

A

May be taken on foreign-earned income in lieu of the foreign tax credit

Excludes first $108,700 (2021) of foreign-earned income from gross income (amount applicable to each spouse if MFJ - community property rules ignored)

52
Q

Switching between foreign income exclusion and foreign tax credit

A

If take exclusion one year may switch to credit next year but then may not reelect the exclusion before the sixth tax year after the tax year in which the change was made (restriction may be waived by IRS)

53
Q

Foreign-earned income

A

Earnings from personal services rendered in a foreign country.

Income from US government and deferred compensation does not qualify for foreign income exclusion

If business produces income from both services and capital no more than 30% of business net profits may be excluded

54
Q

Residency requirements for foreign earned income

A

Taxpayer must be
- resident of one one or more foreign countries for the entire tax year or
- be present in one or more foreign countries for 330 days during 12 consecutive months (need not be a calendar year)

Exclusion may be prorated if taxpayer is not resident of a foreign country for an entire year

55
Q

Foreign housing cost exclusion

A

For housing costs that exceed 16% of the foreign earned income exclusion limitation.

Maximum exclusion of 30% of limitations

Exclusion = total housing costs - $17,392 (up to max of $15,218)

Available to employees foreign countries. Self employed taxpayers in foreign countries may be able to deduct a portion of housing costs

Limit may be higher for cities with higher cost of living

Reduced if taxpayer does not incur cost for entire year

56
Q

Computing taxes on foreign income

A

If not all foreign income is excluded special tax computation is necessary (higher taxes applied to taxable portion of foreign- earned income

57
Q

FICA taxes abroad

A
  • employed by foreign company= generally exempt from fica taxes
  • employed by American company = still subject to FICA except in instances where tax treatment states Americans subject to comparable host country tax
58
Q

Income from cancellation of debt

A

Debt cancelled or forgiven is included in gross income

Important to distinguish from gift, (not taxable) bequest (not taxable), or renegotiation of purchase price (not taxable but changes basis)

If debt unenforceable under state law debt may not be considered income

59
Q

Exception for cancellation of debt as gross income

A

Discharge from bankruptcy or when taxpayer is insolvent

Insolvent if debt owed > FMV of assets owned (all assets reduced to point of solvency)

60
Q

Student loan forgiveness

A

If loans discharges contingent on performance of public services and loans is made by gov, educational or charitable loans and loan proceeds used to pay for educational expenses or refinancing student loan discharge is not taxable.

Discharge on death of student also not taxable

61
Q

Home mortgage forgiveness

A

Through 2025 up to $750,000 of mortgage debt forgiveness on a personal residence may be excluded from gross income

Only for mortgages acquired in connection with acquisition/improvement of personal residence

Reduces taxpayer’s basis in the residence by amount of exclusion

62
Q

Exclusion for gain from small business stock

A

100% exclusion for gains realized by noncorporate taxpayers on the sale or exchange of small business stock bought after Sept 27, 2010 held over five years (other exclusion rates for other years)

Limit on amount of gain excludable for each stock. May not exceed greater of:
- $10million, reduced by amounts previously excluded for gains on a company’s stock or
- 10x taxpayer’s aggregate adjusted basis for stock disposed of during the year (based on FMV of assets contributed to the corporation)

No gain recongized if stock held for over six months sold and proceeds reinvested in other small business within 60 days (basis reduced by unrecognized gain)

63
Q

Who may issue qualified small business stock

A

C corporations not specifically excluded with an aggregate adjusted basis of not more than $50 million of gross assets at least 80% of which is used in active conduct of one or more qualified trades or businesses

64
Q

Exclusions for stocks acquired before Sept 27, 2010

A

Stock acquired:
- after August 10, 1993, but before February 18, 2009 = 50% (some may be 60%)
- after February 17th 2009 but before September 28th, 2010 = 75%

Gains after exclusion taxes at rates of no greater than 28%

65
Q

Miscellaneous other exclusions

A
  • annuities paid survivors of public safety officers killed on duty
  • military disability pay, combat pay, and housing allowance
  • housing allowance for ministers and on campus housing for educational institution employees
  • qualified real property business debt discharge
  • foster care payments (certain allowances)
  • awards for wrongful incarceration
  • rural letter carrier’s allowance for equipment maintenance allowance received
  • qualified Roth IRA distributions
  • education IRA distributions
  • personal foreign currency gains under $200
66
Q

Exclusion for gain from sale of personal residence

A

Up to $250,000 (or $500,000 MFJ) may be excluded of gain of the sale of a personal residence

67
Q

Tax exempt income that must be disclosed on tax returns

A

Tax exempt interest (only disclosed if taxpayer has other income that requires filing)
Tax exempt social security benefits

68
Q

Nontaxable fringe benefits withholding consideration

A

Generally if a fringe benefit is nontaxable employers do not withhold taxes on that amount or report it on W-2s

Survey Of Taxation (14 decks)

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