Ch.4 Notes (continued)

Employer Sponsored Accident and Health Plans
• If the individual carries insurance for costs and losses associated with personal injuries and health problems, collection on this policy are exempt.
• As an exception to the general exclusion rule, reimbursement for medical expenses that were deductible (as an itemized deduction) are taxed to the extent of the prior deductions (under the tax benefit rule)
• As a further exception, if the amount received is for the cost of elective cosmetic surgery the amounts received are subject to tax.
Meals and Lodging
• Importance to Certain Employee
o This exclusion is important for certain classifications of employees (e.g. waiters, police personnel)
o Partners and Proprietors
• Exclusion is available only to employees not partners or proprietors.
 (Armstrong v. Phinney, 68-1 UST PG 9355)
o Incorporated Farmers
• The IRS has acknowledged that a farmer who incorporates the farm, and becomes an employee of the corporation may be able to qualify for the lodging exclusion.
o Requirements for Exclusion treatment
• The meals and/or lodging
 Furnished by the employer
 ON the employee’s business premises
 For the convenience for the employee
o Employee of an educations institution
• Such an employee can exclude the value of campus housing provided by the employer if the employee pay annual rents equal to/or greater than 5% of the appraised value of the facility.
o Ministers of the Gospel
• Ministers can exclude the following:
 The rental value of a home furnished as compensation
 A Rental Allowance paid to them as compensation to the extent the allowance is used to rent or provide a home
• Other Employee Fringe Benefits
o Specific Benefits
• The employer does not have to included in gross income tax value of child and dependent care services paid ofr by the employer and incurred to enable the employe to work.
• The value of the use of an athletic facility by employer, their spouses, and their dependent children may be excluded. The facilities must be in the employer’s premises and substantially all of the use of the facilities must be by employees and their family member
• Foreign Earned Income
o One Time Election
• Once the taxpayer elects the exclusion, it applies to all subsequent years.
• The only situation in which the taxpayer would probably not make the election is where his foreign income exceeds the exclusion limit
• Tax Benefit Rule
o State Income Tax Refunds
• The refund is taxable only if the taxpayers itemized deductions in the year to which the refund relates
• Taxpayers can use this rule to their advantage. For example a taxpayer expects his/her income to decrease significantly for the next tax year, For the current year, s/he can make a generous payment of estimated state income taxes, part of which will be income as a refund in the next tax year
o Claim of Right - The converse of the tax benefit rule
• The taxpayer has reported income received under claim of right, may deduct amounts sh/he must repay in a subsequent tax period
• Income from Discharge of Indebtedness
o Transfer of property in satisfaction of debt vs. debt adjustment. One is a taxable exchange and the income from debt adjustments an be deferred (through basis adjustments)
o Forgiveness of Student Loan
• If the statoroty requirements are satisfied the amount of student loan that is forgiven may be excluded.