4-1 ac 256 unit 4 seminar presented by mike lubell, dba, cpa ©2011 pearson education, inc....

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AC 256 Unit 4 SeminarAC 256 Unit 4 Seminar

Presented By Mike Lubell, DBA, CPA

©2011 Pearson Education, Inc. Publishing as Prentice Hall

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GROSS INCOME: GROSS INCOME: EXCLUSIONSEXCLUSIONS

Items that are not incomeMajor statutory exclusionsTax planning considerationsCompliance and procedural

considerations


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Items that Are Not Items that Are Not IncomeIncome

Unrealized incomeSelf-help incomeRental value of personal-use

propertySelling price of property


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Unrealized Income

Example:Land valued at $20,000 beginning

of year appreciates to $45,000 at end of yearThe $25,000 increase in value is

unrealized income and not taxable


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Self-Help Income

The amount saved is not subject to taxCleaning your own carpetRepairing your car


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Selling Price of Property

Only gain on sale of property is taxable

Selling price – Basis in property= Gain on sale of property


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Major Statutory Major Statutory ExclusionsExclusions

(1 of 2)(1 of 2)

Gifts and inheritancesLife insurance proceedsAdoption expensesAwards for meritorious achievementScholarships and fellowshipsDistributions from qualified tuition

programs


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Major Statutory Major Statutory ExclusionsExclusions

(2 of 2)(2 of 2)

Payments for injury and sicknessEmployee fringe benefitsForeign-earned income exclusionIncome from the discharge of a debtExclusion for gain from small

business stockOther exclusions


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Life Insurance Proceeds

Paid by reason of deathGenerally non-taxable

Policy surrendered not for deathExcess of proceeds over the premiums

paid taxable to recipientDividends on life insurance and

endowment policies non-taxableConsidered return of premiums paid


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Adoption Expenses

Adoption creditTax credits or an exclusion for

amounts paid pursuant to an adoption assistance plan created by an employer

Employee may exclude up to $12,170Phased out between $182,520 and

$222,520


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Awards for Meritorious Achievement

Awards for religious, charitable, scientific, etc. are not taxable if ALL criteria are met:Did not enter contestIs not required to perform substantial

future servicesDesignates a qualified charitable

organization to receive the payment


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Scholarships and Fellowships

Scholarships excluded for degree candidates used for qualified tuition and related expensesRequired for courses of instruction at

an educational institutionTuition, fees, books, supplies, equipment

Not room and board


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Distributions from QualifiedTuition Programs: §529

Plans (1 of 2)

Earnings while in a §529 plan are not taxable

Earnings distributed excluded from income if used by beneficiary for qualified tuition and related expensesTuition, fees, books, supplies,

equipment, AND Room and board if ≥ half-time student


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Distributions from Qualified

Tuition Programs: §529 Plans (2 of 2)

Distributions not used for qualified tuition expensesIncluded in beneficiary’s income, ANDSubject to a 10% penalty

Beneficiary must be “family” member

Beneficiary may be changed w/o tax consequences


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Payments for Injury and Sickness

Injury includes both physical and mental

Disability income policy is non-taxable if purchased by taxpayerTaxable if purchased by employer


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Employee Fringe Benefits(1 of 2)

In generalEmployer-paid insurance§132 fringe benefitsEmployer awardsMeals and lodgingMeals and entertainmentEmployee death benefits


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Employee Fringe Benefits(2 of 2)

Dependent careEducational assistanceCafeteria plans

Flexible spending plansInterest-free loans


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Employee Fringe Benefits in General

Compensation generally taxableLaw encourages certain types of

fringe benefits by Making them nontaxable to the

employee, ANDDeductible by the employer


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Employer-Paid Insurance

Premiums on health, accident, disability and qualifying group term insurance

Most employee life insurance premiums

Benefits from non-discriminatory self-insured plans

See Topic Review 1


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§132 Fringe Benefits

No additional cost benefitsEmployee discountsWorking condition benefitsDe minimis benefitsTransportation fringesAthletic facilitiesSee Topic Review 2


