Income Tax Malman Sugin Wallace

From wikilawschool.net. Wiki Law School does not provide legal advice. For educational purposes only.
Jump to navigationJump to search
Income Tax
Authors Malman
Sugin
Wallace
Text Image of Malman, Sugin, and Wallace's The Individual Tax Base, Cases, Problems, and Policies in Federal Taxation, 3d (American Casebook Series)
Malman, Sugin, and Wallace's The Individual Tax Base, Cases, Problems, and Policies in Federal Taxation, 3d (American Casebook Series)
Taught by
Taught at
Related course(s)



§ 1


§ 1(a), (b), (c) & (d) provide rates, and subsection (i) modifies (c) & (d).




Subsection (j) suspends subsection (i) from 2018 through 2025, with a sunset clause for subsection (j). § 1(j)(3)(B) provides rate breaks that are to be adjusted for inflation in a Revenue Publication. The publication for this year is Rev. Proc. 2018-57.




Subsection (j) created by the 2017 Tax Act.




IRC §§ 61, 62(a), 63(a), (b), (c)(1), (c)(2) (c)(7), (d), (e); Treas. Reg. § 1.61-1(a). Skim: §§ 104(a)(2), 1001(a)-(c)




§ 31(a) – the amount withheld as a tax is used as a credit against taxes owed. If your taxes are more than withheld tax, you pay more. If your taxes are less than withheld amount, you get a refund.



Glenshaw Glass 3-part definition of income: “(1) undeniable accessions to wealth, (2) clearly realized, and (3) over which the taxpayers have complete dominion.”




§ 61 – Gross income “Big Bucket” All income from whatever source derived


§ 61(a)(1) through (12) all items included, but not limited to, in gross income:


(1) Compensation for services;


(2) Gross income derived from business;


(3) Gains from dealings in property;


(4) Interest;


(5) Rents;


(6) Royalties;


(7) Dividends;


(8) Alimony (discontinued after 2018 by 2017 Tax Act);


(9) Annuities;


(10) Income from life insurance and endowment contracts;


(11) Pensions;


(12) Income from discharge of indebtedness;


(13) Distributive share of partnership income;


(14) Income in respect of a decedent;


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




Gross income not limited to cash received


Gross income includes income realized in any form, whether in money, property, or services. Income may also be realized in the form of services, meals, accommodations, stock, or other property, as well as cash. Reg. § 1.61-1(a).



Non-Cash Compensation – Reg. § 1.61-2(d)(1)


Recipients of non-cash compensation must include in income the FMV less the recipient’s cost of such compensation. Reg. § 1.61-2(d)(1).




Payment of Another’s Tax Liability Considered Income - Reg. § 1.61-14(a)


Another person’s payment of the taxpayer’s income taxes constitutes gross income to the taxpayer unless excluded by law. Reg. § 1.61-14(a).






Property Transferred for Performance of Services - Reg. § 1.61-2(d)(2)


If a property is transferred to a taxpayer in connection with the performance of services at a price that is less than the fair market value of such property at the time of transfer, the difference between the fair market value of the property and the amount paid is includible in a taxpayer's gross income as compensation. Reg. § 1.61-2(d)(2).



Treasure Trove as Income - Reg. § 1.61-14(a)


Treasure trove, to the extent of its value in U.S. currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession. Reg. § 1.61-14(a).




Income Included in Gross Income the Year Received – Reg. § 1.451-1(a)


Income is includible in gross income for the taxable year in which it is actually or constructively


received by the taxpayer unless it is includible in a different year in accordance with the taxpayer’s method of accounting. Reg. § 1.451-1(a).




§ 62 – Adjusted Gross Income (AGI)


§ 62(a)(1) – deductions attributable to expenses of a trade or business are allowed if expenses are not from performance of services by the taxpayer as an employee.


