Editing Income Tax Freeland/Outline

'''Chevron Deference''': 2 part test ONLY ON '''FINAL REGULATIONS'''

'''LAST IN TIME RULE''' → most recent authority wins  

'''Effective tax rate''' → tax liability as a percentage of taxable income; the total percentage of tax paid (overall rate, average after all brackets considered, total tax paid); Effective tax rates will show how '''progressive''' a tax is (the more brackets in the tax ladder, the more '''progressive''').

●      Will '''always''' be lower than the marginal tax rate.  

'''Marginal tax rate''' → rate of tax applicable to the taxpayer’s '''last dollar''' of taxable income (the tax bracket at the end, highest bracket applicable to taxpayer).  

'''2018 Marginal Tax Rates''' - Unmarried Persons  

|'''10%'''

|'''$0-$9,525'''

|'''12%'''

|'''$9,526-$38,700'''

|'''22%'''

|'''$38,701-$82,500'''

|'''24%'''

|'''$82,501-$157,500'''

|'''32%'''

|'''$157,501-$200,000'''

|'''35%'''

|'''$200,001-$500,000'''

|'''37%'''

|'''Over $500,000'''

'''Progressive tax''' → progresses higher as income increases (i.e. federal income tax)

'''Regressive tax''' → all pay the same, regardless of income (i.e. sales tax, flat tax in MA)

'''Dead-weight loss''' → cost to implement law or provision outweighs the minimal amount of revenue it would raise.  

Four Pillars of Tax Law Analysis (steps to answer tax law questions):

1)    Sufficiency → does the provision raise enough revenue?

2)    Equity → does the provision treat everyone equally?

3)    Efficiency → don’t want to create too many market disturbances (don’t stifle a section of the market unless that’s a goal)

4)    Administrability → is the rule imposable, policable, practical to regulate and enforce? Is it administratively feasible? (the higher the cost, the less practical it is)  

Horizontal equity → same situation, same treatment

Vertical equity → different situation, different treatment  

Types of Tax:

●      Capitation Tax: everyone pays the same dollar amount

○      Problems: regressive, if different incomes, drastically different impacts (i.e. tax of $5,000 on income of $10,000 v. income of $100,000)

○      Unlikely that much revenue could be generated under this method

●      Sales Tax → percentage cost of goods, levied against consumer

○      States without income tax (TX, FL) use higher sales tax to create revenue

●      Value Added Tax (VAT) → percentage cost of goods, levied against the business, not the consumer

○      By the time the consumer buys, tax has been paid, BUT cost of good generally higher

●      Real Estate Tax → tax imposed on real property (annually)

●      Estate Tax → currently imposed on the largest estates, only paid by a tiny portion of estates, exclusion amount doubled

●      Flat Tax → everyone pays the same percentage of their income  

'''tax = base x rate'''  

Tax Brackets

●      Even though marginal rates are going up, you don’t lose money

●      Each increment taxed at rate of bracket: First $9,000 taxed at 10%, of the next $10,000, $525 will be taxed at 10% and the remaining will be taxed at the next bracket of 12%

●      Taxpayer still benefit from lower rates regardless of income (fewer than 4% of the population makes it to the final tax bracket)

2)    Surviving spouse

3)    Head of household

4)    Unmarried

'''Taxable Income'''  

STEP ONE: GROSS INCOME  

|'''26  U.S. Code § 61 - Gross income defined'''  

'''(a)  General definition. Except as otherwise provided in this subtitle, gross  income means all income from whatever source derived, including (but not  limited to) the following items:'''

'''    (1) Compensation for services, including  fees, commissions, fringe benefits, and similar items;'''

'''    (2) Gross income derived from business;'''

'''    (3) Gains derived from dealings in  property;'''

'''    (4) Interest;'''

'''    (5) Rents;'''

'''    (6) Royalties;'''

'''    (7) Dividends;'''

'''    (8)  [1] Alimony and separate  maintenance payments;'''

'''    (9) Annuities;'''

'''    (10) Income from life insurance and  endowment contracts;'''

'''    (11) Pensions;'''

'''    (12) Income from discharge of  indebtedness;'''

'''    (13) Distributive share of partnership  gross income;'''

'''    (14) Income in respect of a decedent;  and'''

'''    (15) Income from an interest in an  estate or trust.'''     

'''(b)  Cross references. For items specifically included in gross income, see part  II (sec. 71 and following). For items specifically excluded from gross  income, see part III (sec. 101 and following).'''

STEP TWO: DEDUCTIONS UNDER §62(a)  

|'''26  U.S. Code § 62 - Adjusted gross income defined'''  

'''(a)  General rule. For purposes of this subtitle, the term “adjusted gross income”  means, in the case of an individual, gross income minus the following  deductions:'''

'''    (1) Trade and business deductions. The  deductions allowed by this chapter (other than by part VII of this  subchapter) which are attributable to a trade or business carried on by the  taxpayer, if such trade or business does not consist of the performance of  services by the taxpayer as an employee.'''

'''     (2) Certain trade and business  deductions of employees'''

'''         (A) Reimbursed expenses of  employees. The deductions allowed by part VI (section 161 and following)  which consist of expenses paid or incurred by the taxpayer, in connection  with the performance by him of services as an employee, under a reimbursement  or other expense allowance arrangement with his employer. The fact that the  reimbursement may be provided by a third party shall not be determinative of  whether or not the preceding sentence applies.'''

'''          (B) Certain expenses of  performing artists. The deductions allowed by section 162 which consist of  expenses paid or incurred by a qualified performing artist in connection with  the performances by him of services in the performing arts as an employee.'''

'''          (C) Certain expenses of  officials. The deductions allowed by section 162 which consist of expenses  paid or incurred with respect to services performed by an official as an  employee of a State or a political subdivision thereof in a position  compensated in whole or in part on a fee basis.'''

'''          (D) Certain expenses of  elementary and secondary school teachers. The deductions allowed by section  162 which consist of expenses, not in excess of $250, paid or incurred by an  eligible educator—'''

'''              (i) by reason of the  participation of the educator in professional development courses related to  the curriculum in which the educator provides instruction or to the students  for which the educator provides instruction, and'''

'''              '''

'''              (ii) in connection with books,  supplies (other than non athletic supplies for courses of instruction in  health or physical education), computer equipment (including related software  and services) and other equipment, and supplementary materials used by the  eligible educator in the classroom.'''

'''         (E) Certain expenses of members of  reserve components of the Armed Forces of the United States'''

'''The deductions allowed by section 162 which consist of expenses, determined  at a rate not in excess of the rates for travel expenses (including per diem  in lieu of subsistence) authorized for employees of agencies under subchapter  I of chapter 57 of title 5, United States Code, paid or incurred by the  taxpayer in connection with the performance of services by such taxpayer as a  member of a reserve component of the Armed Forces of the United States for  any period during which such individual is more than 100 miles away from home  in connection with such services.'''

