Federal Income Taxation
Authors:
Chirelstein, Marvin A. / Zelenak, Lawrence
Edition:
15th
Copyright Date:
2023
15 chapters
have results for Tax
Part A. Income 215 results (showing 5 best matches)
- income taxes. (By contrast, § 164 authorizes a limited deduction for income taxes.) Perhaps surprisingly, nothing of substance is at stake in the choice between the no-deduction rule of § 275 and an opposite rule allowing a deduction for federal income taxes. Suppose Congress has decided that a person with a pre-tax salary of $1 million should pay income tax of $200,000. It can achieve the desired result either by (1) the combination of the no-deduction rule of § 275 and a flat tax rate of 20 percent, or (2) the combination of the opposite rule and a flat tax rate of 25 percent. In the former case, the $200,000 tax is 20 percent of $1 million; in the latter case, the $200,000 tax is 25 percent of $800,000 ( , $1 million less a $200,000 federal income tax deduction). The point generalizes. For any flat-rate income tax a federal income tax deduction, there is a higher-rate income tax ...tax deduction that produces identical results. Given the lack of any real stakes in the choice...tax
- term-insurance buyers to deduct their allocable premiums as costs incurred for the protection of taxable income. Decedents (or their beneficiaries) would then be taxed on their net mortality gains; survivors would be taxed on their net earnings. This alternative treatment—of deductions for term insurance premiums and taxation of term insurance proceeds—sounds very different from the actual rules of nondeductibility of premiums and exclusion of proceeds. In fact, however, the two systems will produce equivalent results if (1) the same tax rate applies for purposes of the premium deduction and the proceeds inclusion under the alternative treatment, and (2) taxpayers take the applicable tax regime into account in selecting the nominal amount of their insurance coverage. Suppose that, under the current tax rules, a taxpayer in the 20% bracket would choose to buy $100,000 of term insurance at a premium cost of $1,000. Because there are no tax consequences to either the premium payment...
- This is an example of the equivalency, under a single (“flat”) tax rate structure, of a wage tax (exemplified by the current tax treatment of term life insurance) and a consumption tax (exemplified by the alternative system). For an explanation of this equivalency, see the “Note” at p. 493, “Income Tax, Consumption Tax, Flat Tax.”
- , that the tax on stock dividends was unconstitutional? The answer is a bit complicated. The Constitution provides (in both art. I, § 2, cl. 3, and art. I, § 9, cl. 4), that any federal “direct” tax must be apportioned among the states in accordance with their populations. The Constitution does not, however, enumerate or define direct taxes. Only two types of taxes—head (capitation) taxes imposed at a flat dollar amount on the privilege of having a head, and real property taxes—were clearly within the original understanding of direct taxes. When Congress enacted a low-rate income tax in 1894, without (of course) making any attempt to apportion the tax among the states in accordance with their populations, taxpayers quickly challenged it as an unconstitutional unapportioned direct tax. One year later, in Court struck down the tax. The Court broadly (and dubiously) interpreted the direct tax category to include not only property taxes (on both real and personal property), but also
- Consider, for example, a gift of $100,000 cash from Grandmother (GM) to adult Granddaughter (GD). What justifies not taxing GD on the $100,000 when it will buy just as much as any other $100,000, and when $100,000 from most other sources (salary, for example) would be taxable to GD? The standard explanation is based on the understanding of income as the opportunity to consume. A taxpayer with $1 of income has the opportunity to engage in a dollar’s-worth of consumption, either now or in the future. A taxpayer’s dollar’s-worth of consumption opportunity should be reflected in an inclusion of $1 in the taxpayer’s income tax base. From this understanding follows the three-part rationale for not taxing GD on her $100,000 gift from GM: (1) each consumption opportunity should be taxed once and only once, (2) the $100,000 cash represents only one $100,000 consumption opportunity, which GM has transferred to GD, and (3) GM has already paid tax on the $100,000. Thus, to tax GD on the gift...tax
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Introduction. Terminology, Timing and Rates 29 results (showing 5 best matches)
- The 3.8% tax on net investment income is of recent vintage. By contrast, federal payroll taxes on wages have been around for many decades. An employee is subject to a payroll tax equal to 6.2% of her wages, up to a ceiling on taxable wages (in 2023) of $160,200. The employer is also taxed on those same wages, also at the rate of 6.2%. Revenue from both the employee and employer tax is dedicated to funding social security retirement payments. There are also payroll taxes to fund Medicare. These taxes are imposed on all wages; there is no wage ceiling for purposes of the Medicare taxes. Again, there are two identical rate (1.45%) taxes, one imposed on employees and one on employers. Finally, the Affordable Care Act added § 3101(b)(2), which imposes an additional 0.9% tax, applicable to wages in excess of $200,000 for a single taxpayer, or in excess of $250,000 in the case of a joint return. This tax is imposed only on the employee; there is no corresponding tax on the employer. Taking...
- Taxable income is the residual or net amount on which the taxpayer’s tax liability is based. Having selected the appropriate rate schedule from § 1 (depending on whether she is married, single, or a “head of household”), the taxpayer then determines her tax by fitting her taxable income into the schedule in the manner indicated below. The tax liability that results may be reduced by statutory the child tax credit (7.07). Tax credits are subtracted directly from the tax due. While the dollar-value of a depends on the particular taxpayer’s applicable tax rate (so that the value is greater for higher than for lower-bracket taxpayers), a credit has the same dollar-value for all taxpayers entitled to use it. This is so because a credit is a dollar-for-dollar reduction of the tax itself rather than being a subtraction from gross income.
