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Chapter 5                                  Gross Income                                   Exclusions©2012 CCH. All Rights ...
Chapter 5 Exhibits    1.   Social Security Benefits    2.   Interest on U.S. Savings Bonds    3.   EE Bonds Used for Educa...
Chapter 5 Exhibits   10.   Cafeteria Plans   11.   Adoption Assistance   12.   Employee Tuition Reduction Plans   13.   De...
Social Security Benefits     A portion of Social Security income is taxable to the      extent that a taxpayer’s provisio...
Social Security Benefits          1st threshold base amounts - $25,000 for single                                     - $3...
Social Security Benefits      2nd threshold base amounts - $34,000 for single                                 - $44,000 fo...
Social Security Benefits      Married taxpayers filing separately have no base amount and must      include in gross incom...
Interest on U.S. Savings Bonds     The general rule is that interest on U.S. savings bonds is fully      taxable.     Ca...
EE Bonds Used for EducationHowever, interest earned on U.S. savings bonds may beexcluded if the proceeds are used to finan...
EE Bonds Used for Education1. If the qualified educational expenses exceed the Series EE proceeds   (principal and interes...
EE Bonds Used for EducationThe phase out thresholds in 2012 are:                                                          ...
EE Bonds Used for EducationExample 1Mary, a single mother, has modified AGI of $81,850. She redeems Series EE bonds andrec...
EE Bonds Used for EducationExampleThe phaseout amount of the exclusion is calculated as:     [(Income – phaseout floor) / ...
Fringe Benefits     The following 4 non-statutory fringe benefits are excluded from     gross income.1. No-additional-cost...
Fringe Benefits2. Qualified employee discounts   Generally excluded from gross income.     For property purchased at a dis...
Fringe Benefits3. Working condition fringe benefits   The fair market value of any property or services provided to an   e...
Fringe Benefits4. De minimis fringe benefits   Excluded when the value of property or services provided to the   employee ...
Group Life Insurance     An employee can exclude the cost of group term life      insurance provided by an employer as lo...
Annuities         Income received as an annuity from an annuity, endowment          or life insurance contract generally ...
Annuities            The tax free portion of the annuity is spread evenly over the             taxpayer’s lifetime.     ...
AnnuitiesExample:John retired at age of 70 and purchased an annuity contract for$19,000. The annuity contract provides for...
Annuities  Step Two: Compute the exclusion ratio    Exclusion Ratio =         Investment in the contract                  ...
Annuities  Step Three: Compute amount excluded  Total payment for the year x Exclusion ratio = Amount of  exclusion       ...
Compensation for Injuries and Sickness                        Worker’s Compensation Amounts received as compensation for o...
Compensation for Injuries and Sickness                        Accident and Health Insurance Plans Benefits received from e...
Insurance Reimbursement Summary    Insurance Plan        Excluded from gross income                   Included in gross in...
Damage Awards                              Tax Treatment for Damages    Type                                     Damages1 ...
Damage Awards   Example:   Sally’s professional reputation is damaged as a result of a false   credit report. As a result ...
Cafeteria PlansTax Advantage of Cafeteria Plans     Under a cafeteria plan, each employee is permitted to choose     betwe...
Cafeteria Plans Nontaxable Items Allowable Under Cafeteria Plans        Group-term life insurance coverage below $50,000 ...
Adoption AssistanceAn employee may exclude from gross income of up to $12,650of adoption expenses per child, where such ex...
Employee Tuition Reduction Plans    Payments of up to $5,250 per year paid by an employer to, or    on behalf of, an emplo...
Dependent Care Assistance Program  $5,000 exclusion    A qualified dependent care assistance program is a separate    writ...
Dependent Care Assistance Program  The exclusion is subject to an earned income limitation. An  unmarried taxpayer may not...
