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 • 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 Scholarships • 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 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 whole. • 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 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. 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 reimbursement. 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.