concepts in federal income taxation

Concepts in Federal Taxation: Concepts in Federal Taxation: IndividualsIndividuals

Basic tax structure Basic tax structure

Gross IncomeGross Income

- Deduction (Adjustments to Income)- Deduction (Adjustments to Income)

Adjusted Gross IncomeAdjusted Gross Income

-Itemized Deductions or Standard -Itemized Deductions or Standard DeductionDeduction

-Exemptions-Exemptions

Taxable Income—apply rates for dollar Taxable Income—apply rates for dollar amount of tax amount of tax


Gross income Gross income means means all income from all income from whatever source derivedwhatever source derived. .

IRC Sec 61 IRC Sec 61

Glenshaw GlassGlenshaw Glass

CesariniCesarini

Who is subject to taxation?Who is subject to taxation?

Can you give or assign away income?Can you give or assign away income?

Who is taxed if TP sets up a Grantor Who is taxed if TP sets up a Grantor Trust?Trust?


Exclusions from IncomeExclusions from Income

GiftsGifts

Life Insurance ProceedsLife Insurance Proceeds

(Some) Fringe Benefits(Some) Fringe Benefits

Personal Injury AwardsPersonal Injury Awards

What is income here?What is income here?

BasisBasis

How did the TP acquire the property?How did the TP acquire the property?

Purchase-costPurchase-cost

Exchange-FMV of property receivedExchange-FMV of property received

Gift-Carryover basisGift-Carryover basis

Inheritance-Stepped up (DOD)Inheritance-Stepped up (DOD)

Joint tenancy with Right of Survivorship and T in CJoint tenancy with Right of Survivorship and T in C

- assume husband and wife buy property for $1,000. assume husband and wife buy property for $1,000. - A year later, wife dies andA year later, wife dies and

property is now worth $3,000. One year later, husband sellsproperty is now worth $3,000. One year later, husband sellsproperty for $6,000. property for $6,000.

Husband has initial basis of $500 at time of purchase. Husband has initial basis of $500 at time of purchase.

Then, when wife dies, he inherits by law, her half Then, when wife dies, he inherits by law, her half (VALUATION?) and(VALUATION?) and

now has to add $1,500 to basis of $500 for total new basis ofnow has to add $1,500 to basis of $500 for total new basis of$2,000. When he sells the land for $6,000, he realizes a $2,000. When he sells the land for $6,000, he realizes a

gain of $4,000.gain of $4,000.

BasisBasis

DeductionsDeductions

(Selected—there are more!)(Selected—there are more!)

Trade or business expensesTrade or business expenses

Capital Assets—DepreciationCapital Assets—Depreciation

Losses from Sale or ExchangesLosses from Sale or Exchanges

Passive LossesPassive Losses

Code sec 465 generally limits loss Code sec 465 generally limits loss deductions to amount that TP has at deductions to amount that TP has at risk. This keeps TPs from offsetting risk. This keeps TPs from offsetting trade, business or professional trade, business or professional income by losses from investments.income by losses from investments.

Capital Gains & LossesCapital Gains & Losses

A capital gain is the profit when you A capital gain is the profit when you sell a capital asset, which is property sell a capital asset, which is property such as stocks, bonds, mutual fund such as stocks, bonds, mutual fund shares, and real estate.shares, and real estate.

(not Capital Assets: inventory, (not Capital Assets: inventory, depreciable business property, and depreciable business property, and real property used in trade or real property used in trade or business.business.

You invest in a capital asset for You invest in a capital asset for $20,000 and then sell it for $100,000 $20,000 and then sell it for $100,000 twenty years later and your capital twenty years later and your capital gain is $80,000 with no discount for gain is $80,000 with no discount for how inflation has eroded the value of how inflation has eroded the value of money during the period of money during the period of ownership. ownership.


Capital Losses Are Limited to $3,000- Capital Losses Are Limited to $3,000- annually as offsets against other ordinary annually as offsets against other ordinary income. income.

EXAMPLE: TP bought stock for $10,000 EXAMPLE: TP bought stock for $10,000 and then sells it for $2,000. and then sells it for $2,000.

This $8,000 loss on the stock asset cannot This $8,000 loss on the stock asset cannot be taken in full but only $3,000 of it may be taken in full but only $3,000 of it may be deducted against other income (sec be deducted against other income (sec 1211). 1211).

The difference of $5,000 isn't lost forever, The difference of $5,000 isn't lost forever, rather it carries over. It carries over in the rather it carries over. It carries over in the subsequent year until it is used up.subsequent year until it is used up.


Alternative Minimum TaxAlternative Minimum Tax

In addition to the normal tax code In addition to the normal tax code calculations, the AMT system uses a calculations, the AMT system uses a different set of rules for determining different set of rules for determining taxable income and allowable taxable income and allowable deductions. deductions.

The "tax preference items" are added back, The "tax preference items" are added back, then an AMT Exemption is subtracted to then an AMT Exemption is subtracted to compute AMT Taxable Income (AMTI). The compute AMT Taxable Income (AMTI). The AMT Exemption is phased out at 25 cents AMT Exemption is phased out at 25 cents per dollar of AMTI above $150,000 on joint per dollar of AMTI above $150,000 on joint returns. Criticism often focuses on the fact returns. Criticism often focuses on the fact that the $150,000 phase-out threshold has that the $150,000 phase-out threshold has never been adjusted for inflation since its never been adjusted for inflation since its enactment in 1986.enactment in 1986.

Alternative Minimum TaxAlternative Minimum Tax

Domestic Relations Applications Domestic Relations Applications of Federal Taxationof Federal Taxation

Alimony is income to recipient Alimony is income to recipient spouse and deductible by payor spouse and deductible by payor spouse. spouse.

– says that custodial parent (parentsays that custodial parent (parent who has child for more than 1/2 who has child for more than 1/2

year) is entitled to the dependency year) is entitled to the dependency deduction. There is no deduction deduction. There is no deduction for payments to child support from for payments to child support from paying parent. (Specify in decree)paying parent. (Specify in decree)


No gain or loss is recognized in No gain or loss is recognized in property conveyed spouse to property conveyed spouse to spouse in a divorce. Code Sec 1041 spouse in a divorce. Code Sec 1041 (a), nor is the gain on property (a), nor is the gain on property included in gross income.included in gross income.


concepts in federal income taxation

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