'''     (3) Losses from sale or exchange  of property. The deductions allowed by part VI (sec. 161 and following) as  losses from the sale or exchange of property.'''

'''     (4) Deductions attributable to  rents and royalties. The deductions allowed by part VI (sec. 161 and  following), by section 212 (relating to expenses for production of income),  and by section 611 (relating to depletion) which are attributable to property  held for the production of rents or royalties.'''

'''     (5) Certain deductions of life  tenants and income beneficiaries of property. In the case of a life tenant of  property, or an income beneficiary of property held in trust, or an heir,  legatee, or devisee of an estate, the deduction for depreciation allowed by  section 167 and the deduction allowed by section 611.'''

'''     (6) Pension, profit-sharing, and  annuity plans of self-employed individuals. In the case of an individual who  is an employee within the meaning of section 401(c)(1), the deduction allowed  by section 404.'''

'''     (7) Retirement savings. The  deduction allowed by section 219 (relating to deduction of certain retirement  savings).'''

'''     [(8) Repealed. Pub. L. 104–188,  title I, § 1401(b)(4), Aug. 20, 1996, 110 Stat. 1788]'''

'''    (9) Penalties forfeited because of  premature withdrawal of funds from time savings accounts or deposits. The  deductions allowed by section 165 for losses incurred in any transaction  entered into for profit, though not connected with a trade or business, to  the extent that such losses include amounts forfeited to a bank, mutual  savings bank, savings and loan association, building and loan association,  cooperative bank or homestead association as a penalty for premature  withdrawal of funds from a time savings account, certificate of deposit, or  similar class of deposit.'''

'''     (10) Alimony. The deduction  allowed by section 215.'''

'''     (11) Reforestation expenses. The  deduction allowed by section 194.'''

'''     (12) Certain required repayments  of supplemental unemployment compensation benefits. The deduction allowed by  section 165 for the repayment to a trust described in paragraph (9) or (17)  of section 501(c) of supplemental unemployment compensation benefits received  from such trust if such repayment is required because of the receipt of trade  readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19  U.S.C. 2291 and 2292).'''

'''     (13) Jury duty pay remitted to  employer. Any deduction allowable under this chapter by reason of an individual  remitting any portion of any jury pay to such individual’s employer in  exchange for payment by the employer of compensation for the period such  individual was performing jury duty. For purposes of the preceding sentence,  the term “jury pay” means any payment received by the individual for the  discharge of jury duty.'''

'''     [(14) Repealed. Pub. L. 113–295,  div. A, title II, § 221(a)(34)(C), Dec. 19, 2014, 128 Stat. 4042]'''

'''    (15) Moving expenses. The deduction  allowed by section 217.'''

'''     (16) Archer MSAs. The deduction  allowed by section 220.'''

'''     (17) Interest on education loans.  The deduction allowed by section 221.'''

'''     (18) Higher education expenses.  The deduction allowed by section 222.'''

'''     (19) Health savings accounts. The  deduction allowed by section 223.'''

'''     (20) Costs involving  discrimination suits, etc. Any deduction allowable under this chapter for  attorney fees and court costs paid by, or on behalf of, the taxpayer in  connection with any action involving a claim of unlawful discrimination (as  defined in subsection (e)) or a claim of a violation of subchapter III of  chapter 37 of title 31, United States Code [2] or a claim made under section  1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The  preceding sentence shall not apply to any deduction in excess of the amount  includible in the taxpayer’s gross income for the taxable year on account of  a judgment or settlement (whether by suit or agreement and whether as lump  sum or periodic payments) resulting from such claim.'''

'''     (21) Attorneys’ fees relating to  awards to whistleblowers'''

'''         (A) In general. Any deduction  allowable under this chapter for attorney fees and court costs paid by, or on  behalf of, the taxpayer in connection with any award under—'''

'''              (i) section 7623(b), or'''

'''              (ii) in the case of taxable  years beginning after December 31, 2017, any action brought under—'''

'''                   (I) section 21F of the  Securities Exchange Act of 1934 (15 U.S.C. 78u–6),'''

'''                   (II) a State false claims  act, including a State false claims act with qui tam provisions, or'''

'''                   (III) section 23 of the  Commodity Exchange Act (7 U.S.C. 26).'''

'''         (B) May not exceed award.  Subparagraph (A) shall not apply to any deduction in excess of the amount  includible in the taxpayer’s gross income for the taxable year on account of  such award.'''       

'''Nothing  in this section shall permit the same item to be deducted more than once. The  deduction allowed by section 199A shall not be treated as a deduction  described in any of the preceding paragraphs of this subsection.'''     

'''(b)  Qualified performing artist'''

'''    (1) In general. For purposes of  subsection (a)(2)(B), the term “qualified performing artist” means, with respect  to any taxable year, any individual if—'''

'''         (A) such individual performed  services in the performing arts as an employee during the taxable year for at  least 2 employers,'''

'''         (B) the aggregate amount allowable  as a deduction under section 162 in connection with the performance of such  services exceeds 10 percent of such individual’s gross income attributable to  the performance of such services, and'''

'''         (C) the adjusted gross income of  such individual for the taxable year (determined without regard to subsection  (a)(2)(B)) does not exceed $16,000.'''

'''    (2) Nominal employer not taken into  account. An individual shall not be treated as performing services in the  performing arts as an employee for any employer during any taxable year  unless the amount received by such individual from such employer for the  performance of such services during the taxable year equals or exceeds $200.'''

'''     (3) Special rules for married  couples'''

'''         (A) In general. Except in the case  of a husband and wife who lived apart at all times during the taxable year,  if the taxpayer is married at the close of the taxable year, subsection  (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return  for the taxable year.'''

'''          (B) Application of paragraph  (1)In the case of a joint return—'''

'''              (i) paragraph (1) (other than  subparagraph (C) thereof) shall be applied separately with respect to each  spouse, but'''

'''              (ii) paragraph (1)(C) shall be  applied with respect to their combined adjusted gross income.'''

'''         (C) Determination of marital  status. For purposes of this subsection, marital status shall be determined  under section 7703(a).'''

'''          (D) Joint return. For  purposes of this subsection, the term “joint return” means the joint return  of a husband and wife made under section 6013.'''

'''(c) Certain arrangements not treated as reimbursement arrangements. For  purposes of subsection (a)(2)(A), an arrangement shall in no event be treated  as a reimbursement or other expense allowance arrangement if—'''

'''    (1) such arrangement does not require  the employee to substantiate the expenses covered by the arrangement to the  person providing the reimbursement, or'''

'''    (2) such arrangement provides the  employee the right to retain any amount in excess of the substantiated  expenses covered under the arrangement.'''     

