Chapter 3

Partial list of exclusions from gross income

Accident insurance proceeds
Annuities (cost element)
Bequests
Child support payments
Cost-of-living allowance (for military)
Damages for personal injury or sickness
Gifts received
Group term life insurance, premium paid
by employer (for coverage up to $50,000)
Inheritances
Interest from state and local
(i.e., municipal) bonds
Life insurance paid upon death
Meals and lodging (if furnished for employers
convenience)
Military allowances
Ministers dwelling rental value allowance
Railroad retirement benefits (to a limited
extent)
Scholarship grants (to a limited extent)
Social Security benefits (to a limited extent)
Veterans benefits
Welfare payments
Workers compensation benefits.

Professional fees
Punitive damages
Rents
Rewards
Royalties
Salaries
Severance pay
Strike and lockout benefits
Supplemental unemployment benefits
Tips and gratuities
Travel allowance (in certain cases)
Treasure trove (found property)
Wages
Deductions for adjust Gross income
Expenses incurred in a trade or business.
Part of the self-employment tax.
Unreimbursed moving expenses.
Contributions to traditional Individual Retirement Accounts
(IRAs) and certain other
retirement plans.
Fees for college tuition and related expenses.
Contributions to Health Savings Accounts (HSAs).
Penalty for early withdrawal from savings.
Interest on student loans.
Excess capital losses.
Alimony payments.

Partial list of gross income

Partial list of itemized Deductions

Alimony
Annuities (income element)
Awards
Back pay
Bargain purchase from employer
Bonuses
Breach of contract damages
Business income
Clergy fees
Commissions
Compensation for services
Death benefits
Debts forgiven
Directors fees
Dividends
Embezzled funds
Employee awards (in certain
cases)
Employee benefits (except certain
fringe benefits)
Estate and trust income
Farm income
Fees
Gains from illegal activities
Gains from sale of property
Gambling winnings
Group term life insurance, premium paid
by employer (for coverage over $50,000)
Hobby income
Interest
Jury duty fees
Living quarters, meals (unless furnished for
employers convenience)
Mileage allowance (in certain cases)
Military pay (unless combat pay)
Notary fees
Partnership income
Pensions
Prizes

Medical expenses in excess of 10% (7.5% if at least age 65) of

AGI
State and local income or sales taxes
Real estate taxes
Personal property taxes
Interest on home mortgage
Investment interest (to a limited extent)
Charitable contributions (within specified percentage limitations)
Casualty and theft losses in excess of 10% of AGI
Miscellaneous expenses (to the extent such expenses in aggregate
exceed 2% of AGI)
Union dues
Professional dues and subscriptions
Certain educational expenses
Tax return preparation fee
Investment counsel fees
Unreimbursed employee business expenses (after a
percentage reduction for meals
and entertainment)
Non deductible expenditures
Personal living expenses, including any losses on the sale of
personal use property.
Hobby losses.
Life insurance premiums.
Expenses incident to jury duty.
Gambling losses (in excess of gains).
Child support payments.
Fines and penalties.
Political contributions.
Certain passive losses.
Funeral expenses.
Expenses paid on anothers behalf.
Capital expenditures.
Basic standard deductions amount

Single
$6,300
Married, jointly $12,600
Surviving spouse $12,600
Head of house
$9,250
Married Seprate $6,300

accrues daily. Therefore, the interest for the period that includes
the date of the transfer is allocated between the transferor and
transferee based
on the number of days during the period that each owned the
property.

Amount of each additional standard deduction

Single
$1,550
Married joint
$1,250
Surv spose
$1,250
Hoh
$1,550
Married sep
$1,250

Dividends are taxed.

Personal exemption is 4000

Income from Partnership- A partnership is is not a

separate taxable entity. Rather, the partnership merely files an
information return, which serves to provide the data necessary for
determining the character and amount of each partners distributive
share of the partnerships income and deductions.

Qualyfing child
-Relationship test, abode test, age test, support test,
Qualifying relative
Relationship test, gross income test (4000), support
test, joint return, citizen or residency test. Last 2
apply for both.