- Income tax returns are filed and taxes are paid on an The timing of income and deductions is important, because taxpayers strongly prefer to pay their taxes later rather than sooner. Money in the bank or invested in government bonds earns interest, so that if given a choice between paying $1,000 of taxes today and paying $1,000 of taxes a year from now, the taxpayer will always choose the later date. Assuming interest at a rate of 8%, the present value—the value today—of $1,000 due in one year is only $926. Put differently, the sum of $926 invested at 8% today will grow to $1,000 at the end of one year. If (because of accounting or other legal rules) the $1,000 tax is not due until a year from now, the taxpayer can meet that obligation by currently setting aside the sum of $926. But if the tax is due today, the full $1,000 will have to be surrendered. It follows that a year’s delay is worth $74 ($1,000 – $926) to the taxpayer in cold hard cash. The government, of course, sees the...
- In tax terminology the applicable rate of tax at each bracket level is called the rate of tax, while the rate that is applicable to the taxpayer’s income as a whole is called the average or effective rate. A married couple with $200,000 of taxable income, for example, is subject to a rate of—
- Section 199A, added to the Code by the Tax Cuts and Jobs Act of 2017, generally provides a deduction equal to 20% of the “qualified business income” of a noncorporate taxpayer. For a taxpayer in the top (37%) rate bracket under § 1, § 199A produces an effective tax rate of 29.6% (that is, taxing 80% of income at 37% is the equivalent of taxing 100% of income at 29.6%). As with many other features of the 2017 legislation, § 199A is scheduled to terminate after 2025.
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Note. Income Tax, Consumption Tax, Flat Tax 19 results (showing 5 best matches)
- A minor computational complexity results from the fact that income taxes are calculated on a tax-inclusive basis ( the amount of the tax is included in the tax base), whereas retail sales taxes are calculated on a tax-exclusive basis ( the amount of the tax is not included in the tax base). Under a 40% income tax, in Year 1 C earns $1,000, pays $400 tax (40% of $1,000), and is able to consume $600. To replicate these results under a tax-exclusive retail sales tax requires a higher nominal tax rate. Thus, for C to devote her entire $1,000 of Year 1 earnings to consumption and to the tax on that consumption, C would purchase goods at the (pre-tax) cost of $600, and would pay tax of $400, determined by applying a tax rate of 67% to her purchases of $600.
- To summarize: The income tax is a tax system that has two parts. First, it taxes personal service income (wages, salaries, fees, etc.) when earned. Second, it taxes wealth—which represents the amount saved and invested by the taxpayer after first paying tax on her earnings—by including dividends, interest, rents and capital gains in gross income. If we wished to eliminate the wealth-tax element, we could do so in either of two ways. We could simply treat all income from capital investment as tax-exempt, and tax wages only. In the alternative, we could allow all investments to be deducted currently, and tax spending only. Either technique would place Consumer and Saver on an “equal” footing from a tax standpoint, in the sense that the arithmetical relationship between the two would be the same in the post-tax world as it was in the pre-tax world.
- The other method of implementing a progressive consumption tax more closely resembles the current income tax. It would be possible to convert the income tax to a consumption tax while retaining a great deal of the architecture of the current system. Start from the observation that Thus, the income tax would become a consumption tax if all savings were deductible—which could be accomplished simply by amendment to the rules in § 219 restricting the ability of taxpayers to make deductible IRA contributions. If all taxpayers were able to make deductible contributions to savings accounts, in unlimited amount and for any purpose, the income tax would become a consumption tax. When a taxpayer took money out of his savings account to spend on consumption, that spending would be subject to the consumption tax. In terms of the consumption tax formula, , dissaving) is negative savings, and thus increases the consumption tax base for the year of negative savings. ...the income tax to a... ...tax...
- Which brings us back to the wage tax, the first of the two devices for equalizing the tax treatments of C and S. A wage tax is not a consumption tax, but (as the analysis of the situations of C and S has shown) under certain conditions the two types of taxes will produce equivalent economic effects. If we are going to consider ways of making the tax system fairer to the likes of S (on the assumption that the current system is unfair to S), shouldn’t a wage tax be among the options? Of course, the federal government already has a wage tax—the payroll tax devoted to financing Social Security and Medicare—but the idea here would be to repeal the income tax while increasing the rate (or rates) and expanding the base of the payroll tax. In terms of analogies to the current income tax, instead of building on the treatment of regular (deductible) IRAs, as would a cash-flow tax, a wage tax would build on the treatment of Roth IRAs.
- For whatever reason, proposals to replace the income tax have focused on various methods of taxing consumption; no proposal to replace the income tax with an expanded wage tax has attracted significant attention. Should such a proposal attract interest in the future, it is worth briefly noting two respects in which cash-flow ( and wage tax treatment do produce equivalent results. First, the two types of taxation will not produce equivalent results if the applicable tax rates are different under the two systems. For a particular taxpayer, the results will not be the same under the two systems if the taxpayer’s marginal tax rate is different in the year in which she earns income (the taxable year under a wage tax) and the year in which she consumes (the taxable year under the cash-flow tax). Second, the two types of taxation have very different effects on taxpayers who have wealth at the time the systems are introduced. If a taxpayer has wealth at the time a wage tax is introduced,...
