Slide 1GROSS INCOME: EXCLUSIONSItems that Are Not IncomeUnrealized IncomeSelf-Help IncomeSelling Price of PropertyMajor Statutory Exclusions (1 of 2)Major Statutory Exclusions (2 of 2)Life Insurance ProceedsAdoption ExpensesAwards for Meritorious AchievementScholarships and FellowshipsDistributions from Qualified Tuition Programs: §529 Plans (1 of 2)Distributions from Qualified Tuition Programs: §529 Plans (2 of 2)Payments for Injury and SicknessEmployee Fringe Benefits (1 of 2)Employee Fringe Benefits (2 of 2)Employee Fringe Benefits in GeneralEmployer-Paid Insurance§132 Fringe BenefitsEmployer AwardsMeals and LodgingMeals and EntertainmentEmployee Death BenefitsDependent CareEducational AssistanceCafeteria PlansInterest-Free LoansForeign-Earned Income Exclusion (1 of 3)Foreign-Earned Income Exclusion (2 of 3)Foreign-Earned Income Exclusion (3 of 3)Income from the Discharge of a Debt (1 of 2)Income from the Discharge of a Debt (2 of 2)Exclusion for Gain from Small Business StockOther Exclusions (1 of 2)Other Exclusions (2 of 2)Tax Planning ConsiderationsCompliance and Procedural ConsiderationsSlide 394-1©2007 Prentice Hall, Inc.©2007 Prentice Hall, Inc.4-2GROSS INCOME: GROSS INCOME: EXCLUSIONSEXCLUSIONSItems that are not incomeMajor statutory exclusionsTax planning considerationsCompliance and procedural considerations©2007 Prentice Hall, Inc.4-3Items that Are Not Items that Are Not IncomeIncomeUnrealized incomeSelf-help incomeRental value of personal-use propertySelling price of property©2007 Prentice Hall, Inc.4-4Unrealized IncomeLand valued at $20,000 beginning of year appreciates to $40,000 at end of yearThe $20,000 increase in value is unrealized income and not taxable©2007 Prentice Hall, Inc.4-5Self-Help IncomeThe amount saved is not subject to taxCleaning your own carpetRepairing your car©2007 Prentice Hall, Inc.4-6Selling Price of PropertyOnly gain on sale of property is taxable Selling price – Basis in property= Gain on sale of property©2007 Prentice Hall, Inc.4-7Major Statutory Major Statutory ExclusionsExclusions(1 of 2)(1 of 2)Gifts and inheritancesLife insurance proceedsAdoption expensesAwards for meritorious achievementScholarships and fellowshipsDistributions from qualified tuition programs©2007 Prentice Hall, Inc.4-8Major Statutory Major Statutory ExclusionsExclusions(2 of 2)(2 of 2)Payments for injury and sicknessEmployee fringe benefitsForeign-earned income exclusionIncome from the discharge of a debtExclusion for gain from small business stockOther exclusions©2007 Prentice Hall, Inc.4-9Life Insurance ProceedsPaid by reason of deathGenerally non-taxablePolicy surrendered not for deathExcess of proceeds over the premiums paid taxable to recipientDividends on life insurance and endowment policies non-taxableConsidered return of premiums paid©2007 Prentice Hall, Inc.4-10Adoption ExpensesAdoption creditTax credits or an exclusion for amounts paid pursuant to an adoption assistance plan created by an employer©2007 Prentice Hall, Inc.4-11Awards for Meritorious AchievementAwards for religious, charitable, scientific, etc. are not taxable ifDid not enter contestIs not required to perform substantial future servicesDesignates a qualified charitable organization to receive the payment©2007 Prentice Hall, Inc.4-12Scholarships and FellowshipsScholarships excluded for degree candidates used for qualified tuition and related expensesRequired for courses of instruction at an educational institutionTuition, fees, books, supplies, equipmentNot room and board©2007 Prentice Hall, Inc.4-13Distributions from Qualified Tuition Programs: §529 Plans (1 of 2)Earnings while in a §529 plan are not taxableEarnings distributed excluded from income if used by beneficiary for qualified tuition and related expensesTuition, fees, books, supplies, equipment, AND Room and board if ≥ half-time student©2007 Prentice Hall, Inc.4-14Distributions from Qualified Tuition Programs: §529 Plans (2 of 2)Distributions not used for qualified tuition expensesIncluded in beneficiary’s income, ANDSubject to a 10% penaltyBeneficiary must be “family” memberBeneficiary may be changed w/o tax consequences©2007 Prentice Hall, Inc.4-15Payments for Injury and SicknessInjury includes both physical and mentalDisability income policy is non-taxable if purchased by taxpayerTaxable if purchased by employer©2007 Prentice Hall, Inc.4-16Employee Fringe Benefits(1 of 2)In generalEmployer-paid insurance§132 fringe benefitsEmployer awardsMeals and lodgingMeals and entertainmentEmployee death benefits©2007 Prentice Hall, Inc.4-17Employee Fringe Benefits(2 of 2)Dependent careEducational assistanceCafeteria plans Flexible spending plansInterest-free loans©2007 Prentice Hall, Inc.4-18Employee Fringe Benefits in GeneralCompensation generally taxableLaw encourages certain types of fringe benefits by Making them nontaxable to the employee, ANDDeductible by the employer©2007 Prentice Hall, Inc.4-19Employer-Paid InsurancePremiums on health, accident, disability and qualifying group term insuranceMost employee life insurance premiumsBenefits from non-discriminatory self-insured plansSee Topic Review I4-1©2007 Prentice Hall, Inc.4-20§132 Fringe BenefitsNo additional cost benefitsEmployee discountsWorking condition benefitsDe minimis benefitsTransportation fringesAtheletic facilitiesSee Topic Review I4-2©2007 Prentice Hall, Inc.4-21Employer AwardsEmployee achievement awards and qualified plan awardsMust be tangible personal propertyLimited to average of $400/employeeMax award $1,600Includes safety or length of serviceMust not discriminate in favor of highly paid employees©2007 Prentice Hall, Inc.4-22Meals and LodgingProvided on employer’s premisesFor the convenience of employerAs a condition of employment for lodging©2007 Prentice Hall, Inc.4-23Meals and Entertainment50% of meal or cost of entertaining customers is deductibleIncludes cost of employee’s meal or entertainmentEmployer gets deduction if employer pays or reimburses employeeEmployee does NOT recognize income©2007 Prentice Hall, Inc.4-24Employee Death Benefits§101(b) provides exclusion up to $5,000Amounts over $5,000 may be nontaxable gifts