Chapter_4 - CHAPTER 4 INCOME EXCLUSIONS I In General A...

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I. In General A. Legislative Grace CHAPTER 4 INCOME EXCLUSIONS B. Strict interpretation and application C. Reasons for tax relief 2. Equity - avoid double taxation 3. Social Goals - encourage provision of goods and/or services by private sector; encourage individuals to take actions that protect themselves medically and financially. 4. ADMINISTRATIVE CONVENIENCE II. Donative Items A. Gifts 1. Gifts made in a business setting B. Inheritances Note: Exclusions for gifts and inheritances is limited to FMV of gift. Any subsequent income is taxable. C. Life Insurance Proceeds 1. Proceeds taken in installments -- If the proceeds are taken over time and there is some element of interest, then the excluded amount is determined in the same fashion as with annuities. (See example 7 in the text). 2. Policies obtained for consideration -- If beneficiary pays consideration for insurance policy, the proceeds from the policy are taxable to the extent they exceed his/her investment.
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Chapter 4 - 2 a. Exception for insurance used to fund buy-sell agreements; key man protection. Done to allow business owners to maintain continuity of business in the event of the death of one of the owners. The exclusion applies even if there is a windfall to the business from the insurance proceeds. D. Scholarships -- Cannot require the student to perform any future services. 2. Direct Cost Limitation -- Cannot exceed the direct costs of student’s college education. This includes tuition, fees, books, supplies and other required equipment. Not allowed to exclude amounts used for personal living expenses (i.e., room and board are fully taxable). III. Employment Related Exclusions -- Costly to the government. A. Importance in compensation packages 1. 2. Deduction for employer, no income to employee. Intended to provide equity in cases of double taxation and act as incentive to employers and employees to engage in the specified activity. B. Foreign Earned Income - provides relief from double taxation. A taxpayer receiving foreign earned income has the option of: 1. Excluding up to $100,800 of foreign earned income or 2. Include foreign earned income in gross income and take a tax credit for foreign taxes paid (credit cannot exceed U.S. tax on FEI). Note: The credit is the lesser of actual foreign taxes paid or the U.S. tax that would have been paid on the foreign income. a. To take advantage of the exclusion, the taxpayer must either be a bona-fide resident of the foreign country or be present in the foreign country 330 days in 12 consecutive months.
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  • Spring '16
  • Poole
  • Taxation in the United States, foreign earned income

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