Chapter 5 Outline

Chapter 5 Outline - Chapter 5: Exclusions from Gross Income...

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Chapter 5: Exclusions from Gross Income If an income item is within all-inclusive definition of gross income, it can be excluded only if taxpayer can locate specific authority for doing so. Principal exclusions from gross income: (exhibit 5.1 pg 5-4) 1. Donative Items a. Gifts, bequests, inheritances b. Life insurance proceeds paid by reason of death c. Accelerated death benefits d. scholarships 2. Personal and welfare items a. Injury/sick payments b. Public assistance payments c. Disaster relief payments d. Reimbursements for foster child care 3. Wage and salary supplements a. Fringe Benefits i. ii. Health savings accts iii. Employee discounts iv. Long-term care insurance v. Educational assistance payments…etc. b. Military Benefits i. Combat pay ii. Housing, uniforms, other benefits c. Foreign earned income 4. Investor Items a. Interest on state and local government obligations b. 75% exclusion for gain on sale of certain small business stock 5. Benefits for Elderly a. Social Security benefits 6. Other Benefits a. Income from discharge of indebtedness b. Gain from sale of personal residence c. Recovery of prior year’s deduction that yielded no tax benefit Statutory Authority Sections 101 through 150 provide authority for excluding specific items from gross income Each exclusion has own history and reason for enactment—some are intended as form of indirect welfare payments, others prevent double taxation of income In some cases, Congress enacts exclusions to rectify effects of judicial decisions Congress also responds to specific events o In 2001, enacted exclusion so that victims of a qualified disaster (i.e. Sept. 11 th ) would not be required to include payments for living expenses, funeral expenses, and property damage in gross income
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Gifts and Inheritances Recipient of gift of income-producing property is subject to tax on income subsequently earned from the property Gift: a voluntary transfer of property by one to another without adequate consideration or compensation therefrom…payment must be made out of affection, respect, charity, etc. o Cases on this issue are decided on donor’s intent Comm. V. Duberstein: Duberstein received Cadillac from businessman who he helped out by giving names of potential customers…it was still considered taxable income because the Supreme Court said the car was a payment for past service or an inducement for him to be of further service in future Transfers from employer to employee cannot be excluded as a gift o But victims of disaster who are reimbursed by employers for living, funeral expenses etc can exclude this from gross income Payments to employees surviving spouse/beneficiaries o Taxable if decedent had nonforfeitable right to payments o Considered a gift if following conditions are met: Employer derived no benefit from payment Surviving spouse/children performed no services for employer Decedent was fully compensated for services rendered
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Chapter 5 Outline - Chapter 5: Exclusions from Gross Income...

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