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Acct 308 Chap5 lesson - CCH Federal Taxation Comprehensive...

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CCH Federal Taxation Comprehensive Topics Chapter 5 Gross Income—Exclusions ©2005, CCH INCORPORATED 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 http://tax.cchgroup.com
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CCH Federal Taxation Comprehensive Topics 2 of 31 EE Bonds Used for Education—Rules Qualified educational expenses . Tuition and fees qualify. Room and board and expenses incurred outside of the degree program (e.g., sports, clubs) do not qualify. The bonds must be redeemed during the same tax year in which qualified educational expenses are incurred. Computing the exclusion . 1. If the redemption amount (principal and interest) is less than or equal to the qualified educational expenses, then all the interest may be subject to exclusion and subject to the income phaseout rules. 2. If the redemption amount (principal and interest) is greater than the qualified educational expenses, then only a portion of the interest may be excluded based on the following formula: (Exclusion amount) = ( Interest on the EE savings bond) x [( Qualified expenditures ) ÷ ( Series EE proceeds (principal and interest )] Chapter 5, Exhibit 1a
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CCH Federal Taxation Comprehensive Topics 3 of 31 EE Bonds Used for Education—Rules The phaseout thresholds in 2004 are: Filing Status Modified AGI Ceiling Floor Phaseout Range (Ceiling – Floor) Married filing jointly $121,850 $91,850 $30,000 Single and head of household $ 76,200 $61,200 $15,000 Married filing separately (not eligible) N/A N/A N/A Chapter 5, Exhibit 1b
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CCH Federal Taxation Comprehensive Topics 4 of 31 EE Bonds Used for Education—Examples Example 1: Qualified Educational Expenses Exceed Redemption Amount Mary, age 50, files as a single mother. Her modified AGI is $71,200. She redeems Series EE bonds and receives $5,000 of principal and $2,500 of accrued interest. Mary’s daughter attends college and has qualified educational expenses of $8,000. How much of the $2,500 may be excluded from gross income? Interest Income Subject to Exclusion: $833 = $2,500 – $1,667 phaseout amount Phaseout amount: $1,667 = $2,500 x [($71,200 - $61,200) ÷ $15,000] Chapter 5, Exhibit 2a
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CCH Federal Taxation Comprehensive Topics 5 of 31 EE Bonds Used for Education—Examples Example 2: Redemption Amount Exceeds Qualified Educational Expenses Same as Example 1, except that qualified educational expenses are $6,000, not $8,000. The amount of the interest exclusion would be $667: Interest Income Subject to Exclusion: $2,000 = $2,500 x [$6,000 ÷ ($5,000+ $2,500)] Phaseout amount: $1,333 = $2,000 x [($71,200 - $61,200) ÷ $15,000] Interest Exclusion After Phaseout: $667 = $2,000 – $1,333 phaseout amount Chapter 5, Exhibit 2b
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CCH Federal Taxation Comprehensive Topics 6 of 31 Fringe Benefits No-additional-cost services Generally excluded if no significant additional costs are incurred by the employer . The exclusion also applies to spouses and dependent children of employees. Example: Free travel is offered to airline employees who fly on standby . Spouses and dependent children may be included with no income tax consequences.
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