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Chapter 5 Gross IncomeExclusions

SUMMARY OF CHAPTER
Having just completed the study of gross income in the preceding chapter and thus gained a comprehension of what income is and when it is taxable, the student should now be ready to proceed to the concepts underlying exclusions from gross income, which are discussed in the present chapter. Since gross income includes income from all sources, to be excluded from gross income the items must be expressly exempted by law. Sections 101139 list those items.

Common Exclusions from Gross Income

5001 Gifts and Inheritances A gift, bequest, or inheritance is excluded from gross income. Thus, the donor does not receive a tax deduction for the property transmitted. If property received by gift or inheritance later produces income, the income is taxable. 5015 Life Insurance Proceeds Generally, life insurance proceeds received by the beneciary are not included in gross income if such amounts are paid by reason of death of the insured. It is immaterial who the beneciary is or whether the policy was part of a group life insurance plan or was individually purchased. However, if payment is delayed and the total amount when received includes interest, the interest is taxable. 5025 Sale of Residence Sales of principal residences on May 7, 1997, and thereafter are eligible for a $500,000 exclusion from gross income ($250,000 for single individuals). A two-year ownership and occupancy test and a two-year frequency test must be met to qualify for the exclusion. 5035 Recovery of Tax Benet Items Gross income includes amounts received that were part of an earlier year deduction or credit. This is considered a recovery and generally must be included in gross income in the year received. 5055 Retirement Income A portion of the Social Security benets or railroad retirement benets must be included in taxable income for taxpayers whose modied adjusted gross income exceeds a base of $25,000 for a single taxpayer ($32,000 for a married taxpayer ling a joint return and zero for a married person ling a separate return). The Revenue Reconciliation Act of 1993 added a second threshold for taxpayers whose provisional income exceeds $34,000 ($44,000 for a married taxpayer ling a joint return and zero for a married person ling a separate return). 5075 Interest on Government Obligations Interest earned on U.S. savings bonds is fully taxable. On Series EE bonds, no interest per se is paid each year, but the bond is issued at a discount and each year increases in value until maturity. The difference between the purchase price of the bond and the redemption value is taxable interest income. For tax years after 1989, a tax exemption is provided for interest earned on U.S. savings bonds used to nance the higher education of the taxpayer, the taxpayers spouse, or dependents. Interest received on state and local government bonds is generally excludable from gross income.

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CCH Federal TaxationBasic Principles

Employee Benets
5101 Fringe Benets There are four categories of fringe benets: (1) no-additional-cost services provided to employees, (2) qualied employee discounts, (3) working condition fringe benets, and (4) de minimis fringe benets (property or services, the value of which is so small as to make accounting for it unreasonable or administratively impracticable). 5115 Group-Term Life Insurance An employee is allowed to exclude from gross income all of the cost of a group-term life insurance policy provided by an employer if the face amount of the policy does not exceed $50,000. When over $50,000 of groupterm life insurance is purchased, the cost of the premium for the amount of insurance over $50,000 must be included in the employees gross income. 5125 Annuities When income is received as an annuity under an annuity, endowment, or life insurance contract, the amount received generally consists of two separate parts: (1) a nontaxable return of the annuitants investment in the contract and (2) a taxable amount representing a gain on the investment (interest). Under special rules, the tax-free portion of annuity income is spread evenly over the annuitants lifetime. If an employer paid in all of the cost of the pension or annuity, the payments received by the employee are fully taxable to the employee. If the employee made contributions, the total amount that an employee may exclude from income is the total amount of the employees contributions. 5140 Adoption Expenses Taxpayers may exclude from gross income $12,150 of adoption expenses per year per child. 5145 Compensation for Injuries and Sickness Specically excluded from gross income are (1) payments under workers compensation acts for personal injuries or sickness, (2) damages received on account of personal injuries or sickness, (3) payments under accident and health insurance for personal injuries or sickness, (4) payments received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces and certain government services, and (5) payments received by federal government employees as disability income for injuries incurred during terrorist attacks outside the U.S. Punitive damages received where no physical injury or sickness occurred are includible in gross income for all lawsuits led after July 10, 1989. 5155 Accident and Health Plans Benets received by an employee under an accident and health plan where premiums are paid by the employer are excludable from gross income if (1) payments are made on the nature of the injury and not on work time lost by the employee and (2) reimbursement is for medical expenses of the employee, spouse, or dependents. 5165 Qualied Long-Term Care Insurance Beginning after January 1, 1997, qualied long-term care insurance contracts will be treated as accident and health plans. 5185 Meals and Lodging Meals furnished an employee or the employees family are considered compensation to the employee. However, employees may exclude the value of meals furnished by the employer if (1) the meals are furnished on the premises of the employer and (2) they are furnished for the convenience of the employer.

