Chapter 4 - Exclusions

Introduction - Section 61 all-inclusive; exclusions must be specified (IRC); following are some exclusions (laundry list); much of chap: EE benefits - but not QRP

Gifts and Inheritances - income tax exclusion but gift or estate return; disinterested motive; from empler to emplee not a gift (102 © )

Life insurance proceeds

Scholarships

Exclusion: but room & board included=earned inc for stand deduc

conditions: degree candidate, study or research

Compensation: injuries and sickness Damages-replacement principle Personal injury damages - repl prin but even

exclude lost inc if phys injury Worker’s comp - repl inc but not taxed Punitive damages - included Other damages (sexual harassment, age

discrimination – include unless phys inj)

Accident & Health Insurance

Emplee accid & health benefits - exclude if ee purchase

empler accid & health plan - excl benefits if med care payment or if loss of member or function

V. wage continuation

Meals & Lodging

Test: on premises and for convenience er (+, for lodging, condition of employment)

Additional Meals Rules - see below Special housing exclusions - education

institution: 5% x value - rent paid = inclusion Minister of gospel - exclude housing

allowance (even utils)

Other Emplee Benefits

Various specific benefits - e.g., child and dep care pd by er, er educ assistance, gym value, tuition reduc, adoption expenses

General classes of excluded benefits - 5 classes: 1) no addtl cost servs - e.g., air tic to air ee 2) qualif’d ee disc - prop: limit = gp

component; serv: limit = 20% x cus price 3) working condit fringes - e.g., dues,

demonstrator 4) de minimis fringes - e.g., copier, occas

taxi fare or supper money, subs eating facil

5) qualified transportation fringe - parking, limit

nondiscrimination - 1 & 2 discrimination - 3 & 4 & 5 (except eating

facil)

Foreign Earned Income Interest on State and Local Gov Obligs

(Muni’s) Certain Dividends (stock, misnamed) Educational Savings Bonds - requirements -

phase out Tax Benefit Rule: exclud recov if deduc = no

benefit

Income from discharge of indebtedness

General rule: income exclusions or basis

adjusm or the like: e.g., gift, bankruptcy/insolvency, purch price adj, corp debt, student loans

Meals & Lodging (cont’d) Taxpayer Relief Act of 1997

Chapters 4 & 8 Empler deduc for meals provided on

premisesFor convenience EE’s have exclusion ER now full deduc (not lim’d to 50%) (274)

de minimis fringe under 132 (v. 274) Effective After 12/31/97

Meals & Lodging (cont’d) IRS Restructuring & Reform Act of 1998

Chapter 4 Deduction of Employer Provided meals by

ER and exclusion by EE Gen Test - (1) on premises, (2) for

convenience of ER New Test - if 50% EE’s receive on

premises and for convenience, all EE’s who receive = for convenience of ER

Meals & Lodging (cont’d) - IRS Restructuring & Reform Act of 1998

Chapter 8 Deduc by ER Usual rule - 50% deduc if meet gen test

above (50% of amt for certain EE’s) New Test - 100% deduc (full deduc) if meet

new test above

Meals & Lodging (Cont’d)Reg.

Chapter 8 also - 100% ER deduc if 90% EE’s meals

for convenience– 100% EE meals deductible - ER (and

excludible - EE) - Reg. Ex. 1.119-1(f)– 100% deduc (full deduc) - CT opinions

Exclusion – Distributions Qualified tuition Plans (529 Plans) EGTTRA ‘01

After ’01, total exclusion for distributions for qualified higher education expenses

After ’97 can transfer to “member of family” After ’01, roll over to another 529 for same B After ’01, 10% penalty and taxable if not used for

qualified higher education expenses Completed gifts

Exclusion – Distributions Qualified Tuition Plans (529 plans) EGTTRA ’01 (Cont’d)

Two types plans: savings (CA), prepaid tuition (not CA)

Can join any state’s plan After ’01 private eligible institutions

besides states (distribution exclusion ’03)

Employer Provided Educational Assistance Exclusion – EGTRRA ‘01

Permanent after ’01

Graduate as well as undergraduate after ‘01