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CCH Federal Taxation Basic Principles Chapter 5 Gross Income—Exclusions

CCH Federal Taxation Basic Principles Chapter 5 Gross Income—Exclusions. ©2003 , CCH INCORPORATED 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 http://tax.cchgroup.com. Chapter 5 Exhibits. 1. EE Bonds Used for Education—Rules 2. EE Bonds Used for Education—Examples

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CCH Federal Taxation Basic Principles Chapter 5 Gross Income—Exclusions

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  1. CCH Federal TaxationBasic PrinciplesChapter 5Gross Income—Exclusions ©2003, CCH INCORPORATED 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 http://tax.cchgroup.com

  2. Chapter 5 Exhibits 1. EE Bonds Used for Education—Rules 2. EE Bonds Used for Education—Examples 3. Fringe Benefits 4. Employee Tuition Reduction Plans 5. Retirement Income—History of Social Security Taxes 6. Damage Awards 7. Insurance Reimbursements 8. Cafeteria Plans—Rules 9. Cafeteria Plans—Example 10. Dependent Care Assistance Program—Definition 11. Dependent Care Assistance Programs—Example Chapter 5, Exhibit Contents CCH Federal Taxation Basic Principles

  3. EE Bonds Used for Education—Rules Chapter 5, Exhibit 1a CCH Federal Taxation Basic Principles

  4. EE Bonds Used for Education—Rules Chapter 5, Exhibit 1b CCH Federal Taxation Basic Principles

  5. EE Bonds Used for Education—Examples Chapter 5, Exhibit 2a CCH Federal Taxation Basic Principles

  6. EE Bonds Used for Education—Examples Chapter 5, Exhibit 2b CCH Federal Taxation Basic Principles

  7. Fringe Benefits No-additional-cost services Generally excluded if no significant additional costs are incurred by the employer. The exclusion also applies to spouses and dependent children of employees. 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 3a CCH Federal Taxation Basic Principles

  8. Fringe Benefits Qualified employee discounts 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 3b CCH Federal Taxation Basic Principles

  9. Fringe Benefits 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: Car phone rental 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 3c CCH Federal Taxation Basic Principles

  10. Fringe Benefits 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 picnics Chapter 5, Exhibit 3d CCH Federal Taxation Basic Principles

  11. 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. (Code Sec. 127.) Qualified educational expenses. Excludable educational assistance includes the payment or provision of tuition, fees, books, supplies, and equipment. Nonqualified educational expenses • Tools or supplies that may be retained by the employee after completion of the course • Meals, lodging, or transportation provided by the employer • Courses that involve sports, games, or hobbies UNLESS (1) directly related to the employer’s business; OR (2) required as part of a degree program; OR (3) used to instruct employees on how to maintain and improve health as long as the education does not involve the use of athletic facilities or equipment and is not recreational in use. Chapter 5, Exhibit 4 CCH Federal Taxation Basic Principles

  12. Retirement Income—History of Social Security Taxes Chapter 5, Exhibit 5 CCH Federal Taxation Basic Principles

  13. Damage Awards Chapter 5, Exhibit 6a CCH Federal Taxation Basic Principles

  14. Damage Awards Example 1: Fred is injured in a car accident and settles a lawsuit for $100,000. He had suffered from pain and suffering, emotional distress (i.e., non-physical), medical expenses (not previously deducted), and lost wages while recuperating. The entire $100,000 is excludable. Chapter 5, Exhibit 6b CCH Federal Taxation Basic Principles

  15. Damage Awards Example 2: In addition to Fred’s award in Example 1, Fred’s wife Wilma receives a $50,000 non-punitive award for “loss of consortium” (i.e., loss of physical and social companionship). Wilma’s $50,000 is also excludable since it has its origin in Fred’s physical injury. Chapter 5, Exhibit 6c CCH Federal Taxation Basic Principles

  16. Damage Awards Example 3: 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 6d CCH Federal Taxation Basic Principles

