South-Western Federal Taxation, 2009 Edition
Comprehensive Volume
ISBN: 0324660529
Chapter 5
Gross Income: Exclusions
Accelerated death benefits. The amount received from a life insurance policy by the insured who is terminally ill or chronically ill. Any realized gain may be excluded from the gross income of the insured if the policy is surrendered to the insurer or is sold to a licensed viatical settlement provider. § 101(g).
Accident and health benefits. Employee fringe benefits provided by employers through the payment of health and accident insurance premiums or the establishment of employer-funded medical reimbursement plans. Employers generally are entitled to a deduction for such payments, whereas employees generally exclude such fringe benefits from gross income. §§ 105 and 106.
Cafeteria plan. An employee benefit plan under which an employee is allowed to select from among a variety of employer-provided fringe benefits. Some of the benefits may be taxable, and some may be statutory nontaxable benefits (e.g., health and accident insurance and group term life insurance). The employee is taxed only on the taxable benefits selected. A cafeteria benefit plan is also referred to as a flexible benefit plan. § 125.
Compensatory damages. Damages received or paid by the taxpayer can be classified as compensatory damages or as punitive damages. Compensatory damages are those paid to compensate one for harm caused by another. Compensatory damages are excludible from the recipient’s gross income.
De minimis fringe. Benefits provided to employees that are too insignificant to warrant the time and effort required to account for the benefits received by each employee and the value of those benefits. Such amounts are excludible from the employee’s gross income. § 132.
Death benefit. A payment made by an employer to the beneficiary or beneficiaries of a deceased employee on account of the death of the employee.
Educational savings bonds. U.S. Series EE bonds whose proceeds are used for qualified higher educational expenses for the taxpayer, the taxpayer’s spouse, or a dependent. The interest may be excluded from gross income, provided the taxpayer’s adjusted gross income does not exceed certain amounts. § 135.
Flexible spending plan. An employee benefit plan that allows the employee to take a reduction in salary in exchange for the employer paying benefits that can be provided by the employer without the employee being required to recognize income (e.g., medical and child care benefits).
Foreign earned income exclusion. The Code allows exclusions for earned income generated outside the United States to alleviate any tax base and rate disparities among countries. In addition, the exclusion is allowed for housing expenditures incurred by the taxpayer’s employer with respect to the non-U.S. assignment, and self-employed individuals can deduct foreign housing expenses incurred in a trade or business. The exclusion is limited to $85,700 per year for 2007 ($82,400 in 2006). § 911.
Gift. A transfer of property for less than adequate consideration. Gifts usually occur in a personal setting (such as between members of the same family). They are excluded from the income tax base but may be subject to a transfer tax.
Health savings account (HSA). A medical savings account created in legislation enacted in December 2003 that is designed to replace and expand Archer Medical Savings Accounts.
Life insurance proceeds. A specified sum (the face value or maturity value of the policy) paid to the designated beneficiary of the policy by the life insurance company upon the death of the insured.
Long-term care insurance. Insurance that helps pay the cost of care when the insured is unable to care for himself or herself. Such insurance is generally thought of as insurance against the cost of an aged person entering a nursing home. The employer can provide the insurance, and the premiums may be excluded from the employee’s gross income. § 7702B.
No-additional-cost services. Services that the employer may provide the employee at no additional cost to the employer. Generally, the benefit is the ability to utilize the employer’s excess capacity (e.g., vacant seats on an airliner). Such amounts are excludible from the recipient’s gross income.
Punitive damages. Damages received or paid by the taxpayer can be classified as compensatory damages or as punitive damages. Punitive damages are those awarded to punish the defendant for gross negligence or the intentional infliction of harm. Such damages are includible in gross income. § 104.
Qualified employee discounts. Discounts offered employees on merchandise or services that the employer ordinarily sells or provides to customers. The discounts must be generally available to all employees. In the case of property, the discount cannot exceed the employer’s gross profit (the sales price cannot be less than the employer’s cost). In the case of services, the discounts cannot exceed 20 percent of the normal sales price. § 132.
Qualified real property business indebtedness. Indebtedness that was incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property. The taxpayer must not be a C corporation. For qualified real property business indebtedness, the taxpayer may elect to exclude some or all of the income realized from cancellation of debt on qualified real property. If the election is made, the basis of the property must be reduced by the amount excluded. The amount excluded cannot be greater than the excess of the principal amount of the outstanding debt over the fair market value (net of any other debt outstanding on the property) of the property securing the debt. § 108(c).
Qualified transportation fringes. Transportation benefits provided by the employer to the employee. Such benefits include (1) transportation in a commuter highway vehicle between the employee’s residence and the place of employment, (2) a transit pass, and (3) qualified parking. Qualified transportation fringes are excludible from the employee’s gross income to the extent categories (1) and (2) above do not exceed $110 per month in 2007 and category (3) does not exceed $215 per month in 2007. These amounts are indexed annually for inflation. § 132.
Qualified tuition program. A program that allows college tuition to be prepaid for a beneficiary. When amounts in the plan are used, nothing is included in gross income provided they are used for qualified higher education expenses. § 529.
Qualified tuition reduction plan. A type of fringe benefit plan that is available to employees of nonprofit educational institutions. Such employees (and the spouse and dependent children) are allowed to exclude from gross income a tuition waiver pursuant to a qualified tuition reduction plan. The exclusion applies to undergraduate tuition. In limited circumstances, the exclusion also applies to the graduate tuition of teaching and research assistants. §117(d).
Scholarships. Scholarships are generally excluded from the gross income of the recipient unless the payments are a disguised form of compensation for services rendered. However, the Code imposes restrictions on the exclusion. The recipient must be a degree candidate. The excluded amount is limited to amounts used for tuition, fees, books, supplies, and equipment required for courses of instruction. Amounts received for room and board are not eligible for the exclusion. § 117.
Tax benefit rule. A provision that limits the recognition of income from the recovery of an expense or loss properly deducted in a prior tax year to the amount of the deduction that generated a tax saving. Assume that last year Gary had medical expenses of $3,000 and adjusted gross income of $30,000. Because of the 7.5 percent limitation, Gary could deduct only $750 of these expenses [$3,000 - (7.5% x $30,000)]. If, this year, Gary is reimbursed by his insurance company for $900 of these expenses, the tax benefit rule limits the amount of income from the reimbursement to $750 (the amount previously deducted with a tax saving).
Working condition fringe. A type of fringe benefit received by the employee that is excludible from the employee’s gross income. It consists of property or services provided (paid or reimbursed) by the employer for which the employee could take a tax deduction if the employee had paid for them. § 132.