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2013 cch basic principles ch05

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Transcript of "2013 cch basic principles ch05"

  1. 1. Chapter 5 Gross Income Exclusions©2012 CCH. All Rights Reserved.4025 W. Peterson Ave.Chicago, IL 60646-60851 800 248 3248www.CCHGroup.com
  2. 2. Chapter 5 Exhibits 1. Social Security Benefits 2. Interest on U.S. Savings Bonds 3. EE Bonds Used for Education 4. Fringe Benefits 5. Group Life Insurance 6. Annuities 7. Compensation for Injuries and Sickness 8. Insurance Reimbursement Summary 9. Damage AwardsChapter 5, Exhibit Contents A CCH Federal Taxation Basic Principles 2 of 34
  3. 3. Chapter 5 Exhibits 10. Cafeteria Plans 11. Adoption Assistance 12. Employee Tuition Reduction Plans 13. Dependent Care Assistance ProgramChapter 5, Exhibit Contents B CCH Federal Taxation Basic Principles 3 of 34
  4. 4. Social Security Benefits  A portion of Social Security income is taxable to the extent that a taxpayer’s provisional income exceeds certain base amounts.  Provisional income equals adjusted gross income, plus one-half of Social Security received, plus some non- taxable items such as tax exempt interest.Chapter 5, Exhibit 1a CCH Federal Taxation Basic Principles 4 of 34
  5. 5. Social Security Benefits 1st threshold base amounts - $25,000 for single - $32,000 for married filing jointly If a taxpayer’s provisional income exceeds the 1st threshold (but does not exceed the 2nd threshold), the taxable portion of Social Security is the lesser of: A. 50% of Social Security benefits or B. 50% of the excess of the taxpayer’s provisional income over the base.Chapter 5, Exhibit 1b CCH Federal Taxation Basic Principles 5 of 34
  6. 6. Social Security Benefits 2nd threshold base amounts - $34,000 for single - $44,000 for married filing jointly If a taxpayer’s provisional income exceeds the 2nd threshold, the taxable portion of Social Security is the lesser of: A. 85% of Social Security benefits OR B. 85% of the amount that provisional income exceeds the threshold plus the smaller of (1) the amount of SS benefits included under the prior law or (2) $4,500 for unmarried taxpayers or $6,000 for married filing jointly.Chapter 5, Exhibit 1c CCH Federal Taxation Basic Principles 6 of 34
  7. 7. Social Security Benefits Married taxpayers filing separately have no base amount and must include in gross income the lesser of A. 85% of Social Security benefits OR B. 85% of their provisional incomeChapter 5, Exhibit 1d CCH Federal Taxation Basic Principles 7 of 34
  8. 8. Interest on U.S. Savings Bonds  The general rule is that interest on U.S. savings bonds is fully taxable.  Cash basis taxpayers may report interest income on a yearly basis or defer the recognition of interest income until the bonds mature.Chapter 5, Exhibit 2 CCH Federal Taxation Basic Principles 8 of 34
  9. 9. EE Bonds Used for EducationHowever, interest earned on U.S. savings bonds may beexcluded if the proceeds are used to finance the higher educationof the taxpayer, taxpayer’s spouse or dependents.Qualified higher education expenses. Tuition and fees qualify.Room and board and expenses incurred outside of the degreeprogram (e.g., sports, clubs) do not qualify. The bonds must beredeemed during the same tax year in which qualified educationalexpenses are incurred.Chapter 5, Exhibit 3a CCH Federal Taxation Basic Principles 9 of 34
  10. 10. EE Bonds Used for Education1. If the qualified educational expenses exceed the Series EE proceeds (principal and interest), then all the interest may be excluded, subject to the income phase out rules.2. If the qualified educational expenses are less than the Series EE proceeds (principal and interest), then only a portion of the interest may be excluded based on the following formula:Exclusion amount=Interest on EE savings bond x Qualified educational expenses Series EE proceedsChapter 5, Exhibit 3b CCH Federal Taxation Basic Principles 10 of 34
  11. 11. EE Bonds Used for EducationThe phase out thresholds in 2012 are: Modified AGI Ceiling Floor Phaseout Range (Ceiling – Floor)Married filing jointly $139,250 $109,250 $30,000Single and head of household $ 87,850 $72,850 $15,000Married filing separately (not eligible) N/A N/A N/AChapter 5, Exhibit 3c CCH Federal Taxation Basic Principles 11 of 34
  12. 12. EE Bonds Used for EducationExample 1Mary, a single mother, has modified AGI of $81,850. She redeems Series EE bonds andreceives $5,000 of principal and $2,500 of interest. Mary’s daughter attends college andhas qualified educational expenses of $8,000. How much of the $2,500 interest may beexcluded from gross income?AnswerThe qualified educational expenses of $8,000 exceed the Series EE proceeds of $7,500.Mary would have been able to exclude the full $2,500 except for the fact that she issubject to the phase out for higher income taxpayers.Chapter 5, Exhibit 3d CCH Federal Taxation Basic Principles 12 of 34
