Colonial Times... 2 The Post Revolutionary Era... 3 The Civil War... 3 The 16th Amendment... 3 World War I and the 1920s... 5 The Social Security Tax... 5 World War II... 5 Developments after World War II... 6 The Reagan Tax Cut... 6 The Tax Reform Act of 1986... 6 EGTRRA 2001 (The Bush Tax Cut)... 7 The Patient Protection and Affordable Care Act (PPACA) of 2010... 7 TRA 2010... 8 The American Taxpayer Relief Act of 2012 (ATRA 2012)... 8 The Tax Increase Prevention Act of 2014... 8 Protecting Americans from Tax Hikes Act of 2015... 9 Consolidated Appropriations Act of 2015... 10 The Tax Cuts and Jobs Act of 2017... 10 The Bipartisan Budget Act of 2018... 11
Overview of Federal Income Taxation... 13 The Three Tax Systems... 13 Basic Rules of Income Taxation... 14 All Accretions to Wealth Constitute Income... 14 For Every Deduction, There Must be an Inclusion... 15 Triads of Income Taxation...16 Summary... 20 Statutory Sources of Tax Law... 28 How Tax Laws are Passed... 29 Administrative Sources of Tax Law... 30 Judicial Sources of Tax Law... 33 Role of the IRS... 34 Statute of Limitations... 34 Interest and Penalties for Noncompliance... 36 Penalties for Underpayment of Estimated Tax... 39 Preparer Penalties... 41 Audits... 41 Dispute Resolution... 43 Court System... 46
Introduction... 61 Income... 62 Exclusions... 63 Gross Income... 66 Deductions... 66 Adjusted Gross Income (AGI)... 67 Taxable Income... 70 Tax on Taxable Income... 71 Credit for Estimated Tax Payments... 73 Other Tax Credits... 73 Tax Accounting Periods... 75 Tax Accounting Methods... 76 Filing Status... 79 Personal and Dependency Exemptions... 85 Calculation of the Standard Deduction for a Dependent... 93 Kiddie Tax... 94 Filing the Tax Return... 96 Taxpayers Required to File a Return... 97 Credit for Taxes Withheld... 97 Tax Year and Accounting Method... 112 Gains Normally Taxed When Realized... 113
Investment Income... 117 Income from Personal Activities... 117 Employment Income... 117 Special Issues for Persons Living in Community Property States... 118 Investment Items Included in Gross Income... 120 Investment Items Excluded from Gross Income... 132 Personal Activity Items Included in Gross Income... 143 Alimony Paid... 144 Personal Activity Items Excluded from Gross Income... 150 Special Rules for Compensation for Injuries and Sickness... 153 Foreign Earned Income... 168 Introduction to Fringe Benefits... 173 Taxation of Fringe Benefits... 174 Nondiscrimination of Fringe Benefits... 174 Individuals Who May Enjoy Benefits... 175 Health Insurance... 175 2010 Health Care Law... 177 Archer Medical Savings Accounts... 177 Health Savings Accounts... 178 Qualified Medical Expenses... 180 Life Insurance... 180 Disability Insurance... 182 Cafeteria Plans... 183 Flexible Spending Accounts (FSAs)... 184 Long-Term Care... 188
Meals and Lodging... 189 No-Additional-Cost Services... 191 Qualified Employee Discounts... 192 Working Condition Fringe Benefits... 193 De Minimis Fringe Benefits... 194 Qualified Transportation Fringe Benefits... 195 Qualified Moving Expense Reimbursements... 196 Qualified Retirement Planning Services... 197 Athletic Facilities... 197 Educational Assistance Programs... 198 Dependent Care Assistance... 198 Tuition Reductions Granted to Employees of Educational Institutions... 199 Adoption Assistance Programs... 199 Employee Achievement Awards... 200 Combat Pay and Other Benefits of Military Personnel... 201 Rental Value of Parsonage... 201 Frequent Flyer Miles... 201 Employee Deferrals... 201 Employer Contributions... 201 Retirement Plan Earnings... 201 Retirement Plan Distributions... 202 Income from Roth 401(k) and 403(b) Accounts... 202 Employee Stock Options: ISOs & NQSOs... 202 Unemployment Compensation... 204 Workers Compensation... 204 Social Security... 204 Modified Adjusted Gross Income (MAGI) for Social Security Income Inclusion... 207
