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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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