Federal Income Taxation of Individuals in a Nutshell
Authors:
McNulty, John K. / Lathrope, Daniel J. / Yamamoto, Kevin M.
Edition:
9th
Copyright Date:
2023
14 chapters
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Preface 5 results
- This book, now in its ninth edition, is designed to serve as an introduction to the federal income taxation of individuals. It is thus a companion to McNulty & McCouch, Federal Estate and Gift Taxation in a Nutshell (9th ed. 2019), and McCouch, Federal Income Taxation of Estates, Trusts, and Beneficiaries in a Nutshell (3d ed. 2023). It is written for use by law students as a supplement to usual law school courses and materials; students, lawyers and scholars in other legal systems; and perhaps as a refresher (or an introduction) for lawyers and accountants. It summarizes the law and inquires occasionally into the policy and purposes of, and alternatives to, existing legal rules. It does not attempt a thorough critical evaluation or an adequate history or justification of the federal income tax.
- Also, as the title indicates, the book limits itself to the taxation of individuals; it does not cover taxation of organizations such as corporations, partnerships, limited-liability companies, or exempt organizations. Nor does it do much to cover the special taxation of individuals as they are involved in such organizations, though many of the general principles of individual income taxation apply in that context as well.
- We hope this short book will prove useful to introduce, or to review, the subject matter of federal income taxation and provide an overview of the subject matter. It cannot substitute for, it can only supplement, a thoroughgoing examination and analysis of the Code, regulations, cases and rulings which are the sources of our income tax law, and which must be emphasized in the study of that law by students in law school courses.
- is the taxpayer that must report a particular item of income or is allowed to take a deduction? And finally, Chapter 9 delves into the issue of how income is taxed? Dispositions of property, capital gains and losses, and special tax rates are examined in Chapter 9. Little or no attention is given in the book to the topics of tax procedure, tax administration, compliance, filling out forms or tax returns, taxation of foreign income, economics, deep policy analysis, or reforming the income tax. Those topics are simply beyond the scope of this volume.
- During the lifespan of the eighth edition of this book, John K. “Jack” McNulty passed. Jack was a nationally recognized scholar of the law of taxation and a member of the Berkeley Law faculty for 56 years. Jack authored the first six editions of this book, and I was honored to have been asked by Jack to be his co-author and to have worked with him on the seventh and eighth editions. With the publication of this ninth edition, I am pleased to welcome Kevin M. Yamamoto, who teaches at South Texas College of Law Houston, as a new co-author of the book. Kevin and I have been friends since 1995, when we both taught at the Graduate Tax Program at the University of Florida School of Law. He has an extensive background as a tax teacher and is a distinguished tax scholar. I am confident that Kevin will help elevate the quality of this and future editions of the book.
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Chapter 2. What Is Income? 9 results (showing 5 best matches)
- net disposable command over resources, the result will be to “tilt” the income tax in the direction of a tax on consumption, with the resulting deferral benefits. If that conception is used as the model against which to compare the current U.S. income tax, an income tax that is not “tilted” in the direction of a consumption tax, that is to say a Haig-Simons accretion-type income tax, the present U.S. tax will be observed to produce higher taxation, by way of taxation sooner, on income that is used for savings or investment, compared to the consumption model tax.
- The requirement of a realization plays not only a conceptual but also a practical role. A hard-core realization event such as a sale of Blackacre for cash provides the tax system with a determination once and for all (1) whether the taxpayer has enjoyed any gain or not and (2) what the amount of that gain is. The realization requirement also usually defers taxation until the taxpayer has the wherewithal to pay the tax. Moreover, since the occurrence of a realization is generally in a taxpayer’s control (but not always—consider a condemnation of taxpayer’s property or a dividend paid by a corporation whose dividend policies the taxpayer does not control), its requirement prevents many taxpayer hardships.
- Employee fringe benefits—a combination of gifts and imputed income and, sometimes, working conditions—also sometimes escape tax. Thus, a company car used for business purposes, a convention trip within North America, group insurance, free recreation facilities, or a cheap on-site cafeteria enjoyed by the employee may not be taxed to the employee. But if such items rise to a high level of value and amount to a payment in kind, the Commissioner will bear down. And generally regarding taxation of fringe benefits,
- directly to do with the attempts by courts, scholars and others to define “income.” Moreover, the objection to the so-called “over taxation” of savings under an income tax that does not contain exemptions for savings is freighted with considerations important for an understanding of the income tax in general.
- If the deferral were as long as 10 years and if interest rates were about 7.5%, the amount of deferred tax could be put in a savings account at compound interest and would double by the end of the 10-year period. There would then be enough dollars in the account to pay the tax on the original deposit and accumulated interest and still have an additional amount left over. The taxpayer may have to pay tax on the interest as it accrues over the years, and therefore the net benefit would be somewhat less than the computations suggested. Nevertheless, there would be very significant net benefits. This benefit of deferral shows the advantage of an income tax that postpones tax on income until it is used for consumption. The concept of deferral has much to do with tax planning as well as the principles of taxation.
