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
Life insurance premiums: paid by employee
Not deductible
Life insurance benefits: paid by employer
Excluded from gross income
Life insurance benefits: paid by employee
Excluded from gross Income
Eligibility test for discrimination
5 highest paid officers, 10% or greater shareholders
And highest paid 25% of employees
Non discrimination requirements
If benefits plan discriminates in favor of highly compensated
Employees, these employees must include benefits in
Gross income
To qualify for group term life insurance premiums for exclusion…
Requirements for coverage?
Broad coverage of employees is required
Coverage must bare uniform relationship to each employee’s
Compensation
When must group life insurance be included in gross income?
When it exceeds $50,000
7 section 132 fringe benefits
1 no additional cost benefits 2 qualified employee discounts 3 working condition benefits 4 de minimis 5 qualified transportation 6 recreation and athletic facilities 7 educational assistance
Section 132 fringe benefit: no additional cost
Availability?
Telephones, unused hotel rooms, unused airline seats
Available to employees, spouses, dependents, retirees
Section 132 fringe benefit: qualified employee discounts
Availability?
Discounts on merchandise sold by employer
Employees, spouses, dependents, retirees
Section 132 fringe benefit: working condition
Availability?
Free magazines, outplacement, memberships
Employees
Section 132 fringe benefit: deminimis
Availability?
Free coffee, holiday turkeys, use of company eating facilities
Employees
Section 132 fringe benefit: qualified transportation
Availability?
Transit passes, tokens, parking
Employees
Section 132 fringe benefit: recreation and athletic facilities
Availability?
Gyms, pools, saunas, tennis courts
Employees, spouses, dependents, retirees
Section 132 fringe benefit: educational assistance
Availability?
Employees and former employees
Qualified plan awards and Employee Achievement Awards
Qualified plan awards are limited to $1,600
$400 on avg.
Must be presented as an award
Must be tangible
Meals and entertainment
Can deduct 50% of cost for tax purposes
Employee death benefits
Usually taxable unless it is a gift
Deductible for employer if it’s taxable income
Dependent care assistance programs
Employer financed programs that provide care for
employee’s children or other dependents
Employee may exclude up to $5000 of assistance each yr.
($2500 for married filing separate)
Qualified adoption expenses
Employee may exclude $12,970 from gross income
Of qualified expenses paid for adoption of child under 18
Exclusion is phased out for high income earners
Educational assistance
Employers that pay employee education expenses
May exclude from gross income annual payments of
$5,250
Exclusion applies to payments for tuition, fees, books,
Supplies and training equipment
cafeteria plans AKA flexible spending accounts
Offer employees option of choosing cash or statutory
non taxable fringe benefits (medical, group life insurance,
Adoption expenses, child care, etc.)
Cash is taxable, statutory benefits are excluded from
Gross income if chosen
What is the maximum amount employees can elect to contribute to tax free flexible spending account for healthcare?
$2,500
Availability of tax favored fringe benefits to owners
Not as available for partners, shareholders, S corporation shareholders that own more than 2%
Can deduct fringe benefits for AGI
only C corporations are eligible for tax favored fringe benefits
Fringe benefits for partners, proprietors and owners: what taxes are they subject to
FICA and self-employment taxes
Foreign tax credit
US citizens may subtract taxes they pay to foreign
countries from their US tax liability
Option of foreign earned income exclusion
Can exclude first $97,600 per spouse in 2013 of foreign earned income From gross income
Foreign earned income
Includes individual’s earnings from personal services
Rendered in a foreign country
Qualifying for foreign earned income exclusion,
what sources of income don’t qualify for the exclusion?
Taxpayer must be resident or abroad in 1 or more countries
For 330 days during the period
Pensions, annuities, salary paid by US government or
Deferred compensation don’t qualify for the exclusion
Americans employed abroad, FICA taxation
Only pay social security tax if employed abroad by American
Company
Income from discharge of debt
Forgiveness of debt is included in gross income unless
Given as gift from another individual
Section 108: discharge on indebtedness (2 examples where indebtedness isn’t taxable)
1 discharge occurs in bankruptcy
2 discharge occurs when taxpayer is insolvent
Student loan forgiveness
Contingent on individual’s performing certain public services
Usually for governmental, charitable or educational
organizations
Home mortgage forgiveness sec. 108 (a)(1)(E)
Through 2013 homeowners may exclude debt forgiveness
On principal residence of up to $2 million
Only applies to mortgages acquired for improvement of
Principal residences
Exclusion for gain from small business stock
Exclusion on up to $10million ranging from 50%-100%
exclusion
Taxpayers don’t have to recognize any gain if they reinvest
Proceeds from sale of small business stock w/in 60 days
Of sale
Qualifying as a small business in the excluded capital gains transactions
Gross assets of under $50 million
At least 80% value of assets must be used in conduct of
1 or more qualified trades or businesses
Exclusion: gain from sale of personal residence
Taxpayers may exclude up to $250,000 ($500k married
Filing joint), on gain from sale of personal residence
Exclusion: campus housing
Limited exclusion provided to employees of educational
Institutions when provided with on campus housing
Exclusion: annuities paid to survivors of public safety officers
Survivors of firefighters, police officers killed in line of duty
Exclusions: military
Exclude disability pay and combat pay, housing allowances
noncommissioned personnel only
Exclusions: housing allowances ministers
Exclude rental value homes or rental allowance in connection
With religious duties
Exclusions: foster care payments
Certain allowances to foster care providers excluded
Exclusions: rural letter carriers
Exclude equipment maintenance allowance they receive for
Using their personal automobiles when delivering mail
Exclusions: Roth IRA
Roth IRA distributions excluded from gross income
Exclusions: Education IRA distributions
Qualified distributions form Coverdell Education Savings
Acct. IRAs are excluded from gross income
Exclusions: personal foreign currency gains
Individuals excused recognizing gain from personal
Transaction of foreign currency under $200
Employee fringe benefits
Deducted if reasonable amounts
Employers receive small benefit because fringe benefits
Not subject to social security or Medicare taxes