  17. Damage Awards Chapter 5, Exhibit 6e CCH Federal Taxation Basic Principles

  18. Insurance Reimbursements Chapter 5, Exhibit 7 CCH Federal Taxation Basic Principles

  19. Cafeteria Plans—Rules Tax Advantage of Cafeteria Plans Under a cafeteria plan, each employee is permitted to choose between cash or other taxable benefits (e.g., group-term life insurance coverage above $50,000, group legal services) and at least one (often several) nontaxable benefits. Employees are not subject to federal income tax, FICA, or federal unemployment 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 8a CCH Federal Taxation Basic Principles

  20. Cafeteria Plans—Rules Nontaxable Items Allowable Under Cafeteria Plans • Group-term life insurance coverage below $50,000 (Code Sec. 79) • Health and accident protection and dental plans (Code Sec. 106) • Child care (Code Sec. 129) • Vacation days (Reg. §125-2T) • Dependent care assistance (Code Sec. 129) • Adoption assistance (Code Sec. 137) Chapter 5, Exhibit 8b CCH Federal Taxation Basic Principles

  21. Cafeteria Plans—Rules Nontaxable Items Disallowed Under Cafeteria Plans Congress prohibits the following items from being included in cafeteria plans: • Medical Savings Accounts (excludable under Code Sec. 106(b)) • Qualified scholarships (excludable under Code Sec. 117) • Meals and lodging (excludable under Code Sec. 119) • Vanpooling (excludable under Code Sec. 124) • Educational assistance programs (excludable under Code Sec. 127) • Excludable fringe benefits (Code Sec. 132) • Long-term care insurance for chronically ill individuals (Code Sec.7702B) Chapter 5, Exhibit 8c CCH Federal Taxation Basic Principles

  22. Cafeteria Plans—Rules Unused Benefits Unused benefits from one plan year may not be accumulated by an employee and carried over to succeeding years. Example: An employee chooses the $2,000 medical coverage from the benefits menu, but, due to excellent health, uses only $1,200. He or she forfeits the remaining $800. Chapter 5, Exhibit 8d CCH Federal Taxation Basic Principles

  23. Cafeteria Plans—Example Chapter 5, Exhibit 9 CCH Federal Taxation Basic Principles

  24. Dependent Care Assistance Program—Definition $5,000 exclusion Under Code Sec. 129(d)(1), 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. Under Code Sec. 129(a)(1), employees can exclude up to $5,000 ($2,500 for married persons filing separately). Chapter 5, Exhibit 10a CCH Federal Taxation Basic Principles

  25. Dependent Care Assistance Program—Definition Tax-Free Status Excludable dependent care assistance is not subject to federal income tax, FICA, or federal unemployment taxes. Chapter 5, Exhibit 10b CCH Federal Taxation Basic Principles

  26. Dependent Care Assistance Program—Definition Employer deductions The employer’s payments or reimbursements are deductible under Code Sec. 162. Chapter 5, Exhibit 10c CCH Federal Taxation Basic Principles

  27. Dependent Care Assistance Program—Definition Self-employed taxpayers do qualify The term “employee” includes individuals who are self-employed (Code Sec. 129(e)(3)). A sole proprietor will be treated as his or her own employer. Thus, dependent care assistance, unlike most other fringe benefits, is available on a tax-free basis to the self-employed. Chapter 5, Exhibit 10d CCH Federal Taxation Basic Principles

  28. Dependent Care Assistance Program—Definition Reporting requirements A dependent care plan must furnish to an employee, on or before January 31 of the next year, a written statement showing amounts paid or expenses incurred by the employer in providing dependent care assistance to that employee during the year. Chapter 5, Exhibit 10e CCH Federal Taxation Basic Principles

  29. Dependent Care Assistance Program—Definition Taxable amount of dependent care assistance The value of dependent care assistance in excess of the exclusion limit must be included in gross income in the tax year in which the dependent care services are provided (even if payment for those services is made in another year). Chapter 5, Exhibit 10f CCH Federal Taxation Basic Principles

  30. Dependent Care Assistance Programs—Example Chapter 5, Exhibit 11a CCH Federal Taxation Basic Principles

  31. Dependent Care Assistance Programs—Example Chapter 5, Exhibit 11b CCH Federal Taxation Basic Principles

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