2.1 GROSS INCOME

Death Benefits

All death benefits received by the beneficiaries or the estate of an employee from, or on behalf of, an employer are included in gross income. This is for employer-paid death benefits, not to be confused with the death benefits of a life insurance plan provided by an employer.

Bartering

Bartered services or goods are included in gross income at the fair market value of the item(s) received in exchange for the services.

Statutory Employees

Business taxpayers must determine the correct classification for each worker.A statutory employee is a worker who straddles the divide between being self-employed and being considered a regular employee.A statutory employee is a person who is in business for himself or herself, but who works primarily or wholly for a specific company.If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes (listed in item d. below):A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products, or who picks up and delivers laundry or dry cleaning, if the driver is the business agent or is paid on commission.A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.An individual who works at home on materials or goods that the taxpayer/employer supplies and that must be returned to the taxpayer or to a person the taxpayer names if the taxpayer also furnishes specifications for the work to be done.A full-time traveling or city salesperson who works on the taxpayer's/employer's behalf and turns in orders to the taxpayer from wholesalers; retailers; contractors; or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for the taxpayer must be the salesperson's principal business activity.Officers of exempt organizations are considered statutory employees.The employer withholds Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply:The service contract states or implies that substantially all the services are to be performed by them.They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).The services are performed on a continuing basis for the same payer.Companies report their payments to statutory employees on Form W-2, but they must check Box 13 on the W-2 for "Statutory employee."Federal income tax is not withheld from the wages of statutory employees.Federal unemployment (FUTA) taxes are paid by employers on the first and fourth categories (b.1. and b.4. above) of statutory employees but not on categories b.2. and b.3.Statutory employee earnings are reported on line 1 of Schedule C, Profit or Loss From Business.Employees check the box on line 1 of Schedule C.The employee does not have to fill out a Schedule SE.The employee is permitted to deduct work-related expenses on Schedule C instead of Schedule A.The employee does not combine statutory employee income and other income from a business on a single Schedule C.Two Schedule Cs must be filed, and only the income from the non-statutory-employee business will flow through to Schedule SE.Statutory employees are not eligible to participate in retirement plans sponsored by the company that employs them.Statutory employees are regarded as "self-employed individuals" under Sec. 401(c)(1) and allowed to set up their own retirement plans.Full-time life insurance salespersons are deemed to be employed by the insurance company whose policies the salespersons sell for the purposes of retirement and health plans and can be covered under the insurance company retirement plan.

Child Support

Child support payments are an exclusion from the gross income of the recipient and are not deductible by the payor. These payments are not alimony. If the divorce or separation instrument specifies payments of both alimony and child support, and only partial payments are made, then the partial payments are considered to be child support until this obligation is fully paid, and any excess is then treated as alimony. If the payment amount is to be reduced based on a contingency relating to a child (e.g., attaining a certain age, marrying), the amount of the reduction will be treated as child support.

Employee Housing at an Educational Institution

Employee housing at an educational institution (including an academic health center) is excluded from income if the rent paid by the employee exceeds 5% of the fair market value of the housing.

Recovery of Medical Deductions

If the taxpayer incurred medical expenses in Year 1, deducted these expenses on his or her Year 1 tax return, and received reimbursement for the same medical expenses in Year 2, the reimbursement is included in gross income on the Year 2 return to the extent of the previous deduction that was allowed on the return.

Illegal Activities

Income from illegal activities is gross income.

Taxpayer gives the underlying securities to her 20-year-old daughter

Interest earned after the transfer is gross income to the daughter.

Laura received a scholarship of $2,500, and as a condition for receiving the scholarship, Laura must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for teaching. Assuming Laura only uses her scholarship for qualified education expenses, Laura will be able to exclude

Laura will be able to exclude $1,500 from income. The $1,000 she received for teaching is taxable and must be included in income

Employer-Provided Life Insurance

Proceeds of a life insurance policy for which the employer paid the premiums are excluded from the employee's gross income. Certain premiums paid by the employer are, however, included in the employee's gross income. The cost of group term life insurance up to a coverage amount of $50,000 is excluded from the employee's gross income.The amount included is the premiums representing excess coverage (over $50,000) less any amounts paid by the employee on the insurance policy.