§ 62(a)(2)(A) – deduction of expenses of a taxpayer in their services as an employee is allowed if it is part of an employee reimbursement program


(a)(3) Losses from sale or exchange of property;


(a)(4) deductions from rent and royalties;


(a)(5) life tenant deductions and property income beneficiaries;


(a)(6) pensions of self-employed persons;


(a)(7) retirement savings (§ 219);


(a)(17) interest on education loans;


(a)(18) higher education expenses;


(a)(19) health savings accounts.




§ 63 – Taxable Income


The basic standard deduction reduces the taxable income of the individual and essentially replaces the zero-bracket amount. Taxpayers can elect between using the greater of the standard deduction or their total itemized deductions. § 62. The amount of the standard deduction depends on a taxpayer's filing status.



§ 63(a) – “Taxable income” is Gross income minus allowed deductions.


§ 63(b) – If you do not itemize, subtract the following from AGI: (1) standard deduction; (2) personal exemptions allowed under § 151; and (3) any deduction provided for in § 199(A).




§ 63(c)(2) – establishes basic standard deduction. But § 63(c)(7)(A), part of 2017 Tax Act, increases the standard deduction for head of household to $18,000 for $4,400. § 63(c)(7)(A)(i). Standard deduction for “any other case” is increased to $12,200 from $3,000 as part of 2017 Tax Act. § 63(c)(7)(A)(ii). Standard deduction for a married couple is $24,400.




§ 63(c)(4) – adjustment for inflation, but 2017 Tax Act inflation adjustment is § 63(c)(7)(B).




§ 63(d) - § 151 and § 199A are not included in itemized deductions



§ 63(e)(1) – election to itemize deductions. Miscellaneous deductions are disallowed by 2017 Tax Act. § 67(g).



§ 67 – Itemized deductions


All items except for the following are miscellaneous itemized deductions per § 67(b):


§ 67(b)(1) § 163 deductions relating to interest,


(2) § 164 deduction for state and local taxes,


(3) §165 casualty insurance


(4) § 170 deductions (charitable donations) & § 642(c) (amounts paid or set aside for a charitable purpose),


(5) § 213 deductions for medical expenses,


(6) deductions allowed for impairment-related work expenses,


(7) § 691(c) estate deduction for income by decedent,


(8) any deduction allowable in connection with the shortsale of personal property,


(9) § 1341 where taxpayer restores substantial amount under claim of right,


(10) § 72(b)(3) where annuity payments cease before the investment is recovered,


(11) § 171 for amortizable bond premiums,


(12) § 216 in connection with cooperative housing corporations.




The Tax Act of 2017 disallows miscellaneous itemized deductions for tax years 2018 through 2025. § 67(g).




Treas. Reg. §1.61-1(a) – Gross income defined.




Marginal Tax Rate – MTR is the tax paid on the next dollar the taxpayer earns. A good way to think about how a tax rate effects people’s behavior.




Effective Tax Rate – The ETR is tax rate the taxpayer actually pays. This is a better reflection of how someone fairs in the tax system than MTR. ETR shows the burden a tax places on a taxpayer. (Total tax liability divided by taxable income).



DEFINING INCOME - ORDINARY AND NECESSARY DEDUCTIONS IRC § 162(a), (c), (f), (g); Treas. Reg. § 1.162-1(a).




An employer paying income taxes assessable against an employee constitutes taxable income for that employee. Old Colony Trust Co. v. Commissioner.




Gross Up


When an employer agrees to pay an employee’s tax liability on compensation, the payment is described as a “gross up.” Moving expenses are an instance where gross ups are used, since those expenses (previously deductible above the line under § 217(a)) are disallowed by the 2017 Tax Act.


Calculation for Gross Up



Total Pay = Stated Pay


1 – R



§ 162 – Deductions for a trade or business – this section supplements § 62


§ 162(a) – allows for the deduction of all ordinary and necessary expenses paid or incurred in the taxable year in carrying on a trade or business.


§ 162(a)(1) – allows the taxpayer to deduct a “reasonable allowance for salaries or other compensation.” Unreasonable compensation is not deductible. Reg. §1.162-7(b)(3).



