Tax Study Guide-5-Exclusions

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De minimis fringe

Benefits provided to employees that are too insignificant to warrant the time and effort required to account for the benefits received by each employee and the value of those benefits. Such amounts are excludible from the employee's gross income. § 132.

Accelerated death benefits

The amount received from a life insurance policy by the insured who is terminally ill or chronically ill. Any realized gain may be excluded from the gross income of the insured if the policy is surrendered to the insurer or is sold to a licensed viatical settlement provider. § 101(g).

Accident and health benefits

Employee fringe benefits provided by employers through the payment of health and accident insurance premiums or the establishment of employer-funded medical reimbursement plans. Employers generally are entitled to a deduction for such payments, whereas employees generally exclude the fringe benefits from gross income. §§ 105 and 106.

Compensatory damages

Damages received or paid by the taxpayer can be classified as compensatory damages or as punitive damages. Compensatory damages are those paid to compensate one for harm caused by another. Compensatory damages are excludible from the recipient's gross income. See also punitive damages.

Death benefit

A payment made by an employer to the beneficiary or beneficiaries of a deceased employee on account of the death of the employee.

Educational savings bonds

U.S. Series EE bonds whose proceeds are used for qualified higher educational expenses for the taxpayer, the taxpayer's spouse, or a dependent. The interest may be excluded from gross income, provided the taxpayer's adjusted gross income does not exceed certain amounts. § 135.

Flexible spending plan

An employee benefit plan that allows the employee to take a reduction in salary in exchange for the employer paying benefits that can be provided by the employer without the employee being required to recognize income (e.g., medical and child care benefits).

Foreign earned income exclusion

The foreign earned income exclusion is a relief provision that applies to U.S. citizens working in a foreign country. To qualify for the exclusion, the taxpayer must be either a bona fide resident of the foreign country or present in the country for 330 days during any 12 consecutive months. The exclusion is limited to $91,500 per year for 2010 ($91,400 in 2009). § 911.


A transfer of property for less than adequate consideration. Gifts usually occur in a personal setting (such as between members of the same family). Gifts are excluded from the income tax but may be subject to the gift tax.

Health savings account

A medical savings account created in legislation enacted in December 2003 that is designed to replace and expand Archer Medical Savings Accounts. See also medical savings account.

Life insurance proceeds

Generally, life insurance proceeds paid to a beneficiary upon the death of the insured are exempt from Federal income tax. An exception is provided when a life insurance contract has been transferred for valuable consideration to another individual who assumes ownership rights. In that case, the proceeds are income to the assignee to the extent that the proceeds exceed the amount paid for the policy plus any subsequent premiums paid. Insurance proceeds may be subject to the Federal estate tax if the decedent retained any incidents of ownership in the policy before death or if the proceeds are payable to the decedent' estate. §§ 101 and 2042.

Long-term care insurance

Insurance that helps pay the cost of care when the insured is unable to care for himself or herself. Such insurance is generally thought of as insurance against the cost of an aged person entering a nursing home. The employer can provide the insurance, and the premiums may be excluded from the employee's gross income. § 7702B.

No-additional-cost services

Services that the employer may provide the employee at no additional cost to the employer. Generally, the benefit is the ability to utilize the employer's excess capacity (vacant seats on an airliner). Such amounts are excludible from the recipient's gross income. § 132.

Punitive damages

Damages received or paid by the taxpayer can be classified as compensatory damages or as punitive damages. Punitive damages are those awarded to punish the defendant for gross negligence or the intentional infliction of harm. Such damages are includible in gross income. § 104. See also compensatory damages.

Qualified employee discounts

Discounts offered employees on merchandise or services that the employer ordinarily sells or provides to customers. The discounts must be generally available to all employees. In the case of property, the discount cannot exceed the employer's gross profit (the sales price cannot be less than the employer's cost). In the case of services, the discounts cannot exceed 20 percent of the normal sales price. § 132.

