Question

The following scenarios deal with various general fringe benefits. From the dropdown list, select the correct amount which will be excluded from or included in gross income.

a. Jim is an employee of Fast Tax Prep, Inc. All employees of Fast Tax Prep are eligible for a 50% discount on the preparation of their income tax returns. Jim's tax return preparation would normally have cost $300, but he paid only $150 because of the discount. $60 excluded from gross income b. Mabel is a lawyer for a large law firm, Winken, Blinken, and Nod. Winken pays Mabel's annual license renewal fee of $400 and her $300 annual dues to the American Lawyers' Association. Mabel also takes advantage of Winken's educational assistance plan and receives payment for the $6,000 cost of taking two night school courses in consumer law. $5,950 excluded from gross income c. Lori Company runs a nursery near its offices. Employees are allowed to leave their children at the nursery free of charge during working hours. Nonemployees may also use the facility at a cost of $300 per month per child. Dolph is an employee of Lori with two children who stay at Lori's facility while Dolph is at work. $2,200 included in gross income d. At the sporting goods store where Melissa works, her employer lets all employees buy goods at a 40% discount. Melissa purchases for $300 camping and fishing supplies that retail for $500. The goods had cost her employer $250. All is excluded from gross income

Numbers are all correct answers. Please explain how to calculate these answers. Thank you!

Answer 1

The reasons for the answers specified in the question have been adequately explained below. Please let me know in case any further queries.

Answer :

a. Because the discount is available to all employees, it qualifies for exclusion. However, the exclusion for discounts on services is limited to 20%. Thus, only $60 ($300 x 20%) of the $150 discount is excluded from gross income. The additional $90 discount is included in Jim's gross income.

b. The payment of Mabel's licensing fees and association membership by Winken is excluded as a working condition fringe. That is, Mabel would have been able to deduct these costs as an employee business expense had she paid for them herself. Employees can exclude up to $5,250 of reimbursements from qualified educational assistance plans that reimburse an employee for the cost of coursework. Mabel must include $750 ($6,000 - $5,250) in gross income. However, depending on her adjusted gross income she can deduct the cost either as a deduction for adjusted gross income or as a miscellaneous itemized deduction. Alternatively, she might be able take a Lifetime Learning Tax credit on the $750 she reported as income.

c. The value of employer-provided day care is excluded up to a maximum of $5,000. In this case, the value received is $7,200 ($300 x 2 x 12) and Dolph is taxed on the $2,200 ($7,200 - $5,000) excess.

d. This is a qualified employee discount and is not taxable to Melissa. The discount is less than the employer's gross profit percentage (50%) and therefore, is not included in Melissa's gross income.