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Whole Ball of Tax 2003

THERE’S STILL SOME INCOME OUT OF UNCLE SAM’S REACH

(RIVERWOODS, ILL., January 2003) – It may seem as if the government has found a way to tax just about everything, but the list of items that escape the tax bite has grown longer in recent years—and will get longer still if President Bush’s tax plan to eliminate income tax on shareholder dividends makes its way through Congress. According to CCH INCORPORATED (CCH), a leading provider of tax law information and software, there are many items that are not taxable as income.

"You don’t have to be a CPA or memorize the tax code to find tax-free income opportunities – they’re available to almost everyone," said Mildred Carter, JD, CCH federal tax analyst. "It’s well worth the effort to explore which of these opportunities are available to you, especially since the benefits of tax-free income are twofold."

When you can exclude an amount from your income, you actually benefit twice. You don’t pay tax on the amount excluded and having a lower gross income makes you more eligible for other breaks in the tax code – such as being able to take a larger deduction, being eligible for a credit or shielding more of your Social Security benefits from tax.

Taxpayers stand to gain further in the future if the President’s proposal is passed. In addition to the dividends provision, the plan would benefit individuals by speeding up provisions under the Economic Growth and Tax Relief Reconciliation Act of 2001, which were scheduled to take effect between 2004 and 2010. Under EGTRRA, there was a gradual phase-in of a range of tax benefits tied to a taxpayer’s gross income or adjusted gross income.

With a focus on what you can do for the 2002 tax year, CCH identifies many of the opportunities that may be available to you.

Payments that Escape the IRS

Certain types of payments simply escape the definition of income, no matter how much they enrich you. Gifts, inheritances, life insurance proceeds, health insurance benefits and annuities all escape the clutches of the IRS, at least in part.

  • Gifts, bequests, devises and inheritances themselves don’t count as income. However, any income flowing from such property is taxable.
  • Life insurance proceeds paid upon the death of the insured are not considered income, nor are accelerated death benefits or viatical settlements paid prior to the death of a terminally ill insured person.
  • Child support payments made to a custodial parent aren’t considered income, although alimony is.
  • Certain amounts received for personal physical injuries or sickness, including amounts received under workers’ compensation acts, employer-provided accident or health insurance plans and compensatory damages awarded by reason of lawsuit and settlement all are tax-free. Compensatory damages for lost income are includible in taxable income, as are damages received for personal nonphysical injuries, such as employment discrimination or injury to reputation.
  • Supplemental Security Income (SSI) payments aren’t taxed.
  • Income received as an annuity escapes tax, but only to the extent that the income represents a return of your investment rather than interest.
  • Interest on certain bonds issued by a state or political entity escapes federal tax, but it may be taxable at the state level. The states, however, can’t tax the income from U.S. bonds and notes.
  • Scholarship and fellowship grants made to degree candidates aren’t counted as income to the extent that they’re used to pay for tuition and course-related fees, books, supplies and equipment. The exclusion isn’t available when the payment is tied to teaching or research work, though.
  • State tax refunds are excludable, except to the extent that deducting the state tax reduced your federal income tax in a prior year.
  • Depending on the size of total income, 15 percent or 50 percent of Social Security benefits escape taxation, and in some cases the benefits may not be taxed at all.
  • Welfare payments such as Temporary Assistance for Needy Families (TANF) are generally not taxable. These replaced Aid to Families with Dependent Children (AFDC) payments following welfare reform in 1996.
  • Amounts received by degree candidates at qualified educational organizations from National Health Service Corps and Armed Forces Scholarship Programs for tuition, fees, books, supplies and equipment are tax-free.

Employees Benefit from Exclusions

Being an employee is the key to receiving several types of untaxed income. You can be on the receiving end of all the following benefits – potentially worth tens of thousands of dollars – and not have to pay a dime in tax on them.

  • Accident and health insurance premiums paid by an employer-sponsored plan normally don’t count as income. However, if the plan discriminates in favor of key or highly compensated employees, they will be required to include the value of the premiums in their gross income.
  • You also get a break on group term life insurance your company provides to you. The first $50,000 in coverage comes to you tax-free. It’s only the cost of coverage above that amount that is included in your income.
  • Premiums paid for long-term care insurance by an employer are also not counted as income, but the premiums cannot be paid under a cafeteria plan.
  • You can get up to $5,250 a year in tuition reimbursement from an employer without paying tax, including graduate-level courses.
  • Child or dependent care that you receive from your employer - either in the form of payments or the value of services such as on-site day care, are tax-free up to a maximum of $5,000 ($2,500 if you’re married but filing separately).
  • Up to $10,000 paid or reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.
  • Employer-provided qualified retirement planning services for employees and their spouses are excludable for employers sponsoring qualified retirement plans.
  • Meals and lodging furnished for the convenience of the employer and provided on the business premises aren’t taxable.
  • You can also normally exclude the value of employee achievement awards made on the basis of length of service or safety achievement, such as merchandise given for 10 years of service with your company. There are rules about the maximum amount that can be received, but companies generally run their awards programs so as to be tax-free for employees.
  • You can receive certain "de minimis" and "no-additional-cost" fringe benefits without any tax consequences. Free coffee or a Thanksgiving turkey would be examples of "de minimis" fringes.
  • For 2002, you can receive up to $185 a month tax-free from your employer for parking expenses and/or up to $100 per month reimbursement for van pooling expenses or transit passes.

