Gross income: Exclusions

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Chapter 4

• Gross income Exclusions

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Learning Objectives

• Explain the conditions that must exist for an
  item to be excluded from gross income
• Determine whether an item is income
• Decide whether specific exclusions are available
• Understand employment-related fringe benefit
  exclusion items

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Items That Are Not Income

• Unrealized income
• Land valued at 20,000 beginning of year
  appreciates to 40,000 at end of year, the
  20,000 increase in value is unrealized income
  and is not subject to tax.

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Items That Are Not Income

• Self-help income
• The amount saved is not subject to tax
• Cleaning your own carpet
• Repairing your car
• Rental value of personal use property
• Selling price of property
• Only the gain, not the entire selling price

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Major Statutory Exclusions

• Social generosity or benevolence
• Gifts and inheritances
• Gain on personal residences
• Economic incentives
• Exclusion of certain scholarships
• Employee fringe benefits

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Gifts And Inheritance
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Life Insurance Proceeds

• Paid by reason of death, generally non-taxable
• Policy matures or is surrendered, the excess of
  proceeds over the premiums paid is taxable to
  recipient
• Dividends received on life insurance and
  endowment policies are normally non-taxable
  because they are considered return of premiums
  paid

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Awards For Meritorious Achievement

• Awards for religious, charitable, scientific,
  etc. are not taxable if
• Did not enter contest
• Is not required to perform substantial future
  services
• Designates a qualified charitable organization to
  receive the payment

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Scholarships And Fellowships

• Scholarships are excluded for degree candidates
• Tuition
• Fees
• Books
• Supplies
• Equipment
• Not room and board

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Payments For Injury Or Sickness

• Injury includes both physical and mental
• Disability income policy is non-taxable if
  purchased by taxpayer

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Section 132 BenefitsEmployee Fringe Benefits

• No additional cost benefits
• Employee discounts
• Working condition benefits
• De minimis benefits
• Recreation facilities
• Transportation fringes

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Employer-paid Insurance

• Premiums on health, accident, disability and
  qualifying group term insurance
• Most employee life insurance premiums
• Benefits from non-discriminatory self-insured
  plans

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Meals And Lodging

• Provided on employers premises
• For the convenience of employer
• As a condition of employment for lodging

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Meals And Entertainment

• Sutter rule
• 50 of the cost of entertaining customers is
  deductible

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Other Fringe Benefits

• Dependent care (up to 5,000)
• Educational assistance (up to 5,250)
• Cafeteria plans (flexible spending plans)

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Foreign Earned Income

• To qualify
• Must be bonafide resident of one or more foreign
  countries for an entire taxable year or for 330
  days during a period of 12 consecutive months
• Exclude up to 80K

• Foreign tax credit
• Alternate option

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Income From The Discharge Of A Debt

• If debt is cancelled or forgiven, the
  taxpayer may have to include the cancelled amount
  in gross income, but there are some exceptions,
  for example
• Student loan the discharge of certain
  student loans is excluded from gross income if
  the discharge is contingent on the individuals
  performing certain public services.

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Exclusion For Gain From Small Business Stock

• 50 of gain realized from small business stock
  issued after August 10, 1993 may be excluded from
  gross income, if held for more than five years,
  taxed at 28 (effective tax rate 14).

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Compliance And Procedural Considerations

• Form W-2 If a fringe benefit is not taxable,
  then it may be excluded from an employees W-2.
• Penalties
• For failure to report - 50 per failure
• For failure to withhold 100
• This penalty can be imposed on the employer and
  other people, such as officers or accountants