Chapter 4 - Exclusions n Introduction - Section 61 all-inclusive; exclusions must be specified (IRC); following are some exclusions (laundry list); much of chap: EE benefits - but not QRP n Gifts and Inheritances - income tax exclusion but gift or estate return; disinterested motive; from empler to emplee not a gift (102 © ) n Life insurance proceeds

Scholarships n Exclusion: but room & board included=earned inc for stand deduc n conditions: degree candidate, study or research

Compensation: injuries and sickness n Damages-replacement principle n Personal injury damages - repl prin but even exclude lost inc if phys injury n Worker’s comp - repl inc but not taxed n Punitive damages - included n Other damages (sexual harassment, age discrimination – include unless phys inj)

Accident & Health Insurance n Emplee accid & health benefits - exclude if ee purchase n empler accid & health plan - excl benefits if med care payment or if loss of member or function n V. wage continuation

Meals & Lodging n Test: on premises and for convenience er (+, for lodging, condition of employment) n Additional Meals Rules - see below n Special housing exclusions - education institution: 5% x value - rent paid = inclusion n Minister of gospel - exclude housing allowance (even utils)

Other Emplee Benefits n Various specific benefits - e.g., child and dep care pd by er, er educ assistance, gym value, tuition reduc, adoption expenses

General classes of excluded benefits - 5 classes: n 1) no addtl cost servs - e.g., air tic to air ee n 2) qualif’d ee disc - prop: limit = gp component; serv: limit = 20% x cus price n 3) working condit fringes - e.g., dues, demonstrator n 4) de minimis fringes - e.g., copier, occas taxi fare or supper money, subs eating facil

n 5) qualified transportation fringe - parking, limit n nondiscrimination - 1 & 2 n discrimination - 3 & 4 & 5 (except eating facil)

n Foreign Earned Income n Interest on State and Local Gov Obligs (Muni’s) n Certain Dividends (stock, misnamed) n Educational Savings Bonds - requirements - phase out n Tax Benefit Rule: exclud recov if deduc = no benefit

Income from discharge of indebtedness n General rule: income n exclusions or basis adjusm or the like: e.g., gift, bankruptcy/insolvency, purch price adj, corp debt, student loans

Meals & Lodging (cont’d) Taxpayer Relief Act of 1997 n Chapters 4 & 8 n Empler deduc for meals provided  on premises  For convenience n EE’s have exclusion n ER now full deduc (not lim’d to 50%) (274)  de minimis fringe under 132 (v. 274) n Effective After 12/31/97

Meals & Lodging (cont’d) IRS Restructuring & Reform Act of 1998 Chapter 4 n Deduction of Employer Provided meals by ER and exclusion by EE n Gen Test - (1) on premises, (2) for convenience of ER n New Test - if  50% EE’s receive on premises and for convenience, all EE’s who receive = for convenience of ER

Meals & Lodging (cont’d) - IRS Restructuring & Reform Act of 1998 n Chapter 8 n Deduc by ER n Usual rule - 50% deduc if meet gen test above (50% of amt for certain EE’s) n New Test - 100% deduc (full deduc) if meet new test above

Meals & Lodging (Cont’d) Reg. n Chapter 8 n also - 100% ER deduc if 90% EE’s meals for convenience – 100% EE meals deductible - ER (and excludible - EE) - Reg. Ex (f) – 100% deduc (full deduc) - CT opinions

Exclusion – Distributions Qualified tuition Plans (529 Plans) EGTTRA ‘01 n After ’01, total exclusion for distributions for qualified higher education expenses n After ’97 can transfer to “member of family” n After ’01, roll over to another 529 for same B n After ’01, 10% penalty and taxable if not used for qualified higher education expenses n Completed gifts

Exclusion – Distributions Qualified Tuition Plans (529 plans) EGTTRA ’01 (Cont’d) n Two types plans: savings (CA), prepaid tuition (not CA) n Can join any state’s plan n After ’01 private eligible institutions besides states (distribution exclusion ’03)

Employer Provided Educational Assistance Exclusion – EGTRRA ‘01 n Permanent after ’01 n Graduate as well as undergraduate after ‘01