Chapter 4 11-12

Chapter 4 11-12 - ACCT 403 CHAPTER 4 FALL 2011 INCOME...

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ACCT 403 CHAPTER 4 – FALL 2011 INCOME EXCLUSIONS I. Donative Items A. Gifts 1. Should distinguish between gifts and compensation. a. Made out of love, affection, and disinterested generosity. b. Examples 1-3, pp. 4.3-4. 2. Employer "gifts" < $25/employee per year are excludible (Rev. Rul. 59-58). B. Inheritances 1. Have never been taxable. 2. See Examples 4-5, p. 4.4. C. Life Insurance proceeds 1. Generally are excludible. a. Must have an “insurable interest.” Otherwise, it is treated as an investment. 1. Compare Examples 8-9, p. 4.5. 2. Two basic types of life insurance -- term and whole life. a. Term policies provide life protection only. b. Whole life policies provide life protection and an investment element. 3. Proceeds from both Term & Whole life policies are nontaxable to the beneficiary. 4. If policy owner elects to "cash in" on a whole life policy, income is realized to the extent that the cash surrender value exceeds the investment premiums. 5. If the face value of the insurance is received in installments, and the insurance company pays out more than the face amount, Sec. 72 (annuity rules) is employed to determine the amount excludible. D. Scholarships and Fellowship Grants (Sec. 117). 1. For degree candidates , most amounts are excludible if used for tuition, books, fees and supplies. 2. If services must be performed, it is includible even if the services were required to satisfy the degree requirements.
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2 3. Exclusion does not include amounts for room, board, laundry, etc. 4. Examples 10-12, p. 4.6. II. Employment-Related Exclusions A. Foreign-Earned Income 1. May choose to have a tax credit or income exclusion. 2. Exclusion amount is $92,900 ($91,500 in 2010). 3. Must be a resident of the foreign country or present in the country for 330 days in any 12 consecutive months. 4. Example 13, p. 4.7 B. Retirement Contributions 1. Income contributed to the plan are not currently taxed. a. Includes employer contributions and employee contributions (including IRA contributions). 2.
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Chapter 4 11-12 - ACCT 403 CHAPTER 4 FALL 2011 INCOME...

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