Property Settlement

Property settlements, which are simply a division of property, are not treated as alimony. Property transferred to a spouse or former spouse incident to a divorce is treated as a transfer by gift, which is specifically excluded from gross income."Incident to a divorce" means a transfer of property within 1 year after the date the marriage ceases or a transfer of property related to the cessation of the marriage.This exclusion does not apply if the spouse or former spouse is a nonresident alien.

Reimbursements for Moving Expenses

Qualified reimbursements incurred by members of the military on active duty are excluded from gross income. If the reimbursement is not for qualified moving expenses, or if the taxpayer is not a member of the military, it is included in gross income.

Recovery of Tax Benefit Item

The tax benefit rule includes, in gross income, items received for which the taxpayer received a tax benefit in a prior year. Section 111 provides for exclusion of amounts recovered during the tax year that were deducted in a prior year to the extent the amount did not reduce income tax.

Unemployment Benefits

Unemployment benefits received under a federal or state program, as well as company-financed supplemental plans, are gross income. Strike benefits received from a union are also included in income.

Rebate

A rebate to the purchaser is treated as a reduction of the purchase price. It is not included in gross income.

Claim-of-Right Doctrine

A taxpayer receiving payments under a claim of right and without restrictions on its use or disposition includes the payment in income in the year received even though the right to retain the payment is not yet fixed or the taxpayer may later be required to return it. If payment is not received, then the payment is not included in income.

Alimony

Alimony and separate maintenance payments are included in the gross income of the recipient (payee) and are deducted from the gross income of the payor for divorce decrees executed (i.e., established) prior to 2019. Alimony is not deductible by the payor and is not included in the gross income of the recipient if (a) the divorce is finalized after 2018 or (b) a pre-2019 divorce is modified after 2018 and that modification expressly provides for exclusion from income. A payment is considered to be alimony (even if paid to a third party, e.g., home mortgage) when it isPaid in cashPaid pursuant to a written divorce or separation instrumentNot designated as other than alimonyTerminated at death of recipientNot paid to a member of the same householdNot paid to a spouse with whom the taxpayer is filing a joint return

Compensation for Services

All compensation for personal services is gross income. The form of payment is irrelevant. If services are paid for in property, its fair market value at the time of receipt is gross income. The amount included in income becomes the basis in the property. If services were performed for a price agreed on beforehand, the price will be accepted as the FMV of the property only if there is no evidence to the contrary. Gross income of an employee includes any amount paid by an employer for a liability (including taxes) or expense of the employee. Income from self-employment is included in gross income. The director of a corporation is considered self-employed, and all fees are included in gross income. Reported and unreported compensation (e.g., tips) is gross income.Food service employers required to allocate tip income use 8% of food and drink sales to determine the allocable amount. (Food/drink sales × 8%) - All employee's reported tips = Amount to be allocated

Gambling

All gambling winnings are gross income and may require reporting by the payor on Form W-2G. Gambling losses, e.g., nonwinning lottery tickets, are deductible only to the extent of winnings as an other itemized deduction. Gambling losses over winnings for the taxable year cannot be used as a carryover or carryback to reduce gambling income from other years.

Scholarships

Amounts received by an individual as scholarships or fellowships are excluded from gross income to the extent that the individual is a candidate for a degree from a qualified educational institution and the amounts are used for required tuition or fees, books, supplies, or equipment (not personal expenses, such as room and board). Gross income includes any amount received, e.g., as tuition reduction, in exchange for the performance of services, such as teaching or research. Generally, a reduction in undergraduate tuition for an employee of a qualified educational organization does not constitute gross income. Subsistence payments administered by Veteran Affairs are excluded from gross income.

Fringe Benefits

An employee's gross income does not include the cost of any fringe benefit supplied or paid for by the employer that qualifies as a(n) No-additional-cost service Qualified employee discount Working condition fringe De minimis fringe Qualified transportation fringe Qualified moving expense reimbursement (active military only) Employer-provided educational assistance

Accident and Health Plans

Benefits received by an employee under an accident and health plan under which the employer paid the premiums or contributed to an independent fund are excluded from gross income of the employee. The benefits must be eitherPayments made due to permanent injury or loss of bodily functions orReimbursement paid to the employee for medical expenses of the employee, spouse, or dependents.Any reimbursement in excess of medical expenses is included in income. The plan must not discriminate in favor of highly compensated executives, shareholders, or officers. Any excess reimbursement over the actual cost of medical expenses may be excluded only to the extent the taxpayer contributed to the plan.

