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Chapter 6 - Income Taxation Chapter 6 Gross Income...

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Unformatted text preview: Income Taxation: Chapter 6 Gross Income: Exclusions 1 Inheritances, Gifts, & Awards Inheritances, s Personal Gifts generally are excluded from Personal income of the recipient income s Inheritances excluded from income of recipient s Business related gifts (Secs. 74, 274(b), 274(j)) s Cash gifts = always treat as compensation s Compensations vs. gift issues s Employer’s Intention s Does employer/giver deduct cost? s Nominal in amount s Employer Awards generally treated as Employer Compensation Compensation 2 Interest Exclusions s Interest Income s Sales of Nontaxable Municipal Bonds Sales s Generally taxable, except for interest on Generally s s s State and local bonds (may be exempt from state taxation) taxation) U.S. Treasury Obligations (only exempt from state taxation) taxation) Educational Savings bonds (n/a for MFS, See Educational Example on p. 6.10) Example 3 Social Security Benefits s Social Security payments to individuals with Social “high” incomes may be taxed “high” s To determine the amount of social security benefits To that will be taxed: that s Step 1: Determine “ provisional income” before social Step security inclusion and “modified AGI” (MAGI). MAGI equals AGI: AGI: + excluded tax-exempt interest excluded + higher education deduction for AGI = Modified AGI plus 1/2 S.S. Benefits Received Modified EQUALS “PROVISIONAL INCOME” EQUALS 4 Social Security Benefits s Step 2: Determine inclusion: Step Exclude the following amounts (depending on filing status) Exclude Prov Inc $0 INFINITY 32,000 MFJ 0 MFS 25,000 S, HH If Prov Inc less than 1st tier: no inclusion ­ 1st & 2nd tiers: include lessor of: 1) 50% benefits 2) 50% (Prov Inc ­ first threshold) 44,000 MFJ 0 MFS 34,000 S, HH ­ over 2nd tier: include lessor of: 1) 85% benefits 2) 85%* (Prov Inc ­ second threshold) + lesser of amt. determined at 1st level or $6,000/$4500 5 S.S. Example 1 s John and Marcia file MFJ: s They have $30,000 combined income, plus $11,000 in They social security benefits. s They include the lesser of 50%(11,000) = $5,500 OR 50%[30,000 + 1/2(11,000) - 32,000] = $1,750 Include $1,750 in taxable income 6 S.S. Example 2 s Janis and Jim, MFJ, have AGI $72,000 not including Janis $14,000 of social security benefits that are taxable. $14,000 s Include lessor of: s 85%(14,000) = $11,900 or s 85%[72,000 + 1/2(14,000) -44,000] + 6,000* = $35,750 *amount determined at 1st level or $6,000/$4,500: Lesser of 50%($14,000) = $7,000 OR $6,000 (MFJ) or $4,500 (S, HH) Include $11,900 in taxable income. 7 Damages: Exclusions s Damages received under court judgment or by Damages agreement -- Sec. 104(a)(2) agreement s General rule: Exclude actual damages received for personal physical injury or sickness, e.g., wrongful personal e.g., death claims death s Exceptions: s Punitive damages cannot be excluded. s Amounts paid as substitution for income cannot be Amounts excluded, e.g., lost wages or employment, emotional distress, age and gender discrimination, etc. distress, 8 A & H Benefits: Exclusions s Medical expense Reimbursement Plans (i.e., “Tax Medical Benefit” Rule) Benefit” s Disability Policies s Workers’ Compensation Benefits s Damages s Government Disability Programs 9 A & H Benefits: Exclusions s Benefits Received under Accident and Health Benefits Insurance Plans Insurance s General rules: benefits paid under accident and health insurance plans are excludable if: insurance s s The employee paid the premiums -- Sec. 104(a)(3) The employee If the employer paid the premiums -- only the If employer amounts paid for reimbursement of medical expenses are excludable -- Sec. 105(b) are 10 A & H Benefits: Exclusions s Benefits Received for Loss of Limb, Permanent Loss Benefits of Body Function, Disfigurement, etc., are excludable regardless of who paid the premiums -- Sec. 105(c) regardless s Disability Benefit Exclusions -- Sec. 105(e) s General rules (See pages 6.15 – 6.18 for examples) s When the employee pays the premiums, exclude all When disability benefits received disability s If the employer pays the premiums, benefits are If includable in income except amounts paid for loss of limb, permanent loss of body function, etc. limb, s Employee should always pay premiums. Employee should 11 A & H Premiums: Exclusions s Health and Accident Insurance Premiums Paid by Health an Employer an s Excluded from income under Sec. 106 s Employer claims a deduction for premiums paid Employer s s Includes qualified long-term care insurance under Includes Sections 104 to 106. Sections Self-Funded Medical Reimbursement Plans must be Self-Funded non-discriminatory for Employer deduction and Employee exclusion Employee 12 ...
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