Taxation of Employee Benefits

Question 1

What’s the general rule re: benefits received by an employee?

Answer 1

Included in gross income.

Question 2

Is reimbursement of employee business expense included in income of the employee? Exception?

Answer 2

Yes (the employee might get deduction to offset the income).

Reimbursement under an accountable plan are not required to be reported on the W-2.

Question 3

When employee benefits are generally excluded from income?

Answer 3

When the benefits plans do not discriminate in favor of highly compensated employees (apply to everyone).

Question 4

What happens when benefits do discriminate?

Answer 4

Highly compensated employees must include it in income, but in general other employees don’t.

Question 5

Life insurance (group-term policy - can’t discriminate): whats the tax treatment for employees when the employer pays the premiums?

Answer 5

up to $50,000 can be excluded from income.

Amount over $50,000 is taxed based on IRS rate based on the TP’s age.

Question 6

What’s the difference between term insurance and whole-life insurance?

Answer 6

Whole: builds cash value.
Term: it doesn’t.

Question 7

A whole-life insurance: Tax treatment when an employer pays premiums?

Answer 7

The value of premiums are included in income.

Question 8

Health insurance premiums paid by employer: Tax treatment?

Answer 8

Excluded.

Question 9

Long-term care policies paid by employer: Tax treatment?

Answer 9

Excluded.

Question 10

Wage continuation insurance paid by employer: Tax treatment?

Answer 10

Included.

Question 11

Disability insurance: Tax treatment for premiums paid by TP?

Answer 11

Not deductible.

Question 12

Disability insurance: Tax treatment for premiums paid by an employer?

Answer 12

For employer: deductible.

For employee: excluded from income.

Question 13

Disability insurance: Tax treatment for benefits received when premiums were paid by TP?

Answer 13

Excluded from income.

Question 14

Disability insurance: Tax treatment for benefits received when premiums were paid by employer?

Answer 14

Included in income.

Question 15

What are 3 criteria for meals to be excluded?

Answer 15

• Furnished for convenience of employer.
• On employer’s premise.
• Meals must be in-kind.

Question 16

When can lodging provided by employer be excluded? At what value?

Answer 16

If it was a condition of employment.

FMV.

Question 17

Tax treatment for no-additional cost services (let employees use extra seatings on airplanes)?

Answer 17

Excluded.

Question 18

Tax treatment for employee discounts? Limits?

Answer 18

Excluded.

Limited to gross profit percentage (cost) or 20% for services.

Question 19

Tax treatment for working condition fringe (ex: subscription to tax journal)?

Answer 19

Excluded.

Question 20

Tax treatment for de minimis fringes (ex: use of copy/fax machines, free coffee)?

Answer 20

Excluded because it is minimum.

Question 21

Tax treatment for nominal gifts (up to $25)?

Answer 21

Excluded.

Question 22

Tax treatment for pmts for transportation and parking ?

Answer 22

Excluded. ($255 per month in 2017) ($255 per month in 2017)

Question 23

Tax treatment for employer-provided retirement planning advice?

Answer 23

Excluded.

Question 24

Tax treatment for pmts from employer for expenses that would be deductible as moving expense?

Answer 24

Excluded.

Question 25

Tax treatment for child and dependent care services provided by employer (on location or reimbursement) so that the employee can work? Limits?

Answer 25

Excluded.

Up to $5,000. $2,500 if married filling separately.

Question 26

Tax treatment for undergraduate, graduate tuition fees, books, and supplies provided by employer (not discriminated)? Limits?

Answer 26

Excluded.

up to $5,250.

Question 27

Tax treatment for undergraduate tuition waivers for employees, spouses, and dependent children for employees of nonprofit educational institutions? Criteria?

Answer 27

Excluded.

If it is a qualified plan (not discriminated).

Question 28

When is graduate tuition waivers excluded from income? Tax treatment for cash pmts?

Answer 28

When TPs are graduate teaching/research assistants (full-time students).
Included.

Question 29

Tax treatment for expenses incurred to adopt a child if employer reimbursed? Limit?

Answer 29

Excluded.

Phase out at higher AGI level.

Question 30

Tax treatment for cafeteria plan?

Answer 30

If employees have a option to choose between fringe benefits and cash, fringe benefits is excluded. If the employee chooses cash, taxed as wages.

Question 31

Examples of cafeteria plans?

Answer 31

Benefits/coverage under accident or health plans.
LT or ST disability coverage.
Group-term life insurance coverage.
Dependent care assistance programs.
Section 401(k) plans.
Contributions through health savings accounts.
Adoptions assistance.

Question 32

What are 2 types of stock options?

Answer 32

Incentive stock option.

Non-qualified stock option.

Question 33

Non-qualified stock option: whats the tax classification on grant date, exercise date, and sale date?

Answer 33

None.
Ordinary income.
Capital gain (ST or LT depends on holding period).

Question 34

Incentive stock option: whats the tax classification on grant date, exercise date, and sale date?

Answer 34

None.
None (except for amt purposes).
There can be only capital gain or ordinary income and capital gain (amt.adj.reverses).

Question 35

Stock options: What portion does a corporation receive deduction?

Answer 35

Ordinary income portion only.

Question 36

Non-qualified stock option: Formula to compute ordinary income on exercise date?

Answer 36

(FMV of stock - Exercise price) x # of shares exercised.

Question 37

What is criteria to be qualified as incentive option re: option price?

Answer 37

Has to be at least equal to the FMV on the grant date.

Question 38

Non-qualified stock option: Formula to compute capital gain on sale date?

Answer 38

Amount realized - adjusted basis (option price + ordinary income: should be added to basis) = Capital gain.

Question 39

Incentive stock options: what are 2 criteria for the gain on sale is LTCG? What happens if these 2 criteria are not met?

Answer 39

• Held for more than 1 yr.
• Not sold until after 2 years from the date the option was granted.

Treated as non-qualified stock option.

Question 40

Incentive stock option: when does income recognized when it becomes non-qualified option?

Answer 40

On sale date rather than exercise date.

Question 41

What are criteria to be qualified as cafeteria plans?

Answer 41

1) all participants must be employees;
2) participants may choose between two or more benefits composed of cash or qualified benefits;
3) participants are required to make elections among the benefits;
4) the plan must be in writing and have certain specified information;
5) the plan may not provide participants with deferred income, except for under 401(k) plans.