Federal Income Tax
I. Introduction
1. Paying Tax:
A. Gross Income (§61)
+ What is GI (§§71 – 86)
– What is not GI (§§101-137)
– Some business and investment expenses (§62)
(basically costs of earning income, alimony)
B. Adjusted Gross Income
– Standard Deduction or
– Itemized deductions
a. Business
b. Investment
c. Personal (Casualty, Medical, Interest, Real Estate Tax, Charitable Contributions)
– Personal Exemptions = $3,000 each
C. Taxable Income (§63)
Multiply by progressive tax rates (§1(a)-(d))
– The rate applicable to the last dollar of income earned by the taxpayer is the taxpayer’s marginal rate
– The marginal rate is relevant for purposes of tax planning and for understanding incentive effects.
D. Credits
E. Capital Gains Tax
II. Characteristics of Income
Gross income §61
(§ 61) All income from whatever source derived (unless there is a specific code exclusion).
(§ 61(a)(2)) Includes gross income derived from business.
(§ 61(a)(3)) Includes realized gains from dealing in property.
(§ 1001a ) Includes the amount realized in sale or exchange.
1. Realized gains are included in gross income only if the gain is also recognized.
A. A realized gain is not recognized if a non-recognition rule in the Code applies to the sale or exchange.
· Non-recognition rules generally apply to transactions in which the taxpayer has exchanged property but has continued her investment in another form.
· Example: “like-kind exchange” non-recognition rule (§1031).
2. Haig and Simons: Income equals consumption plus the net change in wealth.
(§1.61-2(d)) For services paid in property, FMV of property used as compensation.
Non-cash Compensation: Fringe Benefits
(§61a(1)) Gross income includes “compensation for services,” including “fringe benefits.”
(1.61-2d(1)) “If services are paid for in property, the FMV of the property taken in payment must be included in income as compensation.”
– But . . . the Code contains a number of provisions excluding specific non-cash fringe benefits from GI.
Employer-Provided Meals and Lodging
(§119) Allows employees to exclude the value of employer-provided meals and lodging from income.
Meals
(§119(a)) Excludes from income the value of meals if:
a) Employer furnishes meals to an employee, her spouse, or her dependants
b) Meals
works.
(§132(b)(2)) 2. Benefit constitutes a service that imposes no substantial additional cost on employer.
Employee Discounts
(§132(1)(a)) 1. Employee can exclude a discount up to the employer’s gross profit percentage.
(§132(1)(b)) 2. Employee can exclude up to a 20% discount on the value of services from the price at which the services are offered to customers.
(§132(c)(4)) Exclusion limited to goods or services sold in the line of business in which the employee provides services.
(§132(j)(1)) Conditioned upon compliance with a nondiscrimination provision
Working Condition Fringe Benefit
(§132(d)) Items deductible as business expenses under §162 or §167 if paid directly by employee.
– Includes ordinary and necessary costs for one’s employment.
De Minimis Fringe Benefit
(§132(e)(1)) Any property or service with a value small that it makes accounting for it unreasonable or administratively impracticable.
(Reg 1.132-6(e)) Examples:
a. Occasional parties
b. Occasional theater or sporting event tickets
c. Coffee, doughnuts, soft drinks