©2011 CCH. All Rights Reserved. Chapter 5
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 101–139 list those items.
Common Exclusions from Gross Income
¶5001 Gifts and Inheritances
A gift, bequest, or inheritance is excluded from gross income. Thus, ...view middle of the document...
The Revenue Reconciliation Act
of 1993 added a second threshold for taxpayers whose provisional income exceeds $34,000 ($44,000 for a married
taxpayer fi ling a joint return and zero for a married person fi 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 fi nance the higher education of the taxpayer,
the taxpayer’s spouse, or dependents. Interest received on state and local government bonds is generally excludable
from gross income.
60 CCH Federal Taxation—Comprehensive Topics
Chapter 5 ©2011 CCH. All Rights Reserved.
Employee Benefi ts
¶5101 Fringe Benefi ts
There are four categories of fringe benefi ts: (1) no-additional-cost services provided to employees, (2) qualifi ed
employee discounts, (3) working condition fringe benefi ts, and (4) de minimis fringe benefi ts (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 group-term
life insurance is purchased, the cost of the premium for the amount of insurance over $50,000 must be included in the
employee’s gross income.
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 annuitant’s 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 annuitant’s 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 employee’s contributions.
¶5140 Adoption Expenses
Taxpayers may exclude from gross income $13,360 of adoption expenses per year per child.
¶5145 Compensation for Injuries and Sickness
Specifi cally 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