2009 Pearson Education Inc Publishing as Prentice Hall
© 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -1
GROSS INCOME: EXCLUSIONS ® Items that are not income ® Major statutory exclusions ® Tax planning considerations ® Compliance and procedural considerations © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -2
Items That Are Not Income ® Unrealized income ® Self-help income ® Rental value of personal-use property ® Selling price of property © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -3
Unrealized Income ® 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -4
Self-Help Income ® The amount saved is not subject to tax Cleaning your own carpet Repairing your car © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -5
Selling Price of Property ® Only gain on sale of property is taxable Selling price – Basis in property = Gain on sale of property © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -6
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -7
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -8
Life Insurance Proceeds ® Paid by reason of death Generally ® Policy non-taxable 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -9
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 $11, 650 Phased out between $174, 730 and $214, 730 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -10
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -11
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -12
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -13
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -14
Payments for Injury and Sickness ® Injury includes both physical and mental ® Disability income policy is nontaxable if purchased by taxpayer Taxable if purchased by employer © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -15
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -16
Employee Fringe Benefits (2 of 2) ® Dependent care ® Educational assistance ® Cafeteria plans Flexible spending plans ® Interest-free loans © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -17
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -18
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 I 4 -1 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -19
§ 132 Fringe Benefits ® No additional cost benefits ® Employee discounts ® Working condition benefits ® De minimis benefits ® Transportation fringes ® Athletic facilities ® See Topic Review I 4 -2 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -20
Employee Awards ® Employee achievement awards and qualified plan awards Must 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -21
Meals and Lodging ® Provided on employer’s premises ® For the convenience of employer ® As a condition of employment for lodging © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -22
Meals and Entertainment ® 50% of meal or cost of entertaining customers is deductible Includes cost of employee’s meal or entertainment Employer gets deduction if employer pays or reimburses employee ¬Employee does NOT recognize income © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -23
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 intention Gift is NOT deductible by employer © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -24
Dependent Care ® Employer-financed programs ® Employee may exclude up to $5, 000 of assistance each year ® Cannot discriminate in favor of highly compensated employees © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -25
Educational Assistance ® Employers pay employee educational costs ® Employee may exclude up to $5, 250 per year for tuition, fees, books, supplies, and equipment © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -26
Cafeteria Plans ® Also called flexible spending accounts Employee has option of receiving any combination of benefits up to a certain amount, including cash Only receipt of cash is taxable © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -27
Interest-Free Loans ® Interest must generally be imputed on interest-free loans Imputed interest generally deductible by employer and taxable to employee © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -28
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -29
Foreign-Earned Income Exclusion (2 of 3) ®Foreign earned income exclusion alternative to FTC May exclude up to $87, 600 of foreign earned income Additional exclusion foreign housing costs © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -30
Foreign-Earned Income Exclusion (3 of 3) ® To qualify 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 2 tax years, exclusion pro rated based on # days/365 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -31
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -32
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 ® Foreclosure on principal residence May be forgiven in 2008 if caused by decline in value of real estate ¬Related to sub-prime mortgage problem © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -33
Exclusion for Gain from Small Business Stock ® 50% of gain may be excluded from gross income if held > 5 years ® Maximum tax rate on taxable amount is 28% Effective tax rate of 14% ® Eligible amount limited to lesser of $10 M or 10 x adjusted basis in stock © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -34
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -35
Other Exclusions (2 of 2) ® Rural letter carrier’s allowance ® Roth IRA distributions ® Education IRA distributions ® Personal foreign currency gains ® See Table I 4 -2 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -36
Tax Planning Considerations ® Employee fringe benefits Cafeteria 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -37
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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -38
Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -39
- Slides: 39