Contents
I. Introduction. 5
A. Overview of the Tax System in the United States. 5
B. Overview of Federal Income Tax System.. 5
C. Marginal and Average Tax Rates. 7
1. Marginal Tax Rates. 7
2. Average Tax Rates. 7
D. Progressivity of Taxes. 7
E. Inflation Bracket Creep and Indexation. 8
F. Tax Avoidance. 8
1. Income Shifting. 8
2. Deferral9
3. Conversion. 10
G. Principles of Tax Policy Analysis. 11
II. Some Characteristics of Income. 11
A. What is Gross Income. 11
B. Non-cash / In-kind Benefits. 12
1. Meals and Lodging. 13
2. Fringe Benefits. 13
3. Life Insurance. 13
4. Healthcare. 13
C. Imputed Income. 15
D. Windfalls and Gifts. 15
1. Gifts and Inheritances. 15
2. Other Transfers. 16
E. Recovery of Capital17
1. Annuities. 17
2. Life Insurance. 17
F. Income from Discharge of Indebtedness. 18
1. Loans. 18
G. Interest on State and Local Bonds. 19
III. Gains and Loss from the Sale or Disposition of Property, part 1. 19
A. Realization. 19
1. Depreciation. 20
2. Realization Requirement. 20
3. Losses. 20
B. Recognition. 21
1. Express Non-Recognition Provisions. 21
C. Special Rules for Gifts and Bequests. 22
1. Gifts. 22
2. Bequests. 22
D. Transactions Involving Loans. 23
IV. Gains and Loss from the Sale or Disposition of Property, part 2. 23
A. Property Held “Primarily for Sale to Customers”. 25
B. Transactions Related to the Taxpayer’s Regular Business. 25
C. Substitutes for Ordinary Income. 25
D. Fragmentation versus Unification of Collective Assets. 26
E. Correlation with Prior Related Transaction. 26
F. Requirement of a Sale or Exchange. 27
V. Deductions and Credits. 27
A. Preventing Tax Arbitrage. 28
B. Exceptions to Annual Taxation. 28
1. Capitalization. 28
2. Net Operating Losses. 29
C. Matching Income and Deductions across Activities. 29
D. Depreciation. 30
E. Miscellaneous Personal Deductions and Credits. 31
1. Charitable Deductions. 31
2. Interest. 31
3. Taxes. 31
4. Earned Income Credit. 31
5. Children and Childcare. 31
6. New Credits from Stimulus Program.. 31
Tax Provisions
§ 1(h)………………………………………………………………………………………………………………………………………………………………………….. 25
§ 1001……………………………………………………………………………………………………………………………………………………………… 20, 21, 23
§ 1011…………………………………………………………………………………………………………………………………………………………………… 20, 22
§ 1012………………………………………………………………………………………………………………………………………………………………………… 20
§ 1014………………………………………………………………………………………………………………………………………………………………………… 23
§ 1015………………………………………………………………………………………………………………………………………………………………………… 23
§ 1016………………………………………………………………………………………………………………………………………………………………………… 20
§ 1017………………………………………………………………………………………………………………………………………………………………………… 20
§ 1019………………………………………………………………………………………………………………………………………………………………………… 20
§ 102………………………………………………………………………………………………………………………………………………………………………….. 17
§ 1022………………………………………………………………………………………………………………………………………………………………………… 23
§ 103………………………………………………………………………………………………………………………………………………………………………….. 20
§ 1031…………………………………………………………………………………………………………………………………………………………………… 21, 22
§ 1033………………………………………………………………………………………………………………………………………………………………………… 22
§ 1041………………………………………………………………………………………………………………………………………………………………………… 17
§ 105…………………………………………………………………………………………………………………………………………………………………….. 14, 15
§ 106………………………………………………………………………………………………………………………………………………………………………….. 14
§ 1060………………………………………………………………………………………………………………………………………………………………………… 27
§ 108…………………………………………………………………………………………………………………………………………………………………….. 19, 24
§ 1091………………………………………………………………………………………………………………………………………………………………………… 21
§ 117………………………………………………………………………………………………………………………………………………………………………….. 17
§ 119………………………………………………………………………………………………………………………………………………………………………….. 14
§ 121………………………………………………………………………………………………………………………………………………………………………….. 20
§ 1211………………………………………………………………………………………………………………………………………………………………………… 24
§ 1221…………………………………………………………………………………………………………………………………………………………………… 25, 26
§ 1222………………………………………………………………………………………………………………………………………………………………………… 25
§ 1231………………………………………………………………………………………………………………………………………………………………………… 25
§ 1236………………………………………………………………………………………………………………………………………………………………………… 26
§ 125………………………………………………………………………………………………………………………………………………………………………….. 15
§ 132………………………………………………………………………………………………………………………………………………………………………….. 14
§ 1471………………………………………………………………………………………………………………………………………………………………………… 26
§ 151………………………………………………………………………………………………………………………………………………………………………….. 28
§ 162(l)……………………………………………………………………………………………………………………………………………………………………….. 15
§ 163……………………………………………………………………………………………………………………………………………………………….. 29, 31, 32
§ 164………………………………………………………………………………………………………………………………………………………………………….. 32
§ 165…………………………………………………………………………………………………………………………………………………………………….. 22, 24
§ 167…………………………………………………………………………………………………………………………………………………………………….. 20, 31
§ 168………………………………………………………………………………………………………………………………………………………………………….. 31
§ 170………………………………………………………………………………………………………………………………………………………………………….. 32
§ 172………………………………………………………………………………………………………………………………………………………………………….. 30
§ 21……………………………………………………………………………………………………………………………………………………………………………. 28
§ 213………………………………………………………………………………………………………………………………………………………………………….. 15
§ 263………………………………………………………………………………………………………………………………………………………………………….. 29
§ 264………………………………………………………………………………………………………………………………………………………………………….. 29
§ 265………………………………………………………………………………………………………………………………………………………………………….. 29
§ 403………………………………………………………………………………………………………………………………………………………………………….. 30
§ 404………………………………………………………………………………………………………………………………………………………………………….. 30
§ 469………………………………………………………………………………………………………………………………………………………………………….. 31
§ 501(c)………………………………………………………………………………………………………………………………………………………………………. 32
§ 61……………………………………………………………………………………………………………………………………………………………………………. 13
§ 62…………………………………………………………………………………………….
