Академический Документы
Профессиональный Документы
Культура Документы
o o
Improvements by tenant to landlords property 75% exclusion for gain from sale of certain small business stock 5. Benefits for the elderly Social security benefits (except in the case of certain higher-income taxpayers) 6. Other benefits Income from discharge of indebtedness Recovery of a prior years deduction that yielded no tax benefit Gain from the sale of personal residence Educational savings bonds Qualified tuition program Coverdell Education Savings Account Lessee construction allowances for short-term leases Conservation cost-sharing payments
Statutory Authority
Sections 101-150 provide the authority for excluding specific items from gross income o Other exclusions are also scattered throughout the code Certain exclusions are intended as a form of indirect welfare payments Other exclusions prevent double taxation of income Some exclusions provide incentives for socially desirable activities In some cases, Congress has enacted exclusions to rectify the effects of judicial decisions At times, Congress responds to specific events i.e. 2001- victims of a qualified disaster would not be required to include payments received for living expenses, funeral expenses & property damage resulting from the disaster in gross income
Frequently, an employer makes payments (death benefits) to a deceased employees surviving spouse, children, or other beneficiaries o If the decedent had a non-forfeitable right to the payments (i.e. the decedents accrued salary), the amounts are generally taxable to the recipient the same as if the employee had lived & collected the payments o When the employer makes voluntary payments, the gift issue arises In general, the IRS considers such payments to be compensation for prior services rendered by the deceased employee Some courts have held that payments to an employees surviving spouse/ other beneficiaries are gifts if the following are true: The payments were made to the surviving spouse & children rather than to the employees estate The employer derived no benefit from the payments The surviving spouse & children performed no services for the employer The decedent had been fully compensated for services rendered Payments were made pursuant to a board of directors resolution that followed a general company policy of providing payments for families of deceased employees o But not exclusively for families of shareholder-employees o If all of the above conditions are satisfied, the payment is presumed to have been made as an act of affection or charity o When one or more of these conditions is not satisfied, the surviving spouse & children may still be deemed the recipients of a gift if the payment is made in light of the survivors financial needs
A person who purchases a life insurance policy from the insured does not qualify Transfer for Valuable Consideration A life insurance policy (other than one associated with accelerated death benefits) may be transferred after it is issued by the insurance company o If the policy is transferred for valuable consideration, the insurance proceeds are includible in the gross income of the transferee to the extent the proceeds received exceed the amount paid for the policy by the transferee plus any subsequent premiums paid The Code provides 4 exceptions to this rule that permit exclusion treatment for transfers to the following: o 1. A partner of the insured o 2. A partnership in which the insured is a partner o 3. A corporation in which the insured is an officer or shareholder The first 3 exceptions facilitate the use of insurance contracts to fund buy-sell agreements o 4. A transferee whose basis in the policy is determined by reference to the transferors basis This exception applies to policies that were transferred pursuant to a tax free exchange or were received by gift Investment earnings arising from the reinvestment of life insurance proceeds are generally subject to income tax o Often, the beneficiary will elect to collect the insurance proceeds in installments Annuity rules are used to apportion the installment payments between the principal element (excludible) and the interest element (includible)
Scholarships
General Information Payments or benefits received by a student at an educational institution may be o 1. Compensation for services o 2. A gift o Or 3. A scholarship If the payments or benefits are received as compensation for services (past or present), the fact that the recipient is a student does not generally render the amounts received nontaxable The scholarship rules are intended to provide exclusion treatment for education-related benefits that cannot qualify as gifts but are not compensation for services o According to the regulations, a scholarship is an amount paid or allowed to, or for the benefit of, an individual to aid such individual in the pursuit of study or research The recipient must be a candidate for a degree at an education institution o A scholarship recipient may exclude from gross income the amount used for tuition and related expenses (books, supplies, etc), provided the conditions of the grant dont require that the funds be used for other purposes o Amounts received for room and board are NOT excludible & are treated as earned income for purposes of calculating the standard deduction for a taxpayer who is another taxpayers dependent Timing Issues Frequently, the scholarship recipient is a cash basis taxpayer who receives the money in one tax year, but pays the educational expenses in a subsequent year o The amount eligible for exclusion may not be known at the time the money is received In such a case, the transaction is help open until the educational expenses are paid Disguised Compensation Some employers make scholarships available solely to the children of key employees o The tax objective of these plans is to provide a nontaxable fringe benefit to the executives by making the payment to the child in the form of an excludible scholarship The IRS has ruled that the payments are generally includible in the gross income of the parentemployee Qualified Tuition Reduction Plans Employees (including retired/disabled former employees) of nonprofit educational institutions are allowed to exclude a tuition waiver from gross income if the waver is pursuant to a qualified tuition reduction plan o The plan may not discriminate in favor of highly compensated employees