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5195 Cafeteria Plans Cafeteria plans are employer-sponsored benet packages that offer employees a choice between taking cash and qualied benets. If qualied benets are chosen, they are excludable to the extent allowed by the law; if cash is chosen, it is includible in gross income as compensation. Nontaxable benets in the plan might include: group-term life insurance, disability benets, accident and health benets, and group legal services plans. However, certain benets are expressly prohibited from inclusion: qualied scholarships, educational assistance programs, and excludable fringe benets. 5201 Educational Assistance Plans Payments of up to $5,250 per year received by an employee for both undergraduate and graduate tuition, fees, books, and supplies under an employers assistance program may be excluded from gross income. Any excess is includible in the employees gross income and is subject to employment and income tax withholding. 5215 Tuition Reduction Plans Qualied tuition reductions made available to employees (and their families) of qualied educational institutions are excludable from the employees gross income. The tuition reduction must be for education below the graduate level. Under a special rule, benets paid to graduate teaching and research assistants employed by the qualied educational institutions may also be excluded from gross income. 5235 Dependent Care Assistance Programs Dependent care assistance benets paid under an employer plan are excludable from the employees gross income, subject to an earned income limitation. The exclusion for employer-provided dependent care assistance is limited to $5,000 a year ($2,500 for a married individual ling separately). The taxpayer identication number of the person performing the child or dependent care services must be included on the employees return. 5255 Military Benets Qualied military benets are excluded from gross income. Qualied military benets are benets that, as of September 9, 1986, were excludable by law. Military retirement pay must be included in gross income. However, veterans benets are excludable from gross income.

ANSWER TO KEYSTONE PROBLEMCHAPTER 5

(5255.) The area of management compensation is quite complex. However, one area that cannot be ignored is the tax aspects of the various plans. The goal is for the company to have a tax deduction for purchasing a fringe benet for the executive and at the same time the executive should recognize no income. Also, group plans prove advantageous because the purchase price of such plans is more favorable. The cafeteria plan is quite popular today because the individual has a choice among various fringes. Furthermore, when both spouses are employed, they can obtain better coverage at the same expense to their employers. Purchasing fringes for an executive, without other employees having a right to participate, will prove much more costly to both the company and the executive. However, sometimes in negotiating to recruit an individual, it is necessary to custom design a package.

ANSWERS TO QUESTIONSCHAPTER 5
Topical List of Questions
1. 2. 3. 4. Tax Exclusion v. Tax Deduction (Overview) Life Insurance Proceeds (5015) Social Security Benets (5055) Social Security Benets (5055)

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5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

CCH Federal TaxationBasic Principles

Savings Bond Interest (5075) Private Activity Bonds (5075) Annuities (5125) Annuity Exclusion (5125) Compensation for Injuries or Sickness (5145) Employer Contributions to Accident and Health Plans (5155) Cafeteria Plans (5195) Joint and Survivor Annuities (5125) Fringe Benets (5195) Comprehensive List of Gross Income Exclusions Exclusion of Meals (5185) Educational Assistance Plans (5201) Educational Assistance Plans (5201) Group-Term Life Insurance (5115)

