Federal Income Tax I – Fall 2015 – Outline
Prof. Elaine Wilson
617F
POLICY
The goal of good tax planning is to accomplish the client’s goals in the most tax efficient manner, not simply to reduce taxes.
The Code is a tool that government uses to influence the behavior of individuals and business, and in turn society as a whole.
Read income inclusion broadly, exclusion narrowly.See Kowalski outline p. 8.
Be sure to hit on each of these issues/hallmarks in analysis.
HALLMARKS OF TAX POLICY
RAISE REVENUE FOR THE GOVERNMENT
PROMOTE ECONOMIC GROWTH
Gives gov’t opportunity to build infrastructure, etc.
Horizontal Equity
Same circumstances, stame treatment
Vertical Equity
Appropriate difference for people in different circumstances
REDISTRIBUTION OF INCOME AND/OR WEALTH
Are we effecting the decision making of businesses?
SPECIAL INCENTIVES AND DISINCENTIVES
Use the Code to promote or deter certain behaviors
EASE OF ADMINISTRATION
Is it practical to administer?
TAX PLANNING
Tax Liability Calculation: TAX BASE x TAX RATE = TAX DUE
Tax Base Plays
Reduce a client’s income tax base
Tax Base = Gross Income – Allowable Deductions
Included in income generally
Can it be excluded from income under the statute?
Can you take deductions for expenses to reduce it?
Tax Rate Plays
Using the lowest possible rate
“running up the brackets” – Marginal Rates §1
Between years
Between Taxpayers
Favored categories of income §1(h)
Ordinary income v. capital gain rates
Marginal v. Effective Rate
1. Example – unmarried individual with a tax base of $70,000 using unadjusted §1(c) rates:
Income Rate Tax Total
First 22,100 .15 3,315 3,315
Next 31,400 .28 8,792 12,107
Next 16,500 .31 5,115 17,222
70,000 Effective rate = 17,222/70,000 = 24.6%
2. Two unmarried individuals, each with $35,000, total household tax base of $70,000 using unadjusted §1(c) rates
Income Rate Tax Total
first 22,100 .15 3,315 3,315
next 12,900 .28 3,612 6,927
35,000 (x2) 13,854 Effective rate =19.8%
3. Married couple with a total household tax base of $70,000, using unadjusted §1(a) rates :
Income Rate Tax Total
first 36,900 .15 5,535 5,535
next 33,100 .28 9,268 14,803
70,000 Effective rate = 14,803/70,000 = 21.1%
4. Compare…
Single Split Income Married
Tax Base 70,000 70,000 70,000
Tax Paid 17,222 13,854 14,803
Marginal 31% 28% 28%
Effective 24.6% 19.8%
gs, alimony, moving expenses, interest on education loans, education expenses, HSAs, costs of discrimination suits…
– § 102 – p. 86 – Excludes gifts and inheritances.
– § 103 – p. 86 – Excludes interest on state and local bonds. (b) Exceptions.
– § 107 – p. 91 – Excludes rental value of home for minister.
– § 108 – p. 91 – Excludes certain debt discharges, e.g. Chapter 11, farm debt, etc.
– § 121- p. 104 – Excludes gain from sale of principle residence.
– § 139 – p. 123 – Excludes qualified disaster relief payments.
Taxable Income Defined
§ 63–p. 50–TAXABLE INCOME = GROSS INCOME – DEDUCTIONS allowed here (BTLine)
§63(a) – Gross income minus deductions gives us “taxable income.” (b)-(c) Distinguishes itemizing and standard deduction. (d) Itemized deductions.
MISCELLANEOUS ITEMIZED DEDUCTIONS: ALL i.d. not specifically listed in §67(b).
§ 67 – p. 54 – 2% floor on misc. itemized deductions
“The miscellaneous itemized deductions for any taxable year shall be allowed only to the extent the aggregate of such deductions exceeds 2% of adjusted gross income.
– Section 68 – p. 55 – Overall limitation on itemized deductions. “phase out”
– Section 151 – p. 127 – establishes personal exemptions.
– See also Section 6501 – p. 815 – 3 year stat. of limitations on collecting tax.
