Exceptions to Gross Income Flashcards
What is the rule regarding life insurance proceeds?
Gross income does not include proceeds paid by reason of death of the insured. However, when proceeds are paid in installments, any interest will be taxable.
Smokey the bear dies and his life insurance policy names his son Jr. as the beneficiary. Policy pays Jr. $13,000 in three installments, plus $3,000 in interest. How should Jr. report this?
$13000 excluded,
$3000 taxable income.
What is the general rule for assets obtained via inheritence?
Gross income does NOT include amounts received by bequest, devise, or inheritance. No estate or inheritance tax in IL.
Jr. inherits his father’s cabin in the woods worth $100,000 and a bank account balance with a balance of $300,000. The cabin is currently being rented to Yogi Bear for $1000 a month. What are the consequences of these facts?
The cabin and bank account are excluded from Jr’s income. However, the rent, and any interest he gains on the bank account ARE taxable.
What is the rule for gifts?
Gross income does NOT include amounts received by gifts.
What is a gift?
A gift is a transfer made out of defected and disinterested generosity. (aka, for love, affection charity, etc).
Note: Gifts CANNOT be made by employers to employees, seen as compensation.
What is the rule for Torts awards?
Gross income does not include damages received on account of PHYSICAL PERSONAL INJURY or SICKNESS, irregardless of a court award vs settlement, lump sum vs installment.
What about awards for solely emotional distress? For punitive damages?
These are taxable, if NOT connected with a physical injury.
Punitive damages are always taxable.
After a Knicks game, Spike Lee punched Reggie Miller in the face, causing a broken nose and other physical injuries. Reggie recovers $25,000 for physical injuries in a suit against Spike. He also receives $100,000 in a defamation case against Spike, and $50,000 in punitive damages. What are the tax consequences?
$25,000-Excluded
$100,000-Taxable
$50,000-taxable
A was struck by a drunk driver, and filed suit against the driver for compensatory damages, lost wages, and emotional distress. She accepts a settlement for $8000 to cover her medical expenses, $1200 for lost wages, and $100,000 for emotional distress. What are the tax consequences?
Everything is excluded. If emotional distress damages ARISES FROM a physical injury, they are excluded.
What are the rules for health and accident insurance from an employer?
Value of employer provided health or accident insurance, i.e. the premium paid by the employer, are excluded from gross income.
What about employer provided health insurance reimbursements?
Health insurance reimbursements for medical expenses actually incurred are also excluded from gross income
What about employer provided life insurance?
Taxpayers may exclude the value of THE FIRST $50,000 of employer provided group term life insurance. Gross income INCLUDES the value of any excess life insurance coverage provided by the employer
Can you exclude value for employer provided meals and lodging?
Yes, if they are provided for the convenience of the employer, in-kind, and on the employer’s premises.
What are some other tax free fringe benefits?
No additional cost to employer: airline industry tickets
Some employee discounts
Pension plans
safety/service awards-> no cash, must have a ceremony, <$400