Answers to Questions
Tax Exclusion v. Tax Deduction 1. Exclusions do not appear on your tax return and tax deductions do appear on your return. Exclusions may still be taxed. See Chapter 9 on tax credits and the alternative minimum tax. Life Insurance Proceeds 2. $5,000. Proceeds less investment in contract. Receipt of life insurance is in essence the recovery of a capital asset. Social Security Benets 3. In determining if any Social Security benets are taxable, the rst step is to calculate modied adjusted gross income. In this calculation, tax-exempt bond interest is included. Therefore, interest on tax-exempt securities has a direct bearing on the taxation of Social Security benets. Social Security Benets 4. Prior to 1994, the amount of Social Security benets included in income was the lesser of one-half of the benets or one-half of the excess of taxpayers income over base ($25,000 single, $32,000 joint return, zero for married ling separately). For 1994 and later years, taxpayers with provisional income exceeding thresholds ($34,000, single taxpayers; $44,000, joint taxpayers) will include the lesser of: a. 85 percent of the taxpayers Social Security; or b. The total of the following: (1) 85 percent of the amount that provisional income exceeds the higher threshold amounts, plus (2) The smaller of (a) the amount of Social Security benets included under lower limits, or (b) $4,500 for single taxpayers, or $6,000 for joint lers. Savings Bond Interest 5. The taxpayer makes the choice of either being taxed in the year the interest is earned or deferred recognition of interest income until the Series EE bond is redeemed. Private Activity Bonds 6. One justication is to stimulate economic development. Another reason is the construction of major projects. For a more extensive list, refer back to 5075.

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Annuities 7. An annuity is a contract that pays a xed income at set regular intervals for a specied period of time. Features would include the number of years for payments, amount of payment to be made, and life expectancy of annuitant. Annuity Exclusion 8. Net cost of annuity Expected payments under contract Compensation for Injuries or Sickness 9. For amounts received under workers compensation, the law specically excludes from gross income: (1) Amounts received under workers compensation acts as compensation for personal injuries or sickness. (2) Amounts of any damages received on account of personal injuries or sickness. (3) Amounts received through accident and health insurance for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (a) are attributable to contributions by the employer which were not includible in the gross income of the employee or (b) are paid by the employer). (4) Amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of Section 808 of the Foreign Service Act of 1980. (5) Amounts received as disability income attributable to injuries incurred as a direct result of violent attack which the Secretary of State determines to be a terrorist attack and which occurred while such an individual was an employee of the United States engaged in the performance of ofcial duties outside the United States. Employer Contributions to Accident and Health Plans 10. Employer contributions are excluded from employees gross income. Cafeteria Plans 11. A cafeteria plan must have a minimum of two benets consisting of cash and statutory nontaxable benets. A cafeteria plan is benecial to the employer in that all items in the plan are tax deductible, but the major advantages are to the employees. That is, they can pick and choose any of the benet plans that interest them. Joint and Survivor Annuities 12. Under a joint and survivor annuity, two individuals who are alive receive periodic benets for life. In calculating benets, both spouses must be taken into consideration. When one spouse dies, the surviving spouse receives payments until his or her death, at which time all payments cease. Fringe Benets 13. Under the law only statutory nontaxable benets may be included in a cafeteria plan. Employer contributions for prot-sharing or stock-bonus plans under a qualied cash or deferred arrangement as dened by Code Sec. 401(k)(2) can be included in cafeteria plans. Also, deferred compensation, qualied education programs, scholarships and fellowships, and fringe benets must be excluded. Payment received under annuity = Excludable Portion

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Gross Income Exclusions 14. a. Excluded b. Included c. Included d. Included e. Excluded f. Included g. Included h. Included i. Excluded j. Excluded k. Excluded l. Excluded m. Excluded Exclusion of Meals

CCH Federal TaxationBasic Principles

15. If a waiter is required to be available for work through the lunch or dinner break and not leave the restaurant, then the fact that he eats food from the restaurant will not give rise to income. The waiter in this case is required to be on the premises. Educational Assistance Plans 16. $2,000. Grants or awards for items other than tuition, books, and fees must be included in gross income. 17. No. She is allowed to exclude $5,250 from her gross income. Since the reimbursement exceeded $5,250 she would have $750 of income. Group-Term Life Insurance 18. Yes. Premiums for group-term life insurance coverage over $50,000 per year must be included in income regardless of income level, as long as the plan is not discriminatory. The amount to be included in income is determined by the uniform premium schedule covered under Reg. 1.79-3(d)(2).