Qualified real property business indebtedness

Indebtedness that was incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property. The taxpayer must not be a C corporation. For qualified real property business indebtedness, the taxpayer may elect to exclude some or all of the income realized from cancellation of debt on qualified real property. If the election is made, the basis of the property must be reduced by the amount excluded. The amount excluded cannot be greater than the excess of the principal amount of the outstanding debt over the fair market value (net of any other debt outstanding on the property) of the property securing the debt. § 108(c).

Qualified transportation fringes

Transportation benefits provided by the employer to the employee. Such benefits include (1) transportation in a commuter highway vehicle between the employee's residence and the place of employment, (2) a transit pass, and (3) qualified parking. Qualified transportation fringes are excludible from the employee's gross income to the extent categories (1) and (2) above do not exceed $230 per month in 2010($230 in 2009) and category (3) does not exceed $230 per month in 2010 ($230 in 2009). These amounts are indexed annually for inflation. § 132.

Qualified tuition program

A program that allows college tuition to be prepaid for a beneficiary. When amounts in the plan are used, nothing is included in gross income provided they are used for qualified higher education expenses. § 529.

Qualified tuition reduction plan

A type of fringe benefit plan that is available to employees of nonprofit educational institutions. Such employees (and the spouse and dependent children) are allowed to exclude from gross income a tuition waiver pursuant to a qualified tuition reduction plan. The exclusion applies to undergraduate tuition. In limited circumstances, the exclusion also applies to the graduate tuition of teaching and research assistants. § 117(d).


Scholarships are generally excluded from the gross income of the recipient unless the payments are a disguised form of compensation for services rendered. However, the Code imposes restrictions on the exclusion. The recipient must be a degree candidate. The excluded amount is limited to amounts used for tuition, fees, books, supplies, and equipment required for courses of instruction. Amounts received for room and board are not eligible for the exclusion. § 117.

Tax benefit rule

A provision that limits the recognition of income from the recovery of an expense or loss properly deducted in a prior tax year to the amount of the deduction that generated a tax benefit. § 111.

Working condition fringe

A type of fringe benefit received by the employee that is excludible from the employee's gross income. It consists of property or services provided (paid or reimbursed) by the employer for which the employee could take a tax deduction if the employee had paid for them. § 132.

Public assistance payments (welfare) are generally taxable.


Gifts from an employer to an employee are always excluded from gross income


In a flexible spending plan, the employee accepts lower cash wages in return for the employer agreeing to pay certain costs of the employee.


Life insurance proceeds are always excluded from the gross income of the recipient.

False. Proceeds may be included if the policy was transferred for valuable consideration

The interest element received by a beneficiary on life insurance proceeds taken in installments is excluded from income.

False. The interest portion of the installment payment is generally included in gross income.

A transfer of appreciated property in satisfaction of a debt is a realizable event for income tax purposes.


In 2010, the maximum exclusion for employee child care fringe benefits is $5,000 per year or the earned income of the spouse who has the lesser amount of earned income.


Under the tax benefit rule, if a taxpayer obtains a deduction in one year and later recovers a portion of the prior deduction, the recovery produces taxable income.


There are limits on the use of tax-exempt bonds to finance private business activities


A United States citizen is generally subject to US tax on his total (world-wide) income regardless of the geographic origin of the income.


To be excluded from gross income, meals furnished by an employer must be on the business premises and be for the convenience of the employer


Workers' compensation benefits are included in the gross income of the taxpayer receiving the benefits.


The foreign earned income exclusion is subject to an annual maximum amount, plus a limited exclusion for foreign housing costs.


To qualify for the foreign earned income exclusion, the taxpayer must either be a bona fide resident of the foreign country or present in the foreign country for 250 days during any 12 consecutive months.

False. The taxpayer must be present in the foreign country 330 days during any consecutive months

Dividends on a mutual life insurance policy are taxable to the owner of the policy only if the policy has a cash surrender value of $5,000 or more.

