Federal Income Tax Shaheen Fall 2014
v Tax Rate assumptions for class problem and EXAM (UNLESS otherwise indicated):
o 35% for ordinary income and short term capital gain (STCG),
o 28% for long term capital gain (LTCG) on collectibles
o 25% for unrecaptured depreciation on real property held for more than one year
o 15% on remaining LTCGs
**When using an asset for a fraction of business purpose, you can deduct that portion which is used for the business purpose (i.e. the sample exam question).
TERMS AND DEFINITIONS
· Tax Base: whatever we are imposing the tax on
o Important b/c the rules are in relation to the item being taxed.
o EX. the Tax Base for income tax, is income.
· Income Tax: tax on income
o Important b/c
o How do we determine tax on income?
§ Determine income, then multiply income by the tax rate.
· Taxable income “times” tax rate
· Income: any increase in wealth
o i.e. compensation, dividend, sell property for gain
· Taxable Income:
o Income “minus” deductions
· Gross Income: All income from whatever source derived
o Adjusted Gross Income(AGI): gross income minus certain expense, typically business expenses
§ Only for individuals
o Normative Deductions:
· Income “In-Kind” = non-cash income
o Ex. receiving property for services rendered
· Deductions: stuff you subtract from gross income
o i.e. expenses
· Itemized Deductions:
· Standard Deductions: flat amount that varies with marital status, that taxpayers may deduct regardless of whether or not you incurred any underlying expense to justify it.
· Exemption: normally taxable, but there is an exception (for policy objectives)
o Note: different from deductions
· Excluded: not considered income to begin with
· Gain: when the increase in value of an asset is realized
o Price of property sold “minus” price previously paid
§ Amount Realized: price property is sold for
§ Basis: the cost of that property, or what you paid for it
§ SO……….. Amount Realized “minus” Basis
· Appreciation: when the value of an asset increases
· Loss: excess of Basis over the Amount Realized
· Basis Recovery: money received to balance against cost of property
· Adjusted Basis: Basis increase, or decrease, to reflect subsequent expenditures attributable to the asset
o EX. A car bought for $1000, then improve car for $200
§ Hence, Basis goes from $1000 to $1200
· Realization: capture the appreciation or depreciation
o Allowance and disallowance of certain deductions
o Business Expenses???? Expenses created in the production of investment income
o Generally, personal expenses are not deductible.
§ Except, interest of mortgage payments.
· Itemized Deductions:
· What could be income?
o What is Income?
§ Income is
· OR — Income = saving + consumption
o Hags Simons Formula? For defining income.
o Expenses incurred in the production of income, can NOT be deducted immediately in the year incurred or accrued, and are capitalized.
§ Meaning they are added to the taxpayers….????
· Depreciation: (tangible property) recovery of capital expenditures over ……??
o Amortization: (intangible property)
· The TIME-VALUE of Money
· Capital Gains: gains that result from….
o Long-term Capital Gain:
· Capital Loses:
· Progressive Tax Rate:
o Tax Brackets
· Flat Tax Rate:
· Marginal Tax Rate: the rate that applies to additional dollars of taxable income, and therefore is the rate that affects tax decisions at the margin.
o Marginal Rate tells you how much an additional dollar of income or deduction will change your tax liability.
o (p. 24) for Example
· Average Tax Rate: the total tax liability divided by income.
· Credit: Dollar for dollar reduction on your tax liability
· Deduction: reduces the income that will taxed
o Tax Benefit:
· Tax Liability:
· Refundable Credit:
· Taxable Year:
o Corporations can generally choose a different start and stop of their taxable year, as long as it’s a year.
· Two Methods of ACCOUNTING (p. 26)
o Cash Method (we only deal with Cash Method, b/c the course is on Individual Fed Inc tax)
§ When you actually receive or pay it
o Accrued Method
§ When you are entitled to income or expense
GROSS INCOME = (WHAT IS INCOME?)
· Section 1 imposes an income tax on taxable income
· Section 63 tells us what taxable income is
o Adjusted Gross Income
· Section 61 tells us what Gross Income is
· Income = consumption + saving
· NOTE = For “de minimis fringe” it must be “OCCASSIONAL BASIS”
o Regulation 132-6(d)(2)(A)
o IS it income
money or property is NOT considered to be an accession to wealth and thus is NOT income (i.e. LOANS)
Ø EXCEPTION: money or property that is obtained illegally must be reported in gross income despite the taxpayer’s legal obligation to restore the funds.
· James v. US = IF a wrongdoer included illegal receipts in income AND subsequently gave Restitution to his victim, he would be entitled to a DEDUCTION in the year of repayment.
E. IMPUTED INCOME
a. Rev. Rul. 79-24 = When two Individuals Trade SERVICES, each has Gross Income equal to the FMV of the Services RECEIVED.
i. Bartered service provides income to both participants
ii. EX. An artist trades a painting to a landlord for living in one of his apartments. (gross income equal to the FMV of the services received)
b. Imputed Income = the benefits derived from labor on one’s own behalf or the benefits from the ownership of property
i. Usually – NOT Gross Income.
ii. Most Common form of IMPUTED INCOME from property is the imputed rental value of owner-occupied homes.
c. Rev. Rul. 60-45-1(a)(4) Exchange of similar services on NON-commercial basis is NOT income for tax purposes (i.e. exchange of babysitting)
d. 1.61-2(d). If services are paid for in exchange for other services, the FMV of such other services taken in payment must be Included in Income as compensation.
i. If the services are rendered at a stipulated price, such price will be presumed to be the FMV of the compensation received in the absence of evidence to the contrary.
Fringe Benefits – (§132) –
· NON-salary “perks” are referred to as Fringe Benefits.
o Describes “IN-KIND” BENEFITS transferred to an employee.
A. The Major Exclusions under §132
· §132 deals with many BUT NOT all excluded fringe benefits.
· Establishes 7 categories of excludable fringes, but focus on FOUR:
2) qualified employee discounts
3) working condition fringes
4) de minimis fringes