Test for Business Expenditure - § 162(a)

  1. Must be paid or incurred during the tax year.
  2. Must be for carrying on a trade or business.
  3. Must be an expense.
  4. Must be ordinary.
  5. Must be necessary.



Even though a taxpayer may incur an expense only once in the lifetime of a business, the expense may qualify as ordinary and necessary if it is appropriate and helpful in carrying on that business, is commonly and frequently incurred in the type of business conducted by the taxpayer, and is not a capital expenditure. See C.I.R. v. Tellier. See Reg. § 1.263(a)-1(a)




A taxpayer cannot deduct payments made to enhance the future reputation of one aspect of the business because enhancing future reputation is not an immediately deductible expense and must be capitalized. See Tigrett v. United States.




Payments made to preserve goodwill and protect a business reputation have been allowed, so there is some ambiguity in the doctrine. See Rev. Ruling 76-203.



Examples of Business Expenses – Reg. § 1.162-1(a)


Among items included in business expenses are management expenses, commissions, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from the home solely in pursuit of the trade or business, advertising, other selling expenses, insurance premiums against fire, storm, theft, or other similar losses in the case of a business, and rental for the use of business property. Reg. §1.162-1(a).



Non-Deductible Expenses - § 162(c), (f), (g)


Taxpayer cannot claim a deduction for: (1) illegal payments to government officials; (2) other illegal payments; (3) kickbacks & bribes for Medicare and Medicaid. Also, cannot deduct fines and penalties or the punitive damages portion of criminal antitrust violations. § 162(c), (f), (g).




Drug Trafficking Expenses Non-Deductible


§ 208E provides that expenses incurred in drug trafficking are not deductible. This affects taxpayers that operate marijuana dispensaries in states where the drug is legal, since the substance is still illegal under federal law.




No Deduction for Own Labor


Just as the value of a taxpayer’s labor (imputed income) is not included in his gross income, the value of the taxpayer’s labor is not deductible as a business expense. Thus, if a taxpayer personally made repairs to his business property, the value of his labor is not a deductible business expense.



A business expense deduction is only to be disallowed if it is barred by a specific provision in the Code. Reg. § 1.162-1(a).




Capital Expenditures


Capital expenditures are paid or incurred with respect to assets, the useful life of which are substantially longer than the taxable year; hence the expenditure is not subject to a current deduction. See § 263. Costs or benefits that last beyond the taxable year must be capitalized. Reg. § 1.461-1(a).



FRINGE BENEFITS IRC § 132; skim IRC § 119, Treas. Reg. §§ 1.132-9(b) Q/A- 16(a), 1.132 (Lathrope excerpts)


Fringe benefits are a type of forced compensation. The value that an employee places on the benefit has no bearing on the tax value of that exclusion. Fringe benefits are also a way to ensure that all compensation is documented and understood.



§132 – Exclusion for Miscellaneous Fringe benefits


The following 7 items are excluded from employee income under § 132: (1) no-additional-cost service, (2) qualified employee discount, (3) working condition fringe, (4) de minimis fringe, (5) qualified transportation fringe, (6), qualified retirement planning services.




No-additional-cost services - § 132(a)(1)


No-additional-cost services are not included in an employee’s gross income. § 132(a)(1). Services excluded under this provision are usually excess capacity services provided by employer. § 132(a)(1), Reg. § 1.132-1(a)(1).




Test for No-additional-cost services - § 132(b)


A no-additional-cost service is a service provided by an employer to an employee (Reg. § 1.132-1(b)(1) for use by the employee if (§ 132(a)(1)):


1. the service is offered for sale to customers (§132(k)) in the ordinary course of the line of business of the employer in which the employee is performing services (§132(b)(1)); and


2. the employer incurs no substantial additional cost (including forgone revenue) in providing the service to the employee (determined without regard to any amount paid by the employee for the service) (§ 132(b)(2)).




