Tax ch. 4
(5) STATUTORY EXCLUSIONS: Payments for Injury and Sickness
Payments "on account of personal physical injuries or physical sickness" are excluded from income
In October 2010, Jose acquired 100% of Acorn Corporation common stock by transferring property with an adjusted basis of $1,000,000 and fair market value of $4,000,000. Acorn is a qualified small business corporation. On April 1, 2016, Jose sells all of the Acorn Corporation common stock for $16,000,000. a. What is the amount of gain that may be excluded from Jose's gross income?
Selling Price = 16000000 Less: AB = (1,000,000) Realized Gain$15,000,000 Limitation upon the gain eligible for exclusion: The GREATER OF - $10 million OR - $40 million (10*4million FMV) SO NONE OF THE $15 MILLION IS SUBJECT TO LIMITATION "Max Gain eligible for the exclusion is limited to a greater of: - 10 million less prior year exclusions OR - 10 times the FMV of assets contributed on date of contribution" PP slide 17^^^^
Intangible Personal Property EMPLOYEE ACHIEVEMENT AWARDS
Something that represents value but has no physical attributes, such as a copyright, patent, or franchise right.
Determine what payments for sickness and injury must be included in the taxpayer's gross income. c. Rob, who pays the cost of a commercial disability income policy, fell and injured his back. He was unable to work for six months. The insurance company paid him $1800 per month during the time he was unable to work.
The $1,800 is excluded from GI (not taxable) **slide 9: Employer-paid Insurance premiums: any benefits paid under the medical, health, and group term insurance (limited) are excludable to the EE
Ursula is employed by USA Corporation. USA Corporation provides medical and health, disability, and group life insurance coverage for its employees. Premiums attributable to Ursula were as follows: Medical and Health $3,600. Disability $300 and Group life (face amount is $40,000) $200. During the year, Ursula suffered a heart attack and died. Before her death, Ursula collected $14,000 as a reimbursement for medical expenses and $5,000 of disability income. Upon her death, Ursula's husband collected the $40,000 face value of the life insurance policy. C) How much must Ursula include in income relative to the insurance benefits?
The $5,000 of disability income is taxable - benefits related to disability policies are taxable (included in GI) - Ursula may possibly qualify for the credit for the elderly and disabled. - Because the medical insurance benefit represents a reimbursement for medical expenses it is not taxable (EXCLUDED)
Prizes and Awards. For each of the following, indicate whether the amount is taxable: c. Linda was awarded $2,000 when she was selected as "Teacher of the Year" by the localschool district.
The award is taxable
Discharge of Debt EX 4 Indy coal CO> has seen its business decline during the past 2 years. The CO. has a significant amount of bank debt that was incurred over the years to fund its' coal operations. Indy entered into an agreement with the bank whereby the bank agreed to cancel 50% of Indy's debt. Assuming Indy was solvent at the time of the cancellation, Indy must report_________________
The discharge of indebtedness as GI
Discharge of Debt STUDENT LOAN FORGIVENESS (if death results)
The discharge of student loans on account of the students death is not taxable
Foreign Earned Income Exclusion
The exclusion (deduction is available for housing costs that exceed 16% of the foreign earned income exclusion limitation OR $17,216 (2020). MAX housing cost exclusion is 30% - generally limited to $15,064 (2020) An annual amount of foreign source earned income on which expatriates are not required to pay federal income tax
Death Benefits. After a brief illness, Bill died. Bill's employer paid $20,000 to his widow. The corporation sent along a letter with the check indicating that $5,000 represented payment for Bill's accrued vacation days and back wages. The balance was being awarded in recognition of Bill's many years of loyal service. The company was obligated to pay the accrued vacation days and back wages, but the balance was discretionary. a. Is the employer entitled to deduct the $20,000 paid to Bill's widow?
The letter indicates the amount awarded is for past services. In absence of any contradictory information, and assuming the amount is reasonable, it's DEDUCTABLE (TAXABLE)
Prizes and Awards. For each of the following, indicate whether the amount is taxable: b. Jane won a $500 prize for her entry in a poetry contest.
The prize is taxable
LIFE INSURANCE PROCEEDS EXAMPLE: after a serious stroke, Ruth moved into a nursing home. She was in the nursing home for 140 days. Nursing home charges, physician fees, and other related expenses totaled $46,000. Under her LT care insurance contract, Ruth received reimbursements of $48,000.
The reimbursements are EXCLUDED (not includible in Ruth's GI) because the amounts are less than the allowed exclusion amount of $53,000 (140 days*$380). This exclusion applies even though she was reimbursed more than her actual costs. Alternatively, if the reimbursements had been $54,400, she would be required to report $1,200 ($54,400-$53,200) as GI. **Slides 2-3
Prizes and Awards. For each of the following, indicate whether the amount is taxable: a. Peggy won $4,000 in the state lottery.
The winnings are taxable
Court and insurance awards. Determine whether the following items represent taxable income a. as the result of an age discrimination suit, Pat received a cash settlement of $40,000. One-half of the settlement represented wages lost by Pat as a result of the discrimination and the balance represented an award based on personal injury.
Under section 104, the taxpayer will have to include the entire $40,000 award in GI as there is no indication of physical injury nor are there any medical expenses
In October 2010, Jose acquired 100% of Acorn Corporation common stock by transferring property with an adjusted basis of $1,000,000 and fair market value of $4,000,000. Acorn is a qualified small business corporation. On April 1, 2016, Jose sells all of the Acorn Corporation common stock for $16,000,000. d. Can Jose avoid recognizing gain by purchasing replacement stock?
Yes. If Jose acquires $16 million or more of qualified stock within 60 days, no gain is recognized. This is true as long as the OG stock was held for over 6 months. PP I:4-21 and I:4-22
I:4-35 Life Insurance Proceeds Don is the beneficiary of a $50,000 insurance policy on the life of his mother, Anna. To this date, Anna has paid premiums of $16,000. What amount of GI must be reported? a. Anna elects to cancel the policy and receives $20,000, the cash surrender value of the policy.
a. Anna must include $4,000 in income (20000-16000) *ppt. slide 3 - Exception SURRENDER: Excess of proceeds (cash surrender value) over premiums paid is generally taxable to the recipient**
(4) STATUTORY EXCLUSIONS: Section 529 Plans
after-tax contributions grow and can be withdrawn tax-free of amounts are used to pay for "qualified higher education expenses" for the beneficiary
Subject to certain limitations, scholarships are excluded from GI. A scholarship is an....
amount paid or allowed to a student, whether an undergraduate or a graduate, to aid degree-seeking individuals.
