Gross Income Exclusions

1
Chapter 4

• Gross Income - Exclusions

2
Major Statutory Exclusions

• Gifts and inheritances
• Scholarships and fellowships
• Life insurance proceeds
• Awards for Meritorious Achievement
• Distributions from Qualified State Tuition
  Programs
• Payments for Injury and Sickness
• Foreign earned income exclusion

3
Major Statutory Exclusions - contd

• Employee Benefits
• Adoption Expenses
• Meals and Lodging
• Meals and Entertainment
• Dependent Care
• Educational Assistance
• Cafeteria Plans
• Certain Income from discharge of indebtedness
• Exclusion for gain from small business stock

4
Gifts and Inheritances

• Transfers of property with donative intent are
  excludable from gross income whether made during
  life (gift) or at death (inheritance)
• Income earned from such property is subject to
  the income tax rules

5
Scholarships and Fellowships

• Scholarships for tuition, fees, books, supplies,
  and equipment are excluded for degree candidates
• Amounts received for room and board are
  includible in gross income

6
Life Insurance Proceeds

• Life insurance proceeds paid for reason of death
  of the insured are excludible
• Amounts in excess of face value are taxable
• Policies purchased from another individual
  treated as investment
• If surrendered, excess of proceeds over premiums
  paid is taxable
• exclusion is available for accelerated death
  benefits paid to terminally ill person
• Dividends earned on life policies are nontaxable
  to extent of premiums paid
• Interest earned on the dividends is taxable

7
Awards for Meritorious Achievement

• Awards are generally taxable
• Awards for religious, charitable, scientific,
  educational, artistic, literary, or civic
  achievement are excluded from income if taxpayer
• did not enter the contest
• is not required to perform substantial additional
  services
• designates a qualified charitable organization to
  receive the payment

8
Scholarships and Fellowships

• Scholarships for tuition, fees, books, supplies,
  and equipment are excluded
• Amounts received for room and board must be
  included in gross income

9
Distributions from Qualified State Tuition
Programs

• Distributions made from qualified state tuition
  programs are taxable only to the extent they
  exceed donor contributions
• 2001 Tax Act
• Expanded scope of qualified tuition plans to
  include private institutions
• Distributions from state-sponsored plans will be
  excludable if made in 2002 and after
• Distributions from non-state programs will be
  excludable if made in 2004 and after

10
Payments for Injury and Sickness

• Amounts received for physical injury or physical
  sickness are excluded whether paid by insurance
  or from damages
• Damages on nonphysical injury are taxable
• Punitive damages are taxable

11
Employee Benefits

• Adoption Expenses
• An employee is allowed a 5,000 per child
  exclusion for qualified adoption expenses paid by
  employer
• Exclusion increases for child with special needs
  and phased out at high AGI levels
• Alternate adoption credit is available (Chapter
  14)

12
Employee Benefits

• Meals and Lodging
• Employer provided meals and lodging are excluded
  if
• provided on the employers premises
• for the convenience of the employer
• and, for lodging to be excludible the employee is
  required go accept the lodging as a condition of
  employment

13
Employee Benefits

• Meals and Entertainment
• Only 50 of the cost of meals and entertainment
  are excludible
• Dependent Care
• Up to 5,000 of dependent care provided by
  employer is excludible
• Educational Assistance
• Up to 5,250 of employer paid undergraduate
  educational reimbursement is excludible
• Under the new tax law this exclusion has be
  extended to include graduate expenses incurred
  after 12/31/2001 and the provision has been made
  permanent

14
Employee Benefits

• Cafeteria Plans
• Employees may select from cash or nontaxable
  fringe benefits
• Two types of plans
• Supplemental wage plans
• Wage reduction plans
• Employee Achievement Awards (non cash)
• Awarded for length of service and safety
• Employee achievement - limited to 400 value each
• for length of service must be more than 5 years
• Qualified plan awards (e.g. safety)
• limited to 1,600 max and 400 average per
  employee

15
Employee Benefits

• Section 132 Fringe Benefits (Table I4-2)
• No additional cost
• Employee Discounts
• Services limited to 20
• Merchandise limited to gross profit
• De minimis - so small accounting is unreasonable
• Qualified transportation
• Limited to 175/mo. parking and 65 for other
• Recreation and athletic facilities

16
Foreign Earned Income Exclusion

• U.S. citizens can exclude 76,000 of foreign-
  earned income in 2000 in lieu of taking the
  foreign tax credit
• Both spouses can take the exclusion if each has
  sufficient earned income
• If change from exclusion method to credit method
  may not change back for 5 years without approval
• Must prorate unless TP is resident of foreign
  country for entire tax year or 330 days during 12
  consecutive months
• Deductions directly attributable to foreign
  income are disallowed
• Additional exclusion for high housing costs

17
Income from Discharge of Indebtedness

• General Rule income is recognized on a discharge
  of indebtedness
• Exception when
• Discharge is a gift
• Discharge is a bequest (forgiven through will)
• Discharge occurs in bankruptcy
• Discharge occurs when TP is insolvent and
  discharge does not make TP solvent (but, must
  reduce tax attributes)
• Discharge is from student loan for certain
  approved post-education employment

18
Exclusion for Gain from Small Business Stock

• Noncorporate TPs may exclude 50 of the gain on
  disposition of certain qualified small business
  stock
• must be issued after August 10, 1993
• held more than 5 years
• a C corporation with not more than 50 million of
  gross assets, with 80 of value of assets used in
  active trade or business
• Cannot be professional services, financial
  services, hospitality, mining/oil/gas production
• Exclusion limited to 10 million or 10 times
  basis of stock disposed of during year.

19
Holocaust Restitution Payments

• Restitution payments received after 1999 by
  victims of Nazi persecution or their heirs or
  estates are not includable in gross income for
  federal income tax purposes
• 2001 Tax Act change