  13. 13. EE Bonds Used for EducationExampleThe phaseout amount of the exclusion is calculated as: [(Income – phaseout floor) / phaseout range] x Interest [($81,850 - $72,850) ÷ $15,000] x $2,500 = $1,500Interest income excluded is $1,000 ($2,500 – $1,500).Therefore, taxable interest income is $1,500.Chapter 5, Exhibit 3e CCH Federal Taxation Basic Principles 13 of 34
  14. 14. Fringe Benefits The following 4 non-statutory fringe benefits are excluded from gross income.1. No-additional-cost services Generally excluded from gross income if:  no significant additional costs are incurred by the employer and  the service provided is offered for sale to customers in the ordinary course of the line of business for which the employee is working. Example: Free travel is offered to airline employees who fly on standby. Spouses and dependent children may be included with no income tax consequences.Chapter 5, Exhibit 4a CCH Federal Taxation Basic Principles 14 of 34
  15. 15. Fringe Benefits2. Qualified employee discounts Generally excluded from gross income. For property purchased at a discount, the exclusion may not exceed the employer’s gross profit margin. For services purchased at a discount, the exclusion may not exceed 20%.Chapter 5, Exhibit 4b CCH Federal Taxation Basic Principles 15 of 34
  16. 16. Fringe Benefits3. Working condition fringe benefits The fair market value of any property or services provided to an employee is excluded by that employee if it represents an ordinary and necessary business deduction to the employer. Examples: Cell phone used by the employee for the primary convenience of the employer, but also available for personal use; subscriptions to business periodicals; on-the-job training; inventory being tested by the employees outside of the employer’s workplace.Chapter 5, Exhibit 4c CCH Federal Taxation Basic Principles 16 of 34
  17. 17. Fringe Benefits4. De minimis fringe benefits Excluded when the value of property or services provided to the employee are so minimal that accounting for it would be unreasonable. Examples: Using the copy machine for personal purposes; occasional tickets to sports events, coffee and snacks, occasional company picnicsChapter 5, Exhibit 4d CCH Federal Taxation Basic Principles 17 of 34
  18. 18. Group Life Insurance  An employee can exclude the cost of group term life insurance provided by an employer as long as the face value of the policy does not exceed $50,000.  If over $50,000 of coverage is provided by an employer, the cost of the premium for the excess coverage must be included in the gross income of the employee.Chapter 5, Exhibit 5 CCH Federal Taxation Basic Principles 18 of 34
  19. 19. Annuities  Income received as an annuity from an annuity, endowment or life insurance contract generally consists of 2 parts: 1) non-taxable return of investment 2) taxable gain on investmentChapter 5, Exhibit 6a CCH Federal Taxation Basic Principles 19 of 34
  20. 20. Annuities  The tax free portion of the annuity is spread evenly over the taxpayer’s lifetime.  The amount of the annuity payment that may be excluded from gross income is the annuity payments received multiplied by the exclusion ratio Exclusion Ratio = Investment in contract expected return under the contract* * expected return is calculated by multiplying the annual annuity payment by the multiplier on the appropriate table.Chapter 5, Exhibit 6b CCH Federal Taxation Basic Principles 20 of 34
  21. 21. AnnuitiesExample:John retired at age of 70 and purchased an annuity contract for$19,000. The annuity contract provides for him to receive $150 permonth for life.Step One: Compute expected return under the contract. Multiplier from Table 2 16.0 x Annual annuity payments $1,800 ($150 x 12) = Expected return $28,800Chapter 5, Exhibit 6c CCH Federal Taxation Basic Principles 21 of 34
  22. 22. Annuities Step Two: Compute the exclusion ratio Exclusion Ratio = Investment in the contract Expected return under the contract 66% = $19,000 $28,800Chapter 5, Exhibit 6d CCH Federal Taxation Basic Principles 22 of 34
  23. 23. Annuities Step Three: Compute amount excluded Total payment for the year x Exclusion ratio = Amount of exclusion $1,800 x 66% = $1,188 The remainder of the annuity payment received ($1,800 - $1,188 = $612) is included in gross income.Chapter 5, Exhibit 6e CCH Federal Taxation Basic Principles 23 of 34
  24. 24. Compensation for Injuries and Sickness Worker’s Compensation Amounts received as compensation for occupational personal injury or sickness are excluded from gross income. Amounts received as compensation for non-occupational personal injury or sickness are taxable.Chapter 5, Exhibit 7a CCH Federal Taxation Basic Principles 24 of 34
