Ch 4 Flashcards
Unrealized income
Unrealized gains from appreciation in property value
5 items not considered income
1 addition obtained by loan 2 unrealized income 3 self-help income 4 rental value and personal use property 5 gross selling price of property (as opposed to gain on sale)
Self help income
Exchange of services between 2 individuals
Ex. Doing taxes for house painter in exchange for getting House painted (increases value, but goes untaxed)
Rental value of personal use property
Taxpayers aren’t taxed on rental value of personally owned property
Item that isn’t taxes: selling price of property
If property is sold at gain, gain and not entire sales price
Is taxable
1) Intervivos gifts
2) testamentary transfers
1) Gifts received during the life of the donor
2) transfers at death: bequests, devises and inheritances
Determining whether transfer is gift
Depends on intent of donor
Life insurance proceeds, interest on life insurance proceeds
Paid to person due to death aren’t taxable
Interest on life insurance proceeds is taxable
What is the exception where life insurance proceeds might get taxed?
When you purchase a life insurance policy for cash from
Another individual instead of directly from insurance co.
Surrender or sale of life insurance policy
Taxable if sold before death of insured
Amounts exceeding net premiums paid are taxable
Dividends on life insurance and endowment policies, how is interest treated on dividends left with insurance company?
Normally not taxable because considered partial return of
Premiums paid
Dividends are taxable if received while exceeding premiums
paid,
if dividends are left with insurance company interest is taxable
Accelerated death benefits: life insurance
Include payments made to terminally ill patients (physician
Says person likely to die in 24 months)
Non taxable
Meritorious achievement awards
To exclude award from tax for meritorious achievement
Award must not come in possession of taxpayer
3 conditions for non taxable meritorious award achievement
1 was selected w/out action on his part to enter proceeding
2 does not have to perform substantial future services as
Condition for receiving prize
3 designates payor is to pay amount of award to government
Or charitable organization
Scholarships and fellowships
Covering tuition, fees, books, supplies, equipment are
excluded from taxes
Scholarships that cover room, board and laundry, salary paid and required by school aren’t Excluded from taxes
Distributions from qualified tuition plans (QTP) AKA Section 529 plans
Withdraw from plans tax free if used for higher education
Expenses of tuition, books, fees, supplies, equipment,
Room and board
No income limitation on these plans
Any income from plans not used for qualified expenses is
Included in beneficiary’s gross income and subject to
10% penalty
3 important features of QTP
1 change beneficiaries without tax consequences
2 exclusion permitted under section 529 must be reduced
By any amounts used to claim American opportunity tax
Credit or lifetime learning credit
3 can’t contribute more than $14,000/year per beneficiary
Payments on injury and sickness
damages (other than punitive damages) Received on
physical injuries or sickness is excluded From tax
Taxpayers may exclude reimbursements for medical
Expenses related to nonphysical injuries (emotional)
If an employer pays half the benefits for an employee?
The part the employer pays isn’t taxable
The part the employee pays is taxable
Employee fringe benefits tax law
Allows employer to deduct cost of benefit, permits
employee to exclude benefit from gross income
Fringe benefits that qualify include: employee insurance,
Sec. 132 benefits, meals, lodging, dependent care, meal plans
Employer paid insurance: employers may deduct premiums paid for…
Life, health, accident and disability insurance
Which employer paid insurance policies are excluded from employee income? Which are generally taxable?
Medical, health, group term life insurance (generally life
Insurance is included)
Disability is generally taxable
Medical and health premiums: premiums paid by employer
Premiums not included in employee’s gross income
Premiums deductible by employer
Medical and health premiums: premiums paid by employee
Premiums deductible as medical expense subject
To 7.5% of AGI limitations, increases to 10% for
Most tax payers 2013
Medical and health Benefits: premiums paid by employer
Excluded from employee’s gross income except when
Benefits exceed actual expenses
Medical and health Benefits: paid by employee
Excluded from gross income
Disability premiums: paid by employer
Premiums not included in employees gross income
Premiums deductible by employer
Disability premiums: paid by employee
Not deductible
Disability benefits: paid by employer
Included in employee’s gross income
May qualify for credit for elderly and disabled
Disability benefits paid by employee
Excluded from gross income
Life insurance premiums: paid by employer
Included In employee’s gross income (except group term
Life insurance)
Premiums deductible by employer assuming employer
Isn’t beneficiary