'''The  substantiation requirements of the preceding sentence shall not apply to any  expense to the extent that substantiation is not required under section  274(d) for such expense by reason of the regulations prescribed under the 2nd  sentence thereof.'''     

'''(d)  Definition; special rules'''

'''    (1) Eligible educator'''

'''         (A) In general. For purposes of  subsection (a)(2)(D), the term “eligible educator” means, with respect to any  taxable year, an individual who is a kindergarten through grade 12 teacher,  instructor, counselor, principal, or aide in a school for at least 900 hours  during a school year.'''

'''          (B) School. The term “school”  means any school which provides elementary education or secondary education  (kindergarten through grade 12), as determined under State law.'''

'''     (2) Coordination with exclusions.  A deduction shall be allowed under subsection (a)(2)(D) for expenses only to  the extent the amount of such expenses exceeds the amount excludable under  section 135, 529(c)(1), or 530(d)(2) for the taxable year.'''

'''     (3) Inflation adjustment. In the  case of any taxable year beginning after 2015, the $250 amount in subsection  (a)(2)(D) shall be increased by an amount equal to—'''

'''         (A) such dollar amount, multiplied  by'''

'''         (B) the cost-of-living adjustment  determined under section 1(f)(3) for the calendar year in which the taxable  year begins, determined by substituting “calendar year 2014” for “calendar  year 2016” in subparagraph (A)(ii) thereof.'''     

'''Any  increase determined under the preceding sentence shall be rounded to the  nearest multiple of $50.'''     

'''(e)  Unlawful discrimination defined. For purposes of subsection (a)(20), the term  “unlawful discrimination” means an act that is unlawful under any of the  following:'''

'''    (1) Section 302 of the Civil Rights Act  of 1991 (2 U.S.C. 1202).[3]'''

'''    (2) Section 201, 202, 203, 204, 205,  206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311,  1312, 1313, 1314, 1315, 1316, or 1317).'''

'''    (3) The National Labor Relations Act (29  U.S.C. 151 et seq.).'''

'''    (4) The Fair Labor Standards Act of 1938  (29 U.S.C. 201 et seq.).'''

'''    '''

'''    (5) Section 4 or 15 of the Age  Discrimination in Employment Act of 1967 (29 U.S.C. 623 or 633a).'''

'''    (6) Section 501 or 504 of the  Rehabilitation Act of 1973 (29 U.S.C. 791 or 794).'''

'''    (7) Section 510 of the Employee  Retirement Income Security Act of 1974 (29 U.S.C. 1140).'''

'''    (8) Title IX of the Education Amendments  of 1972 (20 U.S.C. 1681 et seq.).'''

'''    (9) The Employee Polygraph Protection  Act of 1988 (29 U.S.C. 2001 et seq.).'''

'''    (10) The Worker Adjustment and  Retraining Notification Act (29 U.S.C. 2102 et seq.).'''

'''    (11) Section 105 of the Family and  Medical Leave Act of 1993 (29 U.S.C. 2615).'''

'''    (12) Chapter 43 of title 38, United  States Code (relating to employment and reemployment rights of members of the  uniformed services).'''

'''    (13) Section 1977, 1979, or 1980 of the  Revised Statutes (42 U.S.C. 1981, 1983, or 1985).'''

'''    (14) Section 703, 704, or 717 of the  Civil Rights Act of 1964 (42 U.S.C. 2000e–2, 2000e–3, or 2000e–16).'''

'''    (15) Section 804, 805, 806, 808, or 818  of the Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).'''

'''    (16) Section 102, 202, 302, or 503 of  the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182,  or 12203).'''

'''    (17) Any provision of Federal law  (popularly known as whistleblower protection provisions) prohibiting the  discharge of an employee, the discrimination against an employee, or any  other form of retaliation or reprisal against an employee for asserting  rights or taking other actions permitted under Federal law.'''

'''    (18) Any provision of Federal, State, or  local law, or common law claims permitted under Federal, State, or local law—'''

'''         (i) providing for the enforcement  of civil rights, or'''

'''         (ii) regulating any aspect of the  employment relationship, including claims for wages, compensation, or  benefits, or prohibiting the discharge of an employee, the discrimination  against an employee, or any other form of retaliation or reprisal against an  employee for asserting rights or taking other actions permitted by law.'''

STEP THREE: LESS QUALIFIED BUSINESS INCOME UNDER 199A  

|'''26  U.S. Code § 199A - Qualified business income'''  

'''(a)  In general. In the case of a taxpayer other than a corporation, there shall  be allowed as a deduction for any taxable year an amount equal to the sum of—'''

'''    (1) the lesser of—'''

'''         (A) the combined qualified business  income amount of the taxpayer, or'''

'''         (B) an amount equal to 20 percent  of the excess (if any) of—'''

'''              (i) the taxable income of the  taxpayer for the taxable year, over'''

'''              (ii) the sum of any net  capital gain (as defined in section 1(h)), plus the aggregate amount of the  qualified cooperative dividends, of the taxpayer for the taxable year, plus'''

'''    (2) the lesser of—'''

'''         (A) 20 percent of the aggregate  amount of the qualified cooperative dividends of the taxpayer for the taxable  year, or'''

'''         (B) taxable income (reduced by the  net capital gain (as so defined)) of the taxpayer for the taxable year.'''     

'''The  amount determined under the preceding sentence shall not exceed the taxable  income (reduced by the net capital gain (as so defined)) of the taxpayer for  the taxable year.'''     

'''(b)  Combined qualified business income amount. For purposes of this section—'''

'''    (1) In general. The term “combined  qualified business income amount” means, with respect to any taxable year, an  amount equal to—'''

'''         (A) the sum of the amounts  determined under paragraph (2) for each qualified trade or business carried  on by the taxpayer, plus'''

'''         (B) 20 percent of the aggregate  amount of the qualified REIT dividends and qualified publicly traded  partnership income of the taxpayer for the taxable year.'''

'''    (2) Determination of deductible amount  for each trade or business. The amount determined under this paragraph with  respect to any qualified trade or business is the lesser of—'''

'''         (A) 20 percent of the taxpayer’s  qualified business income with respect to the qualified trade or business, or'''

'''         (B) the greater of—'''

'''              (i) 50 percent of the W–2  wages with respect to the qualified trade or business, or'''

'''              (ii) the sum of 25 percent of  the W–2 wages with respect to the qualified trade or business, plus 2.5  percent of the unadjusted basis immediately after acquisition of all  qualified property.'''

'''    (3) Modifications to limit based on  taxable income'''

'''         (A) Exception from limit. In the  case of any taxpayer whose taxable income for the taxable year does not  exceed the threshold amount, paragraph (2) shall be applied without regard to  subparagraph (B).'''

