Legal Definitions - exclusion

In legal terms, an exclusion refers to something that is specifically left out or not included, often to limit scope, liability, or taxation. The meaning of "exclusion" can vary significantly depending on the area of law.

• In Tax Law: An exclusion refers to an item of income or a type of transaction that is specifically not counted when calculating a person's or entity's taxable income or gift tax obligations.

  • General Income Exclusion: Certain types of income are not included in your "gross income" for tax purposes, meaning you don't pay tax on them.

    • Example 1: A university student receives a scholarship that covers their tuition and required fees. The portion of the scholarship used for these educational expenses is typically an exclusion from their taxable income.

      Explanation: Even though the scholarship is a financial benefit, tax law specifically excludes it from the student's gross income, so they do not owe income tax on that amount.

    • Example 2: An individual receives a gift of $50,000 from a wealthy relative. Under U.S. tax law, the recipient of a gift generally does not have to pay income tax on the gift. This is an exclusion for the recipient.

      Explanation: While the relative who gave the gift might have gift tax implications, the person receiving the gift is not required to report it as income, as it is excluded from their taxable income.

  • Annual Gift Tax Exclusion: This refers to the specific amount of money or value of property that an individual can give to another person each year without incurring gift tax or needing to file a gift tax return.

    • Example 1: A parent gives their child $18,000 for their birthday in a single calendar year. If the annual gift tax exclusion limit for that year is $18,000, this gift falls entirely within the annual gift tax exclusion.

      Explanation: Because the gift amount is at or below the annual exclusion limit, the parent does not owe gift tax on this amount and does not need to report it to the IRS.

    • Example 2: A married couple jointly gifts $36,000 to their niece to help her buy a car. If the annual gift tax exclusion for an individual is $18,000, then for a married couple making a joint gift, they can exclude up to $36,000 per recipient (each spouse using their $18,000 exclusion). This entire gift would be covered by the annual gift tax exclusion.

      Explanation: By combining their individual annual exclusions, the couple can give a larger sum without triggering gift tax obligations or reporting requirements.

• In Evidence Law: An exclusion refers to a trial judge's decision to prevent certain evidence from being presented to the jury or considered by the court during a trial.

  • Example 1: During a criminal trial, the defense attorney argues that a confession obtained from their client was coerced by police. After hearing arguments, the judge rules that the confession cannot be used as evidence because it was not given voluntarily. This is an exclusion of evidence.

    Explanation: The judge has determined that the confession, despite its potential relevance, was obtained improperly and therefore cannot be presented to the jury.

  • Example 2: In a civil lawsuit, one party tries to introduce a document that is clearly hearsay (an out-of-court statement offered to prove the truth of the matter asserted). The opposing attorney objects, and the judge agrees, preventing the document from being shown to the jury. This is an exclusion.

    Explanation: The judge's ruling keeps the hearsay evidence out of the trial, ensuring that only admissible evidence is considered by the trier of fact.

• In Insurance Law: An exclusion is a specific provision within an insurance policy that identifies certain events, conditions, or types of damage that are not covered by the policy.

  • Example 1: A homeowner's insurance policy contains a "flood exclusion," stating that it will not cover damage to the home caused by flooding. After a severe storm, the homeowner's basement is inundated with water from a nearby overflowing river.

    Explanation: Because the policy specifically excludes flood damage, the insurance company will deny the claim, and the homeowner will not receive compensation for the water damage under this policy.

  • Example 2: A small business owner has a commercial general liability (CGL) policy that includes an "employee injury exclusion." An employee is injured on the job due to faulty equipment and sues the business owner for negligence.

    Explanation: The CGL policy's exclusion means it will not cover the costs associated with the employee's injury claim, as such injuries are typically covered by workers' compensation insurance, not general liability.

  • Example 3: An auto insurance policy has a "racing exclusion." The policyholder decides to participate in an amateur drag race and crashes their car, causing significant damage. When they file a claim, the insurance company denies it.

    Explanation: The policy explicitly states that damage occurring during racing events is not covered, making the policyholder responsible for the repair costs.