Exclusions From Gross Income

Question 1

Gifts and Inheritance

Answer 1

§102 (a) “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”

BUT the income you make from gift, inheritance, etc is going to be included in gross come [§102(b)]

Question 2

When are gifts excluded from gross income?

Answer 2

when they’re not from employer to employee

Question 3

Determining what is a gift, look for:

Answer 3

Detached & Disinterested generosity
a. Which means I don’t expect anything for what I’m giving you → it’s out of affection, respect, admiration, charity or like impulses

Commissioner v. Duberstein
a. RULE → a gift is a transfer made by a transferor motivated by a “detached and disinterred generosity”

Question 4

Employee Gifts

Answer 4

§102(c) → transfers between employer to employee for the benefit of the employee are includable gross income

**If amount transferred is considered compensation –> not a gift–> = includable as gross income

Question 5

When are employee gifts excludable as gross income? (Exception)

Answer 5

transfers between employer to employee are excludable as gross income IF:

Employee can show that the transfer was not made in recognition of the employee’s employment

Question 6

Prizes & Awards

Answer 6

§74 → General rule = income includes amounts received as prizes and awards

Question 7

What is the exception to Prizes & Awards general rule? (1 out of 2)

Answer 7

§74(b) – Gross income doesn’t’ include amounts received as prizes/awards in specific areas:

1. Religious
2. Charitable
3. Scientific
4. Education
5. Artistic
6. Literary or
7. Civic

But only IF:

1. The recipient was selected without any action on her part (aka didn’t enter contest), AND
2. Substantial future services by recipient aren’t a condition of receiving the prize/award, AND
3. Prize/award is transferred by payor to governmental unit/organization of 170(c)(1)

a. Taxpayer must not receive the award – Reg 1.74-1(c)-(f)
b. Designation can be made before or after taxpayer is aware of award

Question 8

What is the exception to Prizes & Awards general rule? (2 out of 2)

Answer 8

74(c) – Employee achievement awards

Award may be excluded from gross income if it relates to length of service OR safety

1. Must in form of tangible personal property
2. Amount of award §274(j)(2)(A) shall not exceed $400
3. Must be awarded as part of a meaningful ceremony
4. Not disguised as compensation

Question 9

How many years required for length of service award?

Answer 9

Employee must have worked for employer for 5 years or more

Question 10

Requirements of Safety Award

Answer 10

1. May be excluded from gross income if made to employee other than: manager, administrator, clerical employee, or other professional employee; AND
2. Only if 10% or less of employees receive such awards during the year

Question 11

Retirement gift

Answer 11

§132(a)(4) may exclude a retirement gift after a long period of service

Question 12

Scholarships and Fellowings

Answer 12

§117 → General rule = Gross income doesn’t include amounts received as a “qualified scholarship” by a degree candidate at an education organization

Question 13

What is a qualified scholarship under 117

Answer 13

A qualified scholarship is = any amount received by an individual as a scholarship or fellowship grant — the money must be used for qualified tuition and related expenses

Question 14

What is are qualified tuition and related expenses under 117?

Answer 14

Tuition and enrollment fees, books, supplies, equipment required

NOT for room & board

Question 15

What is included as income under 117?

Answer 15

Portion that represents a payment for teaching, research or other services required as a condition for receiving the scholarship

Question 16

Educational assistance programs

Answer 16

§127

i. An employee may exclude up to $5,50 from gross income for amounts paid for by employer for education assistance at undergrad or graduate level
ii. Applies to tuition, books, supplies, and an employer provided educational course

Question 17

Life Insurance Proceeds

Answer 17

§101

Question 18

Qualified Adoption expenses

Answer 18

§137

When employers give employees money to adopt, that money is not included in gross income

Question 19

Payments for personal physical sickness and injuries

Answer 19

§104

Worker’s Comp is not includable in gross income

Question 20

Discharge of indebtedness during bankruptcy or insolvency

Answer 20

§108

Question 21

Partial exclusions for Social Security benefits

Answer 21

§86

Question 22

Gain from sale of principal residence

Answer 22

§121

Taxpayer may exclude up to $250K ($500K for joint filers) of qualifying gain on the sale of a principal residence, IF:

1. During 5 year period – ending on date of dale
2. Property was owned and used by taxpayer
3. As principal residence

Can exclude $500K, IF

1. Either spouse meets ownership requirements;
2. Both spouses meet the use requirement; AND
3. Neither spouse is ineligible for the benefits b/c during 2 year period ending date of sale there was any other sale by taxpayer to which subsection(a) applied

Question 23

Income Earned Abroad

Answer 23

§911

Income earned abroad may be excluded from gross income, IF:

1. American citizen OR resident;
2. In foreign country for at least 330 days during 12 month period
3. Income is for performance of services
4. Up to max of $97,600 for 2013

Question 24

Exclusions for higher education

Answer 24

i. American Opportunity Credit (AOTC)
ii. Lifetime Learning Credit

Cannot claim both AOTC or Lifetime Learning Credit for the same student in the same year

iii. §135 → Savings bonds pays for education
v. §529 → Qualified tuition programs
vi. §530 → Coverdell Educational Savings Accounts