'''          (B) Phase-in of limit for  certain taxpayers'''

'''              (i) In general. If—'''

'''                   (I) the taxable income of  a taxpayer for any taxable year exceeds the threshold amount, but does not  exceed the sum of the threshold amount plus $50,000 ($100,000 in the case of  a joint return), and'''

'''                   (II) the amount  determined under paragraph (2)(B) (determined without regard to this  subparagraph) with respect to any qualified trade or business carried on by  the taxpayer is less than the amount determined under paragraph (2)(A) with  respect such trade or business, then paragraph (2) shall be applied with  respect to such trade or business without regard to subparagraph (B) thereof  and by reducing the amount determined under subparagraph (A) thereof by the  amount determined under clause (ii).'''

'''              (ii) Amount of reduction. The  amount determined under this subparagraph is the amount which bears the same  ratio to the excess amount as—'''

'''                   (I) the amount by which  the taxpayer’s taxable income for the taxable year exceeds the threshold  amount, bears to'''

'''                   (II) $50,000 ($100,000 in  the case of a joint return).'''

'''              (iii) Excess amount. For  purposes of clause (ii), the excess amount is the excess of—'''

'''                   (I) the amount determined  under paragraph (2)(A) (determined without regard to this paragraph), over'''

'''                   (II) the amount  determined under paragraph (2)(B) (determined without regard to this  paragraph).'''

'''    (4) Wages, etc'''

'''         (A) In general. The term “W–2  wages” means, with respect to any person for any taxable year of such person,  the amounts described in paragraphs (3) and (8) of section 6051(a) paid by  such person with respect to employment of employees by such person during the  calendar year ending during such taxable year.'''

'''          (B) Limitation to wages  attributable to qualified business income. Such term shall not include any  amount which is not properly allocable to qualified business income for  purposes of subsection (c)(1).'''

'''          (C) Return requirement. Such  term shall not include any amount which is not properly included in a return  filed with the Social Security Administration on or before the 60th day after  the due date (including extensions) for such return.'''

'''     (5) Acquisitions, dispositions,  and short taxable years. The Secretary shall provide for the application of  this subsection in cases of a short taxable year or where the taxpayer  acquires, or disposes of, the major portion of a trade or business or the  major portion of a separate unit of a trade or business during the taxable  year.'''

'''     (6) Qualified property. For  purposes of this section:'''

'''         '''  

'''          (A) In general. The term “qualified  property” means, with respect to any qualified trade or business for a  taxable year, tangible property of a character subject to the allowance for  depreciation under section 167—'''

'''              (i) which is held by, and  available for use in, the qualified trade or business at the close of the  taxable year,'''

'''              (ii) which is used at any  point during the taxable year in the production of qualified business income,  and'''

'''              (iii) the depreciable period  for which has not ended before the close of the taxable year.'''

'''         (B) Depreciable period. The term  “depreciable period” means, with respect to qualified property of a taxpayer,  the period beginning on the date the property was first placed in service by  the taxpayer and ending on the later of—'''

'''              (i) the date that is 10 years  after such date, or'''

'''              (ii) the last day of the last  full year in the applicable recovery period that would apply to the property  under section 168 (determined without regard to subsection (g) thereof).'''     

'''(c)  Qualified business income. For purposes of this section—'''

'''    (1) In general. The term “qualified  business income” means, for any taxable year, the net amount of qualified  items of income, gain, deduction, and loss with respect to any qualified  trade or business of the taxpayer. Such term shall not include any qualified  REIT dividends, qualified cooperative dividends, or qualified publicly traded  partnership income.'''

'''     (2) Carryover of losses. If the  net amount of qualified income, gain, deduction, and loss with respect to  qualified trades or businesses of the taxpayer for any taxable year is less  than zero, such amount shall be treated as a loss from a qualified trade or  business in the succeeding taxable year.'''

'''    (3) Qualified items of income, gain,  deduction, and loss. For purposes of this subsection—'''

'''         (A) In general. The term “qualified items of income, gain, deduction,  and loss” means items of income, gain, deduction, and loss to the extent such  items are—'''

'''              (i) effectively connected with  the conduct of a trade or business within the United States (within the  meaning of section 864(c), determined by substituting “qualified trade or  business (within the meaning of section 199A)” for“nonresident alien  individual or a foreign corporation” or for “a foreign corporation” each  place it appears), and'''

'''              (ii) included or allowed in  determining taxable income for the taxable year.'''

'''         (B) Exceptions. The following  investment items shall not be taken into account as a qualified item of  income, gain, deduction, or loss:'''

'''               (i) Any item of short-term capital gain, short-term capital loss,  long-term capital gain, or long-term capital loss.'''

'''              (ii) Any dividend, income  equivalent to a dividend, or payment in lieu of dividends described in  section 954(c)(1)(G).'''

'''              (iii) Any interest income  other than interest income which is properly allocable to a trade or  business.'''

'''              (iv) Any item of gain or loss  described in subparagraph (C) or (D) of section 954(c)(1) (applied by  substituting “qualified trade or business” for “controlled foreign  corporation”).'''

'''              (v) Any item of income, gain,  deduction, or loss taken into account under section 954(c)(1)(F) (determined  without regard to clause (ii) thereof and other than items attributable to  notional principal contracts entered into in transactions qualifying under  section 1221(a)(7)).'''

'''              (vi) Any amount received from  an annuity which is not received in connection with the trade or business.'''

'''              (vii) Any item of deduction or  loss properly allocable to an amount described in any of the preceding  clauses.'''

'''    (4) Treatment of reasonable compensation  and guaranteed payments. Qualified business income shall not include—'''

'''         (A) reasonable compensation paid to  the taxpayer by any qualified trade or business of the taxpayer for services  rendered with respect to the trade or business,'''

'''         (B) any guaranteed payment  described in section 707(c) paid to a partner for services rendered with  respect to the trade or business, and'''

'''         (C) to the extent provided in  regulations, any payment described in section 707(a) to a partner for  services rendered with respect to the trade or business.'''     

'''(d)  Qualified trade or business. For purposes of this section—'''

'''    (1) In general. The term “qualified  trade or business” means any trade or business other than—'''

'''         (A) a specified service trade or  business, or'''

'''         (B) the trade or business of  performing services as an employee.'''

'''    (2) Specified service trade or business.  The term “specified service trade or business” means any trade or business—'''

'''         (A) which is described in section  1202(e)(3)(A) (applied without regard to the words “engineering,  architecture,”) or which would be so described if the term “employees or  owners” were substituted for “employees” therein, or'''

'''         (B) which involves the performance  of services that consist of investing and investment management, trading, or  dealing in securities (as defined in section 475(c)(2)), partnership  interests, or commodities (as defined in section 475(e)(2)).'''