The exclusion applies to the employee, the employees spouse & the employees dependent children It also extends to tuition reductions granted by any nonprofit educational institution to employees of any other nonprofit educational institution (reciprocal agreements) The exclusion is generally limited to undergrad. Tuition waivers However, in the case of teaching/research assistants, graduate tuition waivers may also qualify for exclusion treatment The exclusion is limited to the value of the benefit in excess of the employees reasonable compensation o A tuition reduction that has a substitute for cash compensation cannot be excluded
Congress has specifically exempted workers compensation benefits from inclusion in gross income Accident & Health Insurance Benefits The income tax treatment of accident & health insurance benefits depends on whether the policy providing the benefits was purchased by the taxpayer or the taxpayers employer o Benefits collected under an accident &health insurance policy purchased by the taxpayer are excludible, even though they are income
$290 in 2010 (indexed amount) for each day the patient receives the long term care The actual cost of the care The above amount is reduced by any amounts received from other 3rd parties (i.e. damages received) The exclusion for long term care insurance is not available if it is provided as part of a cafeteria plan or a flexible spending plan
Employees of Educational Institutions- an employee of an educational institution may be able to exclude the value of campus housing provided by the employer o Generally, the employee doesnt recognize income if he/she pays annual rents equal to or greater than 5% of the appraised value of the facility o If the rent payments are less than 5% of the value of the facility, the deficiency must be included in gross income Ministers of the Gospelo Ministers of the gospel can exclude: 1. The rental value of a home furnished as compensation 2. A rental allowance paid to them as compensation To the extent the allowance is used to rent or provide a home 3. The Rental value of a home owned by the minister o The housing/housing allowance must be provided as compensation for the conduct of religious worship, the administration & maintenance of religious organizations, or the performance of teaching & administrative duties at theological seminaries Military Personnelo Military personnel are allowed housing exclusions under various circumstances o Authority for these exclusions is generally found in Federal laws that arent a part of the IRC
If the employee chooses the otherwise nontaxable benefits, the cafeteria plan rules enable the benefits to remain nontaxable Congress excluded long term care insurance from the excludible benefits that can be provided under a cafeteria plan An employer must provide these benefits separate from the cafeteria plan
Flexible Spending Plans Flexible spending plans (flexible benefit plans)- the employee accepts lower cash compensation in return for the employer to agreeing to pay certain costs that the employer can pay without the employee recognizing gross income o The employee can estimate certain expenses & agree to a salary reduction equal to the estimated expense The employer then pays or reimburses the employee for the actual expenses incurred, with a ceiling of the amount of the salary reduction If the actual expenses are less than the reduction in cash compensation, the employee cant recover the difference o These plans are often referred to as use or lose plans They can t be used to pay long term care insurance premiums Recently issued IRS rules for these plans- the taxpayer has until the 15th day of the 3rd month after the end of the plan year to use the funds for qualified expenses (a 2.5 month grace period) o Employers have generally amended their plans to provide that payments made during the grace period will be first taken from the balance in the flex spending account at the beginning of the plan year General Classes of Excluded Benefits Benefits given to employees from an employer are taxable unless they fall in the categories of the aforementioned provisions o The amount of income is the fair market value of the benefit To avoid undesirable results & create uniform rules for fringe benefits, Congress established 7 broad classes of nontaxable benefits: 1. No-additional cost services- the services will be nontaxable if all of the following conditions are satisfied: o 1. The employee receives services, as opposed to property o 2. The employer doesnt incur substantial additional cost, including forgone revenue, in providing the services to the employee o 3. The services are offered to customers in the ordinary course of business in which the employee works The Code allows for the exclusion for reciprocal benefits offered by employers in the same line of business The no-additional cost exclusion extends to the employees spouse & dependent children & to retired & disabled former employees IRS has conceded that partners who perform services for the partnership are employees for the purposes of the exclusion The exclusion isnt allowed to highly compensated employees unless the benefit is available on a non-discriminatory basis 2. Qualified Employee Discountso When the employer sells goods/services to the employee for a price that is less than the price charged regular customers, the employee realizes income equal to the discount o However, the qualified employee discount can be excluded from the gross income of the employee subject to the following conditions: The exclusion is not available for real property or for personal property of the type commonly held for investment The property or services must be from the same line of business in which the employee works In the case of property, the exclusion is limited to the gross profit component of the price to customers In the case of services, the exclusion is limited to 20% of the customer price o The exclusion applies to employees (including service partners), employees spouses and dependent children & retired & disabled former employees
