AF 450 – Federal Taxation I
Dr. Julia M. Camp
Solutions to Suggested Problems
I4-4, I4-6, I4-10, I4-13, I4-16, I4-34, I4-35, I4-36, I4-38, I4-39, I4-40, I4-42,
I4-43, I4-45, I4-46, I4-47, I4-53, I4-54, I4-56
Most exclusions exist for either reasons of benevolence (social generosity or
sympathy) or incentive (the desire to encourage or reward a particular type of behavior).
Exclusions for employee death benefits, life insurance benefits, and public assistance
exist because of reasons of benevolence while the foreign earned income exclusion and
the exclusions for certain employee benefits are intended to be economic incentives.
Motive plays an important role.
For a transfer to be a gift, it must be made
for reasons such as love, affection, kindness, sympathy, generosity, or admiration.
Tips are considered to be compensation for services.
This is true even
though generosity or other motives may be present.
pp. I:4-4 and I:4-5.
A scholarship is an amount paid or allowed to, or for the benefit of, a
degree candidate to aid the individual in pursuing his or her studies.
The exclusion is limited to amounts awarded for tuition, books, fees,
supplies, and equipment. As a result, if a scholarship either exceeds the total amount of
qualifying expenses or, alternatively, the scholarship is specified as being for
nonqualifying expenses, the scholarship will be at least partially taxable.
It is likely that such a scholarship will be viewed as compensation for
future services, and will, therefore, be taxable.
The expenses incurred by the employee
may be deductible education expenses.
The amounts will normally be taxable compensation.
Employers may generally deduct the cost of premiums paid on medical,
health, disability and life insurance coverage for employees.
Employees need not include in gross income premiums paid by an
employer on medical and health and disability policies.
Except for a limited exclusion
for group term life insurance, an employee must include life insurance premiums paid on
his or her behalf in gross income.
Medical and health insurance benefits are excluded except when the
benefits exceed the actual costs.
Disability benefits are taxable unless the premiums were
paid by the employee. Life insurance benefits are generally excluded from gross income.
pp. I:4-9 and I:4-10.