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Index 3 results
Chapter 8. To Whom Is Income Taxable? 9 results (showing 5 best matches)
- The federal income taxation of trusts and estates is a large and sometimes immensely complicated subject. For present purposes, it must be reduced to an outline of simple principles.
- . Likewise, the complex trust rules have sought to avoid imposing a “double tax” on trust income—once to the trust and again to the beneficiary—and thus to preserve the “conduit” conception of a trust. To accomplish these ends, doctrines such as the throwback rule, which stands in the way of a trust distributing income every other year and thus splitting the taxation of trust income between the trust and beneficiary, had to be used. ...then were elevated to statutory stature in the faint hope that if nearly every fact situation were anticipated and provided for, the rules could execute themselves and minimize administrative and courtroom disputes or uncertainty. Perhaps this very elaborateness and intricacy of rules accounts for the fact that taxpayers’ lawyers and I.R.S. agents alike are often said to disregard much of the statutory law and to settle on taxation of complex trusts on a rough-hewn logical and sensible basis not necessarily identical to that compelled by the...
- Under familiar principles it is feasible, even easy, to shift taxation on the gain in appreciated property, merely by making a transfer of the property. If a donor owns property for which the donor paid $100 and it has increased in value to $170, for example, the donor can quite safely and legitimately give the property to almost any donee and need not fear that the gift transfer itself will entail any income tax for the donor. . If and when the donee sells the property for $170, the donee will have $70 gain, taxable at that time. Under the federal income tax, this is an entirely lawful and proper way to shift taxation of the gain in appreciated property to a donee.
- trust, named after the leading case, where the question is whether someone other than the grantor or trust or beneficiaries will be taxable. Section 679 deals with the taxation of foreign trusts having one or more U.S. beneficiaries. And §§ 651–668
- Another area of taxpayer behavior that involves income shifting and problems of income attribution, and which has been subjected to specific legislative rules, is the operation and taxation of partnerships. A partnership is not a taxable entity. § 701
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Chapter 1. Introduction 5 results
- The taxation of corporations as separate entities and the failure of any systematic plan to integrate the corporate and individual taxes have created a number of problems and complications. For example, corporate profits are subject to “double taxation”—the corporation must pay income tax on its profits, and its shareholders must also pay tax when these profits are distributed to them as dividends. At various times, slight relief has been afforded in the
- Compare the taxation in 2023 of an unmarried taxpayer having $11,000 of taxable income with the taxation of an unmarried taxpayer having $20,000 of taxable income. Under § 1(j)(2)(C), taxable income not over $11,000 is taxed at 10%. The tax on total taxable income over $11,000, but not over $44,725, is $1,100 ($11,000 × 10%)
- In making investment decisions, taxpayers and investors should consider the benefits of compounded interest and deferral of taxation. The discussion and examples below demonstrate the importance of these concepts.
- Income taxation is a complex, dense and broad subject. Its intricacies can better be understood (and survived) if they are seen in a simple conceptual framework; fortunately, a clear framework can be constructed.
- As the foregoing examples demonstrate, the value of money depends on when it is received—hence, the term “time value of money.” Taxpayers usually have a strong incentive to accelerate income and to defer taxation. This incentive will become particularly apparent with the Individual Retirement Account (I.R.A.), which operates similarly to option 2 in the preceding paragraph and is discussed in 7.H.,
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Chapter 7. Annual Accounting: When Is Income Taxable? 11 results (showing 5 best matches)
- One advantage to a taxpayer in setting up such an I.R.A. account, rather than a Keogh plan, is that the individual need not meet any of the requirements relating to the vesting of benefits, minimum funding, or participation of employees, which must be met to defer taxation and to allow the deductions for Keogh plans.
- . Beyond that, gain will be capital gain if the original transaction qualified for capital gain taxation. Loss, if any, also would be taxable as capital or ordinary as determined by the character of the underlying transaction.
- ), categorical taxation of quasi-capital gains and losses (§ 1231
- Prepayments of income and estimated expenses have presented troublesome questions for accrual-method taxpayers. The taxpayer who receives payment in advance would like to defer accrual of income; the taxpayer who prepays an estimated expense may by doing so seek to advance the accrual of a deduction before the liability has become ripe. Suppose, for example, that an accrual basis landlord is paid rent before it is due. Or, suppose an auto club or furnace servicing business receives payment for services before the services are rendered or due to be rendered. The accrual-method taxpayer has actually received the amounts before the right to receive them has become fixed. Is the right to receive payment a necessary condition for accrual as well as a sufficient condition? Can accrual of advance receipts be deferred until future activity makes final the taxpayer’s right to receive the amounts? That is, can taxation of amounts already received be deferred until some later time?