Deductions for AGI (Above the Line)... 220 Itemized Deductions (Below the Line)... 221 Which Type of Deduction is Better Above or Below-the-Line Deductions?... 221 Trade or Business Expenses... 222 Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs)... 224 Individual Retirement Accounts... 226 Moving Expenses... 230 Penalty on Early Withdrawal of Savings... 231 Educator Expenses... 231 Student Loan Interest... 231 Alimony Paid... 233 Types of Businesses and General Deduction Rules... 237 Common Deductions for Employers and the Self-Employed... 239 For Employees... 244 For Business Owners... 245 For Investors... 247 Timing of Deduction... 257 Itemized Deductible Medical Expenses Overview... 258 Capital Expenses... 258
Nursing Homes and Special Schools... 260 Travel and Lodging Expenses... 260 Nondeductible Medical Expenses... 260 Above-the-Line Medical Expenses... 260 Timing of Deduction... 261 Nondeductible Fines and Fees... 263 Qualified Residence Interest Deduction... 265 Investment Interest Deduction... 268 Qualified Charitable Organizations... 270 Additional Requirements for Deduction... 271 Gifts that Qualify for the Deduction... 271 Itemized Deduction Limitations... 275 Partial Interest Gifts... 283 Casualty Loss Limitations... 284 Business Casualty Losses... 286 Deductions Not Subject to the Two Percent Floor (Tier I)... 287 Deductions Subject to the Two Percent Floor (Tier II)... 288 Public Policy Limitations... 303 Political Contributions... 305 Excessive Compensation... 305 Hobby Losses... 305 Rental of Vacation Homes... 313 Expenditures... 318
Bad Debts... 319 Worthless Securities... 320 Section 1244 Stock... 323 Losses of Individuals... 323 Research and Experimental Expenditures... 325 Net Operating Losses... 325 Loss Limitation for Individuals... 326 Depreciation... 327 Excess Contributions Penalty... 328 Early Distribution Penalty... 328 Late Distribution Penalty... 330 Section 1031 Exchanges Resulting in a Loss are Not Immediately Deductible... 331 Wash Sales... 331 Related Party Transactions... 332 Gifts Below Fair Market Value... 332 Sale of Personal Assets for Loss... 333 Nonrefundable Tax Credits... 341 Refundable Tax Credits... 343 Tax Credits vs. Tax Deductions... 344 Tax Policy Issues... 344 Tax Credit Requirements... 345 Nonbusiness and Business Tax Credits... 345 Foreign Tax Credit... 345 Credit for Child and Dependent Care Expenses... 347 Credit for the Elderly or Disabled... 353 Education Credits (American Opportunity Tax and Lifetime Learning Credits)... 353 Retirement Savings Contributions Credit (Saver s Credit)... 358
Child Tax Credit (IRC Section 24)... 359 Family Tax Credit... 364 Residential Energy Property and Residential Energy Efficient Property Credits... 364 Qualified Adoption Expenses Credit... 366 Credits for Taxes Paid... 368 Earned Income Credit... 368 Investment Credit... 374 Work Opportunity Credit... 374 Credit for Increasing Research Activities... 375 Low-Income Housing Credit... 375 Disabled Access Credit... 376 Small Employer Pension Plan Startup Costs Credit... 376 Employer-Provided Child Care Credit... 376 Tax Credits from the 2010 Health Care Legislation... 377 Calculating Gain or Loss... 387 Purpose of Basis... 387 Uses of Basis... 388 Cost Basis... 389 Adjustments to Basis... 390 Basis of Inherited Property... 395 Basis of Gifted Property... 397 Basis of Property Transferred Between Spouses or Incident to Divorce... 400 Related Party Transactions (Sales, Gifts, and Basis-IRC Section 267)... 400 Basis of Jointly Held Property... 403 Introduction... 403