  25. 25. Compensation for Injuries and Sickness Accident and Health Insurance Plans Benefits received from employee-paid plans are excluded from gross income. Benefits received from employer-paid plans are taxable UNLESS the following conditions are met: 1. Permanent injury or loss of bodily function if amounts are paid on the nature of the injury and not on work time lost. 2. Reimbursement for actual medical expenses incurred by employee, spouse or dependents.Chapter 5, Exhibit 7b CCH Federal Taxation Basic Principles 25 of 34
  26. 26. Insurance Reimbursement Summary Insurance Plan Excluded from gross income Included in gross income Workers’ Compensation Amounts received as Amounts received as compensation for an Plans compensation for an occupational personal injury or sickness. non-occupational personal injury or sickness. Accident and Amounts received for personal Amounts received for personal Health Plans injury or sickness from employee- injury or sickness from employer- paid plans. paid plans. Note: For the above exclusions to apply, the benefits must be on account of 1. personal physical injuries or sickness or 2. emotional distress, limited to actual medical expenses incurred.Chapter 5, Exhibit 8 CCH Federal Taxation Basic Principles 26 of 34
  27. 27. Damage Awards Tax Treatment for Damages Type Damages1 Physical Injury or Sickness Excluded from taxable income2 Non Physical Injury or Sickness Taxable, except if damages are used to pay for medical expenses related to emotional distress.3 Lost Wages Taxable Income4 Punitive Damages Taxable IncomeChapter 5, Exhibit 9a CCH Federal Taxation Basic Principles 27 of 34
  28. 28. Damage Awards Example: Sally’s professional reputation is damaged as a result of a false credit report. As a result of her ensuing emotional distress, Sally makes several visits to a qualified counselor, incurring medical expenses totaling $5,000. Later, she receives a $25,000 non-punitive award for damage to professional reputation. $5,000 of the $25,000 award is excludable.Chapter 5, Exhibit 9b CCH Federal Taxation Basic Principles 28 of 34
  29. 29. Cafeteria PlansTax Advantage of Cafeteria Plans Under a cafeteria plan, each employee is permitted to choose between cash or nontaxable benefits. Employees are not subject to federal income tax for the amount of menu items that are nontaxable. In addition, the cost of these fringes is deductible as compensation to the employer.Chapter 5, Exhibit 10a CCH Federal Taxation Basic Principles 29 of 34
  30. 30. Cafeteria Plans Nontaxable Items Allowable Under Cafeteria Plans  Group-term life insurance coverage below $50,000  Health and accident protection and dental plans  Child care  Vacation days  Dependent care assistance  Adoption assistance Unused benefits from one plan year may not be accumulated by an employee and carried over to succeeding years.Chapter 5, Exhibit 10b CCH Federal Taxation Basic Principles 30 of 34
  31. 31. Adoption AssistanceAn employee may exclude from gross income of up to $12,650of adoption expenses per child, where such expenses are paid forby the taxpayer’s employer under a qualified adoption assistanceprogram.Qualified adoption expenses include ordinary and necessaryadoption expenses, court costs, attorney fees and other expensesincurred for the principal purpose of the legal adoption of achild.The exclusion is phased out for taxpayers with an adjusted grossincome between $189,710 and $229,710.Chapter 5, Exhibit 11 CCH Federal Taxation Basic Principles 31 of 34
  32. 32. Employee Tuition Reduction Plans Payments of up to $5,250 per year paid by an employer to, or on behalf of, an employee for tuition and course-related material may be excluded from employee income. Qualified educational expenses includes the payment or provision of tuition, fees, books, supplies, and equipment.Chapter 5, Exhibit 12 CCH Federal Taxation Basic Principles 32 of 34
  33. 33. Dependent Care Assistance Program $5,000 exclusion A qualified dependent care assistance program is a separate written plan of an employer under which the employer pays or incurs dependent care costs for the exclusive benefit of employees. Employees can exclude up to $5,000 ($2,500 for married persons filing separately).Chapter 5, Exhibit 13a CCH Federal Taxation Basic Principles 33 of 34
  34. 34. Dependent Care Assistance Program The exclusion is subject to an earned income limitation. An unmarried taxpayer may not exclude more than his or her earned income for the year. A married taxpayer may not exclude more than the lesser of his or her earned income or the spouse’s earned income. The earned income of an incapacitated or student spouse is deemed to be $250 per month for one qualifying dependent or $500 per month for 2 or more qualifying dependents.Chapter 5, Exhibit 13b CCH Federal Taxation Basic Principles 34 of 34
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