Employee Discount

Certain employee discounts on the selling price of qualified property or services of their employer are excluded from gross income. "Qualified property or services" are offered in the ordinary course of business in which the employee is performing services and are purchased by the employee for his or her own use. The employee discount may not exceedThe gross profit percentage in normal offers by the employer to customers or20% of the price offered to customers in the case of qualified services. The discounts must be available to employees on a nondiscriminatory basis.

Long-Term Care Coverage

Contributions by an employer to an employee's long-term care coverage are nontaxable employee benefits.

Alimony Recapture

Current tax law includes a recapture provision, which is intended to prevent large property settlements from being treated as alimony. Recapture occurs if payments significantly decrease in the second or third year after a divorce. The following steps show how to calculate the final amount of recapture: Second-year alimony recapture is equal to 2nd-year alimony - ($15,000 + 3rd-year alimony) First-year alimony recapture is equal to1st-year alimony -[(2nd-year alimony- 2nd-year recapture)+ 3rd-year alimony)/2 + $15,000] Both the first-year and second-year recapture amounts are included in the payor's gross income and deducted from the payee's gross income in Year 3.

Debt Discharge

Discharge of indebtedness can result in gross income. Gross income includes the cancellation of indebtedness when a debt is canceled in whole or in part for consideration.If a creditor cancels a debt (Form 1099C) in consideration for services performed by the debtor, the debtor must recognize income in the amount of the debt as compensation for his or her services.Income from discharge of indebtedness is reported on the same form as for any other income (i.e., Schedule C for a sole proprietor). Generally, a corporation has gross income from discharge of indebtedness when it satisfies a debt by transferring its own corporate stock to the creditor.The amount of gross income is the amount by which the principal of the debt exceeds the value of the transferred stock, plus the value of any other property transferred. If a creditor gratuitously cancels a debt, the amount forgiven is treated as a gift (the IRC generally provides for exclusion of gifts from gross income). Exceptions. Gross income does not include discharges thatOccur in bankruptcy, except the stock for debt transfer as described in item b. above.Occur when the debtor is insolvent but not in bankruptcy.The amount excluded is the smaller of the debt canceled or the amount of insolvency, based on the excess of liabilities over the FMV of assets on the date of debt cancellation.Are related to qualified farm indebtedness.Are a discharge of qualified real property business indebtedness.Are related to principal residence indebtedness. (Item i. below has more information on this exception.) When a taxpayer excludes discharge of indebtedness under d.1., 2., or 3. above, the taxpayer must reduce his or her tax attributes in the following order:NOLsGeneral business creditMinimum tax creditCapital loss carryoversBasis reductions NOTE: The taxpayer may first elect to decrease the basis of depreciable property. When there is a debt discharge involving real property, there are typically two separate transactions:The property is sold to the lender. Form 1099A may be issued. A gain or loss may be required to be reported on the transaction.The lender cancels the debt. Form 1099C may be issued. Income may have to be reported as discussed above. The sale of the property and the cancellation of the debt do not have to occur in the same year. If they occur in the same year, the lender will issue only a Form 1099C. When a canceled debt is a nonbusiness debt (e.g., discount for early payment of a mortgage loan), it is to be reported as other income on line 8 of Form 1040 (Schedule 1). EXAMPLE 2-7 Debt Forgiveness The amount of debt forgiveness as a reward for early payoff of a home mortgage is other income reported on line 8 of Schedule 1, Form 1040. The Mortgage Forgiveness Debt Relief Act excludes discharges of up to $2 million ($1 million if married filing separately) of indebtedness, which is secured by a principal residence and which is incurred in the acquisition, construction, or substantial improvement of the principal residence.This exclusion applies to discharge of debt occurring after 2006.The amount excluded from gross income reduces the basis of the residence, but not below zero, and only when the taxpayer retains the residence.Principal residence has the same meaning as when used in Sec. 121.The exclusion does not apply if the discharge is due to any reason not directly related to a decline in the home's value or the taxpayer's financial condition.