False. Dividends on a mutual life insurance policy are considered rebates of premiums and are not taxable.

Cafeteria plans allow employees to choose nontaxable benefits rather than cash compensation and have the benefits remain nontaxable to the employee.


Ministers can exclude from gross income the rental value of a home furnished as compensation or a rental allowance used to provide a home.


Professor Gomez's son is enrolled as an undergraduate at the nonprofit university where he teaches. The university waived the tuition of 6,000 for the son. Professor Gomez must include the 6,000 in his income because his son went to school for free.

False. Not income to Professor Gomez.

Scholarship income used for expenses of room and board is treated as earned for purposes of calculating the standard deduction for one who is claimed as a dependent of another taxpayer.


If the amount of a scholarship eligible for exclusion is not known at year-end the transaction is held open until the education expenses are paid.


Generally, punitive damages are not taxed to the recipient because they represent a penalty to the person causing the damages.

False. Punitive damages are included in gross income.

Generally, if an employee has an option of taking cash instead of employer-provided housing then the value of housing is taxable.


Employer-paid parking for company officers qualifies as a qualified transportation fringe benefit and would not be income to the officers.


The annuity rules are used to apportion an installment payment of life insurance proceeds between the principal and interest on earnings from reinvestment of the life insurance proceeds.


If a qualified employee discount plan discriminates in favor of highly compensated employees, then the benefits received by all employees are denied exclusion treatment.

False. Only included in the gross incomes of highly compensated employees.

Leslie is a graduate research assistant. She receives 4,000 for working 400 hours during the semester. In addition, she receives a 5,000 tuition waiver from the university. The 5,000 is excluded from Leslie's income.


One hundred percent of long-term care benefits received by a taxpayer in 2010 are always excluded from his or her gross income.

False. There is a maximum daily limit ($290 in 2010) that can be excluded.

Qualified employer reimbursed adoption expenses are phased out as adjusted gross income increases for an annual indexed amount.


Premiums on employer-sponsored accident and health insurance are not deductible to the employer; they are excluded from the employee's income.

False. The premiums are deductible to employers as well as excludible to employees.

If a life insurance policy is transferred for valuable consideration, any proceeds are taxable to the extent they exceed the amount paid for the policy and any subsequent premiums paid on the policy.


Some states exempt the interest on the bonds they issue, but tax the interest on bonds issued by other states.


Bess received gifts of 9,000 in cash and an automobile with a fair market value of 2,000 (cost 12,000). Assuming Bess is a cash basis, calendar year taxpayer, what amount would be included in her gross income?

0. Gifts are excluded from gross income.

Conrad Corporation sues Amber Corporation and recoveers 500,000 in lost income damages and 300,000 in punitive damages for loss of income. Assuming Conrad is a cash basis, calendar year taxpayer, what amount would be included in its gross income?

800,000. 300,000 + 500,000

In the current year, Doris recovered 12,000 of 18,000 that was deducted for tax purposes two years ago. Assuming Doris is a cash basis, calendar year taxpayer, what amount would be included in her current year gross income?

12,000. Amounts recovered are included in gross income in the year received.

Edgar, an employee of Sandy Corp., dies suddenly. Sandy Corp pays his widow, Ann, 3,000 in accrued wages and 4,500 in light of the family's financial needs. What amount, if any, can be excluded from gross income?

4,500. The family can be deemed the recipients of a gift since the 4,500 payment was made inn light of the survivors' financial needs.

Fay inherited several AT&T bonds. The bonds had a fair market value of 70,000 at the date of death. After receiving the bonds, she was also paid 2,000 in interest. Assuming Fay is a cash basis, calendar year taxpayer, what amount would be included in her gross income?

2,000. Income on gift property is included in gross income.

Pat ( a single taxpayer) received the following income:
Salary, 30,000
Dividends, 1,000
Interest on City of Houston bonds, 2,000
Life insurance proceeds, 10,000
Dividends on Mexican stock, 1,600
What is Pat's gross income?