Discharge of Debt EX 1 Farouk loaned his daughter $4000 to help her purchase an automobile. Several months after she purchased the automobile, but before she repaid the $4000, Farouk's daughter married. Farouk told his daughter that he was 'tearing up' the $4000 note as a wedding present. In this instance, the amount forgiven would constitute...
an excludable gift and would not be taxable as income to the daughter
A large corporation requires 5 of its' employees to work overtime 2 evenings each year when the company takes inventory. The CORP gives each of its' employees a small amount to cover the cost of the dinner for the two evenings. The amounts constitute supper money ....
and are excluded from employees' GI
LIFE INSURANCE PROCEEDS EXAMPLE: Chuck purchased a disability income policy from an insurance company. Chuck subsequently suffered a heart attack. Under the terms of the policy, chuck received $2,500 per month for the 5 months he was unable to work. The amounts received.... ^^^this .... isn't applicable if the accident and health benefits are provided by the TP's employer....
are NOT taxable (EXCLUDED FROM GI) even though the payments are a substitute for the lost wages due to illness. exclusion **slides 2-3 Accelerated Death Benefits
ALL SECTION 132 BENEFIT COSTS....
are based on the inflation index, currently.
dividends on life insurance and endowment policies... dividends are taxable to the extent that the total dividends received exceed the total... & if dividends are left with the insurance company and earn interest, the interest is....
are normally not taxable bc they're considered to be a partial return of premiums paid. premiums paid; taxable
(1) "key" employees- top 10% payscale of the firms workforce (2) must have worked at company for at least 1 year (3) must have worked at least 1250 hours in the preceding year of employment
are taxable
Employee Fringe Benefits Definition & Weber's Words
as we gain employment, our employer will pay us a salary, insurance policies. Benefits related to my employment, but beyond my salary. Definition: A benefit, such as free life or health insurance received by an employee in addition to his/her regular salary.
congress established qualified tuition plans, or so called 529 plans, to.... Amounts contributed to a QTP on behalf of a designated benificiary grow... amounts may be withdrawn...... as long as the amounts are used for qualified education expenses.
assist students with education costs. tax-free; tax free
statutory means
bylaw
I:4-35 Life Insurance Proceeds Don is the beneficiary of a $50,000 insurance policy on the life of his mother, Anna. To this date, Anna has paid premiums of $16,000. What amount of GI must be reported? c. Anna dies and Don elects to receive $15,000 per year for four years
c. Don must report $10,000 over the four years as interest income (15000*4=$60,000) (60,000-50,000 = $10,000) *pp. I:4-5 & I:4-6 **Slide 3: Purchased Policies: BUYER: excess of insurance proceeds over the acquisition cost and premiums paid is taxable gain.
Court and insurance awards. Determine whether the following items represent taxable income c. Pam was injured in an automobile accident and received $10,000 from an employer-sponsored disability policy. In addition, her employer-financed medical insurance policy reimbursed her for $15,000 of medical expenses.
c. The $10,000 she received from the employer sponsored disability policy is taxable. If her injury was deemed permanent, she may possibly qualify for disability credit. As the $15,000 is a reimbursement for medical expenses she does not have to include the reimbursement in GI. pp. I:4-8 to I:4-10
a state highway patrol org. provides its officers with a daily meal allowance to compensate them for meals eaten while they're on duty. Officers typically eat their meals at the restaurant of their choice. Because the officers receive...
cash instead of meals, the amount provided must be included in officer's GI
EMPLOYEE ACHIEVEMENT AWARDS Section 274(i) provides that tangible personal property shall not include:
cash, cash equivalents, gift cards, coupons, or certificates, or vacations, meals, lodging, ticket to theatre or sporting events, stocks, bonds, and other securities (unless pre-approved by employer)
To reward Joe for his success, Eagle Corp gives him 4 concert tickets worth a total of $250 and a $200 gift card. The $450 IN TOTAL is...
compensation for services and is taxable to Joe
Section 132 Benefits (EXCLUDED) (3) Working Condition Fringe Benefits
costs deductible by the employee if paid by the employee, but paid by employer (professional dues; subscription to trade magazines) - we deduct these on our tax returns, if employer pays, they are excluded (CPA liscence fees, continuing education) - we want to encourage employees to stay involved in these things **(if deductable by you, and paid by employer, excluded from income)
LIFE INSURANCE PROCEEDS: in the case of an award intended to reimburse the TP for medical expenses, it follows that the TP cannot ... the reimbursed medical expenses. If the award exceeds the actual expense, it is not taxable EXCEPTin the case of _____________-financed accident and health insurance and in the case of excess _______ _________ care discussed above. State worker's compensation laws establish fixed amounts to be paid to employees suffering specific job-related injuries. Section 104(a)(1) specifically excludes _______________ _________________ from GI, even though payments are intended, in part, to reimburse injured workers for loss of future income and even if the injuries are nonphysical.
deduct (NOT TAXABLE); employer; long term workers compensation
Each year, USA corp presents length-of-service awards to employees who have been with the company 5, 10, 15, or 20 years. The presentations are made at a luncheon sponsored by the company, and include gifts such as desk clocks, briefcases, and watches, none of which cost more than $400. The awards, which qualify as employee achievement awards are......
deductible by USA corp. and are not taxable as income to USA's employees
Joe is a sales rep for eagles Corp. Joe treats Wayne to lunch and a round of Gold. They discuss the possibility of Wayne opening an Eagle retail outlet during lunch and wile playing golf. Wayne subsequently signs a contract and opens Eagles Corp store. Joe is not entitled to any ..
deduction for meals and entertainment even tho the expenses are employment related. Eagle can deduct none of the cost of golf and only 1/2 of the cost of the meal if it reimburses Joe.
Section 132 Benefits (EXCLUDED) (12) Employer-Provided Meals
doesn't apply to reimbursements, employer-provided meals if for the convince of the employer, and if furnished on employers premises - NO LIMIT (max or min)
Advantage of Fringe Benefits
employee does not have to take cash from after-tax income to pay for such benefits
(WEBER) - EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 - want to provide ________________ for small business formation - 1202 allows tp's to ___________ in a qualifying business, and when an investor sells the stock in the business, they can exclude a significant ____________ of the _________ from the sale of their stock.
incentives; invest; portion; gain
the fact that borrowed funds are not _________________ is considered obvious and fundamental
income
(1) STATUTORY EXCLUSIONS: gifts and inheritances
income derived after the donee takes title to the property is taxable to the donee (after person receives gift, the property is taxable to the receiver of the gift)
punitive definition and damages
inflicting or aiming at punishment - these damages are taxable - in certain states, punitive damages are limited - insurance companies have limited on punitive damages
small business stock is a provision for small business entrepreneurs to encourage or set investors to _________________ in startups
invest
unrealized income is ________ taxed. Thus owners of appreciated property ________ taxed on their unrealized gains
not; not (Definition: an increase in wealth without an external transaction)
EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 - Corporations in the following industries are excluded from eligibility: .... - Any gain not excluded from sale of section 1202 stock is taxed at _____________ rates not to exceed _____________% - No___________ recognized (regardless of HP) if proceeds are reinvested in other small business stock within ________ days - Reduce AB of stock by _____________________ gain - Can help if 5-year holding period________ ______
ordinary; 28% gain; 60 days; deferred; not met
Discharge of Debt EXAMPLE PEACE COUR
peace cour, public service can allow students to have student loan forgiveness, if occurs for that reason, student loans are excluded
tangible personal property EMPLOYEE ACHIEVEMENT AWARDS
personal property that can be seen, touched, and possessed.
notice that to exclude awards for meritorious achievement, the award must not come into the _____________________ of the TP
possession
(1) Excluded Fringe Benefits EXAMPLE: Employer - Provided Insurance Premiums: Gonzaga pays about $800/individual. Employees pay $100, Gonzaga pays the rest $700. The $100 is the__________________ that is _________________in/from income. it's a _________________, and _______________________- in TI.
premium; excluded; benefit; not included
Surrender on Sale of Policy (textbook): the amount received is taxable to the extent that the amount received exceeds the net ____________________ paid. No loss is recognized if a life insurance policy is surrendered before maturity and premiums paid ________________________ the cash surrender value.
premiums; exceed
a hospital maintains a cafeteria that is used by employees, patients, and visitors. Employees are provided free meals who,e on duty in order to be available for emergency calls. Since the meals are...
provided on the employer's premises and for the convenience of the employer, the value of the meals is excluded from the employees' GI.
EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 - incentive ____________________ for small business formation - ________% of the gain on the disposition of certain qualified small business stock acquired after 9/27/10 may be excluded by ______________________ taxpayers (_________% of exclusion if. stock is acquired after 10/10/93 and before 2/18/09) (_________% of exclusion if stock is acquired after 2/17/09 and before 9/28/10)
provision; 100%; noncorporate 50%; 75%
The exclusion for scholarships is limited to the amount of the scholarship used for..... and related expenses. The exclusion for scholarships extends to salary paid for services rendered as part of a comprehensive student.........
qualified tuition; work-learning-service program.
after Eisner v. Macomber, the court realized that ___________________ must occur before income is recognized. & this case established ____________________ as a criterion for the recognition of income
realization; realization
GIFTS AND INHERITANCES: if property is gifted to me, it is the mere ____________________ of the gift that is not included in income
receipt
the exclusion for scholarships does not include amounts received for....(3 things)
room, board, and laundry
all items are taxable unless
specifically excluded
although the courts cannot create exclusions, they can interpret the stature and decide whether a particular item is covered by a _______________ ________________
statutory exclusion
fringe benefits is the most pro-TP area in the _______ __________
tax law
Fringe benefits are encouraged by ____ _________(allow employer to _____________ cost of the fringe benefit, by allowing the employee to _________________ the benefit from GI In other words, ORRRR by permitting both employer _________________ and employee ________________________
tax law; deduct; exclude deduction; exclusion
Employee compensation is... regardless of the form it takes
taxable
GIFTS AND INHERITANCES: any income or sales proceeds where I end up with gain is _________________
taxable
Prizes and awards are generally... an exception is applicable to awards and prizes made for religious, charitable, scientific, educational, artistic, literary, or civic achievement if the recipient: (3 key points)
taxable 1. was selected without action on his or her part to enter the contest or the proceeding 2. does not have to perform substantial future services as a condition to receiving the prize or award, AND 3. designates that the payor is to pay the amount of the award to either a government unit or a charitable donation
STATUTORY EXCLUSIONS: Life Insurance Proceeds (PURCHASED POLICIES)
taxable for seller: taxable income for amount received>premiums paid. buyer: excess of insurance proceeds over the acquisitor cost and premiums paid is taxable gain
LIFE INSURANCE PROCEEDS: - interest is __________________, & any interest earned on deferred payments - the death benefit itself is __________ taxable
taxable; NOT
DAN, an employee of Central Corp. has a $40,000 life insurance policy and pays the premiums out of his salary. Since his salary is _________________, the premiums are paid on an after-tax basis. Kay, an employee for Western Corp, is covered by a $40,000 group term life insurance policy financed by Western Corp. Western Corp. pays the premiums on the policy. Because the premiums are _________________, Kay...
taxable; excludable; does not have to report the premiums as income
(3) Excluded Fringe Benefits: Life insurance premiums Key Points: - if death benefit is more than 50K, then the event is ______________________ - the more life insurance you have, the more___________________ it becomes - You must pay tax on the _______________ (tax table 4-1) - The use of the table is for calculating the_____________________ you are taxable on. - As age increases, the _________________ increases (each increase $___________ per month) *any premium paid bu the employer, on behalf of the employee, is ___________________ in/from the employee's income *any benefits paid by these policies are generally _____________________, as is the monthly cost to the employer
taxable; expensive; premium; premiums; amount; $1000; excluded; excluded
LIFE INSURANCE PROCEEDS: If the cost of the coverage is shared by the employer and the TP, a portion of the benefits is.... The principle reason for the different tax treatment is that employer-paid coverage represents a tax-free employee... whereas employee-paid premiums are from after-tax dollars. FOR EXAMPLE: if the employer paid 1/2 of the premiums.... of the benefits would be taxable.
taxable; fringe benefit
GIFTS AND INHERITANCES: as income is earned in the future, it can be __________________
taxed
insolvency
the inability to pay debts when they are due because liabilities far exceed the value of assets (overall debt is greater than the FV of your assets)
Death Benefits. After a brief illness, Bill died. Bill's employer paid $20,000 to his widow. The corporation sent along a letter with the check indicating that $5,000 represented payment for Bill's accrued vacation days and back wages. The balance was being awarded in recognition of Bill's many years of loyal service. The company was obligated to pay the accrued vacation days and back wages, but the balance was discretionary. b. Is Bill's widow required to include the $20,000 in her gross income?
the payment would be TAXABLE. There is little indication that the amount represents gifts. Although there is no legal obligation to pay the additional amount it is paid in recognition of services provided. pp. I:4-15 - I:4-16
Section 132 Benefits (EXCLUDED) (4) De Minimus
too small to measure; administrative convenience means really small; means fringe benefits that are too small (employer provides you with coffee daily, too small to measure, copy machine, personal copies) these are excluded from income
Section 132 Benefits (EXCLUDED) (1) No-Additional Cost Benefits
unused employers services (hotel rooms, airplane seats)
Discharge of Debt EX 2 Clay purchased a used automobile from a dealer for $6000, he paid $2000 down and agreed to pay the balance of $4000 over three years. After Clay purchased the automobile, he determined that it was defective. Clay threatened to sue the dealer. To resolve the problem, the dealer offered to reduce the balance due on the purchase-money debt from $4000 to $2500. Clay agreed. The transaction constitutes a reduction in the purchase price of the car. Clay...
will not recognize any income, but must reduce the basis in his car from 6000 to $4500
2 TYPES DEFINED Section 132 Benefits (EXCLUDED) (10) Cafeteria Plans/Flexible Spending Account
1. Medical FSA's (about $2600/2700) 2. Dependent Care FSA (about $5000/year) - GENERAL care vitamins, used for a bunch of little things - these are USE IT OR LOSE IT accounts. If you don't use the money, it goes back to your employer. You don't ever want to over-contribute
EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 "qualified small business:" C corporations with the adjusted basis of gross assets... - the stock must be held for more than __________ years
<$50 million, with 80% of the value of assets used in the active conduct of a trade or business; 5 years
Compensatory Damages
A money award equivalent to the actual value of injuries or damages sustained by the fairly undtreated (aggrieved) party.
STATUTORY EXCLUSIONS: Life Insurance Proceeds (ACCELERATED death benefits)
ACCELERATED death benefits: an exclusion is available for these paid (1)to a terminally ill person (likely to die within 24 months as certified by a physician) -OR- (2) to a chronically ill person (disability requiring LT care) exclude greater of $380/day (2020) or actual cost of care
Chuck purchased a disability income policy from an insurance company. Chuck subsequently suffered a heart attack. Under the terms of the policy, chuck received $2,500 per month for the 5 months he was unable to work. Chuck's employer paid the premiums on the policy. The amounts received by Chuck....