401(k) Plans

Employer contributions generally are not included in the income of the participant.

After Lisa divorced Jed in Year 1, she paid him $60,000 of alimony in Year 1, $40,000 in Year 2, and $10,000 in Year 3.

Excess alimony in Year 2 was $15,000 [$40,000 - ($15,000 + $10,000)]. Excess alimony in Year 1 was $60,000 - {[($40,000 - $15,000 + $10,000) ÷ 2] + $15,000}, or $27,500. In Year 3, Lisa must include in gross income the total of Year 1 and Year 2 excess alimony, or $42,500. Jed is also allowed a deduction of the same amount.

Student Loan Forgiveness

Federal, state, and/or local government student loan indebtedness may be discharged if the former student engages in certain employment, e.g., in a specified location, for a specified period, for a specified employer.Such income from discharge of indebtedness is excluded from gross income.

Prepaid Income

Generally, prepaid income is taxable in the year received whether the taxpayer is on the cash or accrual method of accounting. Prepayments for merchandise inventory are not income until the merchandise is shipped.

Compensation for Injury or Sickness

Gross income does not include benefits specified that might be received in the form of disability pay, health or accident insurance proceeds, workers' compensation awards, or other "damages" for personal physical injury or physical sickness. Specifically excluded from gross income are amounts receivedUnder workers' compensation acts as compensation for personal injuries or sicknessUnder an accident and health insurance policy purchased by the taxpayer even if the benefits are a substitute for lost incomeBy employees as reimbursement for medical care and payments for permanent injury or loss of bodily function under an employer-financed accident or health planAs a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country The following are excluded from gross income regardless of whether the damages are received by lawsuits or agreements or as lump sums or periodic payments:Damages received for personal physical injury or physical sicknessPayments received for emotional distress if an injury has its origin in a physical injury or physical sickness Compensation for slander of personal, professional, or business reputation is included in gross income. An in- or out-of-court settlement for lost profits in a business or court-awarded damages is included in gross income. Punitive damages received are included in gross income, even if in connection with a physical injury or physical sickness.An amount for both actual and punitive damages must be allocated. Wrongful death damages can be excluded to the extent they were received on account of a personal injury or sickness. Damages received solely for emotional distress are included in gross income. These damages include amounts received for claims, such as employment or age discrimination. Interest earned on an award for personal injuries is included in gross income.

Assignment of Income

Gross income includes income attributable to a person even though the income is received by other persons. This doctrine imposes the tax on income on those who earn it, produce the right to receive it, enjoy the benefit of it when paid, or control property that is its source. The doctrine applies to income earned by personal services or derived from property. Assignment of an income-producing asset is effective to shift the gross income to the assignee. Effective assignment requires that the transfer of property be complete and bona fide, with no control retained over either the property or the income it produces, and that the transfer take place before the income is actually earned

Reimbursed Employee Expenses

If reimbursements equal expenses and the employee makes an accounting of expenses to the employer, the reimbursements are excluded from the employee's gross income, and the employee may not deduct the expenses (accountable plan). This rule also applies if reimbursements exceeding expenses are returned to the employer and the employee substantiates the expenses. If excess reimbursements are not returned or if the employee does not substantiate them, the reimbursements are included in the employee's gross income.

Prizes and Awards

If the prize or award is in a form other than money, the amount of gross income is the FMV of the property. The honoree may avoid inclusion by rejecting the prize or award. Some prizes and awards are excludable. Certain employee achievement awards may qualify for exclusion from the employee's gross income as a de minimis fringe benefit.An award recipient may exclude the FMV of the prize or award from his or her gross income ifThe amount received is in recognition of religious, scientific, charitable, or similar meritorious achievement;The recipient is selected without action on his or her part;The receipt of the award is not conditioned on substantial future services; andThe amount is paid by the organization making the award to a tax-exempt organization (including a governmental unit) designated by the recipient.A prize or award may qualify for exclusion as a scholarship.Employee achievement awards may qualify for exclusion from the recipient employee's gross income if they are awarded as part of a meaningful presentation for safety achievement or length of service andThe awards do not exceed $400 (cost to employer) for all nonqualified plan awards,The awards do not exceed $1,600 (cost to employer) for all qualified plan awards, andThe awards are tangible personal property. Cash and cash equivalents, including gift cards, are not tangible personal property.Awards in excess of limitationsIf the employer exceeds the cost limitations for the award, the employee's exclusion from income is only preserved in part. In this case, the employee must include in his or her gross income, as compensation, the greater ofAn amount equal to the portion of the cost to the employer of the award that was not allowable as a deduction to the employer (as opposed to the excess of the fair market value of the award) orThe amount by which the fair market value of the award exceeds the maximum dollar amount allowable as a deduction to the employer. A qualified plan award is an employee achievement award provided under an established written program that does not discriminate in favor of highly compensated employees.