32,600. 30,000 + 1,000+1,600

In the current year, Armadillo Airlines covers an employee with a qualified dental plan at a cost of 200. In addition, its employees are allowed to fly for free on standby basis, and this same employee takes free flights valued at 3,000. The employee is also provided with free parking at the airport worth 400 per year. Of these amounts, how much must the employee include in his gross income for the current year?


Mike is an employee of Mega Corporation. As an employee, Mike received the following fringe benefits during the current year.
Free use of company gym, 200
10% discount on 250 TV (employers standard gross profit margin, 25%), 25
Free company parking, 400
Personal use of copy machine, 8

If the plan does not discriminate, what amount of these fringe benefits must Mike report as income on his tax return?

0. All these fringes are excluded

Kurt received the following interest payments during the year.
municipal bonds-700
Series HH savings bonds-600
last year's federal income tax refund-200
interest on condemnation award from dispute two years ago-500
If Kurt is a cash basis taxpayer and has made no special elections, what should he include in gross income from the above amounts?

1,300. 600+200+500

Mary is employed as the manager of an apartment complex. Her employer gave her the option of two compensation schemes:
1. Cash salary of 40,000 per year or
2. Cash salary of 32,000 per year plus a free apartment worth 7,000 per year
If Mary selects option two, what amount should she include in gross income?

39,000. 32,000 + 7,000

Silver Corporation's management is allowed to purchase goods from the company for a 20 percent discount and all other employees are allowed a ten percent discount. The employer's usual gross profit margin is 25% . Bill, president of the company, purchased from Silver Corp. goods for 1,600 when the price charged to customers was 2,000. How much income must Bill report from the purchase of the goods?

400. The plan discriminates therefore the discount is taxable.

Big private University allows the children of employees to attend for a special tuition rate that is 30% of the regular tuition. Joel is an employee of DPU and his child attends the school on a full-time basis. Regular tuition at DPU is 10,000 year. How much does Joel have to include in income from the tuition reduction?

0. The tuition is excluded.

In 2010, Lance qualifies for the foreign earned income exclusion. He was present in Ecuador for 344 days in the current year. Lance's salary for the year is $110,000. Assuming a 365 day year, how is Lance's earned income exclusion calculated?

(344 days/365 days)x 2010 annual maximum

Betty owned a 100,000 term life insurance policy(total premiums paid of $10,000) when she was diagnosed as having a terminal illness. She sold a policy for 75,002 to .Bass Benefits, Inc., a company that is qualified by the state of Texas to purchase its policies. How much income must Betty recognize on the date of the sale?

0. The sale of the policy is excluded.

Betty owned a 100,000 term life insurance policy(total premiums paid of $10,000) when she was diagnosed as having a terminal illness. She sold a policy for 75,002 to .Bass Benefits, Inc., a company that is qualified by the state of Texas to purchase its policies. How much must Bass Benefits recognize upon Betty's death if Bass pays an additionall 7,000 in premiums?

100,000 75,000 7,000=18,000

Employer services are provided to employees at a discount equal to 30% of the customer price. The services provided to an individual employee are:

Partially included in gross income. The maximum exclusion is 20% of the customer price

Qualified parking with a value of 290 per month paid in 2010 for an individual employee is:

partially included (290 - 230) in gross income. There is a monthly limit on parking of 230.

An employer-provider bus pass worth 50 per month for an individual employee is:

excluded from gross income because it is fully under the limit.

In 2010, Kent ( a single taxpayer) contributes 4,200 to his self-only coverage Health Savings Accountant (HSA). How much of this amount can he deduct?

3050, the maximum deduction for self coverage allowed.

Under the "use or lose" rules for a Flexible Sending plan, a calendar year taxpayer has until what date to use the funds in his or her plan?

The taxpayer has until the fifteenth day of the third month (March 15) after the end of the plan year to use funds for qualified expenses.

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