Spouse and Dependent Children - § 132(h)(2)(A)


Any use by the spouse or a dependent child of the employee shall be treated as use by the employee.




Airline Travel for Parents of Employees - § 132(h)(3)


Flights taken by parents of current airline employees are treated as if they are used by the employee, so long as those flights are appropriately excludable as no-additional-cost services.



Qualified employee discount - § 132(a)(2), (c)


An employee’s gross income does not include the amount of any income received in the form of a qualified employee discount. § 132(a)(2). This exclusion applies where an employer provides qualified property or services to its employees for their use at a price less than that at which the same property or services are offered by the employer to customers. § 132(c)(3).




Amount of Qualified Discount - § 132(c)(1)


An employee discount on the purchase of qualified property or services will be excluded from income to the extent the discount does not exceed (§ 132(c)(1)):


(1) In the case of property, the gross profit (sales price minus cost divided by sale price) percentage (sales price minus cost divided by sale price) of the price at which the property is being offered by the employer to customers (§ 132(c)(1)(A)), or


(2) In the case of services, 20% of the price at which the services are being offered by the employer to customers (§ 132(c)(1)(B)).




Excess Discounts – Property


The amount that is excludable as qualified employee discount on the sale of property is gross percentage multiplied by the price at which the property is offered for sale to customers. § 132(c)(2)(A). If an employee discount exceeds the gross profit percentage, the excess discount is includible in the employee’s income.




Excess Discounts – Services


With respect to services, a discount of up to 20% may be excludible. If the employee discount exceeds 20%, the excess discount is included in the employee’s income. § 1.132-3(e).




Non-Discriminatory Provision - § 132(j)(1)


Both above fringe benefits are conditioned on compliance with a non-discrimination provision. § 132(j)(1). The nondiscrimination provision requires the discounts be made available to a wide range of employees, including those that qualify as highly compensated employees as defined in § 414(q). §132(j)(6). § 414(q) defines a highly compensated employee as (i) an employee who was a five percent owner during the year or previous year, (ii) in the preceding year, (A) was paid more than $120,000, or (B) was in the top-paid 20 percent group of employees. § 414(q)(1).



Working condition fringe - § 132(a)(3), (d)


A working condition fringe is any property or service provided to an employee of an employer to the extent that, if the employee paid for the property or service, the pay would be allowed as a deduction under § 162 or § 167. § 132(d). Expenses can be excluded because they constitute an unreimbursed employee business expense. The 2017 Tax Act eliminated unreimbursed employee expenses, but that does not render § 132(d) obsolete. For tax years from 2018 through 2025, employees have an increased incentive to have employers pay expenses directly or have a reimbursement plan for employee expenses. The nondiscrimination rules applicable to other § 132 fringe benefits do not apply to as condition for exclusion of a working condition fringe. Reg. § 1.132-5(q).



De minimis fringe benefits - § 132(a)(4), (e)


Any property or service the value of which is so small as to accounting for unreasonable or administratively impractical. § 132(e)(1). Examples of fringe benefits: occasional parties, occasional theater or sports tickets, coffee, donuts, soft drinks, and local telephone calls. Reg. § 1.132-6(e).




Employer Provided Eating Facilities


§ 132(e)(2) provides a special rule for eating facilities operated by employers for their employees. The eating facility will be treated as a de minimis fringe benefit if: (i) the facility is located on or near the business premises of the employer; and (ii) revenue derived from the facility normally equals or exceeds the direct operating costs of such a facility.


If employees can exclude the cost of employer provided meals, the 2017 Tax Act limits employer’s deductions to 50% of employer’s cost for providing employer provided meals. § 274(n)(1).




Qualified transportation fringe benefits - § 132(a)(5), (f)


Includes “qualified parking,” transit passes, and transportation provided in a “commuter highway vehicle” principally used to drive employees to and from work. § 132(f)(1).