'''    (3) Exception for specified service  businesses based on taxpayer’s income'''

'''         (A) In generalIf, for any taxable  year, the taxable income of any taxpayer is less than the sum of the  threshold amount plus $50,000 ($100,000 in the case of a joint return), then—'''

'''              (i) any specified service  trade or business of the taxpayer shall not fail to be treated as a qualified  trade or business due to paragraph (1)(A), but'''

'''              (ii) only the applicable  percentage of qualified items of income, gain, deduction, or loss, and the  W–2 wages and the unadjusted basis immediately after acquisition of qualified  property, of the taxpayer allocable to such specified service trade or  business shall be taken into account in computing the qualified business  income, W–2 wages, and the unadjusted basis immediately after acquisition of  qualified property of the taxpayer for the taxable year for purposes of  applying this section.'''

'''    (B) Applicable percentage. For purposes  of subparagraph (A), the term “applicable percentage” means, with respect to  any taxable year, 100 percent reduced (not below zero) by the percentage  equal to the ratio of—'''

'''              (i) the taxable income of the taxpayer for  the taxable year in excess of the threshold amount, bears to'''

'''              (ii) $50,000 ($100,000 in the  case of a joint return).'''     

'''(e)  Other Definitions. For purposes of this section—'''

'''    (1) Taxable income. Taxable income shall  be computed without regard to the deduction allowable under this section.'''

'''     (2) Threshold amount'''

'''         (A) In general. The term “threshold  amount” means $157,500 (200 percent of such amount in the case of a joint  return).'''

'''          (B) Inflation adjustment. In the  case of any taxable year beginning after 2018, the dollar amount in  subparagraph (A) shall be increased by an amount equal to—'''

'''              (i) such dollar amount,  multiplied by'''

'''              (ii) the cost-of-living  adjustment determined under section 1(f)(3) for the calendar year in which  the taxable year begins, determined by substituting “calendar year 2017” for  “calendar year 2016” in subparagraph (A)(ii) thereof.'''     

'''The  amount of any increase under the preceding sentence shall be rounded as  provided in section 1(f)(7).'''

'''    (3) Qualified REIT dividend. The term  “qualified REIT dividend” means any dividend from a real estate investment  trust received during the taxable year which—'''

'''         (A) is not a capital gain dividend,  as defined in section 857(b)(3), and'''

'''         (B) is not qualified dividend  income, as defined in section 1(h)(11).'''

'''    (4) Qualified cooperative dividend. The  term “qualified cooperative dividend” means any patronage dividend (as defined  in section 1388(a)), any per-unit retain allocation (as defined in section  1388(f)), and any qualified written notice of allocation (as defined in  section 1388(c)), or any similar amount received from an organization  described in subparagraph (B)(ii), which—'''

'''         (A) is includible in gross income,  and'''

'''         (B) is received from—'''

'''              (i) an organization or  corporation described in section 501(c)(12) or 1381(a), or'''

'''              (ii) an organization which is  governed under this title by the rules applicable to cooperatives under this  title before the enactment of subchapter T.'''

'''    (5) Qualified publicly traded  partnership income. The term “qualified publicly traded partnership income”  means, with respect to any qualified trade or business of a taxpayer, the sum  of—'''

'''         (A) the net amount of such  taxpayer’s allocable share of each qualified item of income, gain, deduction,  and loss (as defined in subsection (c)(3) and determined after the  application of subsection (c)(4)) from a publicly traded partnership (as  defined in section 7704(a)) [1] which is not treated as a corporation under  section 7704(c), plus'''

'''         (B) any gain recognized by such  taxpayer upon disposition of its interest in such partnership to the extent  such gain is treated as an amount realized from the sale or exchange of  property other than a capital asset under section 751(a).'''     

'''(f)  Special rules'''

'''    (1) Application to partnerships and s  corporations'''

'''         (A) In general. In the case of a  partnership or S corporation—'''

'''              (i) this section shall be  applied at the partner or shareholder level,'''

'''              (ii) each partner or  shareholder shall take into account such person’s allocable share of each  qualified item of income, gain, deduction, and loss, and'''

'''              (iii) each partner or  shareholder shall be treated for purposes of subsection (b) as having W–2 wages  and unadjusted basis immediately after acquisition of qualified property for  the taxable year in an amount equal to such person’s allocable share of the  W–2 wages and the unadjusted basis immediately after acquisition of qualified  property of the partnership or S corporation for the taxable year (as  determined under regulations prescribed by the Secretary).'''     

'''For  purposes of clause (iii), a partner’s or shareholder’s allocable share of W–2  wages shall be determined in the same manner as the partner’s or shareholder’s  allocable share of wage expenses. For purposes of such clause, partner’s or  shareholder’s allocable share of the unadjusted basis immediately after  acquisition of qualified property shall be determined in the same manner as  the partner’s or shareholder’s allocable share of depreciation. For purposes  of this subparagraph, in the case of an S corporation, an allocable share  shall be the shareholder’s pro rata share of an item.'''

'''         (B) Application to trusts and  estates. Rules similar to the rules under section 199(d)(1)(B)(i) (as in  effect on December 1, 2017) for the apportionment of W–2 wages shall apply to  the apportionment of W–2 wages and the apportionment of unadjusted basis  immediately after acquisition of qualified property under this section.'''

'''     (C) Treatment of trades or  business in Puerto Rico'''

'''              (i) In general. In the case of  any taxpayer with qualified business income from sources within the  commonwealth of Puerto Rico, if all such income is taxable under section 1  for such taxable year, then for purposes of determining the qualified  business income of such taxpayer for such taxable year, the term “United  States” shall include the Commonwealth of Puerto Rico.'''

'''               (ii) Special rule for  applying limit. In the case of any taxpayer described in clause (i), the  determination of W–2 wages of such taxpayer with respect to any qualified  trade or business conducted in Puerto Rico shall be made without regard to  any exclusion under section 3401(a)(8) for remuneration paid for services in  Puerto Rico.'''

'''     (2) Coordination with minimum tax.  For purposes of determining alternative minimum taxable income under section  55, qualified business income shall be determined without regard to any  adjustments under sections 56 through 59.'''

'''     (3) Deduction limited to income  taxes. The deduction under subsection (a) shall only be allowed for purposes  of this chapter.'''

'''     (4) Regulations. The Secretary  shall prescribe such regulations as are necessary to carry out the purposes  of this section, including regulations—'''

'''         (A) for requiring or restricting  the allocation of items and wages under this section and such reporting  requirements as the Secretary determines appropriate, and'''

'''         (B) for the application of this  section in the case of tiered entities.'''     

