Gifts

1
Chapter 5

• Life Insurance
• Meals / Lodging
• Foreign Income Exclusion
• Tax Benefit Rule
• Scholarships
• Personal Injury Settlements

• Long Term Care Insurance
• Group Term Life
• Parking Allowance

2
Gifts

• Gifts generally, not taxable to recipient.
• Exceptions to general rule
• Gifts to employees
• Death Benefits to Employees (not life insurance).

3
Life Insurance

• ABC Corp bought life insurance on the life of its
  President. Policy is for 1,000,000. The
  President dies and the company receives the death
  benefit. Is it taxable to the corporation?
• Life insurance policy is cashed in during the
  life of the insured. Are the proceeds excluded
  from gross income?
• Matt bought a life insurance policy in 1990.
  Over the last 13 years, he has paid premiums of
  26,000. The policy is cashed in for 48,000.
  Tax consequences.

• Who can qualify for accelerated death
  benefits?
• Terminally Ill (will die w/in 24 months)
• Chronically Ill (unable to perform daily
  activities)

4
Life Insurance (cont)

• Transfer for Valuable Consideration Jeremy
  sells his 50,000 life insurance policy to Kerry
  for 6,000. Jeremy had paid premiums over the
  years of 4,000 (1,000 per year). Two years
  later Jeremy dies and Kerry collects the 50,000.
  
• Tax consequences to Jeremy?
• Tax consequences to Kerry?

• Transfers can be made tax free between
• Partners and Partnerships
• Corporation in which the insured is an officer

5
Scholarships
Problem 34

• If scholarship received is for compensation of
  services, it is compensation.
• Scholarships are not compensation for services.
• Tuition, books and academic fees are excluded
• Room and Board are not excluded.
• Room and Board is considered earned income .
  how does this effect the recipients standard
  deduction?

6
Injury, Sickness, Personal Injury
Problem 37

• Loss of Income generally taxed the same as the
  income replaced, but loss of income related to
  injury or sickness is not taxable (see page
  5-11).
• Reimbursement of Medical Expenses nontaxable
• Personal Injury nontaxable, makes the injured
  party whole.
• Punitive Damages included in gross income.
• Workers Compensation nontaxable
• Discrimination taxable age or sex
  discrimination

7
Employer Sponsored Health Plans

• Group Health Plans qualified plans provide
  benefits to employees on a nondiscriminatory
  basis. Benefit is not taxable to employee and
  deductible for the employer.
• qualified basically means that the benefit is
  provided on a nondiscriminatory basis.
• Receipt of payment under the benefit plan could
  be taxable if not considered a deductible medical
  expense.. see page 5-13.

8
Meals and Lodging
Problem 42 Problem 43

• Meals furnished by the employer on the business
  premises for the convenience of the employer.
• Lodging employee is required to accept lodging
  as a condition of employment.
• What if the lodging is optional?

9
Long Term Care Insurance
Problem 41

• Are the benefits received taxable? Exclusion is
  the greater of
• 250 per day, or
• the actual cost reduced by 3rd party payments

• Reduce the exclusion by the amount of 3rd party
  reimbursement.

10
Employee Fringe BenefitsNo-Additional Cost
Services

• Employee receives services not products
• Employer does not incur substantial additional
  cost, including foregone revenue
• Services are offered to customers in the ordinary
  course of business
• Empty seats on airlines
• Hotel rooms nights for employees
• Rounds of golf for golf course employees

11
Employee Fringe BenefitsQualified Employee
Discounts

• Cannot sell goods for less than cost (gross
  profit)
• Services cannot be reduced by more than 20
• Property or services must be in the same line of
  services as employee works
• Clothes for employees at GAP (employee
  discounts)
• Employee discount for dry cleaning limited to 20
  discount.
• Legal / Medical Treatment

12
Employee Fringe BenefitsDe Minimis Fringes

• Benefit is so small it is impractical to account
  for
• Xeroxing
• Typings
• Faxing
• Christmas turkey

13
Employee Fringe BenefitsTransportation and
Parking

• Transportation - 105 per month (mass transit)
• Parking - 205 per month (2,460 per year)
• Not taxed to the recipient employee
• Both of these can be provided on a discriminatory
  basis i.e provided for the president and the
  vice-presidents, only.

14
Workers Compensation

• Compensation paid to an employee for injuries
  while on the job
• Loss of a limb
• Injury

Not Taxable
15
Foreign Earned Income Exclusion

• Can exclude from US Taxable Income up to 80,000
  per person of foreign earned income.
• Must be a bona fide resident of the foreign
  country
• Must be present in a foreign country for at least
  330 days in any 12 consecutive months.
• The 80,000 is apportioned based on the number of
  days present in the foreign country.

Problem 49
16
Tax Benefit Rule

• If a deduction that is taken in a prior year is
  recovered in a later year, then the recovery
  would be included in income.
• Bad Debt you write off a bad debt or loan
  thinking it is uncollectable. A deduction is
  taken on the return. In a later year, the debt
  is repaid. The repayment is income under the tax
  benefit rule.
• Corporation takes a deduction for the cost of an
  audit. In the subsequent year, the audit fee is
  returned to the corporation as a result of
  litigation. The refund of the audit fee is
  included in income under the tax benefit rule.
• Taxpayer takes a deduction for state income taxes
  paid on her 2002 income tax return. Taxpayer
  receives a refund in 2003 of a portion of the
  state income tax (the tax refund). The refund is
  taxable.