ARE TAXABLE **slides 2-3 Purchased Policies
Employee Benefits. Al flies for AAA Airlines. AAA provides its employees with severalfringe benefits. Al and his family are allowed to fly on a space-available basis on AAAAirline. Tickets used by Al and his family during the year are worth $2,000. AAA paid fora subscription to two magazines published for pilots. The subscriptions totaled $80. Theairline paid for Al's meals and lodging while he was away from home overnight in connectionwith his job. Such meals and lodging cost AAA $10,000. Although Al could not eatwhile flying, he was allowed to drink coffee provided by the airline. The coffee was worthabout $50. AAA provided Al with free parking, which is valued at $100 per month. Theairline treated Al and his family to a one-week all-expenses-paid vacation at a resort nearhis home. This benefit was awarded because of Al's outstanding safety record. The valueof the vacation was $2,300. Which of these benefits are taxable to Al?
All of the benefits (EXCEPT THE ONE WEEK VACATION) are covered by section 132, and thus, are nontaxable. - although the vacation was awarded because of Al's safety record, it is compensation for services he rendered as an employee. Therefore, the $2,300 value of the vacation is taxable. - The award does not qualify as a sec. 274 award such as awards must be presented in the form of tangible personal property. - Also, the amount of the award exceeds the $1,600 limit specified in the law. PP. I:4-10-I:4-14
(2) Excluded Fringe Benefits Disability Insurance: insurance paid on ________________________who become disabled (ST OR LT). Most employers provide disability insurance.... PREMIUM if paid by employer, then the cost of the insurance (premium)...employee's income. IF policy actually has to pay benefits, the benefits themselves are... WHO PAID?? - If you pay, benefits..., if employer pays, they're... - if employer provides it, and pays premiums, premiums are....
Disability Insurance: insurance paid on employees who become disabled (ST OR LT). Most employers provide disability insurance tax-free. PREMIUM if paid by employer, then the cost of the insurance (premium) is excluded from employee's income. IF policy actually has to pay benefits, the benefits themselves are taxable. WHO PAID?? - If you pay, benefits are excluded, if employer pays, they're taxable. - if employer provides it, and pays premiums, premiums are excludable.
Section 132 Benefits (EXCLUDED) (13) Employer-Provided Lodging
Excluded if (1) furnished on employers premises (2) for convenience of employer and (3) must be required as a condition of employment
footnote 33; LT care insurance (sometimes called nursing home insurance) can be offered to employees on a tax-favored basis, but that benefit cannot be offered as part of a ....
Flexible Spending ACCT (FSA)
(3) STATUTORY EXCLUSIONS: Scholarships and Fellowships
Funds for qualified education expenses (tuition, fees, books, supplies, and equipment only-NOT ROOM AND BOARD) are excluded - all excess included in GI
EXAMPLE I:4-51 Discharge of Debt During bankruptcy, USA Corporation's debt was reduced from $780,000 to $400,000. USA Corporations assets are valued at $500,000. USAs NOL carryover was $400,000. a. is USA Corporation required to report any income from the discharge of its debts?
No, USA Corp is not required to report any income from the discharge of its' debts because debt reduction during bankruptcy doesn't result in any income.
Discharge of Debt EX 5 Lee borrowed $50,000 from the government to attend medical school. Under the terms of the loan, $20,000 of the debt is forgiven each year she practices medicine in designated low-income neighborhoods. Lee...
Lee doesn't have to include the debt forgiveness in GI (STUDENT LOAN FORGIVENESS)
Court and insurance awards. Determine whether the following items represent taxable income b. Matt sued the local newspaper for a story that reported he was affiliated with organized crime. The court awarded him $50,000 of libel damages.
Libel has been held to be personal injury. However, as it is not a physical injury, no exclusion is available under section 104
Section 132 Benefits (EXCLUDED) (2) Employee Discounts
Limited to 20% on services; discount on goods cannot exceed gross profit percentage (%) - if for services, discount is excluded if it doesn't exceed 20% of the retail price. **if it exceeds 20%, the excess is taxable. Sales - COGS = GP GP/Sales Price (OR net sales)=GP % EMPLOYEE DISCOUNT CANNOT EXCEED GP % - it is up to the employer to keep track of this discount
Section 132 Benefits (EXCLUDED) (8) Employee Death Benefit
Must have been paid to a family out of sympathy and generosity. Decedent employees must have been fully compensated for all services, otherwise taxable. Employee dies, and employer wants to give a gift to the family (survivors). It cannot in any way be compensating the decedent for hours of work they did before they died. Cannot exclude the amount which the employee was owed. It must be paid out of sympathy and generosity. - whatever is communicated to family makes it clear that gift is out of sympathy, generosity, etc. **(LANGUAGE MATTERS HERE) ***(THERE IS NO MIN OR MAX LIMIT HERE)
In October 2010, Jose acquired 100% of Acorn Corporation common stock by transferring property with an adjusted basis of $1,000,000 and fair market value of $4,000,000. Acorn is a qualified small business corporation. On April 1, 2016, Jose sells all of the Acorn Corporation common stock for $16,000,000. c. What would your answer be if the stock were sold after two years?
NONE OF THE GAIN IS EXCLUDED because the stock has not been held for a period of more than 5 years. SO the entire realized portion of $15 million is recognized
Ursula is employed by USA Corporation. USA Corporation provides medical and health, disability, and group life insurance coverage for its employees. Premiums attributable to Ursula were as follows: Medical and Health $3,600. Disability $300 and Group life (face amount is $40,000) $200. During the year, Ursula suffered a heart attack and died. Before her death, Ursula collected $14,000 as a reimbursement for medical expenses and $5,000 of disability income. Upon her death, Ursula's husband collected the $40,000 face value of the life insurance policy. b) How much must Ursula include in income relative to the premiums paid?
NONE of the premiums need to be included in Ursela's GI
I:4-34 Excludable Gifts Included in GI? c. Chuck borrowed $500 from his mother in order to finance his last year in college. Upon his graduation, his mother told him he did not have to repay the $500. She intended the $500 to be a graduation present.
NOT INCLUDED IN GI c. The $500 is a nontaxable gift. The forgiveness was based on the family relationship and was given as a graduation present (pp. I:4-4 and I:4-5)
Section 132 Benefits (EXCLUDED) (5) Use of ER recreational Facilities
Nike has a gym you can work out for free in (the employer's facilities) - The use of these are excluded from income - if the employer will reimburse you/gym membership, the use of these are excluded from income
I:4-35 Life Insurance Proceeds Don is the beneficiary of a $50,000 insurance policy on the life of his mother, Anna. To this date, Anna has paid premiums of $16,000. What amount of GI must be reported? b. Anna dies and Don receives the face amount of the policy $50,000
None of the $50,000 is taxable. - life insurance proceeds are excluded - death benefits excluded
Ursula is employed by USA Corporation. USA Corporation provides medical and health, disability, and group life insurance coverage for its employees. Premiums attributable to Ursula were as follows: Medical and Health $3,600. Disability $300 and Group life (face amount is $40,000) $200. During the year, Ursula suffered a heart attack and died. Before her death, Ursula collected $14,000 as a reimbursement for medical expenses and $5,000 of disability income. Upon her death, Ursula's husband collected the $40,000 face value of the life insurance policy. D) How much must Ursula's widower include in income?