Virtual Currency

In some environments, virtual currency, e.g., Bitcoin, operates like "real" currency (i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance), but it does not have legal tender status in any jurisdiction. Virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means thatWages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payors must issue Form 1099.The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date the virtual currency was received.

Constructive Receipt

Income, although not actually in a taxpayer's possession, is constructively received in the taxable year during which it is credited to his or her account, set apart for him or her, or otherwise made available so that (s)he may draw upon it at any time, or so that (s)he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. A check received in the mail is considered to be income on the date received, whether or not it is cashed. To determine receipt of income from securities trades, the trade date, rather than the settlement date, should be used. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. Constructive receipt applies to the cash method of accounting. Under the accrual method, income is reported in the year earned.

Reimbursement for Living Expenses

Insurance payments received by a taxpayer whose residence is damaged or destroyed and who must temporarily occupy another residence are excluded. This includes taxpayers with an undamaged residence who are required not to occupy the home due to a disaster. The exclusion is limited to the excess of actual living expenses over normal living expenses.

Combat Zone Compensation

Military officers may exclude compensation up to an amount equal to the highest rate of basic pay at the highest pay grade that enlisted personnel may receive (plus any hostile fire/imminent danger pay). The exclusion applies only to compensation received while serving in a combat zone or while hospitalized as a result of wounds, disease, or injury incurred in a combat zone. Military personnel below officer level (i.e., enlisted) are allowed the same exclusion without the cap.

Rental Value of Parsonage

Ministers may exclude from gross income the rental value of a home or a rental allowance to the extent the allowance is used to provide a home, even if deductions are taken for home expenses paid with the allowance. The exclusion is the smaller of The actual expenditures of the minister for the home, The amount designated with the employer as a rental allowance, or The fair rental value of the housing, plus the cost of utilities. The parsonage allowance is subject to self-employment taxes. A minister should include any offerings given directly to him or her for church-related functions (e.g., marriages).

Pensions

Pensions are most often paid in the form of an annuity. Therefore, the rules for pensions are similar to the rules for annuities. Employees are able to recover their cost tax-free. The investment in the contract is the amount contributed by the employee in after-tax dollars. Amounts withdrawn early are treated as a recovery of the employee's contributions (excluded from gross income) and of the employer's contributions (included in gross income).After all of the employee's contributions are recovered, additional withdrawals are included in gross income. Persons retired on disability before they reach minimum retirement age must report their taxable disability payments as wages (this is further explained in Publication 575). A foreign pension or annuity distribution is a payment from a pension plan or retirement annuity received from a source outside the United States. They are received from aForeign employer,Trust established by a foreign employer,Foreign government or one of its agencies (including a foreign social security pension),Foreign insurance company, orForeign trust or other foreign entity designated to pay the annuity. As with domestic pensions or annuities, the taxable amount generally is the gross distribution minus the cost (investment in the contract). Income received from foreign pensions or annuities may be fully or partly taxable, even if the taxpayer did not receive a Form 1099 or the foreign equivalent reporting the amount of the income.

Disability Policies

Proceeds from disability insurance policies are tax-free if paid for by the employee. If the employer contributed to the coverage (employer contributions are excluded from the employee's income), then the amount received must be prorated into taxable and nontaxable amounts. Payments made from a qualified trust on behalf of a self-employed person are considered employer contributions. For example, if the employer pays 75% of the insurance premiums of a disability policy, 75% of the proceeds are includible in income.

