Income Tax - Waggoner 2005 - A - INCOME TAX OUTLINE CHAPTER...

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INCOME TAX OUTLINE CHAPTER 2: THE SCOPE OF GROSS INCOME C ASH R ECEIPTS : D OES S OURCE M ATTER ? o Generally, No Computing Tax Liability Generally § 61 defines Gross Income (GI) o If something is not gross income, you do not have to report it as income tax § 62 defines Adjusted Gross Income (AGI) o Allows for deductions for several things, particularly business deductions o Gross income minus certain costs of earning the income § 63 defines Taxable Income (TI) o TI = AGI – (Personal exemptions + the greater of standard deduction or itemized deductions) o Allows for deductions for personal expenses Apply the tax rates from § 1 to get your tax liability o Progressive – as income increases, rate increases o Marginal rate – the rate applied to the last dollar of income earned by the taxpayer o Effective rate – taxpayer’s average rate Apply any credits o Directly reduces tax Court has applied a broad definition to gross income – “all income from whatever source derived” Glenshaw Glass : Punitive treble damages/exemplary damages not excludable from GI o Congress intended to include all sources of income in GI unless the source is specifically excluded o This is generally, but not always, true Earlier interpretations of the Code were more narrow and taxpayer-friendly; Glenshaw evidenced a change in tone towards being more IRS friendly Gains/profits not taxed until realized Amount realized = the amount the taxpayer receives on the sale or exchange Adjusted basis = the taxpayer’s unrecovered investment in the property Our income tax system does not recognize changes in value Examples of unrealized gains: o Stocks going up o Trustee holding money for someone Gain = Amount Realized – Adjusted Basis Realized gain is included in gross income only if it is also recognized General rule: a realized gain is recognized and included in gross income 1001(c) ) Gain is not recognized if a nonrecognition rule in the Code applies to the sale or exchange o Tax system generally Problem: You get less of whatever you are taxing 1
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If you tax capital gains, you get less investment If you tax personal services, you get less of them System must take this into account before imposing taxes on things Deductions now are more valuable than deductions later Doesn’t take inflation into account because it’s very complicated to factor in Annual accounting system Report things as they look for the year If there’s a mistake, you can either reopen the return and amend it or make a correction in the next year o However, limited reopening Courts As you go from claims district tax court, you get more pro-IRS Always give the tax benefit in a transaction to the person in the higher tax bracket o Treasure trove If you find cash accidentally, this is taxable as income Cesarini – people found old currency in piano, then traded it in for cash at the
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  • Spring '06
  • Perry
  • Tax law, basis, Taxation in the United States

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