Income: Inclusions and Exclusions
In Chapter 2, The Federal Income Tax Return, the federal individual income tax formula was presented. The first element of the formula is gross income. The tax law and other sources state that gross income includes all income from whatever source derived, including (but not limited to) the following items:
Table 3.1. Inclusions to Income
AlimonyalimonyPayment to or for a spouse or former spouse under a separation agreement or divorce decree. and separate maintenance payments |
| Amounts recovered after being deducted in prior years |
| Annuities |
| Awards |
| Back pay |
| Bargain purchase from employer |
| Bonuses |
| Breach of contract damages |
| Business income |
| Clergy fees and contributions received by clergy |
| Commissions |
| Damages for nonphysical personal injury |
| Death benefits |
| Director’s fees |
| Distributive share of partnership gross income |
| Dividends |
| Embezzled funds |
| Employee awards |
| Employee benefits (except certain fringe benefits) |
| Employee bonuses |
Employee stock optionsstock optionRight to buy stock usually at price less than fair market value granted by an employer to employee as payment for services. |
| Farm income |
| Fees |
| Free tours |
| Gains derived from dealings in property, including sales and trades |
| Gains from illegal activities |
| Gambling winnings |
| Gross income derived from business |
| Group-term life insurance premium paid by employer for coverage over $50,000 |
| Hobby income |
| Incentive awards |
| Income from an interest in an estate or trust |
| Income from discharge of indebtedness |
| Income from life insurance and endowment contracts |
| Income in respect of a decedent |
| Interest incomeinterest incomeAmounts earned on bank accounts, loans made to others, and other payments for the use of funds. |
| Jury duty fees |
| Living quarters, meals (unless furnished for employer’s convenience, etc.) |
| Mileage allowance |
| Military pay (unless combat pay) |
| Notary fees |
| Partnership income |
| Pensions |
| Prizes |
| Professional fees |
| Punitive damages |
| Reimbursement for moving expenses |
| Rents |
| Retirement pay |
| Rewards |
| Royalties |
| Salaries |
| Scholarships (room and board) |
| Severance pay |
| Strike and lockout benefits |
| Supplemental unemployment benefits |
| Tips and gratuities |
| Travel allowances |
| Unemployment compensation |
| Wages |
After reading this list, one can wonder, is there anything not taxable? Table 3.2, “Exclusions from Income” lists the exclusions.
Table 3.2. Exclusions from Income
| Accident insurance proceeds |
| Annuities (to a limited extent) |
| Bequests |
| Casualty insurance proceeds |
| Child support payments |
| Damages for physical personal injury or sickness |
| Disability benefits (generally, but not always) |
| Federal Employees’ Compensation Act payments |
| Gifts |
| Group-term life insurance premium paid by employer (coverage not over $50,000) |
| Health insurance premiums paid by employer |
| Health insurance proceeds |
| Inheritances |
| Life insurance proceeds |
| Meals and lodging (furnished for employer’s convenience) |
| Military allowances |
| Minister’s dwelling rental value allowance |
| Municipal bond interest |
| Property settlements in a divorce |
| Relocation payments |
| Scholarships (tuition and books) |
| Social Security benefits.(with limits) |
| State bond interest |
| Veterans’ benefits |
| Welfare payments |
| Workers’ compensation |
The two tables above list many specific items that are included and excluded. In the remainder of the chapter, specific income items most commonly received will be presented in greater detail.
Questions and Problems
Which of the following sources of income is excludable from taxable income?
Goods and services received from your employer as a “bonus.”
As a resident of the United States, you received income from a company based and only doing business in Germany.
Your employer provides you a secured note for your services. You don’t collect on the note until next year.
Your employer pays your share of Social Security and Medicare taxes in addition to the employer’s share.
All of the above are excludable.
None are excludable.
Which of the following is included in taxable income?
You received a motorcycle with a fair market value of $4,000 in trade for landscaping a neighbor’s front yard.
You owed your employer $1,000 in payment of debt. Your employer canceled the debt as partial payment for your work.
State income tax refund (you itemized that year).
You received a mortgage interest refund. You took an itemized deduction for the amount in the prior year.
All of the above are includable.
None of the above is includable.
All of the following items are taxable to the taxpayer receiving them, except:
Bonuses
Damages for physical personal injury
Unemployment compensation
Prizes
Gambling winnings
Which of the following items would be taxable income to the recipient?
Insurance payments for medical care of a dependent child
Insurance payments for loss of the taxpayer’s sight
Season tickets given by a salesperson to a customer
Interest from bonds issued by the state of Texas
Lodging provided to a worker on a remote oil rig
Which of the following would result in insurance proceeds that are taxable to the recipient?
An insurance policy in which the insured is the son of the taxpayer and the beneficiary is the taxpayer
An insurance policy transferred by a partner to the partnership
An insurance policy transferred to a creditor in payment of a debt
An insurance policy purchased by a taxpayer insuring his or her spouse
An insurance policy purchased by a corporation insuring an officer
Which of the following gifts would probably be held to be taxable to the person receiving the gift?
One thousand dollars given to a taxpayer by his or her father
A trip to Mexico given to a purchasing agent by one of the company’s suppliers
A house given to a taxpayer by a friend
A Mercedes-Benz given to a taxpayer by his cousin
An interest in a partnership given to a taxpayer by his or her uncle
Which of the following prizes or awards are taxable?
Professional sports awards
Prizes from a television game show
Awards for superior performance on the job
A one-acre lot received as a prize
All of the above are taxable
Indicate whether each of the items listed below would be included (I) in or excluded (E) from gross income.
Source Include (I) or Exclude (E) a. Welfare payments b. Commissions c. Hobby income d. Scholarships for room and board e. Employee award for length of service—$400 set of golf clubs f. Severance pay g. Ordinary dividend of $50 h. Accident insurance proceeds i. Inheritances j. Gifts k. Tips and gratuities l. Student loan proceeds Jim transfers to Inge an insurance policy with a cash surrender value of $70,000 and a face value of $250,000 in exchange for real estate. Inge continues to pay the premiums on the policy until Jim dies eight years later. At that time, Inge has paid $25,000 in premiums, and she collects the $250,000 face value. How much of the proceeds is taxable to Inge? $__________. Why?
Joel died on July 1 and left his wife, Kate, a $100,000 life insurance policy that she elects to receive at $10,000 per year plus interest for ten years. In the current year, she receives $5,000 in interest. How much should Kate include in her gross income? $__________. Why?
In June of this tax year, Josh inherits ExxonMobil stock worth $75,000. Later in the year, he collects $3,000 in dividends from ExxonMobil. How much of these amounts, if any, should Josh include in this year’s gross income? $__________. Why?
Karl is a single taxpayer. Karl’s employer pays $250 per month ($3,000 this year) for his health insurance. During the year, Karl had knee surgery costing $5,800 and the insurance company paid $5,000 of the expenses. How much of the above amounts, if any, must be included in Karl’s gross income? $__________. Why?
Solve the following problems:
Laura is a nurse whose employer provides meals on the employer’s premises, since only thirty minutes is allowed for lunch. Is the value of these meals taxable income to Laura? Why?
Leo is an Elk Grove fireman. The City provides the firemen with meals while working. Is the value of these meals taxable income to Leo? Why?
