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Ch05IM - 61 Chapter 5 Gross IncomeExclusions SUMMARY OF...

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© 2009 CCH. All Rights Reserved. Chapter 5 61 Chapter 5 Gross Income—Exclusions SUMMARY OF CHAPTER Having just completed the study of gross income in the preceding chapter and thus gained a comprehension of what income is and when it is taxable, the student should now be ready to proceed to the concepts underlying exclusions from gross income, which are discussed in the present chapter. Since gross income includes income from all sources, to be excluded from gross income the items must be expressly exempted by law. Sections 101–139 list those items. Common Exclusions from Gross Income ¶5001 Gifts and Inheritances A gift, bequest, or inheritance is excluded from gross income. Thus, the donor does not receive a tax deduction for the property transmitted. If property received by gift or inheritance later produces income, the income is taxable. ¶5015 Life Insurance Proceeds Generally, life insurance proceeds received by the bene fi ciary are not included in gross income if such amounts are paid by reason of death of the insured. It is immaterial who the bene fi ciary is or whether the policy was part of a group life insurance plan or was individually purchased. However, if payment is delayed and the total amount when received includes interest, the interest is taxable. ¶5025 Sale of Residence Sales of principal residences on May 7, 1997, and thereafter are eligible for a $500,000 exclusion from gross income ($250,000 for single individuals). A two-year ownership and occupancy test and a two-year frequency test must be met to qualify for the exclusion. ¶5035 Recovery of Tax Bene fi t Items Gross income includes amounts received that were part of an earlier year deduction or credit. This is considered a recovery and generally must be included in gross income in the year received. ¶5055 Retirement Income A portion of the Social Security bene fi ts or railroad retirement bene fi ts must be included in taxable income for taxpayers whose modi fi ed adjusted gross income exceeds a base of $25,000 for a single taxpayer ($32,000 for a married taxpayer fi ling a joint return and zero for a married person fi ling a separate return). The Revenue Reconciliation Act of 1993 added a second threshold for taxpayers whose provisional income exceeds $34,000 ($44,000 for a married taxpayer fi ling a joint return and zero for a married person fi ling a separate return). ¶5075 Interest on Government Obligations Interest earned on U.S. savings bonds is fully taxable. On Series EE bonds, no interest per se is paid each year, but the bond is issued at a discount and each year increases in value until maturity. The difference between the purchase price of the bond and the redemption value is taxable interest income. For tax years after 1989, a tax exemption is provided for interest earned on U.S. savings bonds used to fi nance the higher education of the taxpayer, the taxpayer’s spouse, or dependents. Interest received on state and local government bonds is generally excludable from gross income.
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62 CCH Federal Taxation—Comprehensive Topics Chapter 5 © 2009 CCH. All Rights Reserved.
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