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Part B. Deductions 240 results (showing 5 best matches)
- As stated, § 265(a)(2) bars the taxpayer from deducting interest on amounts borrowed to purchase tax-exempt municipal bonds. The aim is to prevent taxpayers from combining exempt income with deductible interest expense to shelter income from other taxable sources. But, of course, Congress did not intend to eliminate the municipal bond exemption; its intent was merely to deny an interest deduction to borrowers. Investors who draw on their corporate bond yielding 10% or $10,000 a year. Everything else being equal, he can sell his taxable bond and purchase an exempt municipal bond yielding 8% or only $8,000 a year. Assume the two bonds are otherwise alike in quality. Why would he give up 10% for 8%? Simple answer: to increase his after-tax return on investment. The taxable bond leaves him with $6,500 after tax, the municipal with $8,000 after tax, so it is plainly in the taxpayer’s interest to make the switch. The concept of “implicit taxes” may be helpful here. Because of market...
- The base of the AMT is “alternative minimum taxable income” (AMTI), the definition of which disallows many of the exclusion and deduction subsidies featured in the taxable income base of the regular tax. The AMTI definition does allow, however, a high exemption (in effect, a zero rate bracket); in 2023 the exemption amount is $126,500 for a married couple and $81,300 for a single taxpayer. A taxpayer with regular tax preferences disallowed for purposes of the AMT may have AMTI considerably greater than his regular taxable income, even after subtraction of the AMT exemption amount. AMTI is then subjected to a semi-flat tax, with rates of 26% and 28%, to produce a “tentative minimum tax.” For many higher-income taxpayers, AMTI will be greater than regular taxable income, but the AMT rates will be lower than regular tax rates (compare the 28% top AMT rate with the 37% top regular tax rate). Because these two differences work in opposite directions, the tentative minimum tax may be...
- If the corporate tax rate is 21% and the dividend tax rate is 20%, why is the combined tax burden only 36.8%, rather than 41% ( 21% plus 20%)? The answer, of course, is that the second tax—the 20% tax on the dividend—is imposed not on the entire $100,000, but only on the $79,000 remaining after the imposition of the first tax.
- The third category of personal expense deductions includes state and local taxes. Prior to 2017 legislation, taxpayers who itemized their deductions (rather than claiming the standard deduction) were permitted to deduct unlimited amounts of state and local real and personal property taxes, and income taxes—and were given the option to deduct unlimited amounts of state and local sales taxes in lieu of income taxes. (Both before and after the 2017 legislation, however, state and local taxes were not deductible for purposes of the alternative minimum tax (discussed at 7.10).) The Tax Cuts and Jobs Act of 2017 very controversially imposed a $10,000 ceiling on the total amount of state and local taxes (of all deductible types) that a Notice the strange contrast between (a) the $10,000 ceiling on deductible state and local taxes, which denies deductions to taxpayers who pay unusually large amounts of state and local taxes, and (b) the percentage-of-adjusted-gross-income floor of § 213 (...
- basis is easier. Tax levels obviously differ from state to state, some higher, some lower. It can be argued that federal deductibility favors individuals living in high-tax as compared with low-tax states, because the former enjoy greater public service benefits than the latter. Allowing state taxes to be deducted permits residents of high-tax states to “buy” their public service benefits—better schools, better roads, better parks—with pre-tax dollars and in that way shifts a part of the cost to residents of low-tax states whose public service benefits are smaller. But choice of residence is a matter of personal preference: if you decide to locate in a high-tax state because you wish to enjoy superior amenities, then the tax you pay is the tax you have to pay; nobody made you live and pay taxes in one place rather than another.
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Part D. Tax Accounting 84 results (showing 5 best matches)
- tax benefit when taken, then the subsequent recovery of the item deducted will be excluded from the taxpayer’s income in the later year. By far the most common application of this rule is with respect to state income tax refunds. If a taxpayer claims state income taxes among his itemized deductions in one year, and receives a refund of some portion of those state income taxes in a later year, the refund will be taxable in the later year under the tax benefit rule. But if the taxpayer claims the standard deduction in the year in which he paid the state income taxes, then a state income tax refund in a later year will be excluded under § 111. Aside from the relief provided by § 111 in the extreme case of an earlier deduction producing no tax benefit whatsoever, Congress has provided no relief from the rigors of the tax benefit rule analogous to the relief provided by § 1341 from the rigors of the claim of right doctrine. If a taxpayer deducts an item in a year in which his marginal
- The analysis changes dramatically, however, if the employer’s tax rate is significantly lower than Odette’s tax rate—as it generally would be under current law, given the top individual rate of 37% and the top corporate rate of 21%. What happens if we rerun the above example, still using 35% as Odette’s tax rate, but using 20% as the employer’s rate? Nothing changes with respect to scenario (a), under which Odette would have about $45,500 at the end of year 20, except that the employer’s after-tax cost of paying Odette $20,000 in year 1 rises to $16,000. Scenario (b), however, changes rather dramatically. The employer takes $16,000 and sets it aside to fund its obligation to pay Odette deferred compensation in 20 years. Because of the employer’s 20% tax rate the after-tax rate of return is 8%—a considerable improvement over Odette’s 6.5% after-tax rate of return. This difference in the after-tax rates of return on investment is the key to the tax advantage of deferred compensation...