$0 Or none included in GI (none of the life insurance benefit is taxable - because life insurance is never included in GI and the death benefit is generally excluded pp. I:4-10-I:4-12
Determine what payments for sickness and injury must be included in the taxpayer's gross income. e. Ted suffered a stroke. He was unable to work for five months. His employer continued to pay Ted his salary of $1,700 per month during the time he was unable to work.
$1,700/per month included in GI (taxable) - derived from Ted's employer
I:4-40 Scholarships Indicate the amount that must be included I the TP's GI c. Western school of nursing requires all 3rd year students to work 20 hours per week at an affiliated hospital. Each student is paid $10/hour. Nancy, a 3rd year student earned $10,000 during the year.
$10,000 included in GI. Even though all students must work in the hospital to graduate, the salary is taxable. p. I:4-7
SECTION 529 PLANS: in the case of elementary and secondary education. the exclusion is limited to $_____________- per student per year and only covers tuition. Wealthy individuals may fund QTP's as there is no income ________________. Anyone can _____________ a QTP.
$10,000; limitation; fund
In the case of foreign-earned income, individuals have available the alternative option of excluding first $___________ in 2020 of foreign-earned income from GI.
$107,600
Wayne is employed in Quebec City, Canada and earns a salary of $130,000. His housing costs are $38,000 for the year. Wayne can exclude $______________ from GI. If the housing costs had been $24,000, Wayne's foreign earned income exclusion would have totaled $____________
$122,664 (107,600 +$15,064) $114,384 [107,600 +(24,000-17,216)
Determine what payments for sickness and injury must be included in the taxpayer's gross income. a. Pat was injured in an automobile accident. The other driver's insurance company paid him $2000 to cover medical expenses and a compensatory amount of $4000 for pain and suffering.
$2000 is excluded (not taxable) $4,000 is excluded (not taxable) pp slide 7 *pain and suffering & reimbursement for medical expenses
Sondra is given a temporary assignment to work in foreign country T. She arrives on Oct 19, 2020 and on Oct. 21, 2021. Although Sondra doesn't establish a permanent residence in T, she is present in T for at least 330 days out of a 12 month period beginning on OCT. 20, 2020. Thus, 73 days fall into 2020, and the rest into 2021. Sondra's exclusion for 2020 is limited to...She may claim...Sondra may also claim...
$21,461 [(73/366)*107,600] eclude $21,461 OR the income she earns in the foreign country, whichever is lesser. Sondra may also claim the foreign earned income exclusion in 2021 for the number of qualified days during the year
I:4-40 Scholarships Indicate the amount that must be included I the TP's GI b. Marty received a $10,000 football scholarship for attending Northern University. The scholarship covered tuition, room and board, laundry, and books. $4,000 of the scholarship was designated for room and board, and laundry. It was understood that Marty would participate in the school's intercollegiate football program, but Marty was not required to do so.
$4,000 designated for room, board and laundry included in GI (used for necessities and housing, not tuition) $6,000 excluded for scholarship
I:4-40 Scholarships Indicate the amount that must be included I the TP's GI a. Larry was given a $15,000 scholarship to attend Eastern Law School. In addition, Eastern paid Larry $4,000 per year to work part-time in the campus bookstore.
$4,000 included in gross income because it's a salary and it's taxable; scholarship isn't taxable as long as tuition, fees, books, supplies, and equipment exceed the $1,500. $1,500 scholarship excluded
Determine what payments for sickness and injury must be included in the taxpayer's gross income. b. A newspaper article state that Quincy had been convicted of tax evasion. Quincy in fact had never been convicted of tax evasion. He sued and won a compensatory settlement of $4000 from the newspaper.
$4,000 is included in GI (taxable) - compensatory settlements are damages for non-physical injury in this case
Ursula is employed by USA Corporation. USA Corporation provides medical and health, disability, and group life insurance coverage for its employees. Premiums attributable to Ursula were as follows: Medical and Health $3,600. Disability $300 and Group life (face amount is $40,000) $200. During the year, Ursula suffered a heart attack and died. Before her death, Ursula collected $14,000 as a reimbursement for medical expenses and $5,000 of disability income. Upon her death, Ursula's husband collected the $40,000 face value of the life insurance policy. a) what amount can USA Corporation deduct for premiums attributable to Ursula?
$4,100 (3,600+300+200 = 4,100) The full amount of premiums paid on Ursula's behalf is deductible
PAYMENTS FOR INJURY AND SICKNESS EXAMPLE: Mary was injured in a car accident caused by another driver. Mary's daughter, Sarah, was in the car, but not physically injured. The other driver's insurance company was required by a court to pay Mary $10,000 to cover medical bills relating to her injuries, $5,000 to compensate her for emotional distress caused by the injuries, and $15,000 of punitive damages. Sarah was paid $3,000 to compensate her for distress caused by her witnessing her mother's injuries. What's taxable (included in GI) and excluded from GI?
$5,000, $10,000, and $3,000 all excluded, $15,000 punitive damages included Textbook answer: Only the $15,000 of punitive damages are taxable to Mary as the other amounts are compensatory damages related to her physical injuries. Sarah's damage award of $3,000 is also excludable. pp slides 7-8 *payments for emotional distress as long as the genesis of the losses was physical injury *reimbursements for medical expenses *punitive damages are always taxable even if physical injury is involved.
Data Corporation has four employees and provides group life insurance coverage for all four employees. Coverage is nondiscriminatory and is as follows: Employee, Age, Key Employee, Coverage, Actual Premiums, Andy 62 yes $200,000 $4,000 Bob 52 yes $40,000 $700 Cindy 33 No $80,000 $600 Damitria 33 No $40,000 $300 a. how much may Data Corp deduct for group term life insurance premiums
$5,600 is deductible for group term life insurance premiums (data corp can deduct the premiums paid on the group term policy) (4000+700+600+300= total deduction)
Determine what payments for sickness and injury must be included in the taxpayer's gross income. d. Steve fell and injured his knee. He was unable to work for four months. His employer financed disability income policy paid Steve $1,600 per month during the time he was unable to work.
$6,400 Included in GI (taxable) (1600*4=$6,400) The $1,600 per month (entire $6,400 in total) is taxable, as it's derived from an employer financed policy
Kwame is the owner and beneficiary of a $100,000 policy on the life of his father. Kwame sells the policy to his brother Anwar for $10,000. Anwar pays premiums of $12,000. Upon his father's death, Anwar must include?????? in GI. However, if Kwame GAVE the policy to his brother, all of the proceeds would be __________________ from GI because the gift policy doesn't constitute valuable consideration
$78,000 [100,000-($10,000+12,000)] (since Anwar is paying premiums, he includes them)
EXAMPLE: USA CORP provides Joy, age 61, with $150,000 of group term life insurance coverage. Joy must include in GI...
$792 (TABLE 1:4-1) 150000-50000(exclusion) = 100000 Premiums (100,000*.66*12)/1000 = $792
Data Corporation has four employees and provides group life insurance coverage for all four employees. Coverage is nondiscriminatory and is as follows: Employee, Age, Key Employee, Coverage, Actual Premiums, Andy 62 yes $200,000 $4,000 Bob 52 yes $40,000 $700 Cindy 33 No $80,000 $600 Damitria 33 No $40,000 $300 b. how much income must be reported by each employee?
