Chapter 5 Life Insurance Meals / Lodging Foreign Income Exclusion Tax Benefit Rule Scholarships Personal Injury Settlements Long Term Care Insurance Group Term Life Parking Allowance

Gifts Gifts – generally, not taxable to recipient. Exceptions to general rule: Gifts to employees Death Benefits to Employees (not life insurance).

Life Insurance ABC Corp bought life insurance on the life of its President. Policy is for $1,000,000. The President dies and the company receives the death benefit. Is it taxable to the corporation? Life insurance policy is cashed in during the life of the insured. Are the proceeds excluded from gross income? Matt bought a life insurance policy in Over the last 13 years, he has paid premiums of $26,000. The policy is cashed in for $48,000. Tax consequences. Who can qualify for accelerated death benefits? Terminally Ill (will die w/in 24 months) Chronically Ill (unable to perform daily activities )

Life Insurance (con’t) Transfer for Valuable Consideration – Jeremy sells his $50,000 life insurance policy to Kerry for $6,000. Jeremy had paid premiums over the years of $4,000 ($1,000 per year). Two years later Jeremy dies and Kerry collects the $50,000. Tax consequences to Jeremy? Tax consequences to Kerry? Transfers can be made tax free between: Partners and Partnerships Corporation in which the insured is an officer

Scholarships If scholarship received is for compensation of services, it is compensation. Scholarships are not compensation for services. Tuition, books and academic fees are excluded Room and Board are not excluded. Room and Board is considered “earned” income ……. how does this effect the recipient’s standard deduction? Problem 34

Injury, Sickness, Personal Injury Loss of Income – generally taxed the same as the income replaced, but loss of income related to injury or sickness is not taxable (see page 5-11). Reimbursement of Medical Expenses – nontaxable Personal Injury – nontaxable, makes the injured party whole. Punitive Damages – included in gross income. Workers Compensation – nontaxable Discrimination – taxable ……… age or sex discrimination Problem 37

Employer Sponsored Health Plans Group Health Plans – “qualified” plans provide benefits to employees on a nondiscriminatory basis. Benefit is not taxable to employee and deductible for the employer. »“qualified” basically means that the benefit is provided on a nondiscriminatory basis. Receipt of payment under the benefit plan could be taxable if not considered a deductible medical expense…….. see page 5-13.

Meals and Lodging Meals – furnished by the employer on the business premises for the convenience of the employer. Lodging – employee is required to accept lodging as a condition of employment. What if the lodging is optional? Problem 42 Problem 43

Long Term Care Insurance Are the benefits received taxable? Exclusion is the greater of: $250 per day, or the actual cost reduced by 3 rd party payments Reduce the exclusion by the amount of 3 rd party reimbursement. Problem 41

Employee Fringe Benefits No-Additional Cost Services Employee receives services – not products Employer does not incur substantial additional cost, including foregone revenue Services are offered to customers in the ordinary course of business Empty seats on airlines Hotel rooms nights for employees Rounds of golf for golf course employees

Cannot sell goods for less than cost (gross profit) Services cannot be reduced by more than 20% Property or services must be in the same line of services as employee works Clothes for employees at GAP (employee discounts) Employee discount for dry cleaning limited to 20% discount. Legal / Medical Treatment Employee Fringe Benefits Qualified Employee Discounts

Benefit is so small it is impractical to account for Xeroxing Typings Faxing Christmas turkey Employee Fringe Benefits De Minimis Fringes

Transportation - $105 per month (mass transit) Parking - $205 per month ($2,460 per year) Not taxed to the recipient employee Both of these can be provided on a discriminatory basis ……… i.e provided for the president and the vice- presidents, only. Employee Fringe Benefits Transportation and Parking

Workers Compensation Compensation paid to an employee for injuries while on the job Loss of a limb Injury Not Taxable

Foreign Earned Income Exclusion Can exclude from US Taxable Income up to $80,000 per person of foreign earned income. Must be a bona fide resident of the foreign country Must be present in a foreign country for at least 330 days in any 12 consecutive months. The $80,000 is apportioned based on the number of days present in the foreign country. Problem 49

Tax Benefit Rule If a deduction that is taken in a prior year is recovered in a later year, then the recovery would be included in income. Bad Debt – you write off a bad debt or loan thinking it is uncollectable. A deduction is taken on the return. In a later year, the debt is repaid. The repayment is income under the tax benefit rule. Corporation takes a deduction for the cost of an audit. In the subsequent year, the audit fee is returned to the corporation as a result of litigation. The refund of the audit fee is included in income under the tax benefit rule. Taxpayer takes a deduction for state income taxes paid on her 2002 income tax return. Taxpayer receives a refund in 2003 of a portion of the state income tax (the tax refund). The refund is taxable.