Income from Life Insurance and Endowment Contracts

Proceeds received due to the death of the insured are generally excluded from gross income. Interest paid on the proceeds of a policy that is paid out over time is gross income to the beneficiary. The amount excluded from gross income of an applicable policy holder with respect to an employer-owned life insurance contract is not to exceed the premiums and other amounts paid by the policyholder for the life insurance policy.The income inclusion applies to all contracts issued after August 17, 2006.The income inclusion rule does not apply to a member of the insured's family, to any individual who is the designated beneficiary of the insured under the contract (other than an applicable policy holder), to a trust established for the benefit of the insured's family or a designated beneficiary, or to the estate of the insured.

Adoption Assistance Programs

Qualified adoption expenses paid to a third party or reimbursed to an employee by an employer under a written adoption assistance program are excludable from the employee's gross income. An adoption assistance program is a written plan thatBenefits employees who qualify under rules set up by the employer that do not favor highly compensated employees or their dependents,Does not pay more than 5% of its payments each year to shareholders or owners of more than 5% of the stock,Provides for adequate notice to employees of their eligibility, andRequires employees to provide reasonable substantiation of qualified expenses that are to be paid or reimbursed.

Transportation Fringe

Qualified transportation fringe benefits of up to $265 per month (2019) may be excluded for the value of employer-provided parking (except residential), transit passes, and transportation in an employer-provided "commuter highway vehicle" (must seat six adults with 80% of mileage used for employee commuting when the vehicle is at least 1/2 full) between the employee's residence and place of employment. Employers may offer the cash equivalent of the benefit without the loss of the $265 employee exclusion for the benefit. If an employee chooses the cash option, cash amounts received are included in gross income. Employees may use any combination of these exclusions (i.e., qualified parking at a subway terminal).

Rich purchased an old piano for $500 15 years ago. In the current year, Rich finds $10,000 hidden in the piano

Rich must report the $10,000 as gross income in the current year.

Lucy is a calendar-year accrual-method taxpayer. She provided services on December 21, Year 1. She billed the customer in the first week of January Year 2 but did not receive payment until February Year 2. She must include the amount received for the services in her Year?

She must include the amount received for the services in her Year 1 income. If she were on the cash basis, she would report the income in Year 2.

Social Security Benefits

Social Security benefits are generally not taxable unless additional income is received. The gross income inclusion is dependent upon the relation of provisional income (PI) to the base amount (BA) and the adjusted base amount (ABA). PI = Adjusted gross income (AGI) + Tax-exempt interest + Excluded foreign income + 50% of Social Security benefits. In other words, tax-exempt interest is included or taken into account but the exclusion of foreign income is not, resulting in all foreign income being included in AGI. BA means $32,000 if married filing jointly (MFJ), $0 if married filing separately and having lived with the spouse at any time during the tax year (MFSLT), or $25,000 for all others. ABA is the BA plus $12,000 if MFJ, $0 if MFSLT, or $9,000 for all others. if . . . Then SS benefit inclusion equals . . . PI ≤ BA ---0% BA < PI ≤ ABA ---50% PI > ABA ---85%

Working Condition Fringe

The FMV of property or services provided to an employee by an employer as a working condition fringe benefit is excludable by the employee to the extent the employer can deduct the costs as an ordinary and necessary business expense. Property or services provided to an employee qualify as a working condition fringe benefit only ifThe employee's use of the property or services relates to the employer's trade or business,The employee would have been entitled to a business expense deduction if the property or services that were provided by the employer had been purchased by the employee, andThe employee maintains the required records, if any, with respect to the business use of the property or services provided by the employer. The maximum value of employer-provided vehicles first made available to employees for personal use in 2019 for which the cents-per-mile valuation may be used is $50,400

Gifts or Inheritance

The IRC provides for exclusion from the gross income of the recipient the value of property acquired by gift or inheritance. A gift is a transfer for less than full or adequate consideration that results from the detached and disinterested generosity of the transferor. Gift transfers include inter vivos (between the living) gifts and gifts by bequest (of personal property by a will), devise (of real property by a will), and inheritance (under state intestacy law). Voluntary transfers from employer to employee are presumed to be compensation, not gifts.

Railroad Retirement

The Railroad Retirement Board allows for participants to receive retirement annuities at age 60 with 30 or more years of service. Social Security beneficiaries are not eligible until age 62, regardless of how long they have been paying into the system. The Social Security Benefits Worksheet is used to determine whether any of the benefits are taxable

Items are included in income based on the method of accounting used by the taxpayer.