(REFER TO TABLE 4-1) & pp. I:4-9-I:4-12 - Andy must report $1188 in income - Bob must report $0 premiums as income (group coverage is less than 50K) - Cindy must report $28.80 in income - Damitria must report $0 premiums as income (group coverage is less than 50K) ANDY: age 62: .66% premium rate $200,000 coverage premiums = $200,000-50,000 = $150,000 ($0.66*12 months*$150,000 excess coverage)/$1,000 = $1188 CINDY: age 33: .08% premium rate, $80,000 coverage premiums = 80000-50000=30000 (.08*12 months*30,000 excess coverage)/$1,000 = $28.80 BOB: age 52: .23% premium rate, **NO EXCESS COVERAGE DAMITRIA: age 33: .08% premium rate, ***NO EXCESS COVERAGE
EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 The max gain eligible for the exclusion is limited to the greater of: - $10,000,000 less prior year exclusions OR - ...........contributed on date of contribution
- $10,000,000 less prior year exclusions OR - 10 times the FMV of assets contributed on date of contribution
(WEBER) - EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 - If I invest in a new Corp, I don't have to recognize _______ (3 titles here___) cannot use 1202 - no financial service company, hospitality company, mining, oil, or gas companies - IF you have taxable gain on sale of 1202 stock (______________________________________), any gain not excluded under 1202 is taxed at ordinary rates, up to a 28% maximum (don't ever have to pay a top rate of 37)
- If I invest in a new Corp, I don't have to recognize gain 1. professional services 2. engineers 3. accountants *********cannot use 1202 - no financial service company, hospitality company, mining, oil, or gas companies - IF you have taxable gain on sale of 1202 stock (didn't meet HP, excess gain), any gain not excluded under 1202 is taxed at ordinary rates, up to a 28% maximum (don't ever have to pay a top rate of 37)
STATUTORY EXCLUSIONS: Life Insurance Proceeds (EXCEPTIONS - 2)
- PURCHASED POLICIES - SURRENDER
items that are not considered income (5) - are not subject to income tax
- amounts obtained by a loan (borrowing) - unrealized income - self help income - rental value of personal-use property - gross selling price of property (as opposed to the profit or gain earned on the sale)
LIFE INSURANCE PROCEEDS: (general rule )
- death benefits aren't taxable. BUT you will be taxed on the death benefit over your excess (what you paid me + additional premiums). This means you WILL be taxable under purchased policies^^ Even though the death benefit, if I purchased policy, it will be taxable.
(2) STATUTORY EXCLUSIONS: Life Insurance Proceeds (death benefits)
- generally, death benefit excluded (these 2 below are excluded) ACCELERATED death benefits: an exclusion is available for these paid (1)to a terminally ill person (likely to die within 24 months as certified by a physician) -OR- (2) to a chronically ill person (disability requiring LT care) exclude greater of $380/day (2020) or actual cost of care (money HAS to be used for their care)
STATUTORY EXCLUSIONS: Scholarships and Fellowships (details) generally are... Must be used for...
- generally, these are not taxable, or excluded from income - They MUST be used for tuition, fees, books, supplies, and equipment only - NOT room and board.
(3) Excluded Fringe Benefits: Life insurance premiums Definition
- if the employer provides, premium is generally excluded. Employers on a tax-free basis can provide insurance to their employees, but the death benefit cannot exceed $50,000.
LIFE INSURANCE PROCEEDS: (extras) - instead of selling the policy, - permanent policies have cash surrender value ... if this value exceeds premiums paid... - if cash surrender value is less than premiums...
- instead of selling the policy, I can terminate or surrender it - permanent policies have cash surrender value (what you get when you surrender policy) if this value exceeds premiums paid, I terminate the policy, I'm taxable on the difference - If cash surrender value is less than premiums, I cannot deduct the loss, I'm ONLY TAXABLE ON GAINS, no benefits are given for losses
STATUTORY EXCLUSIONS: Payments for Injury and Sickness (punitive damages & more)
- lawsuits (generally) where someone else was to blame - includes reimbursement for medical expenses - non-physical injury expenses are taxable (BUT IF YOU'RE SO DISTRAUGHT YOU must go to hospital, medical expenses are excluded
Employee Fringe Benefits GOALS - one of the most_______________________ areas in the tax law (want to incentivize as much as possible because they want a more healthy and s___________ ________________). - if my employer pays my health insurance, that's good for______________.
- one of the most tax-favored areas in the tax law (want to incentivize as much as possible because they want a more healthy and stable society) - if my employer pays my health insurance, that's good for society
MISCONCEPTION: it's assumed that these things are not taxable, but they are.
- severance pay - embezzlement proceeds - gambling winnings - hobby income - prizes - rewards - tips
LIFE INSURANCE PROCEEDS: (permanent insurance & exceptions)
- with permanent insurance, you can get an accelerated death benefit (generally taxable) UNLESS (2 exceptions - terminally ill, chronically ill) - IN THESE CASES, BENEFICIARY WON'T GET ANYTHING OR WILL GET a reduced benefit
Mary suffered a severe stroke and has been admitted to a nursing home where she is expected to remain for the rest of her life. She is certified by a liscenced professional as being a "chronically ill" individual. Her nursing home expenses amount to $300 per day. Mary has elected to receive $340 per day from a $100,000 face amount life insurance policy as accelerated death benefits Include or Exclude?
. Mary may exclude the full amount she receives as it is less than the daily limitation of $380 established by law.
Employer-Provided Lodging EXAMPLES (fireman & hospital)
1. A fireman must live in and stay close to the station during his/her shift due to the need to be close to necessary equipment and to respond quickly to emergencies. 2. A hospital typically provides free or highly discounted meals to personnel since they need to be readily available in the event of a sudden medical event.
EMPLOYEE FRINGE BENEFITS Section 132 Benefits (EXCLUDED) (13 different benefits)
1. No-additional cost benefits 2. employee discounts 3. Working Condition Benefits 4. De Minimus 5. Use of ER Recreational Facilities 6. Qualified Transportation Fringe 7. adoption expenses 8. Employee Death Benefit 9. Dependent Care 10. Cafeteria Plans/Flexible Spending Accounts 11. Educational Assistance 12. Employer-Provided Meals 13. Employer-Provided Lodging
benefits that can be offered to proprietors and partners on a tax-favored basis include: (7)
1. de minimus benefits, 2. no additional cost fringe benefits 3. dependent care assistance 4. educational assistance 5. discounts 6. on premises meals 7. working condition fringe
Employee Fringe Benefits: Congress has provided a framework to incentivize employers to provide employees with fringe benefits. HOW??? 1. employer can... 2. employee's can... *employer is getting a ___________________, but it's ___________________ in income *amazon pays your health insurance, they get to ___________________ the cost of insurance = ______________________ employer's tax liability
1. employer can deduct the cost of all fringe benefits 2. employee's exclude qualifying fringe benefits (employees don't have to recognize taxable income) deduction; excluded; deduct; reduces
Tp's who want to avoid taxation have 2 alternatives
1. establish an item isn't income (i.e. a return of capital) is not subject to income tax 2. establish that a specific exclusion applies to the item of income
STATUTORY EXCLUSIONS: Scholarships and Fellowships (6 key concepts)
1. offered by state or private universities 2. qualified expenses = tuition, books, fees, supplies, equipment, and room and board 3. no income limitations 4. owner of account can change beneficiaries without tax impact. BUT, beneficiaries must be a member of original beneficiaries' family 5. mayors can make a large gift into the plans and can treat it as having paid over 5 years (gift tax) 6. If excess distributions are taken, excess is taxable to beneficiary and subject to a 10% penalty tax
LIFE INSURANCE PROCEEDS: (2 types)
1. permanent insurance: you pay cost each year for 10 years. at end, you stop paying, but keep insurance forever. You pay a premium for certain number of years, but then stop, but insurance remains 2. term insurance: after 15 years, I stop paying premium and insurance stops too. - most of these are provided by employers - At GU, term insurance is provided while employees work here.