It does not apply to highly compensated individuals unless the discount is available on a nondiscriminatory basis 3. Working Condition Fringes- an employee is not required to include in gross income the cost of property/services provided by the employer if the employee could deduct the cost of those items if he/she has actually paid for them (working condition fringes) o In many cases, this exclusion merely avoids reporting income & an offsetting deduction o The working condition fringe benefit rules allow an exclusion where the expense would not be deductible if paid by the employee in 2 specific situations: Auto salespeople are allowed to exclude the value of certain personal use of company demonstrators The employee business expense would be eliminated by the 2% floor on miscellaneous itemized deductions under section 67 o These benefits can be made on a discriminatory basis & still qualify for the exclusion 4. De Minimis Fringes- benefits so small that accounting for them is impractical o Examples: The typing of a personal letter by a company secretary, occasional company cocktail parties, occasional personal use of a company copying machine, occasional supper money or taxi fare for employees b/c of overtime & certain holiday gifts of property w/ a low fair market value are excluded Subsidized eating facilities operated by the employer are excluded if located on or near the employers business premises, if revenue equals or exceeds direct operating costs & if nondiscrimination requirements are met o Except in the case of subsidized eating facilities, the de minimis fringe benefits can be granted in a manner that favors highly compensated employees 5. Qualified Transportation Fringes- the intent of this exclusion is to encourage the use of mass transit for commuting to and from work o Qualified transportation fringes encompass the following transportation benefits provided by the employer to the employee: 1. Transportation in a commuter highway vehicle b/w the employees residence & the place of employment 2. A transit pass 3. Qualified parking 4. Qualified bicycle commuting reimbursement o The combined limit for 1 and 2 is $230/month o The limit for category 3 is $230/month Both of these dollar limits are indexed annually for inflation o A commuter highway vehicle is any highway vehicle with a seating capacity of at least 6 adults (excluding the driver) Also, at least 80% of the vehicles use must be for transporting employees b/w their residences & places of employment o Qualified parking includes the following: Parking provided to an employee on or near the employers business premises Parking provided to an employee on or near a location from which the employee commutes to work via mass transit, in a commuter highway vehicle, or in a carpool o The qualified bicycle commuting reimbursement provides an exclusion of up to $20/month received from an employer as reimbursement for the cost of commuting by bicycle o Qualified transportation fringes may be provided directly by the employer or may be in the form of cash reimbursements 6. Qualified Moving Expense Reimbursementso Qualified moving expenses that are reimbursed/paid by the employer are excludible from gross income o Must be deductible under Section 217 7. Qualified Retirement Planning Services- include any retirement planning advice or info that an employer who maintains a qualified retirement plan provides to an employee or the employees spouse
Congress decided to exclude the value of such services from gross income because they are a key part of retirement income planning 8. Nondiscrimination Provisionso For no-additional cost services, qualified employee discounts and qualified retirement planning services, if the plan is discriminatory in favor of highly compensated employees, these key employees are denied exclusion treatment o However, the non-highly compensated employees who receive benefits from the plan can still enjoy exclusion treatment for the no-additional-cost services, qualified employee discounts & qualified retirement planning services o De minimis (except subsidized eating facilities) and working condition fringe benefits (b/c types of services required vary with the job) can be provided on a discriminatory basis o The qualified transportation fringe & the qualified moving expense reimbursement can be provided on a discriminatory basis Taxable Fringe Benefits If the fringe benefits cant qualify for any of the specific exclusions or do not fit into any of the general classes of excluded benefits, the taxpayer must recognize gross income equal to the fair market value of the benefits If a fringe benefit plan discriminates in favor of highly compensated employees, generally those employees arent allowed to exclude the benefits they receive that other employees dont enjoy However, the highly compensated employees, as well as the other employees, are generally allowed to exclude the nondiscriminatory benefits
However, once a choice is made between the credit or exclusion, it applies to all subsequent years unless affirmatively revoked o A revocation is effective for the year of the change and the 4 subsequent years
Dividends