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Employee Awards

Employee achievement awards and qualified plan awardsMust be tangible personal propertyLimited to average of $400/employee

Max award $1,600Includes safety or length of serviceMust not discriminate in favor of

highly paid employees


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Meals and Lodging

Provided on employer’s premises

For the convenience of employer

Lodging must be a condition of employment to be nontaxable


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Meals and Entertainment

50% of meal or cost of entertaining customers is deductibleIncludes cost of employee’s meal or

entertainmentEmployer gets deduction if employer

pays or reimburses employeeEmployee does NOT recognize income


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Employee Death Benefits

§101(b) provides exclusion up to $5,000

Amounts over $5,000 may be nontaxable gifts depending on facts and circumstances, including employer’s intentionGift is NOT deductible by employer


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Dependent Care

Employer-financed programsEmployee may exclude up to

$5,000 of assistance each yearCannot discriminate in favor or

highly compensated employees


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Educational Assistance

Employers pay employee educational costs

Employee may exclude up to $5,250 per year for tuition, fees, books, supplies, and equipment


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Cafeteria Plans

Also called flexible spending accountsEmployee has option of receiving

any combination of benefits up to a certain amount, including cash

Only receipt of cash is taxable


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Interest-Free Loans

Interest must generally be imputed on interest-free loansImputed interest generally

deductible by employer and taxable to employee


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Foreign-Earned Income Exclusion

(1 of 3)

U.S. citizens subject to U.S. income tax on worldwide incomeSubject to double taxation if foreign income taxed by foreign country

Foreign tax credit (FTC) mitigates double taxation


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(2 of 3)

Foreign earned income exclusion alternative to FTCMay exclude up to $91,500 of foreign earned income

Add’l exclusion for foreign housing costsForeign housing costs in excess of $14,640Max housing exclusion is $12,810


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(3 of 3)

To qualify for foreign earned income exclusionMust be bonafide resident of foreign

country(ies) for entire taxable year, OR Be physically present in foreign country

for 330 days during a 12 month periodIf 12-month period spans two tax years,

exclusion pro rated based on [# days/365]


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Income from the Discharge of a Debt (1 of 2)

Generally, taxpayer may have to include amount of debt forgiveness in gross incomeExceptions: nontaxable situations

Discharge occurs in bankruptcyDischarge occurs when taxpayer is

insolvent


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Income from the Discharge of a Debt (2 of 2)

Student loansDischarge excluded from gross

income if discharge contingent on the performing certain public services


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Exclusion for Gain from Small Business Stock

50% of gain may be excluded from gross income if held > five years

Maximum tax rate on taxable amount is 28%Effective tax rate of 14%

Eligible amount limited to greater of $10M or 10x adjusted basis in stock


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Other Exclusions(1 of 2)

Gain from sale of personal residenceAnnuities paid to survivors of public

safety officersCertain military-related paymentsHousing allowance for ministersCampus housingFoster care payments


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Other Exclusions(2 of 2)

Rural letter carrier’s allowanceRoth IRA distributionsEducation IRA distributionsPersonal foreign currency gainsSee Table 2


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Tax Planning Tax Planning ConsiderationsConsiderations

Employee fringe benefitsCafeteria plans can help provide

valuable benefits to employees or cash if they don’t need the benefits offered

Self-help income and use of personally owned property


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Compliance and Compliance and Procedural Procedural

ConsiderationsConsiderations

Fringe benefits and Form W-2Nontaxable benefit may be excluded

from employees’ W-2Penalties related to wages

For failure to report – $50 per failureFor failure to withhold – 100%

Penalty can be imposed on employer and other people, such as officers or accountants


Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark at University of Northern Colorado’s

Kenneth W. Monfort College of [email protected]

4-39©2011 Pearson Education, Inc. Publishing as Prentice Hall

4-1 ac 256 unit 4 seminar presented by mike lubell, dba, cpa ©2011 pearson education, inc....

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