'''(g)  Deduction allowed to specified agricultural or horticultural cooperatives'''

'''    (1) In general. In the case of any  taxable year of a specified agricultural or horticultural cooperative  beginning after December 31, 2017, there shall be allowed a deduction in an  amount equal to the lesser of—'''

'''         (A) 20 percent of the excess (if  any) of—'''

'''              (i) the gross income of a  specified agricultural or horticultural cooperative, over'''

'''              (ii) the qualified cooperative  dividends (as defined in subsection (e)(4)) paid during the taxable year for  the taxable year, or'''

'''    (B) the greater of—'''

'''              (i) 50 percent of the W–2  wages of the cooperative with respect to its trade or business, or'''

'''              (ii) the sum of 25 percent of  the W–2 wages of the cooperative with respect to its trade or business, plus  2.5 percent of the unadjusted basis immediately after acquisition of all  qualified property of the cooperative.'''

'''    (2) Limitation. The amount determined  under paragraph (1) shall not exceed the taxable income of the specified  agricultural or horticultural for the taxable year.'''

'''     (3) Specified agricultural or  horticultural cooperative. For purposes of this subsection, the term  “specified agricultural or horticultural cooperative” means an organization  to which part I of subchapter T applies which is engaged in—'''

'''         (A) the manufacturing, production,  growth, or extraction in whole or significant part of any agricultural or  horticultural product,'''

'''         (B) the marketing of agricultural  or horticultural products which its patrons have so manufactured, produced,  grown, or extracted, or'''

'''         (C) the provision of supplies,  equipment, or services to farmers or to organizations described in  subparagraph (A) or (B).'''     

'''(h)  Anti-abuse rules. The Secretary shall—'''

'''    (1) apply rules similar to the rules  under section 179(d)(2) in order to prevent the manipulation of the  depreciable period of qualified property using transactions between related  parties, and'''

'''    (2) prescribe rules for determining the  unadjusted basis immediately after acquisition of qualified property acquired  in like-kind exchanges or involuntary conversions.'''     

'''(i)  Termination. This section shall not apply to taxable years beginning after  December 31, 2025.'''

STEP FOUR A: LESS GENERAL DEDUCTION OR ITEMIZED DEDUCTIONS UNDER 63(c) and 63(d)  

|'''26  U.S. Code § 63 - Taxable income defined'''  

'''(a)  In general. Except as provided in subsection (b), for purposes of this  subtitle, the term “taxable income” means gross income minus the deductions  allowed by this chapter (other than the standard deduction).'''

'''(b) Individuals who do not itemize their deductions. In the case of an  individual who does not elect to itemize his deductions for the taxable year,  for purposes of this subtitle, the term “taxable income” means adjusted gross  income, minus—'''

'''    (1) the standard deduction,'''

'''    (2) the deduction for personal  exemptions provided in section 151, and'''

'''    (3) the deduction provided in section  199A.'''     

'''(c)  Standard deduction. For purposes of this subtitle—'''

'''    (1) In general. Except as otherwise  provided in this subsection, the term “standard deduction” means the sum of—'''

'''         (A) the basic standard deduction,  and'''

'''         (B) the additional standard  deduction.'''

'''    (2) Basic standard deduction. For  purposes of paragraph (1), the basic standard deduction is—'''

'''         (A) 200 percent of the dollar  amount in effect under subparagraph (C) for the taxable year in the case of—'''

'''              (i) a joint return, or'''

'''              (ii) a surviving spouse (as  defined in section 2(a)),'''

'''         (B) $4,400 in the case of a head of  household (as defined in section 2(b)), or'''

'''         (C) $3,000 in any other case.'''

'''    (3) Additional standard deduction for  aged and blind. For purposes of paragraph (1), the additional standard  deduction is the sum of each additional amount to which the taxpayer is  entitled under subsection (f).'''

'''     (4) Adjustments for inflation. In  the case of any taxable year beginning in a calendar year after 1988, each  dollar amount contained in paragraph (2)(B), (2)(C), or (5) or subsection (f)  shall be increased by an amount equal to—'''

'''         (A) such dollar amount, multiplied  by'''

'''         (B) the cost-of-living adjustment  determined under section 1(f)(3) for the calendar year in which the taxable  year begins, by substituting for “calendar year 2016” in subparagraph (A)(ii)  thereof—'''

'''              (i) “calendar year 1987” in  the case of the dollar amounts contained in paragraph (2)(B), (2)(C), or  (5)(A) or subsection (f), and'''

'''              (ii) “calendar year 1997” in  the case of the dollar amount contained in paragraph (5)(B).'''

'''    (5) Limitation on basic standard  deduction in the case of certain dependents. In the case of an individual  with respect to whom a deduction under section 151 is allowable to another  taxpayer for a taxable year beginning in the calendar year in which the  individual’s taxable year begins, the basic standard deduction applicable to  such individual for such individual’s taxable year shall not exceed the  greater of—'''

'''         (A) $500, or'''

'''         (B) the sum of $250 and such  individual’s earned income.'''

'''    (6) Certain individuals, etc., not  eligible for standard deduction. In the case of—'''

'''         (A) a married individual filing a  separate return where either spouse itemizes deductions,'''

'''         (B) a nonresident alien individual,'''

'''         (C) an individual making a return  under section 443(a)(1) for a period of less than 12 months on account of a  change in his annual accounting period, or'''

'''         (D) an estate or trust, common  trust fund, or partnership, the standard deduction shall be zero.'''     

     '''(7)  Special rules for taxable years 2018 through 2025. In the case of a taxable  year beginning after December 31, 2017, and before January 1, 2026—'''

'''         (A) Increase in standard deduction.  Paragraph (2) shall be applied—'''

'''              (i) by substituting “$18,000”  for “$4,400” in subparagraph (B), and'''

'''              (ii) by substituting “$12,000”  for “$3,000” in subparagraph (C).'''

'''         (B) Adjustment for inflation'''

'''              (i) In general. Paragraph (4)  shall not apply to the dollar amounts contained in paragraphs (2)(B) and  (2)(C).'''

'''               (ii) Adjustment of  increased amounts. In the case of a taxable year beginning after 2018, the  $18,000 and $12,000 amounts in subparagraph (A) shall each be increased by an  amount equal to—'''

'''                   (I) such dollar amount,  multiplied by'''

'''                   (II) the cost-of-living  adjustment determined under section 1(f)(3) for the calendar year in which  the taxable year begins, determined by substituting “2017” for “2016” in  subparagraph (A)(ii) thereof.'''  

'''If  any increase under this clause is not a multiple of $50, such increase shall  be rounded to the next lowest multiple of $50.'''     

'''(d)  Itemized deductions. For purposes of this subtitle, the term “itemized  deductions” means the deductions allowable under this chapter other than—'''

'''    (1) the deductions allowable in arriving  at adjusted gross income,'''

'''    (2) the deduction for personal exemptions  provided by section 151, and'''

'''    (3) the deduction provided in section  199A.'''     

