Chap I4 by suchenfz


									Chap I4

Gross inc rule: all income taxable unless specifically excluded by the code

Items not income:
    1. unrealized income: incr in value of asset.
    2. self-help income: doing your own repairs, etc. can’t be an exchange of services
    3. selling price of property: basis recovery, return of capital/investment

Statutory exclusions:
    1. Gifts & inheritances (Sec 102)
           - income from gifted property goes to transferee (assignment of income)
           - gift nature depends on intent of donor (look for love, affection, generosity vs
               business motive. Is it a form of compensation

   2. life insurance proceeds
           - amounts received by beneficiary due to insured’s death are N/T, but amounts
               rec’d in excess of face value of policy is taxed as interest (rec’d as annuity)
           - excl not avail if policy obtained in exchange for valuable consideration from
               other than insurance company – other individual or corporation/partnership
               (taxable amount = face value – amount paid for policy – prem paid by benefic)
           - exclusion avail if beneficiary receives policy by gift or other transaction where
               basis c/o
           - if sell policy before death, amt rec’d in excess of net premiums paid (premiums
               paid – CSV of policy) is taxable, no loss allowed
           - accelerated death benefits may be excl from GI if made to terminally ill
               (certified likely to die within 24 months) or chronically ill (need LT care).
               Pymts made to chron ill are limited to greater of $280/day or actual cost of care

   3. adoption expenses
         - allowed $12,150/child excl for qualified exp’s paid by employer under adoption
             assist program, phased out for AGI of 182,180 to 222,180
         - exp’s include adoption fees, court and attorney fees

   4. Merit Awards
         - prizes and awards are generally taxable
         - excl if for religious, charitable, scientific, educ or artistic reasons if recipient:
                 a. selected without action on his part to enter
                 b. doesn’t have to perform significant future services as a condition for
                     the award, or
                 c. designates payer to pay award to gov’t or charitable org

   5. Scholarships & fellowships:
         - excl if used for tuition, fees, books, supplies and required equip (not room &
         - excl doesn’t cover amount for salary paid for services (teaching assistant)
6. Payments for injury and sickness:
      - Sec 104 excl damages rec’d on account of personal physical injuries or physical
         sickness. Nonphysical injuries (discrimination, libel, etc) not excl but may excl
         reimbursements for med exp’s related to these injuries
      - Emotional distress (pain/suffering) excluded only if:
               a. payments for med exp’s related to distress and
               b. payments for distress due to physical injury
      - Amounts to punish causer of damages are taxable (punitive damages)
      - Excl amounts collected under an accident & health insur policy purchased by
         taxpayer even if a substitute for lost wages
      - Excl n/a if accident and health benefits are provided by employer: tax free
         fringe vs paying premiums with after tax dollars
      - Amounts received under qualified L-T care insurance contract excluded from
         GI but limited to greater of 280/day or actual cost of care

7. Qualified tuition plans (QTP):
      - amounts grow tax-free while in QTP
      - can withdraw tax-free by beneficiary if used for qualified higher educ exp’s
          (tuition, fees, books and room and board)
      - no income limits or phaseouts. Open to one and all

           2 types:
                 a. buy tuition credits today to be used by beneficiary in future
                 b. amounts put into funds and invested and that used to pay qual exp’s of

       -   if used for nonqual exp’s, include amount in income and 10% penalty tax
       -   can change beneficiaries in future as long as new one is family member of
           original beneficiary (incl relations of dependency exemption also 1st cousins)
       -   529 exclusion reduced by amounts used for HOPE or Lifetime credits
       -   amounts funded to QTP are treated as gifts and when combined with other gifts
           are generally limited to 13,000/year per beneficiary

8. Employee fringe benefits:
     - generally compensation is taxable regardless of its form, but law allows excl
         from income and deduct by employer to provide the benefit

9. employer paid insurance
      - employer deducts premiums paid for life, health, accident and disability insur
         (no discrimination rules unless self-insured)
      - employee generally excl from income premiums paid on his behalf except for
         life insur
      - benefits rec’d from medical, health and group-term life are generally excl from
       -   benefits rec’d from disability policy paid by employer are taxable, if paid by
           employee nontaxable
       -   life insur prem paid on employees behalf are taxable inc to employees except
           for amounts attributable to 1st 50,000 of group-term life insur coverage. Excess
           is taxable via tables in Regs. This excl not avail to self-employed or partners
       -   self-employed can deduct their med ins premiums for AGI

