Select Page

Federal Income Tax
Rutgers University, Newark School of Law
Blum, Cynthia A.

FEDERAL INCOME TAX

GENERALLY

I. Applicable Tax Rates

A. Married filing jointly – §1(a)
1. Join the incomes together
2. §1(f)(8) eliminates the marriage penalty for the 15% income – this rule ends in 2011

B. Head of household – §1(b)

C. Unmarried & not head of household – §1(c)

D. Married filing separately – §1(d)
1. All make different tax rates

E. Progressive Tax
1. Effective tax rate: the actual percentage of your income you pay
2. Marginal Tax Rate: the rate of tax applicable to the last dollar earned

II. GROSS INCOME – (deductions in §62(a) & §151) = adjusted gross income, then either:

A. Itemized deductions or
1. Subject to limitations
a. 2% haircut – §67 — subtract 2% of your total income from your deductions
b. Phase-out – §68 — over $100K, you start subtracting percentages of your income to phase out your deductions (AGI in excess of $100K must reduce amnt of itemized deductions by 3% of such excess)
i. 4 itemized deductions spared from §68 phase-out à §68(c)

B. Standard deduction – §63(c)

III. §62 deductions:

A. Trade & business deductions

B. Reimbursed expenses of employees

C. Lawsuits for discrimination or whistleblowing

D. Moving expenses, clean-air cars, alimony

E. Losses from sale of property

IV. Personal Exemptions – §151

A. Exemptions for yourself, your spouse, or your dependants

B. Qualifying relative 5 part test:
1. 1 of the 7 listed relationships to the person filing
2. Taxpayer must provide over half of the relative’s support
3. Gross income must be less than the exemption amnt
4. Resident of US, Mexico or Canada
5. The dependant doesn’t file a joint tax return w/ a spouse

C. Qualifying children 5 part test:
1. Must be the taxpayer’s child or sibling
2. Under the age of 19 or 24 & a full time student
3. Resident of US, Mexico or Canada
4. Lives for at least half the yr w/ taxpayer
5. Must not have provided over half of their own support
V. Credits

A. Money deducted dollar for dollar from taxes
1. Household & dependent care credit
a. Percentage of child-care costs
2. Income taxes withheld from wages

















































GROSS INCOME

I. §61: All Income From Any Source Derived

A. Hague Simons — consumption + savings = gross income

B. Eisner v. Macomber (owned stock, and company gave a 50% stock dividend – no income actually was earned since the proportion of stocks was the same)

1. “Income may be defined as the gain derived from capital, from labor, or from both combined”

2. Any enrichment is taxable; accession to wealth (Commissioner v. Glenshaw Glass – money won for punitive damages was taxable, even though not earned)

II. Realization

A. Income is not taxable until realized

B. Taxpayer must receive some right or asset distinct from the property to realize it

III. Non-Cash Benefits (in-kind)

A. If a service or property is given in an exchange, the FMV of that property must be included as income

B. Old Colony Trust v. Commissioner (if an employer pays a tax, that payment must be included in gross income)

C. Fringe Benefits are Usually Gross Income

1. §132 exclusions
a. If the service is of no additional cost to the employer (empty room in hotel)
b. Must be available to a wide cross range of employees, not just the higher-up 1s
c. Must be in the same line of business
d. Qualified employee discounts
i. Up to 20% off for services
ii. Up to the gross profit percentage for tangible
§ Look at the percentage of the normal price that’s profit – employers can offer that much of a percentage off
iii. Discounts are never excluded on investment or real property
iv. Working condition fringe (parking garage)
v. De minimus
vi. Qualified transportation fringe
§ Transportation in a commuter highway vehicle
§ Transit pass
§ Qualified parking
§ Not more than $100-175 a month
vii. Moving expense reimbursement
viii. Gyms on –premise
§ Must be provided to lower & higher employees alike

2. De minimus fringe – fringe benefit so small it is not worth accounting for

3. Stocks
a. Have to put the yr you receive from employer UNLESS:
i. It is not transferable AND
ii. Has a substantial risk of forfeiture (if you quit before 65, they will be taken – don’t put as income until 65)
b. Prizes & awards – §74(a) — Prizes & awards are gross income
D. Trips

1. 2 requirements for trips to be gross income:
a. Must be an economic gain
b. The gain must benefit the taxpayer personally

2. If the trip is paid for the benefit of the employer, not gross income. Look at:
a. If the person HAD to go
b. Whether the employer or the employee benefit

n in value during the decedent’s life, heirs acquire a stepped-up basis of FMV
ii. Stepped-down basis – when property has declined   in value, heirs    get a stepped-down   basis of FMV

c. After 2010, §1022 makes the heir’s basis the decedent’s basis or the FMV, whichever is lower

d. No giving gifts to ppl w/in 3 yrs of their death under the new law
i. **Sunset Rule – §1014 is going to expire in 2010 & be replaced w/ a modified carryover basis rule, but only until the end of 2010

V. Loans & Cancellation of Debt

A. Loans

1. A loan is not GI to the borrower (he’s obliged to pay pack the loan, so no gain in wealth)

2. The lender may not deduct the amnt of the loan
a. He is going to get the money back
b. It is transformed from money to a promise, both assets

3. The amnt paid to satisfy the loan is not deductible by the borrower

4. Interest paid to the lender is included in the lender’s gross income
a. §61(a)(4)
b. The interest is compensation for the use of the lender’s money
c. If there is inflation from foreign money, will be income

5. Interest paid to the lender MAY be deductible by the borrower
a. §163
b. Interest paid in connection w/ the borrower’s business activity will be deductible

B. Cancellation of debt

1. Cancelled debts are income to the borrower
a. §61(a)(12)
b. Old Colony Trust (boss paid off the employee’s income tax – the paying off the debt to the gov’t was income to the employee)
c. Kirby Lumber (lumber put their own bonds on the market, then bought the bonds back for less money = cancellation of debt & gross income)

2. Contested liability: if a taxpayer in good faith disputes the amnt of a debt, the settlement amnt of the debt would be the taxable amnt

3. If the taxpayer is insolvent & the debt is cancelled, not gross income

4. Check §108 for insolvent or bankrupt cancelled debts & their reduction of other tax assets