§ Federal Income Tax Outline
§ Spring 2010
§ Rutgers School of Law Newark
§ Professor Blum
§ Tax Liability Depends on 2 Variables
o 1. Filing Status
§ §1(a) – Married filing jointly (§7703(a)(1), as long as you marry before the end of the year, you can file as married filing jointly)
· When you file a joint return, you are jointly and severally liable, for any tax fraud, omissions.
o §1615, If Innocent Spouse had no way of knowing other spouse was committing fraud, then they will not be held liable.
§ §1(b) – Head of household
§ §1(c) – Unmarried
§ §1(d) – Married filing Seperately
o 2. How to Calculate Taxable Income
§ Examples of Taxes on Taxable Income
· Social Security – 6.2% for first $106,000 in wages (employer must match this amount, for their employee)
· Medicare – 1.45%, unlimited wages (employer must match this amount, for their employee)
· Effective Rate – the average of the rate applied to the total taxable income
· Marginal Rate – the rate that would apply to the last $ earned.
§ Determining Taxable Income
· Income = taxpayer’s consumption + any increase in the taxpayer’s net worth.
· 1. §61(a) – Start With Gross Income
· 2. §62(a) – Subtract from that Above the Line Deductions
o A. Trade and Business Deductions
o B. Trade and Business Deductions of Employers
o C. Losses from Sale or Exchange of Property
o D. Deduction attributable to Rents and Royalties
o E. etc… (Retirement Savings, Alimony, Interest on Educational Loans, Higher Education Expenses, Costs involving Discrimination Suits.)
· 3. Gross income – Above the line deductions = Adjusted Gross Income
· 4. Adjusted Gross Income – (Personal Exemptions) – (Deductions) = TAXABLE INCOME
o §151(b) Personal Exemption
§ §151(d), if there’s a married couple filing jointly, it’s $2,000 per person, so $4,000 personal exemption.
§ §151(d)(3), threshold amounts for deductions, there’s a phaseout after a certain amount.
o §63 Deductions
§ Standard Deduction
§ Itemized Deduction (there are two types)
· 1. Regular Deductions
· 2. Miscellaneous Deductions
o §67(b) tells are those deductions which are not miscellaneous itemized deductions and are therefore regular deductions.
· §67(a), Itemized Deductions are subject to a 2% Haircut. That means, only those deductions, that are more than 2% of Adjusted Gross Income, are subject deduction.
o For example, if the Adjusted Gross Income is $100,000. 2% of that is $2,000, you can
§ The Meaning of Gross Income
o §61 General Definition of everything that’s included in gross income.
§ A. Compensation for services, including fees, commissions, fringe benefits, and similar items;
§ B. Gross Income derived from Business;
§ C. Gains derived from dealings in property;
§ D. Interest;
§ E. Rents;
§ F. Royalties;
§ G. Dividends;
§ H. Alimony, and maintenance payments
§ I. Annuities;
§ J. Income from Life Insurance
§ K. Income from discharge of indebtedness
§ L. Share of partnership income
§ M. Income from a decedent, (this does not include inheritance)
§ N. Income from interest in an estate or trust
o Eisner v Macomber (1920) Income may be defined as the realized gain derived from Capital, from Labor, or both combined.
§ Why do we require realization of income before it is taxed?
· A. We want to ensure the taxpayer has adequate resources to pay the tax, and realizing the gain can ensure that will be.
· B. Until it is realized, the amount of
o all employees, with no business purpose, then that would be income for the employees.
o §61(a) General Rule, Gross Income Includes Fringe Benefits
§ §132 however, these Fringe Benefits will not be seen as Gross Income. (things employers can give you that you will not be taxed on as income)
· (1) no-additional-cost service
o where the employer “ incurs so substantial additional costs, including forgone revenue, in providing such service to the employee”. Employee discounts for vacant hotel rooms, the room was going to go empty anyway, so employer is not losing money, and therefore it is not a taxable fringe benefit.
o Reg 1.132-2(a)(2) provides additional examples
o Reg 1.132-4(a)(1)(i) this no tax fringe is only applicable to the line of business that employee is in, so for example if the employee works in the companies hotel division, that’s the fringe he can get, he cannot get fringe benefits from the companies military subsidiary.
· (2) qualified employee discount
o If it’s property, the discount cannot exceed the cost of the good itself.
o If it’s a service, you can discount it up to 20% of what it is offered to regular customers as.
o Reg 1.132-3(e) provides additional explanation
Reg 1.132-4(a)(1)(i) this no tax fringe is only applicable to the line of business that employee is in, so for example if the employee works in the companies hotel division, that’s the fringe he