The cash method of accounting includes income when constructively received. The accrual method of accounting reports income whenAll events have occurred fixing the right to receive the income.The amount can be determined with reasonable accuracy. The accrual method of accounting is required when there are inventories. The hybrid method allows a business to use the cash method for the portion of the business that is not required to be on the accrual method. Income is reported when it can be estimated with reasonable accuracy. Adjustments are made in a later year for any differences between the actual amount and the previously reported amounts.

Foreign Housing Allowance

The inflation-adjusted standard cost-allowance for 2019 is $31,770 ($105,900 × 30%) for those locations not on the IRS's list of high-cost locations. Foreign housing allowances are broken into three categories:The first $16,944 ($105,900 × 16%) of any foreign housing reimbursement is includible in income,The next portion of any reimbursement up to the greater of $31,770 or the amount listed for the city on the IRS's list of high-cost locations is excludable from income, andAny reimbursement exceeding the amount in item 2. is includible in income. The chart below can help you determine whether a taxpayer can claim either the foreign-earned income exclusion or the foreign housing exclusion.

Taxpayer makes a gift of interest earned on securities to her 20-year-old daughter who attends college

The interest is gross income to Taxpayer.

Adoption Exclusion

The maximum exclusion for 2019 is $14,080.The phase-out range for upper-income taxpayers is $211,160 to $251,160 for 2019.Adoption expenses must be reduced by an amount used in determining the adoption credit. For a child who is a U.S. citizen or resident, the exclusion is taken in the year the payments were made whether or not the adoption became final.For the adoption of a foreign child, the exclusion cannot be taken until the adoption becomes final. The excluded amount is not subject to income tax withholding. However, the payments are subject to Social Security, Medicare, and federal unemployment taxes. An eligible child must be under 18 years of age or must be physically or mentally incapable of self care. Qualified adoption expenses are reasonable and necessary adoption expenses, including adoption fees, court costs, attorney fees, and other directly related expenses.Expenses that are not eligible for the adoption exclusion includeCosts associated with a surrogate parenting arrangement,Expenses incurred in violation of state or federal law, andExpenses incurred in connection with the adoption of a child of the taxpayer's spouse.

Annuity Contracts

The portion of amounts received under an annuity contract for which a statute does not provide an exclusion is gross income. Taxpayers are permitted to recover the cost of the annuity (the price paid) tax-free.

Community Property Income

The question of tax liability for married persons filing separate returns arises frequently during discussions concerning to whom income is taxable. Several states have community property laws. These states require significantly different treatment of tax liability than in states without such laws. In the nine community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, all property acquired by spouses after marriage is considered as owned by them in community, and as such, is referred to as community property.Any income from these properties is automatically considered joint or community income, and if taxpayers are filing separate tax returns, the income would be shared equally between them on their separate returns.Wisconsin has implemented a marital property act; therefore, for federal income tax purposes, it is considered a community property state.Alaska adopted an optional system whereby a couple can choose to opt-in to the community property system. Property acquired before marriage or inherited by one spouse during marriage is considered to be that spouse's separate property.In California, Arizona, Nevada, New Mexico, and Washington, any income from these separate properties is considered separate income; thus, if the spouses are filing separately, the income would not be shared and would be reported on that spouse's separate return.Conversely, in Texas, Idaho, Louisiana, and Wisconsin, income from these separate properties is considered community income; thus, if the spouses are filing separately, the income would be shared between them on their separate returns. Section 66 of the IRC sets forth a specific rule for treatment of community income when the spouses live apart. The need for this section arose because, in community property states, each spouse is liable for one-half of the tax on income. Generally, when spouses are living apart, the spouse that earns the income will keep it. If two individuals are married to each other at some time during a calendar year but live apart for the entire tax year, do not file a joint return, and one or both have earned income, none of which is transferred between them, the following rules cover the reporting of income on their separate tax returns:Earned income (other than trade or business income and partnership income) is treated as income of the spouse who rendered the personal services.Trade or business income shall be treated as the gross income and deductions of the spouse carrying on such trade or business or, if such trade or business is jointly operated, treated as the gross income and deductions of each spouse on the basis of their respective distributive share of the gross income and deductions.Community income derived from the separate property of one spouse is treated as the income of such spouse.All other community income is taxed in accordance with the applicable community property law.

