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Link to special CCH Tax Briefings on key topics from 2003:
CCH can assist you with stories, including interviews with CCH subject experts.
Also, the CCH Whole Ball of Tax 2004 is available in print. Please contact:
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
Neil Allen
(847) 267-2179
allenn@cch.com
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CCH Whole Ball of Tax 2004
Finding the Silver Lining: There's Tax-free Income if You Know Where to Look
(RIVERWOODS, ILL., January 2004) – As most taxpayers would like to see even
more of their income stay in their pockets and less go to the IRS, they may
be pleasantly surprised to find some progress on this front as the result of
2003 tax legislation. And, the list of tax-free items will get longer still
if one of President Bush’s major tax policy goals – the removal of tax considerations
altogether from savings and investment decisions – continues to make progress
this year, according to CCH INCORPORATED (CCH), a leading provider of tax law
information and software.
"There are many items now on the books that are not taxable as income
or are taxed at a significantly reduced rate," said George Jones, JD, CCH
federal tax analyst. "When you can exclude items from your income, you
benefit twice because you don’t pay tax on the amount excluded and having a
lower gross income may make you more eligible for other breaks in the tax code
– such as larger deductions, eligibility for certain credits or simply shielding
more of your Social Security benefits from tax."
Below, CCH identifies many of the tax-free opportunities that may be available
to you as you prepare your 2003 tax returns and plan for 2004.
Tax-free Funds
Certain funds simply escape the definition of income, reducing or limiting
the tax consequences. These include:
- Gifts, bequests, devises and inheritances, which 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 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. Property settlements in divorce, or any property transfers
between spouses, are tax-free.
- Certain amounts received for personal physical injuries or sickness – including
amounts from workers’ compensation, employer-provided accident or health insurance
and compensatory damage awards – are tax-free. Compensatory damages for lost
income are included 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 investment rather than interest.
- Interest on certain bonds issued by state or political entities escape 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.
- While dividend income isn’t completely tax-free, 2003 tax legislation is
significantly reducing tax burdens. Qualified dividends are now taxed at a
maximum rate of 15 percent, the same reduced rate now applicable to capital
gains. Those individuals in the 15- or 10-percent income tax brackets get
an even lower 5-percent dividends and capital gains rate. And for one historic
year – 2008 – the dividends and capital gains tax rate for these lower-bracket
taxpayers will be zero.
- Scholarship and fellowship grants made to degree candidates aren’t counted
as income if they’re used to pay for tuition and course-related fees, books,
supplies and equipment. This exclusion isn’t available when the payment is
tied to teaching or research work.
- 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.
- State tax refunds are excludable, except to the extent that deducting the
state tax reduced federal income tax in a prior year.
- Depending on the amount 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.
- Rebates that an automobile manufacturer pays to qualifying retail customers
are not included in gross income. The rebate reduces either the purchase price
of the vehicle in determining its basis or the rental fee.
- The value of any subsidy provided by a public utility company for the purchase
or installation of an energy conservation measure for a home is excluded from
income.
- If a lender forgives a debt that you legally owe, it is usually income to
you in the amount forgiven. However, taxpayers can exclude discharge of indebtedness
income from gross income in four situations: insolvency or bankruptcy; qualified
farm indebtedness; forgiveness of student loans in exchange for services;
and discharge of qualified real property business indebtedness.
Tax Exclusions for Employees
Employees can be on the receiving end of several types of untaxed income.
- 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.
- The first $50,000 in employer-provided group term life insurance 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 not counted
as income, but the premiums cannot be paid under a cafeteria plan.
- While sick pay is usually not excluded from income, employer-provided disability
payments can be excluded if made for the permanent bodily loss or disfigurement
of the taxpayer, his spouse or a dependent.
- You can get up to $5,250 a year in tax-free tuition reimbursement from an
employer for undergraduate or graduate 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 can be excluded.
- 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.
- Flexible spending accounts (FSAs) maintained at work from pre-tax earnings
to cover either unreimbursed medical expenses (limited only by an amount set
by the employer) or child care costs (limited by law to $5,000) during the
year may be distributed tax-free.
- The value of employee achievement awards made on the basis of length of
service or safety, such as merchandise given for employees for achieving an
accident-free workplace, are normally excluded. 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 2004, you can receive up to $195 a month tax-free from your employer
for parking expenses (up $5 from the 2003 excludable amount). For 2003 or
2004, you also can receive up to $100 per month reimbursement for van pooling
expenses or transit passes.
Finding Tax-free Savings from Education to Retirement
The tax code makes special provisions for certain kinds of payments that otherwise
would be taxable. The following individual exclusions are available:
- New for 2004, an individual who is covered by high-deductible health insurance
(generally, a $1,000 individual and $2,000 family deductible) can maintain
a health savings accounts (HSA) under which contributions are either made
pre-tax or are deductible, and distributions used to cover medical expenses
are fully tax-free. Amounts not spent may be carried over into retirement.
Expect to see a lot more on HSAs in the future.
- Qualified tuition plans (529 plans) allow taxpayers – regardless of their
income level – to invest tax-deferred dollars in state-run savings programs
for higher education expenses. Tax-free withdrawals are permitted for eligible
education expenses. Private institutions are also now allowed to offer prepaid
tuition plans from which, beginning in 2004, distributions for education are
tax-free.
- Distributions from Coverdell Education Savings Accounts are tax-free if
they’re used to pay the "qualified educational expenses" of a "qualified
beneficiary." Qualified distributions cover not only higher education
tuition and books but also elementary and secondary school fees.
- 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.
- For many homeowners, the sale of a home has become a tax-free event as you
now can exclude up to $250,000 in gain 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, for example, allowing a portion of
the exclusion where there is a change in place of employment, change of health
or unforeseen circumstances, such as divorce or loss of a job.
- Distributions from Roth IRAs that have been established for five years qualify
for tax-free treatment. These 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.
Special Exclusions for Certain Groups
Some exclusions apply to specific groups of people:
- Military Tax Relief passed in 2003 provides enhanced tax relief to persons
in the U.S. armed forces. Combat zone compensation, death benefits, housing
allowances, moving and storage, education, training or subsistence allowances
and disability compensation escape federal tax. A 2003 provision extends relief
to astronauts who die in the line of duty.
- 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.
- Ministers can exclude their "parsonage" 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 Sweat the Small Stuff, it’s Tax-Free
The tax code says none of the following must 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 won and transferred directly to a governmental unit or
tax-exempt charity, including awards made in recognition of past accomplishments
in scientific, literary, artistic and other 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 more than four generations of business professionals and
their clients. The company produces more than 700 electronic and print products
for the tax, accounting, legal, securities and small business markets. CCH is
a Wolters Kluwer company. The CCH Federal and State Tax group, CCH Tax Compliance
and Aspen Publishers Tax and Accounting group comprise the new Wolters Kluwer
Tax and Accounting unit. The unit’s web site can be accessed at tax.cchgroup.com.
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