Qualified parking is parking provided by an employer at or near the employer’s business premises. § 132(f)(5)(C).




Employee can choose between employer paying for a fringe benefit or receive the payment directly without incurring tax liability. § 132(f)(4). The employee must have already spent the money and be able to substantiate the expenditure before employer reimburses employee or it is ordinary income instead of a reimbursement. Reg. § 1.132-9.




Transportation fringe benefits are capped at $175 for the aggregate of commuter highway vehicle and transit passes. § 132(f)(2)(A). Qualified parking benefits are capped at $175 per month.


There is an inflation adjustment provision. §132(f)(6)(A).




Qualified bicycle commuting reimbursement for expenses is disallowed by the 2017 Tax Act. § 132(f)(8).




Special rules for gyms and athletics facilities - § 132(j)(4)


Employees do not have to include the value of on premises athletics facilities provided by an employer to his employees. § 132(j)(4)(A).


To qualify: (i) the gym must be located on the premises of the employer, (ii) the gym must be operated by the employer, (iii) substantially all the use is by employees, their spouses, and their dependent children.


Gym dues or fees are not deductible. § 274(2)(A).




Meals or Lodging Furnished for Employer’s Convenience - § 119


Employee meals or lodging provided by an employer can be excluded from income if the meals or lodging are furnished on the employer’s premises and are furnished for the convenience of the employer. § 119(a). For lodging, an employee is required to accept such lodging on the business premises of his employer as a condition of his employment. § 119(a)(2)




Meal can also be excluded for a substantial non-compensatory business reason. Example: an associate that works 100 hours per week and eats dinner at his desk.



Lodging example: doctor that works on an oil rig and needs to live close by.




GIFTS IRC § 102, 74; Treas. Reg. §§ 1.102-1(a), (b), 1.74-1(a); Prop. Reg. §§ 1.74-1(b), 1.74-2(a)




Gifts and inheritances - § 102


For the purposes of the income tax, and the exclusion contained in § 102, “gift” is not defined in the common law sense, but instead depends on the intent of the payor. See Duberstein. The gift must be made with detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses. See Duberstein; see Bogardus.




If a payment is motivated by the payor’s sense of a moral or legal duty, or the payor’s anticipation of economic benefit, the payment is not a gift. See Duberstein; Bogardus. However, the absence of any moral or legal obligation to make a payment does not establish that the payment is a gift. See Duberstein; Old Colony Trust Co. If the payment is in return for services rendered, it is not a gift, even if the payor receives no economic benefit from the payment. Example: tips to waitstaff at a restaurant. See Duberstein; Robertson.




General Rule for Gifts and Inheritances § 102(a)


Gross income does not include the value of any property acquired by gift, bequest, devise, or inheritance. § 102(a).



When a Gift is Income § 102(b)


The following items are not excluded from gross income: (1) income from any property referred to in subsection (a); or (2) gift, bequest, devise, or inheritance is income from property. § 102(b)(1), (2).



'Employee Gifts § 102(c) '


Generally, any amount transferred from employer to employee is not excluded from gross income. § 102(c). Look at § 74(c) for provisions excluding certain employee achievement awards from gross income.




§ 74 – Prizes and Awards



Employee Achievement Awards – Excludible Amount § 74(c)


Qualifying employee achievement awards under § 274(j) are not included in income so long as the award does not exceed the deductible amount for the employer. § 74(c)(1).



If the cost to the employer of the employee achievement award exceeds the amount allowable as a deduction by the employer, the employee must include in gross income the greater of (§ 74(c)(2)):


!--[if !supportLists]-->● !--[endif]-->1. an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (§ 74(c)(2)(A); or


!--[if !supportLists]-->● !--[endif]-->2. the amount by which the fair market value of the award exceeds the maximum dollar amount allowable as a deduction to the employer (§ 74(c)(2)(B).


The remaining portion of the cost or fair market value of the award is not included in the employee's gross income. § 74(c) flush language.



