©2011 CCH. All Rights Reserved. Chapter 5
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Chapter 5
Gross Income—Exclusions
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, 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 benefi ciary are not included in gross income if such amounts are paid by reason of death of the insured. It is immaterial who the benefi ciary 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 Benefi t 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 benefi ts or