The American College: HS 321 Income Taxation

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The American College HS 321Income Taxation

• Class 4 Chapter 6
• Gross Income Exclusions

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Objectives

• Explain the general rule for the income taxation
  of amounts received by gift or inheritance.
• Explain the rules regarding the taxation of
  interest on state and municipal bonds, U.S.
  Treasury obligations, and educational savings
  bonds.

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Objectives

• Explain the rules regarding the income taxation
  of
• Social Security benefits
• and
• accident and health benefits

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History of Gifts and Inheritances
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Inheritances, Gifts, Awards
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Inheritances, Gifts, Awards

• Personal gifts generally are excluded from income
  of the recipient.
• Inheritances are excluded from income of
  recipient.

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Business-Related Gifts

• Cash giftsalways treat as compensation
• Compensation vs. gift issues
• Employers intention
• Does employer/giver deduct cost?

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Inheritances, Gifts, Awards (Continued)
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Business-Related Gifts

• Cash giftsalways treat as compensation
• Compensation vs. gift issues
• Employers intention
• Does employer/giver deduct cost?
• Nominal in amount
• Employer awards generally treated as compensation

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Interest Exclusions
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Interest Exclusions

• Interest income
• Sales of nontaxable municipal bonds

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Interest Exclusions

• Generally taxable, except for interest on
• State and local bonds
• (may be exempt from state taxation)
• U. S. Treasury obligations
• (only exempt from state taxation)
• Educational savings bonds (n/a for MFS)

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Quiz Questions
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Short Quiz 1

• A bequest of a specific sum paid in three or
  fewer installments is generally not taxable as
  income.
• True
• False

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Short Quiz 1

• Accrued interest from certain U. S. savings
  bonds that are redeemed in order to pay for
  qualified higher education expenses of the
  taxpayer may be excludible from gross income.
• True
• False

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Social Security Benefits
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Social Security Benefits

• Social Security payments to individuals with
  high incomes may be taxed.

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Social Security Benefits

• To determine the amount of Social Security
  benefits that will be taxed
• Step 1 Determine provisional income before
  Social Security inclusion and modified AGI
  (MAGI). MAGI AGI

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Social Security Benefits

• MAGI AGI
• excluded tax-exempt interest
• higher education deduction for AGI
• Modified AGI plus 50 S.S. benefits received
• EQUALS PROVISIONAL INCOME

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Social Security Benefits

• Step 2 Determine inclusion
• Exclude the following amounts (depending on
  filing status)
• Tier 1 Tier 2
• MFJ 32,000 44,000
• MFS 0 0
• S, HH 25,000 34,000

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Social Security Benefits

• Results
• If Prov. Inc. is less than 1st tier no inclusion
• 1st 2nd tiers include lesser of 1) 50
  benefits2) 50 (Prov. Inc. - first threshold)

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Social Security Benefits

• Results
• Over 2nd tier include lesser of 1) 85
  benefits2) 85 (Prov. Inc. - second threshold)
• lesser of amount determined at 1st level
  or 6,000/4,500

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Social Security Examples
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Social Security Example 1

• John and Marcia file MFJ
• They have 30,000 combined income, plus 11,000
  in Social Security benefits.
• They include the lesser of 50 (11,000) 5,500
  or
• 50 30,000 1/2 (11,000) - 32,000 1,750
• Include 1,750 in taxable income.

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Social Security Example 2

• Janis and Jim, MFJ, have AGI of 72,000not
  including 14,000 of Social Security benefits
  that are taxable.
• Include lesser of1) 85 (14,000) 11,900
• or

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Social Security Example 2

• 2) 85 72,000 1/2 (14,000) - 44,000
  6,000 35,750
• Amount determined at 1st level or
  6,000/4,500
• Lesser of 50 (14,000) 7,000
• or
• 6,000 (MFJ) or 4,500 (S, HH)
• Include 11,900 in taxable income.

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Quiz Questions
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Quiz 2

• The first tier base amount for a married couple
  filing a joint return is 25,000 for purposes of
  determining the taxability of their Social
  Security benefits.
• True
• False

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Quiz 2

• Social Security benefits are excludible in full
  from gross income unless the recipients adjusted
  gross income exceeds 100,000.
• True
• False

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Accident and Health Benefits
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A H Benefits Exclusions

• Medical expense reimbursement plans (i.e., Tax
  Benefit Rule)
• Disability policies
• Workers compensation benefits
• Damages
• Government disability programs

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A H Benefits Exclusions

• General rules benefits paid under accident and
  health insurance plans are excludible if
• The employee paid the premiums Sec. 104(a)(2)
• If the employer paid the premiums generally only
  the amounts paid for reimbursement of medical
  expenses are excludable Sec. 105(b).

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Damages Exclusions

• Damages received under court judgment or by
  agreement Sec. 104(a)(2)
• General rule Exclude actual damages received for
  personal physical injury or sickness, e.g.,
  wrongful death claims.

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Damages Exclusions

• Exceptions
• Punitive damages cannot be excluded.
• Amounts paid as substitution for income cannot be
  excluded, e.g., lost wages or employment,
  emotional distress, age and gender
  discrimination, etc.

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Other Accident and Health Benefit Exclusions
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AH Benefits Exclusions

• Benefits received for loss of limb, permanent
  loss of body function, disfigurement, etc., are
  excludible regardless of who paid the premiums?
  Sec. 105(c).

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A H Benefits Exclusions

• Disability benefit exclusions Sec. 105(e)
• General rules
• (See text for example.)
• When the employee pays the premiums, exclude all
  disability benefits received.

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A H Benefits Exclusions

• If the employer pays the premiums, benefits are
  generally includible in income except amounts
  paid for loss of limb, permanent loss of body
  function, etc.

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A H Benefits Exclusions

• Health and accident insurance premiums paid by an
  employer
• Excluded from income under Sec. 106
• Employer claims a deduction for premiums paid.

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A H Benefits Exclusions

• Includes qualified long-term care insurance under
  Secs. 104 to 106.
• Self-funded medical reimbursement plans must be
  nondiscriminatory for employer deduction and
  employee exclusion.

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Quiz Questions
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Quiz 3

• Amounts received under workers compensation act
  are excludible from gross income.
• True
• False

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Quiz 3

• If an employer pays the premiums for health care
  coverage for an employee, the premiums paid by
  your employer are includible in the gross income
  of the employee.
• True
• False