ductions
§ Standard deduction – depends on your filing status
· In 2009, for joint filers – $11,400 (adjusted for inflation)
· Married but filing separately – about half the amount – $5700
· Single – $5700
§ Other itemized deductions – i.e. state and local property income taxes, home mortgage interest payments, expenses for the production for income, and miscellaneous itemized deductions (applies only to the extent that their total amount exceeds 2% of your adjusted gross income, so the greater your adjusted gross income, the less you get after you subtract)
o Deduction for personal exemption – $3,650 for each exemption (1 for self, 1 for spouse, 1 for each individual that is a dependent)
· After the below the line deductions à “taxable Income”
· “Taxable income” multiplied by the tax rate à “gross tax liability”
o Rates however are graduated with different brackets along each level of taxable income
o Long term capital gains (over 1 year) and dividends are taxed with a different tax structure (~15% for all levels, though those lowered provisions might expire, also corporations don’t get these lower rates for capital gains)
o Current brackets: 10%, 15%, 25%, 28%, 33%, 35%
o For single tax payers, brackets levels are: $8k, $34k, $82k, $172k, $373k
· Tax credits applied to “gross tax liability”
o 3 kinds of tax credits
§ Refundable – if tax liability is negative, you can get a refund from the government (i.e. tax withheld, earned income tax credit)
§ Nonrefundable – could reduce liability to $0, but depending on the provision, tax credit might carry over to the next tax year
§ Partially refundable – a certain percentage of the tax credit might be refundable
· Regular net tax liability
Alternative Minimum Tax System (broader base with lower rates of tax)
· “Alternative minimum taxable income” (analog to taxable income)
· Reduced by the exemption amount, which is fairly high: $71k for married, $47 for single (the exemption amount however, is NOT indexed for inflation as everything else in the tax code is, and thus over the years there have been some ad hoc patches” but more and more people are caught in the AMT net)
· Rate structure is applied to the results
· More people are caught in the net
o People whose incomes may be derived heavily from capital gains are caught in AMT because AMT doesn’t have lowered rates for capital gains like the regular tax structure does
o People with miscellaneous itemized deductions (i.e. expenses for Bloomberg subscription), which can’t be used as a deduction when calculating AMT liability
o People from states and cities with high tax rates because AMT doesn’t allow taxpayers to deduct state and local taxes like the regular tax structure does
C. Marginal and Average Tax Rates
When discussing tax rates such as the progressivity of a tax structure, people will refer to marginal and average tax rates
1. Marginal Tax Rates
· Marginal tax rates generally refer to the rate of tax on the last or “marginal” dollar but can often times mean 2 different things: There’s a difference between statutory marginal tax rate and economic marginal tax rate because of phase outs. For every marginal increase in income, not only may there be additional tax liability for being in the next bracket, but also many deductions or credits may phase out
o Statutory sense – the rate that applies to individual (under either § 1 or § 11), to the highest bracket that the taxpayer reaches
o Holistic (or economic) marginal tax rate – increase in tax liability per every increased dollar in adjusted gross income (AGI)
· Importance of marginal tax rates (efficiency)
o All things equal, it’s better not to have the tax code influence individuals’ behavior (i.e. differences in marginal tax rate might affect whether an employee decides to work that additional hour)
o To see how people may look to evade taxes and reduce liability
2. Average Tax Rates
· Average tax rate is a ratio with “tax liability” as the numerator and either “adjusted gross income” (AGI) or “taxable income” in the denominator: or
· Importance of average tax rates – equity of tax code (not efficiency like marginal tax rates) as it’s related to the distribution of the tax burden
· Average tax is the weighted average of all the marginal tax rates
o
o Average tax rate
D. Progressivity of Taxes
A tax is progressive if average tax rate increases as AGI increases, so that people with higher AGIs, pay a larger portion in taxes
· Equates economic well-being with AGI or taxable income, both of which aren’t always related to economic well-being
· When income increases, an individual’s tax liability also increases, but at a greater percentage rate than does his income
o Rate in change of x
