Income Exclusions Flashcards
Municipal bond interest
Generally, interest on a bond used to finance government operations is exempt from federal income tax if a state, the District of Columbia, a U.S. possession, or any of their political subdivisions issues the bond for a public purpose (i.e., a toll road). Interest on bonds used for most private activities is not exempt from income tax. An exempt private activity bond is referred to as a “qualified bond” or “qualified private activity bond”. Private activity bonds are often used to build a sports facility or industrial park, airport, for-profit hospital, etc.
GAIN ON SALE OF MAIN HOME
Period of nonqualified use
Any period after 2008 that the taxpayer does not use the property as the main home. A period of nonqualified use does not include:
The five-year period ending on the date of the sale. Any period (not to exceed 10 years) during which taxpayer or spouse is serving on qualified official extended duty as a member of the uniformed services, US foreign service, or employee of the intelligence community. Any period of temporary absence (not to exceed 2 years) due to change of employment or health conditions.
GAIN ON SALE OF MAIN HOME
Portion of gain allocated to nonqualified use
Gain on sale ×
Total nonqualified use after 2008/Total period of ownership
GAIN ON SALE OF MAIN HOME
Section 121 exclusion of gain on sale of main home
Exclusion is up to $250,000 ($500,000 MFJ)
Ownership test – One taxpayer must own home for at least 2 years.
Use test – Home must be the main home for 24 months in the past 5 years. Exception if taxpayer has 1-year use before becoming unable to care for himself. If MFJ, both must meet use test.
Cannot exclude sale of another home in prior 2-year period.
Cannot exclude prior depreciation allowed or allowable.
Cannot exclude gain allocated to periods of nonqualified use.
Discharge of qualified principal residence indebtedness
For tax year 2020, a taxpayer may exclude up to $2 million ($1 million if married filing separately) when qualified principal residence indebtedness is discharged.
Only debt for acquiring, constructing, or substantially improving a principal residence, for which the principal residence serves as security.
Includes refinancing but only to the extent of the prior debt, not cash taken out during refinancing.
Employee achievement awards
Can exclude up to $1,600 of ‘‘tangible personal property’’ received for a length of service or safety achievement. $400 for awards that are not qualified plan awards. The award cannot be in cash, cash equivalents, gift cards, gift coupons or gift certificates, or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.
Military and government disability pensions
Can exclude amounts received as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service. Cannot exclude amounts based on years of service.
Interest on Series EE and I savings bonds
Exempt when used for qualified higher education expenses.
- Tuition and fees required for a taxpayer and dependents (for whom an exemption is claimed) to attend an eligible educational institution.
- Do not include expenses for books, room and board, or for courses involving sports, games, or hobbies that are not part of a degree or certificate-granting program.
- Married taxpayers must file jointly
- The taxpayer must be at least 24 years old before the bond’s issue date.
Distributions from 529 Plan
Up to $10,000 excluded on distributions to pay for qualified educational expenses of the designated beneficiary.
For elementary or secondary school (public, private or religious) or registered apprenticeships.
The cost of room and board qualifies.
Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
Secure Act of 2019 allows principal or interest on qualified student loan repayments, (and an additional $10,000 for each sibling). (Lifetime limit per beneficiary.)
Scholarships and fellowships
Exempt if used for qualified educational expenses.
Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
Not room and board.
Workers’ compensation
An amount received as workers’ compensation for an occupational sickness or injury is fully exempt from tax if paid under a workers’ compensation act or similar statute. The exemption also applies to the victim’s survivors.
Life insurance proceeds
Life insurance proceeds paid because of the death of the insured are generally tax-free to the beneficiary. A taxpayer may exclude certain accelerated payments received before death if terminally or chronically ill.
Compensation for sickness or injury
A taxpayer may exclude the following from income:
Compensatory damages (not punitive) from a lawsuit. Benefits under a health insurance plan where the taxpayer paid the premiums (or employer paid premiums if included in employee's income).
Compensation for permanent loss (or loss of use) of a body part or function, or permanent disfigurement.
Must be based only on the injury and not loss of work.
These benefits are not taxable regardless of who paid premiums.
Reimbursements for medical care.
Foreign earned income exclusion
In 2020 a U.S. citizen or resident alien may exclude up to $107,600 of foreign earned income per qualifying person after subtracting any claimed foreign housing exclusion or housing deduction. The taxpayer must meet all three of the following:
Must have foreign earned income.
Tax home must be in a foreign country.
Must be a bona fide resident of a foreign country (or countries) for an entire tax year or physically present in a foreign country for at least 330 full days during any period that includes an entire tax year.
