©2011 Pearson - PowerPoint Presentation

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©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide2

GROSS INCOME: EXCLUSIONS

Items that are not income

Major statutory exclusionsTax planning considerationsCompliance and procedural considerations

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Items that Are Not Income

Unrealized income

Self-help incomeRental value of personal-use propertySelling price of property

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Education, Inc. Publishing as Prentice HallSlide4

Unrealized Income

Example:

Land

valued at $20,000 beginning of year appreciates to $

45,000

at end of year

The $

25,000

increase in value is unrealized income and not taxable

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Self-Help Income

The amount saved is

not subject to taxCleaning your own carpet

Repairing your car

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Selling Price of Property

Only

gain on sale of property is taxable

Selling price

–

Basis in property

= Gain on sale of property

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Major Statutory Exclusions

(1 of

2)Gifts and inheritances

Life insurance proceeds

Adoption expenses

Awards for meritorious achievement

Scholarships and fellowships

Distributions from qualified tuition programs

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Major Statutory Exclusions

(2 of

2)Payments for injury and sickness

Employee fringe benefits

Foreign-earned income exclusion

Income from the discharge of a debt

Exclusion for gain from small business stock

Other exclusions

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Life Insurance Proceeds

Paid by reason of death

Generally non-taxable

Policy surrendered not for death

Excess of proceeds over the premiums paid taxable to recipient

Dividends on life insurance and endowment policies non-taxable

Considered return of premiums paid

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Adoption Expenses

Adoption credit

Tax credits or an exclusion for amounts paid pursuant to an adoption assistance plan created by an employer

Employee may exclude up to $

12,170

Phased out between $

182,520

and $

222,520

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Awards for Meritorious Achievement

Awards for religious, charitable, scientific, etc. are not taxable

if ALL

criteria are met:

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 excluded for degree candidates used for qualified tuition and related expenses

Required for courses of instruction at an educational institution

Tuition, fees, books, supplies, equipment

Not room and board

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Distributions from

Qualified

Tuition Programs: §529 Plans (1 of 2)

Earnings while in a §529 plan are not taxable

Earnings distributed excluded from income if used by beneficiary for qualified tuition and related expenses

Tuition, fees, books, supplies, equipment,

AND

Room and board if ≥ half-time student

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Distributions from Qualified

Tuition

Programs: §529 Plans (2 of 2)

Distributions not used for qualified tuition expenses

Included in beneficiary’s income,

AND

Subject to a 10% penalty

Beneficiary must be “family” member

Beneficiary may be changed w/o tax consequences

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Payments for Injury and Sickness

Injury includes both physical and mental

Disability income policy is non-taxable if purchased by taxpayerTaxable if purchased by employer

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Employee Fringe Benefits

(1 of 2)

In general

Employer-paid insurance

§132 fringe benefits

Employer awards

Meals and lodging

Meals and entertainment

Employee death benefits

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Employee Fringe Benefits

(2 of 2)

Dependent care

Educational assistance

Cafeteria plans

Flexible spending plans

Interest-free loans

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Employee Fringe Benefits in General

Compensation generally taxable

Law encourages certain types of fringe benefits by Making them nontaxable to the employee,

AND

Deductible by the employer

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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

See Topic Review

1

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§132 Fringe Benefits

No additional cost benefits

Employee discountsWorking condition benefitsDe

minimis

benefits

Transportation fringes

Athletic facilities

See Topic Review

2

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Employee

Awards

Employee achievement awards and qualified plan awardsMust be tangible personal property

Limited to average of $400/employee

Max award $1,600

Includes safety or length of service

Must not discriminate in favor of highly paid employees

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Meals and Lodging

Provided on employer’s premises

For the convenience of employerLodging must be a condition of employment

to be nontaxable

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Meals and Entertainment

50% of meal or cost of entertaining customers is deductible

Includes cost of employee’s meal or entertainmentEmployer gets deduction if employer pays or reimburses employee

Employee does NOT recognize income

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Employee Death Benefits

§101(b) provides exclusion up to $5,000

Amounts over $5,000 may be nontaxable gifts depending on facts and circumstances, including employer’s intentionGift is NOT deductible by employer

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Dependent Care

Employer-financed programs

Employee may exclude up to $5,000 of assistance each yearCannot discriminate in favor or highly compensated employees

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Educational Assistance

Employers pay employee educational costs

Employee may exclude up to $5,250 per year for tuition, fees, books, supplies, and equipment

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Cafeteria Plans

Also called flexible spending accounts

Employee has option of receiving any combination of benefits up to a certain amount, including cashOnly receipt of cash is taxable

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Interest-Free Loans

Interest must generally be imputed on interest-free loans

Imputed interest generally deductible by employer and taxable to employee

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Foreign-Earned Income Exclusion

(1 of 3)

U.S. citizens subject to U.S. income tax on worldwide income

Subject to double taxation if foreign income taxed by foreign country

Foreign tax credit (FTC) mitigates double taxation

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Foreign-Earned Income Exclusion

(2 of 3)

Foreign earned income exclusion alternative to FTC

May exclude up to

$

91,500

of foreign earned income

Add’l

exclusion for foreign housing

costs

Foreign housing costs in excess of $14,640

Max housing exclusion is $12,810

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Foreign-Earned Income Exclusion

(3 of 3)

To qualify for foreign earned income exclusion

Must be

bonafide

resident of foreign country(

ies

) for entire taxable year,

OR

Be physically present in

foreign

country for 330 days during a 12 month

period

If 12-month period spans two tax years, exclusion pro rated based on [# days/365]

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Income from the

Discharge of a Debt

(1 of 2)

Generally, taxpayer may have to include amount of debt forgiveness in gross income

Exceptions: nontaxable situations

Discharge occurs in bankruptcy

Discharge occurs when taxpayer is

insolvent

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Income from the

Discharge of a Debt

(2 of 2)

Student loans

Discharge excluded from gross income if discharge contingent on the performing certain public

services

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Exclusion for Gain from Small Business Stock

50% of gain may be excluded from gross income if held > five years

Maximum tax rate on taxable amount is 28%Effective tax rate of 14%

Eligible amount limited to

greater of

$10M or 10x adjusted basis in stock

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Other Exclusions

(1 of 2)

Gain from sale of personal residence

Annuities paid to survivors of public safety officers

Certain military-related payments

Housing allowance for ministers

Campus housing

Foster care payments

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Other Exclusions

(2 of 2)

Rural letter carrier’s allowance

Roth IRA distributions

Education IRA distributions

Personal foreign currency gains

See Table

2

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Education, Inc. Publishing as Prentice HallSlide37

Tax Planning Considerations

Employee fringe

benefitsCafeteria plans can help provide valuable benefits to employees or cash if they don’t need the benefits offered

Self-help income and use of personally owned property

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Compliance and Procedural Considerations

Fringe benefits and Form W-2

Nontaxable benefit may be excluded from employees

’ W-2

Penalties related to wages

For failure to

report – $

50 per failure

For failure to withhold – 100%Penalty can be imposed on employer and other people, such as officers or accountants

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide39

©2011 Pearson

Education, Inc. Publishing as Prentice Hall