Capital Gains and Losses- Max Net Capital Loss is

$3000 deductible FOR. Personal Losses are not
allowed. (Ex 44)
Chapter 4

Chapter 5
Life Insurance- paid to the beneficiary because of the death
of the insured are exempt from income tax.
Disguised Compensation -Some employers make
scholarships available solely to the children of key employees. The
tax objective of these plans is to provide a nontaxable fringe
benefit to the executives
by making the payment to the child in the form of an excludible
scholarship. However, the IRS has ruled that the payments are
generally includible in the gross income of the parent-employee.

Constructive receipts- Income that has not actually been

received by the taxpayer is taxed as though it had been received
the income is constructively receivedunder the following
conditions:
The amount is made readily available to the taxpayer.
The taxpayers actual receipt is not subject to substantial
limitations or restrictions

Compensation for Damages A person who suffers harm caused by another is often entitled to
compensatory damages. The tax consequences of the receipt of
damages depend on the type of harm the taxpayer has experienced.
The taxpayer may seek recovery for (1) a loss of income,
(2) expenses incurred, (3) property destroyed, or (4) personal
injury. Generally, reimbursement for a loss of income is taxed the
same as the income
replaced (see the exception under Personal Injury below). The
recovery of an expense
is not income unless the expense was deducted. Damages that are a
recovery of the taxpayers
previously deducted expenses are generally taxable under the tax
benefit rule,

Basically if income is available the taxpayer should not be allowed

to postpone the income recongnition.

Compensatory damages- only physical personal injury or

physical sickness can be excluded.

Cash basis method- cash received in the year is

counted towards gross income.
Accrual method- included in gross income for a year
in which it is earned.

Deferral of Advance Payment for Services accrual

can defer payments for services performed after the
year. But whatever services that has been done is
included in gross income for this year.

Income from Services -It is a well-established principle of

taxation that income from personal services must be included in
the gross income of the person who performs the services. This
principle
was first established in a Supreme Court decision, Lucas v. Earl .45
Mr. Earl entered into a binding agreement with his wife under
which Mrs. Earl was to receive one-half of Mr. Earls salary.
Justice Holmes used the celebrated fruit and tree metaphor to
explain that the fruit (income) must be attributed to the tree from
which it came (Mr. Earl). A mere assignment of income does not
shift the liability for the tax.
Income from Interest - According to the IRS, interest

Punitive damages- included in gross income

Workers compensation- exempted from inclusion of gross
income.
Accident and health insurance benefits- if it was
purchased by taxpayer then excludible if purchased
by employer includible.
Meals and Lodging As discussed in Chapter 4, income can
take any form, including meals and lodging. However, 119
excludes from income the value of meals and lodging provided to
the employee and the employees spouse and dependents under the
following
conditions:34
The meals and/or lodging are furnished by the employer on
the employers
business premises for the convenience of the employer .
In the case of lodging, the employee is required to accept
the lodging as a
condition of employment.

The courts have interpreted both of these requirements strictly.

Furnished by the Employer
The following two questions have been raised with regard to the
furnished by the
employer requirement:
Who is considered an employee ?
What is meant by furnished ?
On employers business premises and for the convenience of the
employer
- Student Resident Advisor (a Student who lives in a
dorm and doesnt pay for it)---is similar to an
apartment house super----the value of the living
quarters are tax freeif the conditions are met)
Interest on certain Government Bondsexclusion on this taxes on the interest portion
Tax Benefit Rule- if a taxpayer gets a deduction in

one year and recovers it in the next year it is

considered gross income.
However, the 111 tax benefit rule provides that no income is
recognized upon the recovery of a deduction, or the portion of a
deduction, that did not yield a tax benefit in the year it was taken.
If the taxpayer in Example 33 had no tax liability in the year of the
deduction (e.g., itemized deductions and personal exemptions
exceeded adjusted gross income), the recovery would be partially
or totally excluded from gross income in the year of the recovery.