- and similar cases by adding § 1341 to the Code. Briefly, if an item was included in income in a taxable year because of the claim of right doctrine, and if in a later year it is established that the taxpayer did not have an unrestricted right to the item, so that a deduction exceeding $3,000 is allowable, the tax for the later year will be whichever of the following is the lesser: (a) the tax in the later year computed with the deduction, or (b) the tax in the later year without the deduction, but reduced by the amount by which the tax in the earlier year would have been decreased if the item in question had been excluded from the earlier year’s income. When § 1341 applies, taxpayers never lose and often win. If a taxpayer’s marginal tax rate was higher in the earlier inclusion year than in the later repayment year, the taxpayer chooses option (b) and obtains a tax reduction in the later year equal to the tax cost of the inclusion in the earlier year (thus not losing). ...tax...
- the taxpayer, a munitions manufacturer, incurred a special profits tax on munitions manufactured by it in 1916. The tax became due and was paid in 1917, and the taxpayer sought to deduct the tax payment from its income in the later rather than the earlier year. Once again, income tax rates were higher in 1917 than in 1916. The taxpayer argued that taxes do not accrue until they are assessed, and that the assessment date, 1917, was therefore the proper time for deduction. The Court, however, held that the munitions tax must be deducted in 1916. Conceding that taxes technically do not become a liability until assessed, the Court found, nevertheless, that all the events necessary to fix and determine the taxpayer’s obligation had occurred in the earlier period. In an accounting sense, therefore, the taxes had accrued.
- If the $20,000 of salary is paid currently, Odette owes a tax of $7,000 and has $13,000 left to invest at 10%. She receives $1,300 of interest before tax in year 1, pays tax of $455 (35% of $1,300), and is left with $845 after tax. Thus, the after-tax rate of return on her investment is 6.5%. She has $13,845 ($13,000 plus $845) to invest in year 2. By the end of year 20, her total after-tax fund will have built up to about $45,500. Odette’s employer can of course deduct the $20,000 in year 1 as a current business expense. The deduction reduces the employer’s tax bill by $7,000, so the employer’s after-tax cost of paying Odette $20,000 in year 1 is $13,000.
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Note. What Is the True Value of a Tax Preference? 30 results (showing 5 best matches)
- In view of these effects, does the enactment of the tax exemption impair tax equity? Are similarly situated taxpayers being treated alike, or is there now an element of undue favoritism in the system? The answer is that everything worked out as neatly as shown above, the system would contain no favoritism whatever. From the standpoint of “horizontal equity,” the proper test is whether after-tax returns are the same for taxpayers who are in the same tax bracket and who make identical dollar investments, one in an exempt asset, the other in a taxable asset. In the case above, an investment of $1,667 in the bond yields $100 a year—both before tax and after tax—for a 50% taxpayer. The same dollar investment in an equivalent bond by another 50% taxpayer yields 12% of $1,667 = $200 before tax, and 50% of $200 = $100 after tax. Hence, two taxpayers in the same tax bracket come out the same whichever bond they buy. Once again, the taxable bond yields $200 pre-tax, while the exempt bond...
- The first condition does not obtain if the tax preference attaches to the taxpayer himself, rather than to a particular type of asset. In that case, the “implicit tax” ( , the reduced pre-tax rate of return on tax-favored assets), so central to the above analysis, does not exist. For example, tax exemption for the investment return on Roth IRAs (5.06) depends on the taxpayer’s satisfying the Roth IRA eligibility requirements, not on the nature of the investment assets put into the Roth IRA. Because a taxpayer investing in a Roth IRA does not have to compete with other potential investors for a limited supply of tax-favored Roth IRA assets, the price of Roth IRA assets is not driven up by the tax preference, and there is no implicit tax. A practical implication of this observation is that it would be foolish to purchase tax-exempt municipal bonds for one’s Roth IRA. The interest rate on the municipal bonds would reflect the usual implicit tax on tax-favored assets, but the § 103...
- Brief reference has been made at various points to so-called tax preferences—the exemption for municipal bond interest, for example, or the exclusion of imputed rents from owner-occupied residences, or the phenomenon of accelerated depreciation. Quite obviously, such preferences permit taxpayers who own “preferred” assets to receive income free of tax, or subject to a lower-than-normal effective rate of tax. Not wanting to complicate matters in the main text, we have made little effort to show in detail how these preferences relate to a progressive rate structure but have simply left the reader to infer that the value of tax exemption for $1 dollar of income is equal to $1 times the taxpayer’s marginal tax rate. While this is true as far as it goes, it probably doesn’t go far enough. Tax preferences exist in a dynamic market, which means that they, like other valuable goods, are the object of competitive bidding. An asset—say a municipal bond—that yields tax- ...tax income, they will...
