1. 4-1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

2. 4-2 GROSS INCOME: EXCLUSIONS  Items that are not income  Major statutory exclusions  Tax planning considerations  Compliance and procedural considerations Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

3. 4-3 Items that Are Not Income  Unrealized income  Self-help income  Rental value of personal-use property  Selling price of property Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

4. 4-4 Unrealized Income  Example:  Land valued at $20,000 beginning of year appreciates to $45,000 at end of year  The $25,000 increase in value is unrealized income and not taxable Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

5. 4-5 Self-Help Income  The amount saved is not subject to tax  Cleaning your own carpet  Repairing your car Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6. 4-6 Selling Price of Property  Only gain on sale of property is taxable Selling price – Basis in property Gain on sale of property Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

7. 4-7 Major Statutory Exclusions (1 of 2)  Gifts and inheritances  Life insurance proceeds  Adoption expenses  Awards for meritorious achievement  Scholarships and fellowships  Distributions from qualified tuition programs Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

8. 4-8 Major Statutory Exclusions (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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

9. 4-9 Life 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

10. 4-10 Adoption Expenses  Adoption credit  Tax credits or an exclusion for amounts paid pursuant to an adoption assistance plan created by an employer  Employee may exclude up to $12,650  Phased out between $189,710 - $229,710  Only for special needs adoptions after 2012  Credit reduced to $6,000 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

11. 4-11 Awards for Meritorious Achievement  Awards for religious, charitable, scientific, etc. are not taxable if ALL criteria are met:  Did not enter contest  Is not required to perform substantial future services  Designates a qualified charitable organization to receive the payment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

12. 4-12 Scholarships 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

13. 4-13 Distributions from Qualified Tuition Programs: §529 Plans (1 of 2)  Earnings while in §529 plan 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

14. 4-14 Distributions from Qualified Tuition Programs: §529 Plans (2 of 2)  Distributions of income not used for qualified tuition expenses  Income determined by annuity rules  Included in beneficiary’s income, AND subject to a 10% penalty  Beneficiary must be “family” member  Beneficiary may be changed w/o tax consequences Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

15. 4-15 Payments for Injury and Sickness  Injury includes both physical and mental  Pmts for emotional distress excluded if pmts for medical expenses or attributable to a physical injury  Disability income policy is non- taxable if purchased by taxpayer  Taxable if purchased by employer Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

16. 4-16 Employee Fringe Benefits (1 of 2)  In general  Employer-paid insurance  §132 fringe benefits  Employer awards  Meals and lodging  Meals and entertainment  Employee death benefits Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

17. 4-17 Employee Fringe Benefits (2 of 2)  Dependent care  Educational assistance  Cafeteria plans  Flexible spending plans  Interest-free loans Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

18. 4-18 Employee Fringe Benefits in General  Compensation generally taxable  Law encourages certain types of fringe benefits by treating the benefits as  Nontaxable to the employee, AND  Deductible by the employer Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

19. 4-19 Employer-Paid Insurance (1 of 2)  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 1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

20. 4-20 Employer-Paid Insurance (2 of 2)  2010 Affordable Care Act  Penalizes individuals who do not obtain medical insurance  Penalizes larger employers not providing adequate employee health benefits  Other taxes apply to high-income individuals and large employers who do not provide employee coverage Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

21. 4-21 §132 Fringe Benefits  No additional cost benefits  Employee discounts  Working condition benefits  De minimis benefits  Transportation fringes  Athletic facilities  See Topic Review 2 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

22. 4-22 Employee 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

23. 4-23 Meals and Lodging  Provided on employer’s premises  For the convenience of employer  Lodging must be a condition of employment to be nontaxable Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

24. 4-24 Meals 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

25. 4-25 Employee Death Benefits  §101(b) provides exclusion up to $5,000  Amounts over $5,000 may be nontaxable gifts depending on facts and circumstances, including employer’s intention  Gift is NOT deductible by employer Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

26. 4-26 Dependent Care  Employer-financed programs  Employee may exclude up to $5,000 of assistance each year  Cannot discriminate in favor or highly compensated employees Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

27. 4-27 Educational Assistance  Employers pay employee educational costs  Employee may exclude up to $5,250 per year for tuition, fees, books, supplies, and equipment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

28. 4-28 Cafeteria Plans  Also called flexible spending accounts  Employee has option of receiving any combination of benefits up to a certain amount, including cash  Only receipt of cash is taxable Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

29. 4-29 Interest-Free Loans  Interest must generally be imputed on interest-free loans  Imputed interest generally deductible by employer and taxable to employee Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

30. 4-30 Foreign-Earned Income Exclusion Eligible Taxpayers  U.S. citizens subject to U.S. income tax on worldwide income  Subject to double taxation if foreign income taxed by foreign country  Foreign tax credit (FTC) mitigates double taxation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

31. 4-31 Foreign-Earned Income Exclusion Exclusion Amount  Foreign-earned income exclusion alternative to FTC  May exclude up to $95,100 of foreign-earned income  Add’l exclusion for foreign housing costs  Foreign housing costs in excess of $15,216  Max housing exclusion is $13,312 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

32. 4-32 Foreign-Earned Income Exclusion Residency Tests  To qualify for foreign earned income exclusion  Must be bonafide resident of foreign country(ies) for entire taxable year, OR  Be physically present in foreign country for 330 days during a 12-month period  If 12-month period spans two tax years, exclusion pro rated based on [# days/365] Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

33. 4-33 Income from the Discharge of a Debt (1 of 2)  Generally, taxpayer may have to include amount of debt forgiveness in gross income  Exceptions: nontaxable situations  Discharge occurs in bankruptcy  Discharge occurs when taxpayer is insolvent Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

34. 4-34 Income from the Discharge of a Debt (2 of 2)  Student loans  Discharge excluded from gross income if discharge contingent on performing certain public services for a specified time period in certain professions  Home mortgage forgiveness  Exclude debt up to $2M on acquisition or improvement of principle residence Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

35. 4-35 Exclusion for Gain from Small Business Stock (1 of 2)  % of gain may be excluded from gross income if held > five years  50% if acquired 8/11/1993 – 2/17/2009  75% if acquired 2/18/2009 – 9/27/2010  100% if acquired 9/28/2010 – 12/31/2011  50% if acquired after 12/31/2011  Eligible amount limited to greater of $10M or 10x adjusted basis in stock Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

36. 4-36 Exclusion for Gain from Small Business Stock (2 of 2)  Taxable gain not recognized if proceeds reinvested in other small business stock w/in 60 days  Taxable gain recognized to extent amount realized > amount reinvested  Maximum tax rate on taxable amount is 28% Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

37. 4-37 Other Exclusions (1 of 2)  Gain from sale of personal residence  Annuities paid to survivors of public safety officers  Certain military-related payments  Housing allowance for ministers  Campus housing  Foster care payments Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

38. 4-38 Other Exclusions (2 of 2)  Rural letter carrier’s allowance  Roth IRA distributions  Education IRA distributions  Personal foreign currency gains  See Table 2 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

39. 4-39 Tax Planning Considerations  Employee fringe benefits  Cafeteria plans can help provide valuable benefits to employees or cash if they don’t need the benefits offered  Self-help income and use of personally owned property Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

40. 4-40 Compliance and Procedural Considerations  Fringe benefits and Form W-2  Nontaxable benefit may be excluded from employees’ W-2  Taxable benefits subject to withholding and reported on employees’ W-2 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

41. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 4-41 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall