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61 Cards in this Set

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  • Back
What is required to exclude an item from gross income?
Statutory Authority

Statutory authority for excluding certain items from gross income is provided in SS 101 through 150 of the IRC
Are receipts of gifts and inheritances required to include it in their gross income?
If you receive a gift or inheritance and it generates income, are you required to include this income in your gross income?
The issue of whether a gift has occurred lies on?
the Donor's intent.

Considering, that it is to done without exchange of consideration and out of affection or love
Can an employer transfer cash to employee as a gift?

This prevents employers hiding wages as "gifts." Congress has eliminated any ambiguity
When an employer makes payments to a deceased employee's surviving spouse, children, or other beneficiaries, a fundamental question must be resolved?
Do the payments represent compensation for prior services rendered or are they gifts?
When an employer makes payments to a deceased employee's surviving spouse, children, or other beneficiaries, what has the IRS consider such payments?
Compensation for prior services.

In some situation, they side with gifts.
Are life insurance proceeds received as a result of death exempt from gross income?
If you cancel a life insurance policy, what is the subsequent receipt of cash treated like?

What two situations would provide exceptions?
An Investment, and thus you must report the cash received in excess of premiums paid as a gain.

1. Terminally Ill
2. Chronically Ill
In the accelerated death benefits for terminally ill, must a gain be realized by the recipient or a third party on the life insurance surrender value?
In the accelerated death benefits provisions, are gains recognized on the excess on premiums for the CHRONICALLY ill?
No, BUT! You must be using the proceeds for long term care of the insured.
Is a loss on the surrender value of a life insurance policy deductible?
If you are terminally ill, a doctor must reasonably expect the illness to cause death within?
24 Months
If you purchase a life insurance policy from Carol for $6 and she dies and you receive $10. What amount can you exclude from your gross income?

This is how much you paid to acquire the insurance, thus it is simply a return of capital.
Explain why a partnership in which the insured is a partner, is one of the four exclusion to the "transfer for valuable consideration" rule
Rick and Sam are partners, they both buy life insurance on their own lives. They exchange it their life insurance policies in the event that one dies, the other would be able to buy out the others interest.

Marriage & Corporation follow the premise of this rule and are two more exceptions
When you collect insurance proceeds in installments, you use the ____?_____ ____?____ learned in Chapter 4 to apportion the installment payments
Annuity Rules

The principal element is excludable from income while the interest portion is includible in income.
If you receive a scholarship or fellowship and it's for past, present or future service, is it taxable?
It is generally taxable, if it is to represent compensation for service.
Are scholarships compensation for services or gifts?
No, scholarships are neither
Must you be a student to have a scholarship for study excluded from your gross income?
Are related expenses (fees, books, supplies, and equipment required) excludible from gross income if paid by a scholarship?
Are amounts received for room and board excludible from gross income?
Room and Board scholarship portion is considered...?
Earned Income
You received a scholarship for $2,500 to cover room and board and you're a dependent. Do you have gross income?

You standard deduction is the greater of $900 or Earned Income + $300. Which is $2,800 and thus you have no income.

Remember that scholarship money for room and board is considered to be EARNED income.
If you cannot determine the value of a scholarship when given, the transaction is said to be held __?__

The transaction is held open until the educational expenses are paid.
If scholarships are made to key employee's children, this is an example of __?__ ___?___ and is taxable income to___?_____
1. Disguised Compensation
2. Parent-Employee
An employee of a nonprofit educational institution may exclude from gross income the tuition waiver if the waiver is pursuant to a?
Qualified Tuition Reduction Plan
Reimbursement for the loss of income is taxed in what manner?
It is taxed the same as the income that is replaced.
Payment for damaged or destroyed property is treated as ____?_____ if the proceeds received exceed the property's basis.
In terms of personal injury damages, a distinction is between what?
1. Compensatory Damages
2. Punitive Damages
Can compensatory damages be excluded gross income?
Under specified circumstances
Can punitive damages be excluded from gross income?
Compensatory damages are intended to compensate the taxpayer for the ___?___ ____?_____
Damages Incurred
Are worker's compensation benefits included in gross income?
Under what circumstance are accident and health insurance benefits excludable from gross income?
When the premiums are paid by the taxpayer
Your employer pays for accident and health insurance, disability insurance and long term care for its employees.

Must you include a portion of this in your gross income?

This amount is deductible by the employer
Your employer pays for accident and health insurance, disability insurance and long term care for its employees.

Must you include benefits received from such plans in your gross income?

Remember, you did not pay for these services and you have no capital to be returned. Thus, this amount is fully taxable.
If you do not spend the entirety of your scholarship for eligible expenses, what happens to the remainder?
It is included in your gross income
A person who suffers harm caused by another is often entitled to?
Compensatory Damages
Are recovery of expenses included in income?

Unless, the expense was deducted. The reasoning lies in that you probably paid taxes on the expense, so recovery of expense will be received tax free.
Only those compensatory damages received on account of


can be excluded from gross income
1. Physical Personal Injury
2. Physical Sickness

Such exclusion treatment amounts received for loss of income associated with the physical personal injury or physical sickness.
Is emotional distress compensatory damages gross income excludable?

Because you are likely to still be able to work. If you are unable to work, then it may be deductible.
Why are punitive damages never deductible?
Because they are used to punish the party who caused harm and not to compensate the victim
Are punitive damages included in gross income of the recipient?
If you receive accident and health benefits paid for by the employer for medical care, are these included in your gross income?

Normally, if you receive benefits from an insurance plan operated and paid for by your employer, you do not include it in your gross income. However, the exception is if it is for Medical Care
Is compensation, received for permanent loss or use of a member or function of the boy or permanent disfigurement included in gross income under an employer paid insurance program?

This is the 2nd exception to the rule that says that you must include in gross income benefits received from an employer paid insurance program.
Self-insured reimbursement plans are medical reimbursement plans without insurance. If the plan discriminates, meaning that it is not available to all employees in the organization, is the receipt of this medical reimbursement subject to taxation?
What provides an alternative means of accomplishing a medical reimbursement plan for an employee?
HSA or Health Savings Accounts
Are employees taxed on the contributions to the HSA by the employer?
Are earnings on HSA and withdrawal subject to tax?
Long Term Care Insurance is similar to
Accident and Health Insurance

thus it follows many of the same recognition rules
What happens when money is received from a Long Term Care Insurance plan?
The exclusion from gross income is limited to the greater of

1. $270 for each day the patient receives long term care.
2. The actual cost of care
Info Card

The value of meals provided to an employee and the employee's spouse and dependent is excluded from the taxpayer's income if the following three requirements are met
a. The meals are furnished by the employer
b. The meals are provided on the employer's business premises
c. The meals are provided for the convenience of the employer
Info Card

The value of lodging provided to an employee and the employee's spouse and dependent is excluded from the taxpayer's income if the following four requirements are met
a. The lodging is furnished by the employer
b. The lodging is provided on the employer's business premises
c. The lodging is provided for the convenience of the employer
d. If the employee is REQUIRED to accept the lodging as a condition of employment.

"For the Convenience of the Employer" says that if a service is provided to more than half of the employees than it must be provided to all the employees

If you are given an option between cash or lodging, then lodging being required as a condition of employment is nulled and not satisfied
An employee of an educational institution may be able to exclude the value of campus housing provided by the employer, IF?
Employee pays >5% appraised value of the facility.

The deficiency would be included in gross income
What tax benefit do ministers of the gospel usually enjoy?
Minsters of the gospel can exclude.

1. The rental value of a furnished home as compensation.
2. A rental allowance paid to them as compensation, to the extent the allowance is used to rent or provide a home.
3. The rental value of a home owned by the minister.

The housing allowance must be provided as compensation for the conduct of religious worship, the administration and maintenance of religious organizations, or the performance of teaching and administrative duties at theological seminaries.

The cost of maintaining the house/apt is excluded from gross income
What four specific benefits may be received tax free?
1. Child and dependent care services
2. On premises athletic facilities by employees
3. Educational assistance to U/G's and Grads
4. Pay or reimburse child adoption expenses
Why are employees considered to have gross income if offered a meal plan of cash or some other form of compensation?
Because the employee is deemed to have constructively received the cash even when the noncash option is elected
What is a Cafeteria Plan?
Under such a plan, the employee is permitted to choose between cash and nontaxable benefits.

The cash is taxable and the nontaxable benefits are of course not
What are Flexible Spending Plans?
Under these plans, the employee agrees to reduce his or her cash compensation in return for the employer agreeing to pay certain costs incurred by the employee (medical/dental expenses) with the employee recognizing gross income.

These plans are largely use it or lose it plans