General Information Dividends to shareholders are taxable only to the extent the payments are made from either the corporations current earnings & profits or its accumulated earnings and profits o Distributions that exceed earnings & profits are treated as a nontaxable recovery of capital & reduce the shareholders basis in the stock Once the shareholders basis is reduced to zero, any subsequent distributions are taxed as capital gains The following are payments that are frequently referred to as dividends but are NOT considered dividends for tax purposes: o Dividends received on deposits with savings & loan associations, credit unions & banks are actually interest o Patronage dividends paid by cooperatives (i.e. for farmers) are rebates made to the users & are considered reductions in the cost of items purchased from the association The rebates are usually made after year-end & are apportioned among members on the basis of their purchases o Mutual insurance companies pay dividends on unmatured life insurance policies that are considered rebates of premiums o Shareholders in a mutual investment fund are allowed to report as capital gains their proportionate share of the funds gains realized & distributed The capital gain & ordinary income portions are reported on the Form 1099 that the fund supplies its shareholders each year Stock Dividends When a corporation issues a simple stock dividend, the shareholder doesnt realize income However, if the shareholder has the option of receiving either cash or stock in the corporation, the individual realizes gross income regardless of what he/she chooses o A taxpayer who elects to receive the stock could be deemed to be in constructive receipt of the cash he/she has rejected However, the amount of income in this case is the value of the stock received, rather than the cash the shareholder has rejected
The interest on Series EE US government savings bonds may be excluded from gross income if the bond proceeds are used to pay qualified higher education expenses The exclusion only applies of both of the following requirements are met: 1. The savings bonds are issued after December 31, 1989 2. The savings bonds are issued to an individual who is at least 24 years old at the time of issuance The exclusion is not available for a married couple who file separate returns The redemption process must be used to pay qualified higher education expenses (they consist of tuition & fees paid to an eligible educational institution for the taxpayer, spouse or dependent) In calculating qualified higher education expenses, the tuition & fees paid are reduced by excludible scholarships & veterans benefits received If the redemption proceeds (both principal & interest) exceed the qualified higher education expenses, only a pro rata portion of the interest will qualify for exclusion treatment The exclusion is limited by the application of the wherewithal to pay concept- once the modified adjusted gross income (MAGI) exceeds a threshold amount, the phase-out of the exclusion begins MAGI is AGI prior to the foreign earned income exclusion & the educational savings bond exclusion Thresholds are adjusted for inflation each year 2010- phase-out begins at $70,100 ($105,100 on a joint return) Phase-out is completed when MAGI exceeds the threshold amount by more than $15,000 ($30,000 on a joint return) The otherwise excludible interest is reduced by the amount calculated as follows: ((MAGI-$70,100)/$15000) x excludible interest before phase-out o On a joint return, $105,100 and $30,000 are used instead of $70,100 and $15,000 respectively
Life Insurance
Favorable tax attributes of life insurance include: o The annual increase in the cash surrender value of the policy is not taxable ( no income has been actually or constructively received) The owner can actually receive the policys increase in value in cash without recognizing income
Employee Benefits
Employees can obtain group coverage at much lower rates than individuals would have to pay for the same protection o Premiums paid by the employer can be excluded from the employees gross income Because of the exclusion, employees will have a greater after-tax and after-insurance income if the employer pays a lower salary but also pays the insurance premiums o A similar tax consequence applies to child care and parking costs if the employer pays for them The use of a cafeteria plan in a situation where both spouses in a married couple are working can lead to avoidance of duplications of benefits & addition of other needed benefits o If less than all of the employees allowance is spent, the employee can receive cash The meals & lodging exclusion allows employees to receive from their employer what they ordinarily must purchase with after-tax dollars o However, the requirements of the provision limit the tax planning opportunities Employees discount provision allows employees of manufacturers to avoid tax on the manufacturers, wholesalers and retailers markups
The exclusion of benefits is generally available only to employees (proprietors & partners must pay tax on these benefits) o By incorporating and becoming an employee of the corporation, the former proprietor/partner can also receive these tax-exempt benefits
Investment Income
To realize the maximum benefit from the exemption on the state & local government bonds, the investor can purchase 0 coupon bonds o These investments pay interest only at maturity The investor can earn tax-exempt interest on the accumulated principal and interest If the investor purchases a bond that pays the interest each year, the interest received may be such a small amount that an additional tax-exempt investment cant be made Reinvesting the interest may entail transaction costs o The 0 coupon feature avoids these problems Series EE US govt savings bonds can earn tax-exempt interest if the bond proceeds are used for qualified higher education expenses o However, the investor must take into account the income limitation for excluding the interest from gross income