- Special rules that are heavily concerned with timing questions have developed for the taxation of specific kinds of transactions. One example is the set of rules applicable to deferred compensation, one form of which is employee stock options. Options to purchase stock in a corporation at a bargain price—below the market value of the stock—are often given by that corporation to its employees to compensate
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Chapter 9. How Is Income Taxable? 8 results (showing 5 best matches)
- Throughout most of the history of income taxation in the U.S., a distinction has been drawn between the rate of taxation on “ordinary income” (or ordinary loss) and “capital gain” (or capital loss). “Capital gain” refers to the income from certain transactions in some assets, called capital assets, or from other transactions that Congress has said should be taxed as capital gain. Similarly, capital losses are losses sustained on capital assets or other losses that Congress has decided to treat as if they were capital losses. The most common form of capital gain or loss transaction is a sale for cash of an asset, such as a share of stock or a parcel of investment land.
- will be obtained at the taxpayer’s death, and the gain on the first investment—on which tax was deferred—will avoid taxation.
- a feature of corporate taxation in the United States. However, income earned by partnerships and other pass-through entities (
- (j). However, capital gains may also be taxed at a zero percent, 10%, 25%, or 28% rate. Thus, the taxation of capital gains has become much more complex.
- exception to the definition of a capital asset. There remains, however, the matter of interpreting and applying the statutory exceptions. The taxation of hedging transactions, like those in
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- . Credits against tax can be taken in any event, of course. In 2023, the standard deduction exempts from taxation $13,850 on a tax return of a single individual and married individual filing separately, $27,700 for a married couple filing a joint return, and $20,800 for heads of households.
- Regan v. Taxation With Representation of Washington, 461 U.S. 540 (1983)
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- personal injuries escaped taxation under the § 104(a)(2) exclusion for “any” damages. The Supreme Court eventually resolved the issue by agreeing with the I.R.S. that such punitive damages were gross income under the pre-1997 version of § 104(a)(2).
- To be sure, not all the items to be included as tax preference income are described in terms of receipts or additions to net worth. Some tax preference items are receipts that escape taxation under the normal definition of taxable income because of exclusions or deductions. As to them, § 57
- No deduction is allowed for insurance premiums paid by a person for insurance on the person’s own life. If those premiums are paid by someone else, such as an employer, they may be partly or wholly exempt from taxation, and this gives a tax benefit akin to a deduction. Section 79 taxes an employee on the premiums for group-term life insurance paid by the employer, but only to the extent that the death benefits of insurance so provided exceed $50,000; so, premiums paid for insurance up to $50,000 are not taxed to the employee, an important exclusion in itself. However, such group-term life plans must be non-discriminatory in order for key employees to obtain the $50,000 exclusion. § 79(d)
- . Section 121 simplifies taxation of the sale of a principal residence and provides a potentially huge tax benefit for gains resulting from sales of owner-occupied residences.
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- The lines between a taxpayer’s trade or business and the taxpayer’s (a) personal life and (b) other income-seeking or income-producing life carry important tax consequences for the deduction of expenses, losses and bad debts, the taxation of capital and quasi-capital gains, and more. For present purposes, the lines are drawn mainly to determine the scope of § 162
- . No public policy is affronted by allowing a deduction to a person who hires a lawyer for defense, even if later it be determined that the accused was guilty. Similarly, if a wrongdoer repays amounts wrongfully received the wrongdoer may take a deduction, and the form of deduction (capital or ordinary) will be keyed to the form of taxation of the earlier receipt.
- the taxpayer should be allowed to recover the capital investment tax-free when the oil is extracted and sold. That is, the receipts from the depletable property should be regarded as containing a return of taxpayer’s capital investment. A proportionate part of receipts each year should be received free of taxation as income. Treating the oil as a “wasting asset,” cost depletion would allow annual deductions designed to permit the taxpayer to receive $1,000,000 tax-free over the life of the pumping operations. To do so, the law allows a taxpayer to divide the investment by the (estimated) number of recoverable units in the mineral or other deposit. This cost per unit is then multiplied by the number of units sold each year, and the result is the depletion deduction allowed for that year. The more units sold, the higher the depletion allowance. The process stops when the total cost has been recovered.
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- Publication Date: July 26th, 2023
- ISBN: 9781683284536
- Subject: Taxation
- Series: Nutshells
- Type: Overviews
- Description: How and when is income taxable? To whom will it be taxable? This Nutshell summarizes the U.S. federal income tax law for individuals, defines income, and identifies the different types of deductions available to a taxpayer. The book explains statutory inclusions and exclusions from gross income, profit-related deductions, mixed deductions, personal deductions, other allowances, and the rules for determining taxable income. Sales and dispositions of property, taxation of capital gains and losses, and special tax rates are covered. The book also explores the policy and purposes of, and alternatives to, existing legal rules.