2009 Pearson Education Inc Publishing as Prentice Hall

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -1

© 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -1

GROSS INCOME: EXCLUSIONS ® Items that are not income ® Major statutory exclusions ®

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

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,

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

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

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

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

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

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

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

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

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

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

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

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 ® §

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

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

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 ®

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

§ 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. [email protected] Duh. com © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 -39