Four Types of Income Exclusions
We are all interested in saving taxes. Through effective tax planning you can preserve more of your wealth (or wealth that passes to your heirs) through eliminating income taxes on the gain. There are four types of income that may be excluded permanently.
Income Exclusion #1 – Excluding Gain Realized Appreciation of Personal Residence
This tax rule makes home ownership a must. If you sell your home at a gain that was your primary residence 2 of the past 5 years, you can exclude up to $500,000(jointly owned) of the residence gain. If the gain is owned by only one individual the gain is limited to $250,000. The gain on sale of residence can only be used only once every five years. For more information on this rule please reference IRS Publication 523 http://www.irs.gov/pub/irs-pdf/p523.pdf
Income Exclusion #2 – Excluding Gain on Community Renewal Property
If you purchase a piece of property in a community renewal area and then sell the property at a gain, you will pay no tax on the capital gain. Any portion of the gain attributable to periods before January 1, 2002 and after December 31, 2009 will not qualify. There are 40 authorized community renewal area across the United States. A community renewal area is designated by the Secretary of Housing and Urban Development and Agriculture. The community renewal areas are not necessarily in low income areas. For example, in San Francisco, the community renewal area takes in most of San Francisco’s financial district. For more information on the 40 community renewal areas please visit the United States Housing and Urban Development website at http://www.hud.gov/offices/cpd/economicdevelopment/programs/rc/index.cfm.
Income Exclusion #3 – Excluding Gain on Property Due to Death
When a person dies, all the property that they own is revalued to the market value as of the date of death. This means if the decedent owned stock worth $1 million as of the date of death, new cost bases for the stock will be $1 million. The surviving spouse and/or heirs disregard the actual cost of stock. This special rule should encourage individuals to hold onto highly appreciate assets and let the transfer of assets occur after the date of death. Thus, Uncle Sam will not capture the income tax on appreciated property. This special property revaluation does not apply to stock or assets held in an IRA account or Qualified Pension.
Income Exclusion #4 – Excluding Gain on Life Insurance Proceeds
Life Insurance proceeds received by an individual are excluded from income tax unless the policy was turned over to you for a price. This same rule applies even if the proceeds were turned over under an accident or health insurance policy or endowment contract. For more information on excluding Gain on Life Insurance Proceeds see IRS Publication 554 http://www.irs.gov/pub/irs-pdf/p554.pdf.
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ABOUT THE AUTHOR
Alan L. Olsen, CPA, is the managing partner at Greenstein Rogoff Olsen & Co., a top Bay Area CPA firm with offices in Fremont and Palo Alto, CA. A specialist in income tax planning, he frequently lectures and writes articles on tax issues for professional organizations and community groups. He received a BS in Accounting from Brigham Young University and an MBA in Taxation from California State University at Hayward. His website has tax tools and accounting articles: http://www.groco.com