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  • pg 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

• Gifts – generally, not taxable to recipient.
• Exceptions to general rule:
     • Gifts to employees
     • Death Benefits to Employees (not life insurance).
                         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)
                Life Insurance (con’t)
• 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
                                              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
       • Room and Board are not excluded.
       • Room and Board is considered “earned”
         income ……. how does this effect the
         recipient’s standard deduction?
                                                         Problem 37

            Injury, Sickness, Personal Injury

• 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

• Punitive Damages – included in gross income.

• Workers Compensation – nontaxable

• Discrimination – taxable ……… age or sex discrimination
       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
           » “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
                                          Problem 42
                                          Problem 43
                Meals and Lodging

• 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?
                                                 Problem 41

            Long Term Care Insurance

• 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
             Employee Fringe Benefits
            No-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
            Employee Fringe Benefits
           Qualified 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
              Employee Fringe Benefits
                De Minimis Fringes

• Benefit is so small it is impractical to
  account for

     •   Xeroxing
     •   Typings
     •   Faxing
     •   Christmas turkey
                Employee Fringe Benefits
               Transportation 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.
      Workers Compensation
• Compensation paid to an employee for
  injuries while on the job
     • Loss of a limb
     • Injury

                        Not Taxable
        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
                      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.

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