ANSWERS TO PROBLEMSCHAPTER 5
Topical List of Problems
19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Gift Income (5001) Unemployment Compensation and Disability Income (5145 and 5155) Workers Compensation (5145 and 5155) Pension Income (5055) Retirement Income (5115) Social Security Benets (5055) Group Insurance (5155) Investment Income (5075) Social Security Benets (5055) Social Security Benets (5055)

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29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

Joint and Survivor Annuity (5125) Annuity: Exclusion Ratio (5125) Annuity: Taxable Portion (5125) Annuity Income: Cost-of-Living Increase (5125) Joint and Survivor Annuity (5125) Annuity Exclusion Computation (5125) Educational Savings Bonds (5075) Punitive Damages (5145) Damages Awards and Legal Fees (5145) Damages Awards (5145) Compensation for Injuries (5145 and 5155) Meals and Lodging (5185) Multiple ChoiceLife Insurance (5145) Multiple ChoiceSocial Security (5075) Multiple ChoiceFringe Benets (5101) Multiple ChoiceSeries EE Savings Bonds (5075) Multiple ChoiceFellowships (5201) Multiple ChoiceEducational Expenses (5201) Multiple ChoiceExclusions from Income (5145) Comprehensive ProblemTaxable Income Computation Comprehensive ProblemTaxable Income Computation Research ProblemSupplemental Group-Term Life Insurance

Answers to Problems
Gift Income 19. Leon does not include the value of the cottage, since it was a gift. Income from the cottage does belong to Leon and is taxable income to him. Unemployment Compensation and Disability Income 20. The amount of Reads family income includible in gross income is $24,600, computed as follows: Unemployment compensation [$5,000 - $2,400] SalaryRobert SalaryWife Supplemental unemployment compensation $2,600 10,000 9,000 3,000 $24,600

The rst $2,400 unemployment compensation is excluded from gross income. Disability income is excluded from gross income if the injury was job-related. Workers Compensation 21. All the mentioned insurance proceeds are excludable from Windsors gross income. If medical expenses were deducted on his 2009 tax return, then at the time he received the reimbursement in 2010, he would have to recognize income to the extent of benets received in 2010.

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Pension Income

CCH Federal TaxationBasic Principles

22. Their taxable income is $600. Gross income: Private pensions One-half Social Security Interest on bank deposits Dividends Interest (nontaxable) Modied adjusted gross income plus Social Security benets $18,000 6,000 2,000 1,500 700 $28,200

Since the $28,200 is less than the $32,000 amount allowed married couples ling a joint return, none of the Social Security benets are taxable. Taxable income: Private pensions Interest on bank deposits Dividends Less: Standard deduction Over 65 deduction Less: Personal exemptions (2 $3,650) Taxable income Retirement Income 23. Harry must include in gross income the cost of the premium for the amount of insurance over $50,000. For an individual 50-54 years of age, the premium is assumed to be $2.76 per thousand per year. Harry must include in income $138 ($2.76 50). Social Security Benets 24. Charles Adams must include $750 of his Social Security benets in gross income. Salary Interest income Dividend income Tax-exempt income Social Security benets Net rental income Provisional income Excludable amount Excess 50 percent of excess $14,000 2,000 1,000 1,000 2,500 6,000 $26,500 25,000 $1,500 $750 $11,400 2,200 $18,000 2,000 1,500 $21,500 13,600 $7,900 7,300 $600

The maximum amount that Charles Adams must include in his gross income is the lesser of 50 percent of the excess ($26,500 $25,000 = $1,500), which equals $750, or 50 percent of the Social Security benets ($2,500).

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Charles Adamss taxable income is $13,000. Adjusted gross income without Social Security and tax-exempt income Plus: Social Security Adjusted gross income Less: Standard deduction ($5,700 + $1,400) $7,100 Personal exemption 3,650 Taxable income Group Insurance 25. Felix must include all $650 in gross income because the policy discriminates. If the company policy were to be changed, then the calculation would be: Total coverage Tax free maximum Insurance subject to tax Cost per thousand ($.09 12) = $1.08 Taxable income (50 $1.08) Investment Income 26. Series EE bonds give the investor the opportunity to recognize the interest income yearly or wait until the bonds mature. Investments in qualied veterans bonds and industrial development bonds used for mass transit present other ways of excluding interest from gross income. Social Security Benets 27. Norm and Pat have $27,725 of taxable income. Computation: Gross income Interest income Dividend income Social Security income Provisional income Social Security Computation: (a) $9,000 85% = $7,650 (b) [($46,500 $44,000) 85%] + $4,500 = $6,625 Norm and Pat must include $6,625 in their AGI. AGI ($35,000 + $4,000 + $3,000 + $6,625) Personal exemptions (2 $3,650) Standard deduction ($11,400 + $2,200) Taxable income $48,625 7,300 13,600 $27,725 $100,000 50,000 $50,000 $54 $23,000 750 $23,750 10,750 $13,000