'''(e)  Election to itemize'''

'''    (1) In general. Unless an individual  makes an election under this subsection for the taxable year, no itemized  deduction shall be allowed for the taxable year. For purposes of this  subtitle, the determination of whether a deduction is allowable under this  chapter shall be made without regard to the preceding sentence.'''

'''     (2) Time and manner of election.  Any election under this subsection shall be made on the taxpayer’s return,  and the Secretary shall prescribe the manner of signifying such election on  the return.'''

'''     (3) Change of election.Under  regulations prescribed by the Secretary, a change of election with respect to  itemized deductions for any taxable year may be made after the filing of the  return for such year. If the spouse of the taxpayer filed a separate return  for any taxable year corresponding to the taxable year of the taxpayer, the  change shall not be allowed unless, in accordance with such regulations—'''

'''         (A) the spouse makes a change of  election with respect to itemized deductions, for the taxable year covered in  such separate return, consistent with the change of treatment sought by the  taxpayer, and'''

'''         (B) the taxpayer and his spouse  consent in writing to the assessment (within such period as may be agreed on  with the Secretary) of any deficiency, to the extent attributable to such  change of election, even though at the time of the filing of such consent the  assessment of such deficiency would otherwise be prevented by the operation  of any law or rule of law.'''     

'''This  paragraph shall not apply if the tax liability of the taxpayer’s spouse for  the taxable year corresponding to the taxable year of the taxpayer has been  compromised under section 7122.'''     

'''(f)  Aged or blind additional amounts'''

'''    (1) Additional amounts for the aged. The  taxpayer shall be entitled to an additional amount of $600—'''

'''         (A) for himself if he has attained  age 65 before the close of his taxable year, and'''

'''         (B) for the spouse of the taxpayer  if the spouse has attained age 65 before the close of the taxable year and an  additional exemption is allowable to the taxpayer for such spouse under  section 151(b).'''

'''    (2) Additional amount for blind. The  taxpayer shall be entitled to an additional amount of $600—'''

'''         (A) for himself if he is blind at  the close of the taxable year, and'''

'''         (B) for the spouse of the taxpayer  if the spouse is blind as of the close of the taxable year and an additional  exemption is allowable to the taxpayer for such spouse under section 151(b).'''     

'''For  purposes of subparagraph (B), if the spouse dies during the taxable year the  determination of whether such spouse is blind shall be made as of the time of  such death.'''

'''    (3) Higher amount for certain unmarried  individuals. In the case of an individual who is not married and is not a  surviving spouse, paragraphs (1) and (2) shall be applied by substituting  “$750” for “$600”.'''

'''     (4) Blindness defined. For  purposes of this subsection, an individual is blind only if his central  visual acuity does not exceed 20/200 in the better eye with correcting  lenses, or if his visual acuity is greater than 20/200 but is accompanied by  a limitation in the fields of vision such that the widest diameter of the  visual field subtends an angle no greater than 20 degrees.'''

'''(g) Marital status. For purposes of this section, marital status shall be  determined under section 7703.'''

STEP FOUR B: ITEMIZED DEDUCTIONS §67  

|'''26  U.S. Code § 67 - 2-percent floor on miscellaneous itemized deductions'''  

'''(a)  General rule. In the case of an individual, the miscellaneous itemized  deductions for any taxable year shall be allowed only to the extent that the  aggregate of such deductions exceeds 2 percent of adjusted gross income.'''

'''(b) Miscellaneous itemized deductions. For purposes of this section, the term  “miscellaneous itemized deductions” means the itemized deductions other than—'''

'''    (1) the deduction under section 163  (relating to interest),'''

'''    (2) the deduction under section 164  (relating to taxes),'''

'''    (3) the deduction under section 165(a) for  casualty or theft losses described in paragraph (2) or (3) of section 165(c)  or for losses described in section 165(d),'''

'''    (4) the deductions under section 170  (relating to charitable, etc., contributions and gifts) and section 642(c)  (relating to deduction for amounts paid or permanently set aside for a  charitable purpose),'''

'''    (5) the deduction under section 213  (relating to medical, dental, etc., expenses),'''

'''    (6) any deduction allowable for  impairment-related work expenses,'''

'''    (7) the deduction under section 691(c)  (relating to deduction for estate tax in case of income in respect of the  decedent),'''

'''    (8) any deduction allowable in  connection with personal property used in a short sale,'''

'''    (9) the deduction under section 1341  (relating to computation of tax where taxpayer restores substantial amount  held under claim of right),'''

'''    (10) the deduction under section  72(b)(3) (relating to deduction where annuity payments cease before  investment recovered),'''

'''    (11) the deduction under section 171  (relating to deduction for amortizable bond premium), and'''

'''    (12) the deduction under section 216  (relating to deductions in connection with cooperative housing corporations).'''     

'''(c)  Disallowance of indirect deduction through pass-thru entity'''

'''    (1) In general. The Secretary shall  prescribe regulations which prohibit the indirect deduction through pass-thru  entities of amounts which are not allowable as a deduction if paid or  incurred directly by an individual and which contain such reporting  requirements as may be necessary to carry out the purposes of this  subsection.'''

'''     (2) Treatment of publicly offered  regulated investment companies'''

'''         (A) In general. Paragraph (1) shall  not apply with respect to any publicly offered regulated investment company.'''

'''          (B) Publicly offered  regulated investment companies. For purposes of this subsection—'''

'''              (i) In general. The term  “publicly offered regulated investment company” means a regulated investment  company the shares of which are—'''

'''                   (I) continuously offered  pursuant to a public offering (within the meaning of section 4 of the  Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),'''

'''                   (II) regularly traded on  an established securities market, or'''

'''                   (III) held by or for no  fewer than 500 persons at all times during the taxable year.'''

'''              (ii) Secretary may reduce 500  person requirement. The Secretary may by regulation decrease the minimum  shareholder requirement of clause (i)(III) in the case of regulated  investment companies which experience a loss of shareholders through net  redemptions of their shares.'''

'''     (3) Treatment of certain other  entities. Paragraph (1) shall not apply—'''

'''         (A) with respect to cooperatives  and real estate investment trusts, and'''

'''         (B) except as provided in  regulations, with respect to estates and trusts.'''     

'''(d)  Impairment-related work expenses. For purposes of this section, the term  “impairment-related work expenses” means expenses—'''

'''    (1) of a handicapped individual (as  defined in section 190(b)(3)) for attendant care services at the individual’s  place of employment and other expenses in connection with such place of  employment which are necessary for such individual to be able to work, and'''

'''    (2) with respect to which a deduction is  allowable under section 162 (determined without regard to this section).'''     