- The answer is: nothing. Assuming that financing costs (interest paid to a bank or other lender for funds borrowed to purchase the bond) are deductible, the value of a bond that yields taxable income is the same to a 50% taxpayer as it is to a 20% taxpayer. Going further, the value of the bond to all investors under a progressive tax system is the same as it would be under a proportionate tax system—indeed, it is the same under a progressive (or proportionate) tax system as it would be if there were no income tax at all. The reason, briefly, is that if financing costs are deductible, the reduction in income caused by an income tax (at rate) is offset by a precisely proportional reduction in the after-tax rate at which the income stream is capitalized.
- tax benefit, of which the present value is $278. In addition, and relatedly, the cost to the federal government of enacting the tax subsidy for housing bonds is now greater than the benefit that is actually realized by developers and residents of low-income housing. Compare the results when a top-bracket taxpayer pays $1,389 for a taxable bond paying $167 annual interest ( 12% interest) with the results when a top-bracket taxpayer pays $1,389 for a tax-exempt bond paying $100 annual interest. In the case of the taxable bond, the taxpayer’s after-tax return is $83.50, the bond issuer’s borrowing cost is $167, and the government collects $83.50 tax. In the case of the tax-exempt bond, the taxpayer’s after-tax return is $100, the bond issuer’s borrowing cost is $100, and the government collects no tax. Of the $83.50 of forgone tax revenue, $67 goes to the bond issuer in the form of lower borrowing cost ($167 – $100), but $16.50 goes to the top-bracket taxpayer in the form of a higher...
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Part F. Capital Gains and Losses 109 results (showing 5 best matches)
- What is going on here? How can her marginal tax rate be 105%, when the top rate on ordinary income is only (so to speak) 37%? The answer is that the additional tax of $1.05 million has two components: (1) a tax, at the rate of 37%, on the $1 million development profit (a tax of $370,000), and (2) an increase from 20% to 37% in the tax rate on the $4 million of long-term appreciation (increasing her tax by 17% of $4 million, or $680,000). Her development activities do not merely generate a 37% tax on her development profit; they also convert her long-term investment profit from capital gain to ordinary income, increasing the tax on that long-term gain by $680,000. This is an example of what tax professionals sometimes refer to as a “cliff effect”—a situation in which a relatively small change in the taxpayer’s economic situation produces a disproportionate change in the taxpayer’s tax bill. For the most part, Congress has designed the income tax to avoid cliff effects. The most...
- The equalization of ordinary income and long-term capital gain rates under the 1986 Act, and the elimination of the capital gain preference, did not last very long. The current top rate on most long-term capital gains (20%) is slightly more than half the top marginal rate on ordinary income (37%). Under Code § 1(h) the tax rate on net capital gain ( the excess of net long-term gain over net short-term loss) depends on the amount of the taxpayer’s taxable income. To the extent a taxpayer’s net capital gain, when combined with the taxpayer’s other taxable income, would not result in taxable income of more than $89,250 (joint return), $59,750 (head of household), or $44,625 (single taxpayer), the gain is not taxed. To the extent a taxpayers’ net capital gain would result in taxable income higher than the relevant above amount, but lower than $553,850 (joint return), $523,050 (head of household), or $492,300 (single), the gain is taxed at 15%. Any remaining gain is taxed at 20%. ...tax—...
- The only justification for the capital gains rate preference that stands up at all well to scrutiny is the justification based on the so-called Laffer curve (named after the economist Arthur Laffer, who did not discover the phenomenon illustrated by the curve, but who did explain it to Ronald Reagan). The idea is that, for any type of tax, it is possible to construct a Laffer curve which shows how much revenue the tax would raise if imposed at various rates. Increasing the rate of tax has two countervailing effects on revenue. Raising the rate obviously increases the revenue raised on what remains in the tax base, but increasing the rate also shrinks the tax base by discouraging taxpayers from engaging in the taxed activity. At first, as the rate increases above zero, the increasing rate effect is larger than the shrinking base effect, and revenue increases. Eventually, however, a revenue-maximizing rate is reached (the top of the Laffer curve); if the rate is increased above that...
- Lacking any better opportunity, this may be the place to point out that the federal income tax in a sense discriminates against savers, as compared with consumers, by imposing what some would call a tax on savings. Income, however derived, is taxed to an individual when he earns or receives it. If the amount that remains is expended on consumption goods—food, lodging, entertainment, etc.—no further tax is imposed on the individual with respect to that original receipt. If, however, the individual chooses to “expend” his after-tax income on shares of stock, corporate bonds or other assets which produce further income, then that further income will of course be subject to a further tax. Savers are thus taxed
- When the taxpayer’s subdivision and development activities are substantial enough to convert the land from a capital asset to a non-capital asset, the tax results can be striking. Suppose our taxpayer owns undeveloped acreage in which she has (to keep the numbers simple) a basis of zero. A developer has offered her $4 million for the land. If she sells to the developer, she will have $4 million of long-term capital gain, taxable at 20%. After paying tax of $800,000, she will be left with $3.2 million. Alternatively, she could do the development work herself, subdividing the property and selling off individual lots for single-family homes. Let’s suppose (unrealistically, but again to keep the numbers simple) that she would incur no expenses in developing the property, and that she could sell the lots for a total of $5 million. It would seem that she should seriously consider becoming a developer, since there is an additional pre-tax profit of $1 million to be made. But what will be...
