Summary: Gross Income Exclusions

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• 1 Gross Income exclusions: Gifts, inheritance, employee death benefits

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• What is included in a taxpayer's gross income?

  Taxpayer’s gross income includes all income from whatever source derived, unless specifically excluded.

• What types of income are excluded from gross income?

  • Interest from municipal bonds is excluded.
  • Cash borrowed from a financial institution is not income because it's a liability that the taxpayer has to pay back when it becomes due.

• What defines a gift in terms of tax?

  • The act of giving property or cash without sufficient return.
  • Gifts do not impose a tax obligation on the recipient.
  • Gifts given by employers to their employees typically cannot be exempted from taxes unless special circumstances like achievement awards.

• Under what conditions can employer compensation be excluded from an employee's gross income?

  If an employer compensates their employees for living costs, funeral expenses, or property damage incurred during a natural disaster, these payments can be excluded from the employee's gross income for tax purposes.

• What is an inheritance and its tax implications?

  • A gift from a deceased person.
  • Beneficiaries don’t need to pay tax on what they inherited.
  • Income generated from those gifts (interest and dividends) will be taxable.

•  What is an employee death benefit?

   

  • The payment made by an employer to the surviving spouse, child, or other beneficiaries of a deceased employee.
  • If the deceased employee had an irrevocable entitlement (worked for the money already) to these payments (unpaid salary that has already been earned), these amounts are taxable income for the beneficiaries. They must include them in their taxable income for that year.

•  Under what conditions may employee death benefits be tax exempt as a gift?

   

  1. The payments are made to the surviving spouse or child, not to the deceased employee’s estate.
  2. The employer does not receive any advantage from these payments.
  3. The surviving spouse and children have not performed any services for the employer.
  4. The deceased employee had already received full compensation for their work.

• Case 1: Lena received $18,000 cash from a close family friend as a birthday gift. The transfer was voluntary, motivated by affection, and was not payment for services.Determine the amount included in the recipient's gross income and select the correct tax treatment.

  Determine the amount included in the recipient's gross income and select the correct tax treatment.
  
  Amount included in recipient's gross income:
  $0
  
  Tax treatment: earned death benift taxable; gratatuious support excluded..

•  Case 2: Idris inherited a corporate bond valued at $75,000. During 20X9, the bond paid Idris $3,150 of interest.Determine the amount included in the recipient's gross income and select the correct tax treatment.

   Amount included: 3,150
  Tax treatment: inheritance excluded; later income taxable 

•  Case 3: Priya's employer paid her a $6,400 cash reward for exceeding her annual sales goal.Determine the amount included in the recipient's gross income and select the correct tax treatment.

   Amount included: 6,400
  Tax treatment: taxable employer compensation