'''(e)  Determination of adjusted gross income in case of estates and trusts. For  purposes of this section, the adjusted gross income of an estate or trust  shall be computed in the same manner as in the case of an individual, except  that—'''

'''    (1) the deductions for costs which are  paid or incurred in connection with the administration of the estate or trust  and which would not have been incurred if the property were not held in such  trust or estate, and'''

'''    (2) the deductions allowable under  sections 642(b), 651, and 661,'''

'''shall be treated as allowable in arriving at adjusted gross income. Under  regulations, appropriate adjustments shall be made in the application of part  I of subchapter J of this chapter to take into account the provisions of this  section.'''     

'''(f)  Coordination with other limitation. This section shall be applied before the  application of the dollar limitation of the second sentence of section 162(a)  (relating to trade or business expenses).'''

'''(g) Suspension for  taxable years 2018 through 2025. Notwithstanding subsection (a), no  miscellaneous itemized deduction shall be allowed for any taxable year  beginning after December 31, 2017, and before January 1, 2026.'''

'''EXAMPLE''' → Calculating Taxable Income  

Problem: John and Jane Doe; married with no children; both work at ACME Corp.; additional income: rent out basement apartment to law student.  

| colspan="2" |'''2018 Income and Expenses for John and Jane Doe'''

|'''Combined Salaries --- $95,000'''

|Mortgage Interest (§163) --- $16,000

|'''Rental Income --- $5,000'''

|'''Rental Expenses (§212) --- $2,000'''

|'''Education Loan Interest (§221) --- $8,000'''

|Charitable Contributions (§170) --- $500

|Medical Expenses (§213) --- $2,000

|Unreimbursed Work Expenses (§162) --- $1,000

|Tax Preparation Fee (§212) --- $1,000

STEP ONE: '''Gross Income''' → $100,000 (combined salaries + rental income)  

STEP TWO: '''Deductions''' Under §62(a) → Education Loan Interest §62(a)(4)                   ABOVE THE LINE!

                                                             Rental Expenses §62(a)(17)

                                                             $10,000  

ADJUSTED GROSS INCOME = $90,000 (gross income less deductions under §62(a)).  

STEP THREE: Less Qualified Business Income → N/A, not a qualified business under §199A  

STEP FOUR: Less Standard Deduction OR

                     Less Itemized Deductions  

|'''Standard  Deduction'''

|'''Itemized  Deductions'''

|Look to §63(c) →  Basic Standard Deduction §63(c)(2)  

If married filing jointly, 200% of $3,000 §63(c)(2)(A)-(C)  

BUT look to '''SPECIAL RULES''':

§63(c)(7)(A)(ii)  → Special rules for 2018  

Replace $3,000 with $12,000 above  

$12,000 x 200% =  TOTAL STANDARD → '''<u>$24,000</u>'''

|Regular v.  Miscellaneous  

Regular → on the  list in §67(b)  

Miscellaneous →  anything not on list in §67(b)  

<u>Regular</u>

Mortgage Interest  --- §67(b)(1) → $16, 000

Charitable  Contributions --- §67(b)(4) → $500

Medical Expenses  --- §67(b)(5) → $2,000  

<u>Miscellaneous</u>

Accountant/Tax  Prep. Fees → $1,000

Unreimbursed Work  Expenses → $1,000  

''*normally,  you’d add up misc. and reg. to get total itemized, but due to §67(g), no  misc. at this time.''  

''2%  floor on miscellaneous, but currently inactive''  

TOTAL ITEMIZED → '''<u>$18,500</u>'''

'''STEP FIVE: TOTAL TAXABLE INCOME → $66,000''' (AGI less standard deduction)  

'''Tax Credits'''  

Tax credit → dollar for dollar reduction in the tax bill that you owe; typically, cannot bring tax owed below $0 (cannot cause a refund), but there are a few exceptions:

●      Credit for taxes withheld: money you already paid the government (anything in excess of actual tax owed will go back to the taxpayer

●      Earned income tax credit: to help low-income families with cash; you must be working and earning income to benefit from this tax credit  

Taxpayer preference for tax-reducing strategies:

1)    Tax credits (BEST, actual dollar for dollar reduction)

2)    Above the line deductions (preferred because percentage reduction in AGI)

3)    Below the line deductions (comes after AGI, least preferable, but still good!)  

Child Tax Credit → most subject to change currently; expanded with 2018 tax plan, used to replace eliminated personal exemption deduction

●      Changes “phase out” → you can make more before being phased out

●      Currently, only goes up to including 16 year olds

●      Expanded credit → neediest families are benefitting the least

●      You need an SSN to get the credit (children too), so no mixed-immigrant status families (must be a citizen, TINs are not enough)

'''What is “Income”?'''  

Haig-Simons (NOT GOOD LAW) → Income = change in wealth + consumption

Issues: no realization, phantom income, NOT THE CALCULATION WE USE  

Phantom income → cancellation of debt, loan forgiveness (increase in tax bill, no money to pay it)  

<u>Eisner v. Macomber (1920)</u> - SCOTUS [π owned stock that increased when company experienced growth]

RULE: Under the 16th Amendment a stock dividend paid as additional shares of stock is not taxable income.  

Case Notes: '''no income until sale and realization of actual $'''

●      Income is payment, labor, or a combination of both

●      A stock dividend paid as additional shares is an adjustment to the taxpayer’s invested capital

●      A pro rate stock dividend paid by a corporation is not taxable if:

1)    Shareholders receive no cash;

2)    Proportionate ownership is not altered; and

3)    Shareholders do not realize income by sale of shares   

|'''Recognition'''

|'''Realization'''

|A particular situation in the tax code  exists; “we are putting it on a tax return”  

Realization is a prerequisite to  recognition. If you have realization, then you have recognition.

|realization  requirement →  where the taxpayer must  receive or lose something of monetary value  

If you are engaged in the marketplace, you  likely will have a realization event.

'''Punitive Damages'''  

<u>Commissioner v. Glenshaw Glass (1955)</u> - SCOTUS [Ds collected punitive damages for fed. antitrust action]

RULE: punitive damages are taxable as gross income.  

Case Notes: JUDICIAL DEFINITION: “income derived from any source whatsoever”

●      Congress implied no intent to exclude punitive damages

●      Section 22 of the 1939 Code describes gross income as “income derived from any source whatsoever”  

|'''<u>Glenshaw  Glass</u> Test (to determine “income”)'''  

# '''ASSESSED WEALTH'''

# '''CLEARLY REALIZED'''

# '''COMPLETE DOMINION'''

'''Treasure Trove'''  

Cesarini v. United States (1969) - USDC [πs found cash in used piano purchased at auction]

RULE: all income is subject to tax unless an express exemption applies.  

Case Notes: '''money is taxable when it is discovered, not when the treasure chest was purchased'''

●      REALIZATION EVENT is the finding of the treasure

●      Treas. Reg. §1.61-14 → treasure trove is gross income, tax code does not exempt found money from gross income

●      §61(a) → gross income is “all income from whatever source derived”