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Part C. Attribution of Income 104 results (showing 5 best matches)
- Assuming Mr. and Mrs. Earl pooled their economic resources, why did it matter to them whether Mr. or Mrs. Earl was taxed on Mrs. Earl’s one-half share? It mattered not because they cared who was required to write the check to the government for the tax on her share (they surely did not care), but rather because of the difference in the marginal tax rates of the spouses. If Mrs. Earl’s share was taxed to her, and assuming she had no other income, it would be taxed at the low rates prevailing at the bottom of the tax rate schedule. But if Mrs. Earl’s share was taxed to Mr. Earl, it would be (metaphorically speaking) stacked on top of his one-half share of his earned income (on which he was indisputably the taxpayer), and thus taxed at the higher marginal rates prevailing farther up the tax rate schedule.
- As explained in the text (9.04), it is simply not possible to design a tax system which simultaneously features (1) progressive marginal rates, (2) marriage neutrality ( ., equal tax on equal-income married couples, regardless of how the income is divided between the spouses in each marriage). But consider a tax-and-transfer system which combines an income tax imposed at a flat rate of, say, 20%, and a “demogrant”—a universal cash grant of, say, $10,000 per person per year, and which treats the individual (rather than the married couple) as the taxable unit. If the demogrant is thought of as part of the tax system, then the system features progressive tax rates, despite its lack of progressive rates. A person with income of $50,000 pays zero net tax ($10,000 tax minus $10,000 demogrant), for an average rate of zero. A person with income of $100,000 pays $10,000 net tax ($20,000 tax minus $10,000 demogrant), for an average rate of 10%. At $200,000 income, the net tax is $30,000 ($40...
- At the same time, of course, the federal income tax structure is progressive: as an individual receives additional income, his tax also goes up but at a greater rate of increase. This is so because additional segments of income may be taxed at higher marginal rates than their predecessors. It follows that a family whose income is taxed to one member only—say the father—would usually pay a higher overall tax than a family whose income is divided evenly among all the members of the group. For example, if a married couple with three children has taxable income this year (2023) of $200,000, the pre-credit tax (on a joint return) is about $35,000. But if the same income can somehow be reported on four returns (the joint return plus one each for the three children) at the rate of $50,000 for each return, the overall pre-credit tax on the family will be about $24,500, and a tax-saving of roughly $10,500 will have been achieved.
- Before delving into the details of the grantor trust provisions, we must acknowledge that these rules are not nearly as important today as they were before the enactment of (i) the compressed § 1(e) tax rate schedule for accumulated trust income and (ii) the kiddie tax of § 1(g) (9.02). Avoiding grantor trust status is no victory (and may even be a defeat, depending on the grantor’s own marginal tax rate) if the trust income is accumulated and taxed at 37% under § 1(e). Avoiding grantor trust status is also no victory if the trust income is distributed and taxed to a child, if the kiddie tax applies and imposes a tax rate of 37%. As a general rule, avoiding grantor trust status now results in shifting of investment income to a lower-bracket taxpayer only if (i) the trust income is currently distributed rather than accumulated, and (ii) the income is distributed to an adult ...subject to the kiddie tax. It is doubtful whether the grantor trust rules described below would have been so...
- From a tax standpoint, as explained at 8.01, the Supreme Court’s decision in all married couples, wherever they resided, to treat the family income as if earned equally by each spouse. Under the original joint-return procedure, tax liability was determined by (a) computing a tax on one-half of the couple’s taxable income, and then (b) doubling the tax so computed. As a result, the marginal tax rate applicable to a married couple was the same as that of a single person with only half as much income. If a married couple had $100,000 of taxable income, the marginal tax rate on the last dollar would be the same as the marginal rate for a single person with taxable income of only $50,000, and the average tax rate on their total income would be the same as the average tax rate for a single person with taxable income of $50,000.
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Afterword 10 results (showing 5 best matches)
- Realization and deferral of tax was a leading theme in Part A. As suggested in the Note at p. 493, the effect of the realization requirement is to convert our income tax into a kind of hybrid tax system, in which consumption tax elements—the exemption or partial exemption of investment income—can be found as well as income tax elements.
- essentially tax arbitrage decisions. The question posed was whether economic income that was tax-excluded (as in ), or tax-deferred (as in ), or tax-preferred (as in
- Systemic Problem #3: Tax Arbitrage.
- A taxpayer who can find some legal means of deferring his tax obligation will have succeeded in reducing that obligation in absolute terms. As the reader well knows, the present value of a dollar in tax that can be paid a year from now (or, better yet, ten years, or fifty years) is substantially less than a dollar in tax that has to be paid today. The difference is simply measured by compound interest on the deferred liability. Apart from parents and grandparents (as the old saying goes), the United States is the only lender that is generally willing to make interest-free loans.