Congress Says They’re Tax-Free

The tax code makes special provisions for certain kinds of payments that otherwise would be taxable. The following individual exclusions are available:

  • Qualified tuition plans also known as 529 plans – allow taxpayers to invest in state-run savings programs for higher education expenses. The money contributed grows tax deferred. Starting in 2002, tax-free withdrawals are permitted for eligible education expenses. Additionally, states that run these programs offer various incentives within their own tax code, such as a deduction for a contribution or exclusion for withdrawals. One of the biggest advantages of 529 plans is that any taxpayer can contribute, regardless of their income. Beginning in 2002, qualified tuition programs were expanded to include certain pre-paid tuition programs that are established by private educational institutions.
  • You can exclude up to $250,000 from the sale of a home if filing single, up to $500,000 if married and filing jointly. To qualify, the home must have been your principal residence for two out of the five years preceding the sale. Certain taxpayers who do not meet the two-year residency requirements may be entitled to a partial exclusion under newly-issued temporary regulations. These temporary regs allow these taxpayers a proportion of the exclusion of gain from the sale of a residence in cases where the residence has been used less than two years because of change in place of employment, change of health or unforeseen circumstances, such as divorce or loss of a job. The new regulations can be applied to sales made in the 2002 tax year.
  • Benefits paid to survivors of public safety officers killed in the line of duty are tax-free. To qualify, the benefits must be paid by a government plan that meets certain requirements. Public safety officers include law enforcement officers, firefighters, ambulance crews and rescue squads.
  • Distributions from Roth IRAs qualify for tax-free treatment if the Roth IRA has been established for five years. In addition to the five-year requirement, the distributions must be: made when you are age 59½ or older; made on account of disability; made to a beneficiary or estate after the owner’s death; or made to pay for qualified, first-time homebuyer expenses, of up to $10,000.
  • Distributions from educational IRAs, now called Coverdell Education Savings Accounts (ESAs), also are tax-free if they’re used to pay the "qualified educational expenses" of a "qualified beneficiary." Beginning in 2002, the types of expenses that may be paid with tax-free earnings were expanded to include elementary and secondary education expenses.
  • An individual who redeems any qualified U.S. savings bond in a year in which qualified higher education expenses are paid may exclude from income amounts received, provided certain requirements are met.

Exclusions for Special Groups

Some exclusions apply to specific groups of people:

  • The Victims of Terrorism Tax Relief Act in 2001, provided tax relief for victims of the September 11 attack, Oklahoma City federal building bombing in 1995 and anthrax attacks occurring on or after Sept. 11, 2001, and before Jan. 1, 2002. The relief applies to victims killed in the attacks and in rescue/recovery operations. It provides an income tax exemption for the year of death and the previous tax year. This means that the victims’ estates are able to receive refunds for taxes paid for 2000 and 2001. The exemption applies to income that belonged to the victim. The Act generally allows tax-free receipt of death benefit payments paid by an employer to an employee who died as a result of one of the tragedies.
  • The Act also provided estate tax relief for victims by effectively exempting the first $8.5 million of an estate from federal estate tax. This provision applies to victims identified above, as well as those who die as the result of serving in a combat zone.
  • Some military and veterans’ benefits escape federal tax. These include combat zone compensation, housing allowances, moving and storage, education, training or subsistence allowances and disability compensation.
  • Ministers can exclude their "parsonage" allowance – an allowance for renting a home or rent-free use of a church-owned home – from their gross income, but the value of the allowance is considered wages for Social Security and employment tax purposes.
  • U.S. citizens or residents receiving reparations for Nazi persecution can usually exclude those payments.
  • Foster parents don’t have to count as income the payments they receive from a state or tax-exempt organization for providing qualified foster care.

Don’t Worry, it’s Tax-Free

Finally, there are some payments that most people wouldn’t think of as income in the first place. But, if you’re the type who worries about the IRS before you pick up a dime off the sidewalk, you can rest easy, because the tax code says none of the following has to be reported:

  • Rebates you receive on a car or other merchandise.
  • Reimbursements you receive for mileage or parking when you serve as a juror (jury pay is not excludable).
  • Reimbursements for expenses you incur while working for charity.
  • Car pool reimbursement from fellow employees for commuting expenses provided you aren’t in the car pool to make a profit.
  • Prizes and awards you win and then transfer directly to a governmental unit or tax-exempt charity. This includes awards made in recognition of past accomplishments in scientific, literary, artistic, etc. fields. You must have been selected without taking any action to enter and must not be required to render substantial future services as a condition of receiving the prize or award.

About CCH INCORPORATED

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served over four generations of business professionals and their clients. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH tax and accounting destination site can be accessed at tax.cchgroup.com.

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For more information on the president's 2003 Economic Growth Tax Plan, please visit,
 
2003 Bush Tax Plan

The 2003 Whole Ball of Tax also is available in print. If you would like to request the print version, please contact:

 
Leslie Bonacum
(847) 267-7153
 
mediahelp@cch.com
 
Neil Allen
(847) 267-2179
allenn@cch.com

   


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