Part A: What is Income?
I. Gross Income
a. General Rule -§61: Gross income is income from whatever source derived.
i. §§71-90: list of what is included in income
ii. §§101-149: list of what is NOT included in income
1. These are NOT exclusive lists
b. Above the Line Deductions – §62: this section provides a list of things which are deducted above the line to reach Adjusted Gross Income → these items may be deducted even if taxpayer elects to take standard deduction.
i. Items eligible for Above the line deduction are:
1. Trade and Business Deductions – §162. (See §212 for individuals)
2. Losses from Sale/Exchange of Property §161 and following
3. Deductions attributable to rents/royalties
4. Certain Deductions of life tenants/income beneficiaries
5. Pension, profit-sharing and annuity plans of self-employed individuals
6. Retirement savings
8. Moving Expenses
9. Interest on Education Loans
10. Higher Education Expenses
11. Health Savings Accounts
12. Costs involving Discrimination Suits
c. Below the Line Deductions/Standard Deduction – §63: After calculating AGI, taxpayer then subtracts either the standardized deduction or itemized deductions. This is basically the default for deductions – if not enumerated in §62, and it is a deduction, then would be a below the line deduction under §63.
i. NOTE: for below the line deductions then need to distinguish between miscellaneous and Non-miscellaneous. (see below, discussion of the relevance under §67)
ii. Miscellaneous: anything not listed as non-miscellaneous, such as unreimbursed business expenses, and investment expenses under §212
iii. Non-Miscellaneous (§67(b): generally includes things like interest, taxes, casualty and wagering losses, charitable donations, medical expenses, and several others.
d. Calculating Federal Income Tax Liability
i. Calculate gross income (§61)
ii. Subtract “above the line” deductions (enumerated in §62)
1. The resulting figure (Gross income – Above the line deductions (which are the same as “Exclusions”)) is Adjusted Gross Income (§62)
iii. Subtract “below the line deductions.” Below the line deductions are the sum of personal exemptions (§§151 and 152) and either a standard deduction (§63) or itemized deductions (start with §§67)
1. The resulting figu
Pretax – (Income Pretax x Tax Rate)
III. Fringe Benefits
a. Definition: benefits transferred to employee by employer. There is essentially a spectrum
i. Benefits which are clearly work related → not included in GI (this would be things like pencils etc…)
ii. Benefits which are very unrelated to work → these may be seen as compensation
iii. Benefits which are somewhere in between → these are the difficult cases in terms of determining whether or not to include in GI.
b. Meals and Lodging
i. §119(a): meals and lodging provided to employee, his spouse, and his dependents, by or on behalf of employer and for the convenience of the employer may be excluded from employee’s income if
1. in the case of meals → meals furnished on the business premises of the employer
2. In the case of lodging → employee is required to accept such lodging on the business premises of his employer as a condition of employment.