Tax Test 2 Chapter 5 Gross Income Exclusions 5 1 Statutory authority Victims of a Qualified disaster such as terrorist attack presidentially declared disaster or common accident of a catastrophic disaster would not be required to include in gross income payments received for living expenses funeral expenses and property damage resulting from the disaster 5 2 Gifts and inheritances a Legislative intent Congress has allowed the recipient of a gift to exclude the value of the property from gross income The exclusion applies to gifts made during the life of the donor inter vivos gifts and transfers that take effect upon the death of the donor bequests and inheritances However recipient is taxed on the income subsequently earned from the property If payment is for services rendered then it is not considered a gift 52 b Gifts to Employees Transfers from an employer to an employee cannot be excluded as a gift c Employee death benefits Some courts have held that some payments to an employees surviving spouse or other beneficiaries are gifts if the following are true o Payments were made to the surviving spouse and children rather than to the employees estate o Employer derived no benefit from the payments o Surviving spouse and children performed no services for the employer o Decedent had been fully compensated for services rendered o If money is given to a board of directors with a general company policy of providing payments to families of deceased employees if all conditions above are met it is considered an act of charity If only some are met it is considered a gift if payment is made in light of the surviving spouse s financial needs income earned by the employee but not received before death is considered taxable income to the beneficiary 5 3 Life Insurance Proceeds a General rule b Accelerated death benefits life insurance proceeds paid to the beneficiary because of death to the insured is exempt from tax if the owner of the insurance policy cancels the policy and receives cash the taxpayer must recognize gain equal to the excess of the amount received over the premiums paid on the policy a loss is not deductible Exception for above if taxpayer is terminally or chronically ill A gain is excluded from a terminally ill taxpayer s income In the case of a chronically ill taxpayer no gain is recognized if proceeds of care are used for long term care of the taxpayer c Transfer for valuable consideration If a life insurance policy is transferred for valuable consideration after is it issued then it is includible in the gross income of the transferee to the extent the proceeds exceed the amount paid for the policy by the transferee any subsequent premiums paid Exceptions for exclusions by transfers to the following o The Insured under the policy o Partner of the insured o A partnership is which the insured is a partner o A corporation in which insured is an officer or shareholder o A transferee whose basis is determined by the transferor 5 4 Scholarships a General information Income or stipend received for services rendered will be taxed regardless of being a student Athletic scholarships are generally not taxable A scholarship recipient may exclude from gross income the amount used for tuition and related expenses provided that the conditions of the grant do not require that the funds be used for other purposed c disguised compensation Scholarships made available to employees are includible in gross income 5 5 Compensation for injuries and sickness a Damages A person who suffers harm is entitled to compensatory damages and taxes depend on the type of hard taxpayer has experienced Taxpayer may seek recovery for o Loss of income o Expenses incurred o Property destroyed o Personal injury Personal injury o The basic theory behind personal injury compensation is that the amount received is supposed to compensate as if to make the plaintiff whole like before the accident happened o Personal injury damages are further broken down into compensatory or punitive damages Compensatory intended to compensate taxpayer for damages incurred in terms of physical injury or physical sickness which can be excluded from gross income Punitive amounts the person who caused harm must pay to the victim for punishment of outrageous conduct Punitive damages are included in gross income b Workers Compensation Since workers compensation payments are intended to compensate for a loss of future income congress has specifically exempted workers comp benefits from inclusion in gross income c Accident and health insurance benefits Benefits collected under and accident and health insurance policy purchased by the taxpayer are excludable even though the payments are a substitute for income 5 6 Employer sponsored accident and health plans The premiums paid on these benefits are deductible by the employer and excluded from the employees income If payments are received for medical care then they are not included in gross income However if payments are for expenses that do not meet the definition of medical care the amount must be included in gross income a Medical Reimbursement Plans Benefits received under a self insured plan can be excluded from employee s income if the plan doesn t discriminate in favor of highy compensated employees An alternative medical reimbursement plan can be accomplished if the employer purchases a medical insurance plan with a high deductible and then make contributions to the to the employee s Health Savings Account Withdrawals from this account must be used to reimburse employee for medical expenses paid by the employee that are not covered under the high deductible plan Employee is not taxed on the employer s contribution to the HAS earnings on the fund or the withdrawals b Long term care insurance benefits Covers expenses such as cost of care in a nursing home usually treated the same way as accident and health insurance benefits Employee does not recognize income when employer pays premiums 5 7 Meals and Lodging a General rules for the exclusion Meals and lodging are excluded from income for the employee and employee s spouse and dependents under the following conditions o Meals and lodging are furnished by employer on employer s premises for convenience of employer o Employee is required to accept the lodging as a condition of An employee of an educational institution may be able to exclude the value of campus housing provided by the employer employment b other housing exclusions 5 8