Purpose... 404 Methods of Depreciation... 404 Bonus Depreciation (Additional First Year Depreciation)... 410 Amortization of Intangible Assets... 412 Depletion of Natural Resources... 412 Special Depreciation Issues... 412 Capital Assets... 420 Ordinary Income Assets... 423 Section 1231 Assets... 424 Sale or Exchange Requirements... 435 Calculation of Gain or Loss... 437 Recognition Rules... 439 Holding Periods... 443 Capital Gains Tax Rates... 448 Capital Gains and the AMT... 455 Small Business Stock (Section 1202)... 459
Benefits of Section 1231... 470 The Catch - Depreciation Recapture... 471 Gifts... 488 Nontaxable Exchanges... 489 Transfers at Death... 490 Charitable Contributions... 490 Installment Sales... 491 The 5-Year Lookback Rule... 492 Assets Subject to Like-Kind Exchange Treatment... 501 Requirements for Like-Kind Exchange Treatment... 502 Related-Party Transactions... 505 Tax Consequences of Like-Kind Exchanges... 506
Background to the Passive Activity Loss Rules... 537 Net Investment Income (2013 and Beyond)... 538 Three Types of Income... 540 Passive Activities... 542 Material Participation... 542 Grouping of Passive Activities... 543 The Basis Limitation... 544 At-Risk Rules... 545 Passive Activity Loss Rules... 548 Rental Activities... 553 Real Estate Exceptions... 555
Personal and Dependency Exemptions and the Standard Deduction... 572 Itemized Deduction Changes... 572 Investment-Related Changes... 576 Business-Related Changes... 580 Miscellaneous Adjustments... 581 Ease and Cost of Formation... 588 Complexity of Management and Governance... 589 Transferability and Dissolution... 589 Liability Protection for Owners Personal Assets... 589 Reporting Requirements and Taxation... 590 Formation... 594 Interest, Disposal of Interest, and Dissolution... 594 Capital... 594 Liability... 594 Management/Operations... 594 Income Taxation and Payroll (Social Security) Taxes... 595 Formation... 603 Interest, Disposal of Interest, and Dissolution... 603 Capital... 604 Liability... 604 Management/Operations... 604 Income Taxation and Payroll (Social Security) Taxation... 605 Formation... 609 Interest, Disposal of Interest, and Dissolution... 609
Capital... 609 Liability... 609 Management/Operations... 610 Income Taxation and Payroll (Social Security) Taxes... 610 Formation... 611 Interest, Disposal of Interest, and Dissolution... 611 Capital... 611 Liability... 611 Management/Operations... 612 Income Taxation and Payroll (Social Security) Taxes... 612 Formation... 612 Interest, Disposal of Interest, and Dissolution... 613 Capital... 614 Liability... 614 Taxation... 615 Formation... 616 Interest, Disposal of Interest, and Dissolution... 616 Capital... 616 Liability... 616 Management/Operations... 617 Income Taxation and Payroll (Social Security) Taxes... 617 Formation... 619 Interest, Disposal of Interest, and Dissolution... 620 Capital... 620 Liability... 620 Management/Operations... 620 Income Taxation and Payroll (Social Security) Taxes... 620 Interest, Disposal of Interest, and Dissolution... 624 Capital... 624 Liability... 624 Management/Operations... 624 Income Taxation and Payroll (Social Security) Taxes... 624 Comparison of S Corporations and LLCs... 628 Protecting Minority Shareholders/Members... 632 Elements of Shareholder/Partnership Agreements... 632 Issues Regarding Additional Capital Required... 632