- , one is pretty much forced to conclude that distinguishing “business” from “personal” can never be done in a wholly convincing way and never with complete finality. The courts of appeals decided the first two cases for the government, but both decisions were reversals of the Tax Court, a majority of whose putative tax experts actually found for the taxpayers. In
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Note. Tax Shelters and Economic Substance 34 results (showing 5 best matches)
- A dramatic third factor was the government’s decision to bring felony charges against accountants and lawyers promoting especially egregious tax shelters. Although the number of tax professionals prosecuted was small relative to the number of tax professionals who were engaged in tax shelter promotion, and although not all the defendants were convicted, the prosecutions seem to have had a remarkably chilling effect on the entire tax shelter industry. Given the fact that more than a few tax shelters were being upheld (until the middle of the last decade) in civil litigation, it may be surprising that the government was able to obtain criminal convictions in some shelter cases. The apparent explanation is that some tax shelter promoters were not content with extremely aggressive interpretations of the tax laws; they also fraudulently misrepresented the facts of their shelter transactions. A jury might never convict based on a difference of opinion between the promoter and the...
- In the 1990s and early 2000s, the tax system suffered from a plague of tax shelter devices promoted by major accounting and investment banking firms, often with the active support of some of the best-known law firms in the nation. The plague seems now to have ended—not for any one reason, but for a rather complicated combination of reasons (described below). While the tax shelter phenomenon lasted, the cost to the Treasury—that is, to the rest of us—in taxes never collected was horrendous.
- In the first few years of the new millennium, the IRS appeared to be in serious danger of losing the tax shelter war. Although most courts paid lip service to the economic substance doctrine—under which a transaction lacks economic substance, and so is disregarded for tax purposes, unless the transaction had a realistic potential for producing a non-tax profit, and the taxpayer entered into the transaction for substantial non-tax business purposes—some courts found economic substance almost everywhere they looked. In addition to winning a significant portion of the litigated cases, taxpayers “won” an unknown—but surely significant—number of cases simply because the IRS never detected their shelters. By 2006, however, IRS Commissioner Mark Everson was able to tell a Senate panel, “No longer are abusive tax shelters being marketed by top level accounting firms,” ...of this writing. So what happened? The demise of tax shelters (at least for the time being) seems to have been caused by...
- We may be tempting fate by describing tax shelters in the past tense. The tax shelter industry appeared dead after the enactment of the passive loss rules (13.02) in 1986, but it returned with a vengeance only a few years later. We are not quite convinced that tax shelters are (in the words of the Munchkin coroner) “really most sincerely dead” this time either.
- From the taxpayer’s standpoint there was little to lose (apart from fees) by investing in a tax shelter scheme that the only consequence, if the scheme unraveled, was payment of taxes that would have had to be paid anyway (plus interest on those taxes). So why not give it a try? The outlook would have been a lot more chancy—often prohibitively so—if the taxpayer also had to confront the risk of civil penalties for understating his income, penalties that might, depending on circumstances, run as high as 75% of the tax due. In many cases, probably most, that danger would have rendered the tax shelter unsalable. The solution to this awkward problem was for the promoter to furnish to the taxpayer (at the taxpayer’s expense) an opinion of independent tax counsel whose considered conclusions on the legal status of the tax shelter were presumably entitled to respect. Usually running to forty or fifty pages of heavily footnoted legal analysis, such opinions invariably stated that in the...
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Part E. Recognition of Gains and Losses—Selected Issues 100 results (showing 5 best matches)
- Assuming he expects to have income from other sources and to pay tax at a rate of (say) 30% throughout the five-year period, then—§ 469 aside—the taxpayer will save $36 (30% of $120) in taxes the first year by offsetting his “loss” against such other income, $18 the second year and $3 the third—a total tax saving of $57. In all three years the “losses” are artifacts of the tax system; they do not reflect real economic losses. The taxes saved in years 1–3 will have to be repaid in Years 4 and 5, but, as usual, there is a tangible and substantial benefit in deferring to later periods taxes otherwise due currently.
- Most commentators applaud the matching of the imposition of tax liability with the receipt of cash accomplished by § 453. It may be worth observing, nevertheless, that the provision, when applicable, actually results in a of tax liability and thus has consequences for the taxpayer that are substantive, not merely procedural. If the property seller in the illustration above had sold his building for $100,000 cash, his tax liability of $24,000 would have been payable at once. Having sold on the installment method, his tax is payable at the rate of $2,400 a year over a 10-year period. The present value of the latter obligation, discounted at an after-tax rate of (say) 8%, is only about $16,100. Hence, it can be said that § 453 has effectively reduced the seller’s tax by some $7,900.
- In periods when home prices are steadily rising, § 121 creates a tax incentive to sell one’s home and purchase a similar replacement home in order to obtain a tax-free step-up in the basis of one’s residence. Suppose an unmarried taxpayer owns a house with a basis of $300,000 and a current value of $550,000. Her best guess is that the house will continue to appreciate. If she continues to own and live in that home, any additional appreciation will be in excess of the $250,000 ceiling on the exclusion, and thus will be subject to tax when she eventually sells. But if she sells the house now for $550,000 and buys a nearby replacement home for the same price, her basis in the new home will be $550,000 and she will not be taxed on any gain on the sale of the new home unless she sells it for more than $800,000. ...this tax benefit comes at a high price in terms of realtor’s fees, moving expenses, and the heartbreak of leaving a beloved home (with pencil marks of children’s heights on...