STATUTORY EXCLUSIONS: Payments for Injury and Sickness (3 key points & one exception)
1. this includes payment for personal injuries, pain and suffering, and emotional distress as long as the genesis of the losses was physical injury. Includes reimbursements for medical expenses 2. generally, damages received for nonphysical injuries are taxable (e.g. libel or slander) EXCEPTION HERE: reimbursement for medical expense related to non-physical injuries are excluded 3. Punitive damages (intentional) are always taxable even if physical injury
PAYMENTS FOR INJURY AND SICKNESS: The exclusion under section 104 (a) applies to damages received because of emotional distress in only two situations:
1. when the payments are for medical expenses related to the emotional distress, and 2. when the payments are for emotional distress attributable to a physical injury (including physical injury suffered by another person).
Meals and Lodging Sec 119 provides that if employees can exclude the value of meals from GI, the employer can deduct ______the cost of the meal. IF more than half of the employees who receive the meals meet the "convience of the employer" test, then all employees who receive meals can______________the value from GI
1/2; exclude
(WEBER) - EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 - right now, exclusion % is ________% of the gain from _____________________ stock - exclusion % has _________________ over time - it doesn't matter when we sell the stock, it matters when the stock was ______________
100% qualifying; changed; ACQUIRED
(WEBER) - EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 - for the last 10 years, the exclusion rate has been _________%, the maximum __________ eligible for exclusion is THE GREATER OF: a. $_____million b. ......... contributed by the shareholder ***MAX LIMIT APPLIES TO THE ________________ (NOT ANNUAL), an overall limit for stock sales in the _______________
100%; gain a. $10 million b. 10* the fair value of assets contributed by company; company
Transfer of Life Insurance: Ed is the beneficiary of a $20,000 insurance policy on the life of his mother. Because Ed needs funds, he sells the policy to his sister Amy for $6,000. Amy subsequently pays premiums fo $9,000. a. How much income must Amy report if she collects the face value of the policy upon the death of her mother?
Amy must report $5000. (20000-6000-9000) - Amy purchased the policy from her brother. Because she purchased the policy, she is not entitled to the usual life insurance exclusion. PP I:4-5 & I:4-6
(2) Excluded Fringe Benefits: Disability Insurance Definition (ppt/textbook)
Any benefits paid for disability are included in the employee's income if the premiums were not included in the empoyer's GI. Disability benefits from policies paid by the employee are excluded
Becky is awarded a $5,000 per year scholarship by state university. Becky spends $3,000 of the scholarship for tuition, books, and supplies, and $2,000 for room and board. In addition, Becky works part-time on campus and earns $4,000, which covers the rest of her room and board and other expenses. Becky is taxed on the...
Becky is taxed on the $2,000 of the scholarship spent for room and board and the $4,000 of salary earned from her part-time job.
Discharge of Debt EX 3 Blue Corporation issued bonds for $1000 when interest rates were low. After a few years, interest rates increased, and the bond value declined to $850. Blue Corporation purchased the bonds on the open market. Blue will
Blue will recognize $150 of income from the discharge of indebtedness.
Discharge of Debt Exceptions: (6)
EXCEPTIONS: (don't have to recognize income if: 1. The discharge is a gift 2. the discharge is a bequest 3. the discharge occurs in bankruptcy (tp declares bankruptcy) 4. The discharge occurs when the TP is insolvent to the extent the forgiveness does not make the TP solvent (debt-free) (if debts are greater than assets) 5. The discharge of a student loan occurs for certain approved post-education employment/public service 6. Principle residence mortgage forgiveness up to @2 million (thru 2016)
GIFTS AND INHERITANCES: if I am the recipient of a gift, or if I inherit property, the value of those are ... from my income
EXCLUDED
the issue of taxability of unrealized income was addressed 100 years ago in ...... where supreme court held that a stock dividend cannot be taxed because...
Eisner v. Macomber; "received nothing that answers the definition of income within the meaning of the 16th amendment
Employee Fringe benefits subject to special rules: (6)
Employee insurance, section 132 benefits, meals, lodging, dependent care, and cafeteria plans
Section 132 Benefits (EXCLUDED) (10) Cafeteria Plans/Flexible Spending Account
Employees can elect to take compensation in cash or have money set aside to pay for benefits. If the employee selects cash, then the amount is taxable, if the employee selects statutory, non-taxable fringe benefits, (e.g. health insurance) then amounts are excludable *in an FSA, employees can put money into the account tax-free. Not only income-tax-free, but also payroll-tax free (don't pay FICA on these, which is rare) - you're funds administered for third party, you write for reimbursement of these funds, and they come back tax-free
Section 132 Benefits (EXCLUDED) (9) Employer-Provided Dependent Care
Employer can provide up to $5,000/year in qualified benefits - employers have a dependent care facility, the first $5000 of benefit per year is excluded. *employer-provided, cannot be a reimbursement
(1) Excluded Fringe Benefits (pp & Weber's Words) Employer-Provided Insurance Premiums: EXCEPTION...premiums for employer-provided term life insurance for - SEE TABLE... EXAMPLE: Gerhard, age 45, is provided $160,000 of life insurance coverage by his employer. How much, if any, of the coverage is taxable? ANSWER:
Employer-Provided Insurance Premiums: Not includable in employee's income. Any benefits paid under the medical, health, and group term insurance (limited) are excludable to the employee. & EXCEPTION: premiums for employer-provided term life insurancefor > 50,000 of coverage are includable in employee's income - SEE TABLE 14.1 EXAMPLE: Gerhard, age 45, is provided $160,000 of life insurance coverage by his employer. How much, if any, of the coverage is taxable? ANSWER: death benefit of $50,000 tax free. THE EXCESS $110,000 = DEATH BENEFIT 160000-50000= $110,000 ***the employer can still deduct the additional (or entire) cost [a. for every $1000 that his death benefit exceeds $50,000, he is taxable at $0.15/month*110 = $16.50/month b. $16.50*12 = $198.00/year = taxable income (capital wages) included in GI (taxable)]
Section 132 Benefits (EXCLUDED) (6) Qualified Transportation Fringe Benefits
Employer-financed public transportation (bus/rail passes, parking, etc. - Generally excluded, max of (limited to) $270/month, anything over this cost is taxable. (provide bus passes for employees, free of charge, free parking)
In October 2010, Jose acquired 100% of Acorn Corporation common stock by transferring property with an adjusted basis of $1,000,000 and fair market value of $4,000,000. Acorn is a qualified small business corporation. On April 1, 2016, Jose sells all of the Acorn Corporation common stock for $16,000,000. b. What would your answer be if the fair market value of the Acorn stock were only $800,000 upon its issue?
