Concepts in Federal Income Taxation


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This is the first half of a presentation I gave at Pace University Law School's Program: New Directions: Practical Skills for Returning to Law Practice

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Concepts in Federal Income Taxation

  1. 1. <ul><li>Concepts in Federal Taxation: Individuals </li></ul>
  2. 2. Basic tax structure <ul><li>Gross Income </li></ul><ul><li>- Deduction (Adjustments to Income) </li></ul><ul><li>Adjusted Gross Income </li></ul><ul><li>-Itemized Deductions or Standard Deduction </li></ul><ul><li>-Exemptions </li></ul><ul><li>Taxable Income—apply rates for dollar amount of tax </li></ul>
  3. 3. Gross Income <ul><li>Gross income means all income from whatever source derived . </li></ul><ul><li>IRC Sec 61 </li></ul><ul><li>Glenshaw Glass </li></ul><ul><li>Cesarini </li></ul>
  4. 4. <ul><li>Who is subject to taxation? </li></ul><ul><li>Can you give or assign away income? </li></ul><ul><li>Who is taxed if TP sets up a Grantor Trust? </li></ul>Gross Income
  5. 5. Exclusions from Income <ul><li>Gifts </li></ul><ul><li>Life Insurance Proceeds </li></ul><ul><li>(Some) Fringe Benefits </li></ul><ul><li>Personal Injury Awards </li></ul>
  6. 7. What is income here?
  7. 8. Basis <ul><li>How did the TP acquire the property? </li></ul><ul><li>Purchase-cost </li></ul><ul><li>Exchange-FMV of property received </li></ul><ul><li>Gift-Carryover basis </li></ul><ul><li>Inheritance-Stepped up (DOD) </li></ul>
  8. 9. <ul><li>Joint tenancy with Right of Survivorship and T in C </li></ul><ul><li>assume husband and wife buy property for $1,000. </li></ul><ul><li>A year later, wife dies and </li></ul><ul><li>property is now worth $3,000. One year later, husband sells </li></ul><ul><li>property for $6,000. </li></ul><ul><li>Husband has initial basis of $500 at time of purchase. </li></ul><ul><li>Then, when wife dies, he inherits by law, her half (VALUATION?) and </li></ul><ul><li>now has to add $1,500 to basis of $500 for total new basis of </li></ul><ul><li>$2,000. When he sells the land for $6,000, he realizes a </li></ul><ul><li>gain of $4,000. </li></ul>Basis
  9. 10. Deductions <ul><li>(Selected—there are more!) </li></ul><ul><li>Trade or business expenses </li></ul><ul><li>Capital Assets—Depreciation </li></ul><ul><li>Losses from Sale or Exchanges </li></ul>
  10. 11. Passive Losses <ul><li>Code sec 465 generally limits loss deductions to amount that TP has at risk. This keeps TPs from offsetting trade, business or professional income by losses from investments. </li></ul>
  11. 12. Capital Gains & Losses <ul><li>A capital gain is the profit when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares, and real estate. </li></ul><ul><li>(not Capital Assets: inventory, depreciable business property, and real property used in trade or business. </li></ul>
  12. 13. <ul><li>You invest in a capital asset for $20,000 and then sell it for $100,000 twenty years later and your capital gain is $80,000 with no discount for how inflation has eroded the value of money during the period of ownership. </li></ul>Capital Gains & Losses
  13. 14. <ul><li>Capital Losses Are Limited to $3,000- annually as offsets against other ordinary income. </li></ul><ul><li>EXAMPLE: TP bought stock for $10,000 and then sells it for $2,000. </li></ul><ul><li>This $8,000 loss on the stock asset cannot be taken in full but only $3,000 of it may be deducted against other income (sec 1211). </li></ul><ul><li>The difference of $5,000 isn't lost forever, rather it carries over. It carries over in the subsequent year until it is used up. </li></ul>Capital Gains & Losses
  14. 15. Alternative Minimum Tax <ul><li>In addition to the normal tax code calculations, the AMT system uses a different set of rules for determining taxable income and allowable deductions. </li></ul>
  15. 16. <ul><li>The &quot;tax preference items&quot; are added back, then an AMT Exemption is subtracted to compute AMT Taxable Income (AMTI). The AMT Exemption is phased out at 25 cents per dollar of AMTI above $150,000 on joint returns. Criticism often focuses on the fact that the $150,000 phase-out threshold has never been adjusted for inflation since its enactment in 1986. </li></ul>Alternative Minimum Tax
  16. 17. Domestic Relations Applications of Federal Taxation <ul><li>Alimony is income to recipient spouse and deductible by payor spouse. </li></ul>
  17. 18. <ul><ul><li>says that custodial parent (parent </li></ul></ul><ul><li>who has child for more than 1/2 year) is entitled to the dependency deduction. There is no deduction for payments to child support from paying parent. (Specify in decree) </li></ul>Domestic Relations Applications of Federal Taxation
  18. 19. <ul><li>No gain or loss is recognized in property conveyed spouse to spouse in a divorce. Code Sec 1041 (a), nor is the gain on property included in gross income. </li></ul>Domestic Relations Applications of Federal Taxation