Federal Income Tax Outline

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

· Deductions:

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.

· Capitalization:

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?)

CLASS NOTES

· 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)

· ANALYSIS

o IS it income