Gain eligible for exclusion before considering limitation = $15 million m Limitation is the greater of - 10 million OR - 8 million (10*8million FMV) SO THE EXCLUDED PORTION OF THE GAIN IS LIMITED TO $10 MILLION "Max Gain eligible for the exclusion is limited to a greater of: - 10 million less prior year exclusions OR - 10 times the FMV of assets contributed on date of contribution" PP slide 17^^^^
I:4-34 Excludable Gifts Included in GI? b. Bart received $500 from his employer because he devell=oped an idea that reduced the employer's production costs.
INCLUDED in GI b. the payment is taxable compensation
I:4-34 Excludable Gifts Included in GI? a. Alice appeared on a TC quiz show and received a prize of $5000
INCLUDED in GI a. this is a taxable prize. The payment is not a fir as donative intent is not present
Discharge of Debt
In general, income is recognized on a discharge (forgiveness) of indebtedness. EXCEPTIONS: (don't have to recognize income if: 1. The discharge is a gift 2. the discharge is a bequest 3. the discharge occurs in bankruptcy (tp declares bankruptcy) 4. The discharge occurs when the TP is insolvent to the extent the forgiveness does not make the TP solvent (debt-free) (if debts are greater than assets) 5. The discharge of a student loan occurs for certain approved post-education employment/public service 6. Principle residence mortgage forgiveness up to @2 million (thru 2016)
Section 132 Benefits (EXCLUDED) (7) Adoption Expenses
employees can exclude up to $14,300 in (2020) if qualified adoption expenses are payed by the employer. Exclusion will phase out if MAGI between (below). employee wants to adopt, the employer will help with these costs in general, employee can exclude up to $14,300 in total of adoption expenses (2020), this benefit PHASES OUT for high-income TP's MAGI (modified adjusted gross income for high-income TP's: AGI OVER $214520-254520, the exclusion goes away (or is no longer available)
STATUTORY EXCLUSIONS: Life Insurance Proceeds (Surrender)
excess of proceeds (cash surrender value) over the premiums paid is generally taxable to the recipient
Athletic scholarships for fees, books, and supplies awarded by a university to students who are expected, BUT NOT REQUIRED, to participate in a particular sport can be _____________________.
excludable
ordinary stock dividends continue to be ____________from GI
excluded
GIFTS AND INHERITANCES: reciept of the house is __________________, but as rent is collected, it's ____________________ in GI
excluded; included
Discharge of Debt (exclusion on solvency)
exclusion is allowed up tot he point where the TP becomes solvent (tp's debt is no greater than the price of its' assets - not more than $2 million) $200,000 would be excluded, and $100,000 of debt forgiveness would be taxable),
Fringe Benefits are***by the employer, but not*** for the employee
fringe benefits are deductible by the employer, but not taxable for the employee.
generally, anything paid to-or on behalf of an employee is ..... employer's income as..... EXCEPTION: certain employee ...... - employer deducts the expenses, but the employee ....
generally, anything paid to-or on behalf of an employee is includable in the employer's income as compensation EXCEPTION: certain employee fringe benefits - employer deducts the expenses, but the employee doesn't have to include in income
For each of his 2 young children, David contributes $10,000 to a state-established Qualified Tuition Program. There is no....as the amounts are less than the $15,000 annual per donee gift tax exclusion. Current and future qualified contributions grow......Future distributions of income are tax exempt as long as the amounts do not....the beneficiary's qualified higher education expenses
gift tax; tax-free; exceed;
section 102 excludes gifts received from ______ _____________
gross income
PAYMENTS FOR INJURY AND SICKNESS EXAMPLE: after she was denied a promotion, Jane sued her employer claiming sex discriminationShe was awarded $5,000 to cover the medical bills she incurred because of the related emotional distress, $20,000 to punish her employer for discrimination, and $10,000 to compensate her for lost wages. The $5000 awarded to her to cover medical bills......, but.....
is excluded from GI, but no the amounts awarded as punitive damages or lost wages
Discharge of Debt EXAMPLE: TP had mortgage of $600,000, went down to $400,000, that difference.....the basis of the house is reduced by...a
is excluded; the same amount
John's employer establishes a cafeteria plan which allows each employee to set aside up to $5000 for health insurance premiums and medical reimbursements. Jon has had a salary of $30,000, he agrees to a salary reduction of $4,000, of which $2,600 is to cover his health insurance premiums and $1,400 is available to reimburse his medical expenses. Under the arrangement, Jon's salary is reduced to $26,000 for tax purposes. Neither the health insurance coverage nor the medical expense reimbursement... During the year, John incurs $1300 of medical expenses and the $________balance carries over. Alternatively, if the medical expenses were $1,800, Jon would receive a reimbursement of $________and he must pay the remaining $________ of expenses out of after-tax salary dollars
is taxable $100; $1,400; $400
Discharge of debt. During bankruptcy, USA Corporation debt was reduced from $780,000 to $400,000. USA Corporation's assets are valued at $500,000. USA%u2019s NOL carryover was $400,000. Is USA Corporation required to report any income from the discharge of its debts?
lalala
Section 132 Benefits (EXCLUDED) (11) Educational Assistance
limited to job-related education and training. Employee can exclude up to $5250 for tuition, books, and fees for undergraduate or graduate classes. (no limit here - max or min) Employers assist their employees to further their education. First $5250 reimbursement/support is excluded, for 25 weeks (not INDEX FOR INFLATION - Doesn't move ^^^***REMEMBER)
LIFE INSURANCE PROCEEDS: Sec 104 (a) (3) excludes from GI amounts collected under an accident and health insurance policy purchased by the TP, even if the benefits are a substitute for ..... Sec 101 specifies that benefits received under a qualified long-term care insurance contract may be excluded from GI, but limits the exclusion to the greater of $... per day in 2020 or the actual cost of such care. ^^ such policies pay for nursing homes and other types of LT care. If the benefits exceed the actual cost of such care but are less than $380 per day, no portion of the benefits is ...
lost income; $380; taxable *slides 2-3 (life insurance proceeds; Accelerated Death Benefits & Purchased Policies
(WEBER) - EXCLUSION OF GAIN FROM SMALL BUSINESS STOCK SEC 1202 - must be a........ corperation - must be a........ corperation - AB of gross assets must be LESS THAN >$$$$$ - stock must be held for more than _________years - (but if you sell and get a gain, you don't have to recognize gain if you__________________ proceeds from the _____________ sale into another _________________________ corporation.
must be a taxable corp. must be a C corp. AB of gross assets must be less than $50 million. stock must be held for more than 5 years (but if you sell and get a gain, you don't have to recognize gain if you reinvest proceeds from the first sale into another qualifying corporation).
SECTION 529 PLANS: - A QTP plan may acquire _______________ funds and similar investments - State plans (but not ____________ ___________ may provide for the purchase of credit for future tuition in lieu (substitution) of investments
mutual; private plans