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Chapter 5 Gross Income

Chapter 5 Gross Income - Chapter 5 Gross Income Exclusions...

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Chapter 5 Gross Income: Exclusions 5.1 & 5.2 Exclusions Defined ♫ Items of income that are specifically designated as not included in gross income ♫ Exclusions are generally found in Sections 101 through 150 5.3 Gifts and Inheritances Gifts are nontaxable to donee if: ♫ Transfer is voluntary without adequate consideration, and ♫ Made out of affection, respect, admiration, charity, or donative intent Inheritances are nontaxable to beneficiary Income earned on gifts or inheritances is taxable under normal rules ♥ Example: Father gifts corporate bond to daughter. Gift is excluded from daughter’s gross income, but interest income earned after gift date is taxable to her. ● Transfers by employers to employees do not qualify as excludible gifts ♫ May be excludible under other provisions, e.g., employee achievement awards ♫ Victims of a qualified disaster who are reimbursed by their employers for living expenses, funeral expenses, and property damage can exclude the payments from gross income ● Employee death benefits: amount paid by employer to deceased employee’s spouse, child, or others ♫ If decedent had a nonforfeitable right to payments (e.g., accrued salary), amounts are taxable to employee ● Employee death benefits may be excludible as a gift if: ♫ Paid to surviving spouse or children (not employee’s estate) ♫ Employer derived no benefit from payments ♫ Surviving spouse and children performed no services for employer ♫ Decedent had been fully compensated for services rendered, and ♫ Payments made pursuant to board of director’s resolution under a general company policy 5.4 Life Insurance Proceeds ● Exempt income to beneficiary if paid solely due to death of insured ♫ Relationship to decedent not determinative ● If owner of life insurance policy cancels the policy and receives the cash surrender value ♫ Gain must be recognized to extent amount received exceeds premiums paid on policy ♫ Loss is not recognized ● Accelerated death benefits ♫ Gain on cash surrender or transfer of life insurance policy by terminally or chronically ill individual is excludible ♪ Exclusion for chronically ill is limited to amounts used for long-term care ● Transfers for valuable consideration ♫ If policy is transferred for valuable consideration, proceeds are taxable to extent they exceed amount paid for policy plus subsequent premiums paid ♫ Exceptions exist for policy transfers: ♪ To facilitate funding of buy-sell agreements, ♪ Pursuant to a tax-free exchange, and 1
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♪ For receipt of a policy by gift ● Investment earnings arising from the reinvestment of life insurance proceeds are generally subject to income tax ♥ e.g., Beneficiary elects to collect the insurance proceeds in installments ♪ The annuity rules are used to apportion the installment payment between the principal element (excludible) and the interest element (includible) 5.5 Scholarships and Fellowships
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