$35,000 4,000 3,000 4,500 $46,500

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Social Security Benets

CCH Federal TaxationBasic Principles

28. Ron and Gayle have taxable income of $26,900. Computation: Gross income Interest income Tax-exempt income Social Security income Provisional income Social Security Computation: (a) $12,000 85% = $10,200 (b) [($50,000 $44,000) 85%] + $6,000 = $11,100 $36,000 4,000 4,000 6,000 $50,000

Therefore, $10,200 of their Social Security income is included in their AGI. AGI ($36,000 + $4,000 + $10,200) Personal exemptions (2 $3,650) Itemized deductions Taxable income Joint and Survivor Annuity 29. The exclusion ratio is 64.4 percent. Annual annuity payment ($200 12) Multiple from Table 3 (Ages 66 and 68) Expected return ($2,400 23.3) $36,000 Exclusion ratio $55,920 Annuity: Exclusion Ratio 30. Mary Jones must include $138.37 in her gross income. Annual annuity payment ($125 12) Multiple from Table 2 (Age 61) Expected return ($1,500 23.3) $22,050 Exclusion ratio $34,950 Payments received in 2006: ($125 3) Excluded portion ($375 63.1%) Taxable portion $375.00 236.63 $138.37 = 63.1% $1,500 23.3 $34,950 = 64.4% $2,400 23.3 $55,920 $50,200 7,300 16,000 $26,900

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Annuity: Taxable Portion 31. Don Smith must include $1,253.17 in his gross income. Annual annuity payment ($147 12) Multiple from Table 2 (Age 65) Expected return ($1,764 20) $ 7,938 Exclusion ratio $35,280 Payments received in 2006: ($147 11) Exclusion ratio Excluded from gross income Taxable portion Annuity Income: Cost-of-Living Increase 32. Don Smith is taxed on the full amount of the cost-of-living increase. The exclusion rate (22.5% $147 per month) remains constant. Therefore, the $28-per-month increase in annuity benets is fully taxable. His total taxable annuity income is: Add: ($147 12) 77.5% $28 12 Total taxable annuity income Joint and Survivor Annuity 33. The exclusion ratio for the annuity payment to the husband is 61.4 percent, computed as follows: Cost of annuity Multiple from Table 3 (Ages 70 and 67) Multiple from Table 2 (Age 70) Difference Portion of expected return2nd annuitant ($1,200 6.0) Portion of expected return1st annuitant ($2,400 16.0) Expected return under the contract Cost of Annuity = $28,000 = 61.4% $28,000 22.0 16.0 6.0 $7,200 38,400 $45,600 $1,367.10 336.00 $1,703.10 $1,617.00 22.5 % $363.83 $1,253.17 = 22.5% $1,764 20.0 $35,280

Expected Return $45,600 The amount excludable from each monthly payment made to the husband is: $200 61.4% = $122.80 The remaining $77.20 is includible in his gross income. After the husband dies, the wife would exclude 61.4 percent of $100, which is $61.40.

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CCH Federal TaxationBasic Principles

Annuity Exclusion Computation 34. Peter can exclude $104.75 for each monthly payment from gross income. The exclusion ratio is 41.9 percent. The adjusted multiple used to calculate the exclusion is 19.9. Annuity = $250 per month for life. Cost = $25,000. Annual annuity payment (12 $250) Multiple from Table 2 and Table 5 (20.0 .1) Expected return $25,000 Exclusion ratio $59,700 Adjusted exclusion ratio: Monthly benet Exclusion ratio Excluded from gross income Educational Savings Bonds 35. Beth may exclude from her gross income the $4,000 of interest income. Since her qualied expenses exceeded her proceeds from the bond redemption, all the interest is excluded. Also, Beth may exclude all the interest because her AGI is below the phaseout range. Punitive Damages 36. Yes. Punitive damages received on account of nonphysical injury may not be excluded from gross income. Damages Awards and Legal Fees 37. The $24,000 Steven received is included in gross income under the tax law. Inasmuch as the award is taxable income, costs incurred to secure the award are tax deductible. Damages Awards 38. Compensatory damages for lost wages are income; therefore, $100,000 is taxable income. The $1,000 award for punitive damages is taxable income also. Compensation for Injuries 39. Workers compensation, medical expense reimbursement, and damages for personal injury received by Robert are excluded from his gross income, but the $16,000 of earned wages is not excluded. Meals and Lodging 40. Clearly, the value of the lodging does not have to be included in Roger Corbys gross income because the lodging furnished is for the convenience of the employer. The value of the meals when not on duty, however, must be included because the employee is not required to have his meals on the premises. The meals eaten while on duty are excludable. Multiple ChoiceLife Insurance 41. Anthony must include $30,000 in income. The $50,000 he received for personal injury damages is excluded because it was not punitive damages. $250.00 41.9 % $104.75 = 41.9% $3,000 19.9 $59,700

