ACC584A Ch.5 Terms

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.

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).

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.

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.

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

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.

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).

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.

A medical savings account created in legislation enacted in December 2003 that is designed to replace and expand Archer

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.

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.

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.

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.

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.

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).

• 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.

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.

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.

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.

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.