Chapter 4
Gross income,Exclusions
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
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,
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
Major Statutory
Exclusions
? Social generosity or
benevolence
– Public assistance programs
? Economic incentives
– Exclusion of certain scholarships
– Sec,179
? Confusion avoidance
– Compensation or gift
– Tax exempt interest
Gifts And Inheritance
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 on life insurance and
endowment policies are normally non-
taxable because they are considered
return of premiums paid
Adoption Expenses
? Adoption credit - Congress provides
tax benefits for qualified adoption
expenses in the form of tax credits
or an exclusion for amounts paid
pursuant to an adoption assistance
plan created by an employer
? Employee is allowed a $5,000 per
child exclusion ( $6,000 for a special
needs child)
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
Scholarships And
Fellowships
? Scholarships are
excluded for
degree candidates
? Tuition
? Fees
? Books
? Supplies
? Equipment
? Not room and
board
Distributions from
Qualified State Tuition
Programs
? Sec,259 states that income is
recognized by a beneficiary only
to extent waiver or distributions
made on the beneficiary's behalf
exceed donor contributions
Payments For Injury Or
Sickness
? Injury includes
both physical
and mental
? Disability
income policy is
non-taxable if
purchased by
taxpayer
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
Section 132 Benefits
? No additional cost
benefits
? Employee discounts
? Working condition
benefits
? De minimis benefits
? Recreation facilities
? Transportation fringes
Employee Awards
? Tangible personal
property
? Safety or length of
service
? Limited to $400 per
employee
? Must not
discriminate in
favor of highly paid
employees
Meals And Lodging
? Provided on
employer’s
premises
? For the
convenience of
employer
? As a condition of
employment for
lodging
Meals And
Entertainment
? Sutter rule
? 50% of the cost
of entertaining
customers is
deductible
Employee Death
Benefits
? Section 101(b) provides
exclusion up to $5,000
? Amounts over $5,000 depending
on facts and circumstances
? Transferor’s intention
Other Fringe Benefits
? Dependent care
? Educational assistance
? Cafeteria plans (flexible
spending plans)
Foreign Earned Income
? Foreign tax
credit
– Alternate option
is to exclude up
to $78,000 in
2001
? 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
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
? Student loan – the discharge of certain
student loans is excluded from gross
income if the discharge is contingent on the
individual’s performing certain public
services,
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
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
Gross income,Exclusions
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
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,
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
Major Statutory
Exclusions
? Social generosity or
benevolence
– Public assistance programs
? Economic incentives
– Exclusion of certain scholarships
– Sec,179
? Confusion avoidance
– Compensation or gift
– Tax exempt interest
Gifts And Inheritance
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 on life insurance and
endowment policies are normally non-
taxable because they are considered
return of premiums paid
Adoption Expenses
? Adoption credit - Congress provides
tax benefits for qualified adoption
expenses in the form of tax credits
or an exclusion for amounts paid
pursuant to an adoption assistance
plan created by an employer
? Employee is allowed a $5,000 per
child exclusion ( $6,000 for a special
needs child)
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
Scholarships And
Fellowships
? Scholarships are
excluded for
degree candidates
? Tuition
? Fees
? Books
? Supplies
? Equipment
? Not room and
board
Distributions from
Qualified State Tuition
Programs
? Sec,259 states that income is
recognized by a beneficiary only
to extent waiver or distributions
made on the beneficiary's behalf
exceed donor contributions
Payments For Injury Or
Sickness
? Injury includes
both physical
and mental
? Disability
income policy is
non-taxable if
purchased by
taxpayer
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
Section 132 Benefits
? No additional cost
benefits
? Employee discounts
? Working condition
benefits
? De minimis benefits
? Recreation facilities
? Transportation fringes
Employee Awards
? Tangible personal
property
? Safety or length of
service
? Limited to $400 per
employee
? Must not
discriminate in
favor of highly paid
employees
Meals And Lodging
? Provided on
employer’s
premises
? For the
convenience of
employer
? As a condition of
employment for
lodging
Meals And
Entertainment
? Sutter rule
? 50% of the cost
of entertaining
customers is
deductible
Employee Death
Benefits
? Section 101(b) provides
exclusion up to $5,000
? Amounts over $5,000 depending
on facts and circumstances
? Transferor’s intention
Other Fringe Benefits
? Dependent care
? Educational assistance
? Cafeteria plans (flexible
spending plans)
Foreign Earned Income
? Foreign tax
credit
– Alternate option
is to exclude up
to $78,000 in
2001
? 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
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
? Student loan – the discharge of certain
student loans is excluded from gross
income if the discharge is contingent on the
individual’s performing certain public
services,
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
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