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Multiple ChoiceSocial Security 42. d. Ms. Green must include 85 percent of her Social Security benets in her gross income, computed as follows: Modied AGI: Interest from certicates of deposit $3,000 Tax-exempt interest 6,000 Taxable dividends 5,000 Taxable pension 15,000 Wages from consulting work 9,000 One-half Social Security benets 7,000 Provisional income $45,000 (A) $14,000 85% = $11,900 (B) [($45,000 $34,000) 85% ] + $4,500 = $13,850 Ms. Green must include $11,900 of her Social Security benets in her income, the lesser of (A) or (B). Multiple ChoiceFringe Benets 43. d. Memberships in athletic facilities are not excludable unless the athletic facility is on the employers premises. Multiple ChoiceSeries EE Savings Bonds 44. b. Eligible expenses do not include room and board. Multiple ChoiceEducational Expenses 45. c. Ralph should exclude $2,600 from his gross income. Tuition reimbursement for classes may be excluded from gross income. Ralph cannot exclude the reimbursement for transportation expenses. Multiple ChoiceFellowships 46. a. Amounts received for teaching or as a laboratory assistant are fully taxable. Qualied scholarships include payments for tuition and fees, books, equipment, and supplies required for the students course of instruction. Multiple ChoiceExclusions from Income 47. b. Compensatory damages for physical injury are not included in gross income. Comprehensive ProblemTaxable Income Computation 48. Rodney and Alice have taxable income of $53,748, computed as follows: Gross Income: SalaryRodney SalaryAlice Premium on life insurance over $50,000 Dividends Interest on deposits Gross income Less: Itemized deductions Less: Personal exemptions (7 $3,650) Taxable income $45,000 48,000 48 850 400 $94,298 15,000 25,550 $53,748

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CCH Federal TaxationBasic Principles

Comprehensive ProblemTaxable Income Computation 49. The Morrises taxable income for 2009 is $1,575, computed as follows: Modied AGI: One-half Social Security benets Tax-exempt interest SalarySam SalarySarah Interest income Dividend income Net rental income Security deposit Bank logo contest Sam's annuity Modied AGI Base amount Adjusted gross income ($31,975 $4,950 $900) Less: Standard deduction ($11,400 + $2,200) Less: Personal exemptions (3 $3,650) Taxable income $4,950 900 7,000 5,500 1,800 7,000 4,000 100 500 225 $31,975 32,000 $26,125 13,600 10,950 $1,575

Sam and Sarah do not have to include any of their Social Security benets in gross income because they were under the $32,000 base. Several of their interest income items were not included because they were from tax-exempt sources. Forgiveness of a loan to their daughter does not generate income to their daughter, and Sam and Sarah are allowed no deduction. Only premiums on group-term life insurance over $50,000 are income to the employee. The gifts received by Sam and Sarah are not taxable. Annuity formula: Monthly benet Yearly benet Multiple from Table 2 Expected return ($720 20) $ 9,000 Exclusion ratio: $14,400 62.5% of $600 = $375 Excluded from gross income $225 Included in gross income = 62.5% $60 $720 20 $14,400

Their daughter is a qualifying child because she did not furnish more than half her support and because she is a full-time student under 24.

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Research ProblemSupplemental Group-Term Life Insurance 50. Larry prevailed. Rev. Rul. 71-587 concerns itself with the question of whether payments made by the donee (niece) for supplemental group-term life insurance are includible in the taxpayers gross income under Code Sec. 79(a). Accordingly, premiums paid by the niece were considered as paid by Larry and are not includible in gross income.

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