- Commencing in the 1960’s and continuing at an accelerated pace for some twenty years or so, tax shelters for high-income individuals became a major industry in this country and, in the view of many, a national scandal. Typically through the medium of real estate limited partnerships, top-bracket taxpayers were able, pretty much at will, to reduce their regular tax obligations to very low levels, if not indeed to zero. Public awareness of the tax-shelter phenomenon finally appeared to grow to some degree, and it may be that the willingness of Congress to adopt the 1986 reform legislation after decades of resistance or indifference can in part be traced to a general perception that high-paid people were systematically and habitually avoiding their apparent tax obligations by participating in legally-sanctioned shelter arrangements.
- Apart from taxes (and a hope that the property may appreciate) the arrangement is altogether pointless; but if we stir in (a) the rule, (b) straight-line depreciation, and (c) annual interest deductions, we will have cooked up a very serviceable little tax shelter. Thus, obviously—
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Index 55 results (showing 5 best matches)
Table of Contents 14 results (showing 5 best matches)
Preface 4 results
- This book is intended as a study aid for law students taking the basic course in federal income taxation, and it is therefore largely an explanation of how the income tax affects individuals. A systematic treatment of the taxation of corporations and shareholders—usually the subject of an advanced course, and in any event requiring an entire volume to itself—is not included. Certain fundamental elements of the corporate-shareholder system are referred to at various points, but this is done only as an incident of some other discussion and never in any real detail. The focus here is on the individual income tax and on the case and statutory materials that are likely to be covered in an introductory law-school course.
- Our approach, we should also state, is anything but comprehensive. All sorts of topics are omitted which the student may encounter in the classroom and desire more information about, while other topics of no greater intrinsic importance are discussed at length. But we have not attempted to write a treatise, or a summary of Code sections, or a manual which can be used to answer specific questions about the tax law. Instead, the aim, which has not changed since the senior author’s writing of the First Edition several decades ago, is to disclose the structural characteristics of the income tax mechanism—how the plumbing works, what’s at stake in the controversies that arise, what elements of internal consistency or inconsistency can be detected, and so on. Accordingly, we have used whatever legal materials seemed best to illustrate the technical components of the system. We have tried to sketch the outline of the house—or at least one wing of it—but have made no effort to furnish all...
- The organization of the work—Income, Deductions, Attribution, etc.—roughly mirrors that of the various casebooks in use in the law schools. Although they differ among themselves in many ways, the casebooks also exhibit a great many elements of similarity, and it seems safe to say that the resemblances outnumber the differences. Large subject-matter headings are, of course, alike. In addition, the casebooks generally employ the same “great” landmark cases to carry the tax story from one topic to another: a few dozen well-known Supreme Court decisions are always featured, and even the lesser gleanings from the lower courts and the Internal Revenue Service are often the same. The notes that follow the cases, as well as the independent editorial materials, are very different in emphasis and style, and there are many differences in organization which are of real importance. But, again, there is considerable overlap in the lists of leading cases and administrative rulings.
- This aspect of agreement among the editors, on cases as well as subject matter, has made it possible to write a book which tracks the casebooks—follows them like a reproach, as it were—without really having to develop a closer relationship to any one than to any other. We have used the landmark decisions as vehicles for explanation whenever possible, because the casebooks do so. Where the casebooks diverge, we have tried to invent hypotheticals which abstract from the cases in such a way as to merge the elements that seem to be common to all. Our hope is that this book can be used as a kind of universal supplement, therefore, and that the discussions it contains will have roughly equal relevance for all law students taking the basic tax course, no matter what the identity of their primary course materials. So as not to seem to claim too much, however, we should state again that not every casebook subject is taken up in detail; and some are omitted entirely.
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Marvin Chirelstein 1 result
- is the second since the death of Marvin Chirelstein in 2015. From its original publication in 1977, Chirelstein’s “little book” (as he liked to call it) about the income tax has had a deep influence on generations of law students, and perhaps an even deeper influence on their teachers (including, in both capacities, the co-author of the present edition). Chirelstein’s guide to the law of contracts, , has been similarly influential in its field. He was much more, however, than the author of the two books for which he is best known. He knew everything about the history of boxing and baseball, seemed to have the complete works of Gerard Manley Hopkins committed to memory, and enjoyed playing in string quartets. He cared passionately about the integrity of the income tax, which he continued to defend long after his official retirement. He wrote in an unmistakable voice, with clarity, grace and wit (and not just about tax and contracts—take a look at his last published essay, “Bork,...
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- Publication Date: March 27th, 2023
- ISBN: 9781647083144
- Subject: Taxation
- Series: Concepts and Insights
- Type: Hornbook Treatises
- Description: This highly-acclaimed text explains the conceptual basis of federal income taxation. It is designed to help students quickly pull together the entire subject for end-of-semester review and provide perspective about where a topic fits within the federal income tax scheme. While focusing on the present income tax, the text provides an explanation of the often-discussed consumption tax and contrasts the two taxes in a note at the end of the volume. The new edition reflects developments since the fourteenth edition, including the promulgation of regulations interpreting major provisions of the Tax Cuts and Jobs Act of 2017. It also features new or expanded discussions of several topics, including: possible legislative reconsideration of the realization requirement (in the context of “billionaires’ tax” proposals); the long-term shift from deductions to credits in the design of nonbusiness tax expenditures, and the new and used electric car credits introduced by the Inflation Reduction Act of 2022.