10. Sec 132 fringes (excl from GI)
       - no additional cost benefit (free stand-by air travel). Can’t incur significant costs
           or forego revenue in providing this benefit
       - qualified employee discounts on mdse sold by employer: limited to gross profit
           %. If services are provided, discount limited to 20% and no discount allowed for
           real property or investment property
       - discounts only allowed from same line of business the employee works, but
           there are reciprocity deals
       - working condition benefits: dues, subscriptions, uniforms paid for by employer
       - qualified transportation & parking: limited to $230/month for each
       - athletic facilities
11. Employee awards: deduct by employee and excl by employee
       - be in form of tangible personal prop other than cash and be based on safety or
           length of service
       - employee achievement awards limited to $400/employee/year
       - be presented as part of meaningful presentation
       - qualified plan awards must be granted under written plan and can’t discriminate
           in favor of HCE’s. Avg cost limited to 400 but indiv awards can be up to 1,600
       - length of service awards can’t qualify during 1st 5 yrs of service and can’t
           receive similar award in any of preceding 4 years
       - no more than 10% of eligible employees can receive safety award during year
       - gifts not qualifying as awards can be excl only if de minimis

12. meals and lodging: can excl value of meals/lodging provided at no or reduced cost if:
                a. meals furnished on employers premises and for convenience of
                b. lodging is furnished on employers premises and for employers
                    convenience and is a requirement of employment
       - is there a non-compensatory business reason to provide the meals/lodging
       - employers must actually provide the meals, not provide an allowance
       - excl for occasional overtime meals allowed

13. employee death benefits:
       - if pymt for past services (bonuses, vacation, wages) taxable to employee and
          deduct by employer. Issue is would employee receive amounts if they lived, was
          there a legal obligation by employer to pay
       - other pymts may be taxable compensation or excl gifts. Facts and
          circumstances. If gift, non-deduct, if income, deduct to employer
   14. dependent care
          - employee may excl up to 5,000 of employer paid assistance each year for a type
             and kind of expense that qualifies for dependent care credit

   15. educational assistance
          - employees may excl from GI annual pymts up to 5,250

   16. cafeteria plans: employee may choose cash or nontax fringes
           - if choose cash, taxed. If choose fringes, no tax
           - discrimination rules with HCE’s
           - med reimbursment accounts (FSA’s)

   17. home mortgage forgiveness: for 2007-2009 can exclude debt forgiveness on mortgage
subject to foreclosure up to 2 million for principal residence. Must reduce basis of home by
forgiven amount

Foreign-earned Income Exclusion (FEI)
           - general rule: US citizens taxed on world-wide income, including foreign-earned
              income, could be double-taxed
           - US offers foreign tax credit (FTC) to mitigate
           - Individuals may choose in lieu of FTC to excl 1st 91,400 of foreign-earned
              income. If elect to excl in one year, may switch to FTC in next year, but may
              not reelect excl before 6th year after change made w/o IRS permission
           - FEI includes earnings from personal services rendered in a foreign country.
              Where performed controls
           - If in a T or B where both personal services and capital are material income-
              producing factors, no more than 30% of the net profit can be excl
           - Pensions, annuities, salary paid by US gov’t and deferred comp don’t qualify

To qualify for FEI excl:
           - must be bona fide resident of 1 or more foreign countries for entire tax year, or
           - be present in 1 or more foreign countries for 330 days during a period of 12
               consecutive months

excl is prorated if not present/resident for entire tax year
deducts directly attributable to excl FEI are disallowed
exp’s attributed to FEI (travel, transportation) are allowed if FEI > excl amount. Disallowed =
total exp’s x excl FEI/Total FEI
additional exclusion for housing costs that > 16% of salary of Step1 Grade GS-14

Debt Discharge:
           - if debt is cancelled or forgiven may have taxable income
           - distinguish between cancellation, gift or reduced sales price
Sec 108: not taxable when:
           - occurs in bankruptcy proceedings
           - occurs when taxpayer is insolvent after reduction of debt takes place.
Taxpayer must reduce certain tax attributes in lieu of recognizing income (NOL, etc)

Insolvent taxpayer reduces tax attributes to point of solvency. From then on, any debt reduction
is income

Student loan forgiveness:
           - excl from GI if contingent on individual performing certain public services

Excl for Small Business Stock:
           - noncorporate taxpayers may excl up to 50% of gain of qualified stock issued
               after 8/10/93 if held for over 5 years
           - remaining gain taxed at 28%
           - total gain excl can’t exceed greater of $10 million – prior excl gains or 10 times
               aggregate AB of stock disposed of during the year. When measuring aggregate
               AB for max amount to excl is FMV at date of contribution is used

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