No-Additional-Cost Service

The value of a no-additional-cost fringe benefit provided to employees, their spouses, or their dependent children by employers is excluded from gross income. A no-additional-cost fringe is a service or product that the employer offers for sale to customers in the ordinary course of business in which the employee performs substantial services.The employer must not incur any substantial additional costs in providing the service to the employee.An example is free telephone service to a phone company employee. The fringe benefits must be available to employees on a nondiscriminatory basis; e.g., benefits available only to executives are included in their gross income.

De Minimis Fringe

The value of property or services provided to an employee is excludable as a de minimis fringe benefit if the value is so minimal that accounting for it would be unreasonable or impracticable. The following are examples of de minimis fringes:Occasional use of company copy machinesTyping of personal letters by a company secretaryOccasional company parties or picnicsTickets to entertainment events, if only distributed occasionallyOccasional taxi fare or meal money due to overtime workCoffee and doughnutsTraditional noncash holiday gifts with a small FMVTokens, vouchers, and reimbursements to cover the costs of commuting by public transit as long as the amount of reimbursement provided by the employer does not exceed $265 a month for any month (2019). NOTE: Any cash benefit or its equivalent (e.g., use of a credit card or gift certificate) cannot be excluded as a de minimis fringe benefit under any circumstances. Season tickets to sporting events, commuting use of an employer-provided car more than once a month, or membership to a private country club or athletic facility are never excludable as de minimis fringe benefits. An eating facility for employees is treated as a de minimis fringe benefit ifIt is located on or near the business premises of the employer andThe revenue derived from the facility normally equals or exceeds its direct operating costs. EXAMPLE 2-14 De Minimis Fringe Benefit An employer provides meals at its own eating facility, and the direct operating costs of the facility exceed the annual revenue from the facility. Because the costs exceed revenue, the benefit is taxable to employees. NOTE: The excess value of the meals over the fees charged to employees is excluded from employees' income. The value of an on-premises athletic facility provided by an employer is generally excluded from gross income of employees.

Donna paid $1,200 for an annuity that pays $200 per month for an entire year, for a total of $2,400 ($200 × 12 months). The percentage of each payment that can be excluded is 50% ($1,200 price of annuity ÷ $2,400 total payments).

Therefore, Donna may exclude $100 ($200 × 50%) of each payment from income for a total of $1,200 ($100 × 12 months).

Treasure Trove

Treasure trove is gross income for the tax year in which it is undisputedly in the taxpayer's possession.

Foreign-Earned Income Exclusion

U.S. citizens and qualifying resident aliens may exclude up to $105,900 of foreign-earned income and a statutory housing cost allowance from gross income. To qualify for exclusion, the taxpayer must have foreign-earned income, a tax home in a foreign country, and be one of the following:A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, orA U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The $105,900 limitation must be prorated if the taxpayer is not present in (or a resident of) the foreign country for the entire year (Form 2555). This exclusion is in lieu of the foreign tax credit. Deductions attributed to the foreign-earned income (which is excluded) are disallowed. The following table clarifies the types of income for the purposes of the foreign-earned income exclusion:

Employer-Provided Dependent Care

Up to $5,000 of dependent care provided by an employer is excluded from income. This includes Amounts paid directly to the taxpayer or the taxpayer's care provider for the care of the dependent FMV of employer-provided daycare facility Pre-tax contributions under a flexible spending plan

Employer-Provided Educational Assistance

Up to $5,250 may be excluded by the employee for employer-provided educational assistance.This rule does not apply to graduate teaching or research assistants who receive tuition reduction under Sec. 117(d).Excludable assistance payments may not include tools or supplies that the employee retains after the course or the cost of meals, lodging, or transportation.

Taxpayer pays $2,000 state income tax and itemizes deductions. Subsequent refunds must be included. However, if Taxpayer used the standard deduction, the refund would

the refund would not be included because no tax benefit from payment of state income tax was realized.

Taxpayer writes off bad debt 5 years ago. In the current year, the debtor pays Taxpayer the principal of the debt written off, which must be

which must be included in gross income since the deduction 5 years ago reduced the tax liability.