When an Entire Award is Deductible to Employer - Reg. § 1.74-2(a)


If entire cost of award under § 274(j) is deductible to employer, then employee can exclude the employer’s cost from their gross income. Reg. § 1.74-2(a).



Awards Transferred to Government or Charity - Reg. § 1.74-1(b)


Where a taxpayer transfers prizes or awards to a government or agency in § 170(c), those prizes or awards are excluded from gross income. The Nobel and Pulitzer prize will also qualify. Reg. § 1.74-1(b)




Deductible Gift Limit - §274(b)


Deductible gifts under § 102(a) and § 162 are limited to $25 per recipient per year. Anything over $25 is not deductible. § 274(b).



Employee Achievement Awards - § 274(j)


§ 74 generally requires the inclusion in gross income of all amount received as prizes and awards. § 74(a); Reg. § 1.74-1(a). A limited exclusion is available for awards to employees for length of service or safety achievements. §§ 74(a), 274(j).




Special Exclusion for Certain Employee Achievement Awards – Reg. § 1.74-2(a)(1)


Where the cost of an employee achievement award is fully deductible to the employer after considering the limitation under § 274(j), the value representing the employer’s cost of the award is excludable from the employee’s gross income. Reg. § 1.74-2(a)(1).




Employee Achievement Award Defined - § 274(j)(3)(A)


An employee achievement award is defined as an item of tangible personal property transferred by an employer to an employee for length of service or safety achievement. The item must be awarded as part of a meaningful presentation under conditions and circumstances that do not create a significant likelihood the payment is actually disguised as compensation. § 274(j)(3)(A).




Items That are NOT Tangible Personal Property - § 274(j)(3)(A)(ii)


Certain items are not eligible for the employee achievement award exclusion. Specifically, tangible personal property does not include: (I) cash, cash equivalents, gift cards, gift coupons, gift certificates, or (II) vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. § 274(j)(3)(A)(ii)(I), (II).




Employer Deduction Limitations - § 274(j)(2)(A), (B)


There are two parts to the annual limit on an employer's deduction for the cost of an employee achievement award made to particular employee. Awards to a single employee that are not “qualified plan awards” cannot exceed $400 during a year, while the total awards to a single employee, under all plans, cannot exceed $1,600. § 274(j)(2)(A), (B).




Qualified Plan Award - § 274(j)(3)(B)


A “qualified plan award” is an employee achievement award granted as part of an established written plan or program of the taxpayer that does not discriminate in favor of highly compensated employees (§ 414(q)) as to eligibility or benefits. § 274(j)(3)(B)(i). However, an employee achievement award is not a qualified plan award if the average cost of all employee achievement awards providing during the year exceeds $400. Awards of nominal value are not included when calculating the average cost. § 274(j)(3)(B)(ii).




Length of Service Awards - § 274(j)(4)(B)''''


An item provided by an employer to an employee is not treated as a length of service


achievement if it is received during the recipient’s first 5 years of employment or if the recipient received a length of service achievement (other than an award excludable under § 132(e)(1)) during that year or any of the prior 4 years. § 274(j)(4)(B).



Safety Achievement Awards - § 274(j)(4)(C), C(i), (C)(ii)''''


An item provided by an employer to an employee is not treated as having been proved for safety achievement if: (i) during the taxable year, employee achievement awards (other than an award excludable under § 132(e)(1)) for safety achievement have previously been awarded by the employer to more than 10% of the employees of the employer (excluding employees described in clause (ii)), or (ii) such item is awarded to a manager administrator, clerical employee, or other professional employee. § 274(j)(4)(C), C(i), (C)(ii).




If Award Exceeds Employer Deductible Limit''''


§ 274(j)(2)(A) allows for a maximum deduction of $400 for a non-qualified plan award. If an award exceeds this amount, the taxpayer must use § 72(c)(2) to calculate the amount he must include in income. § 74(c)(2) specifies that the taxpayer must include the greater of either § 74(c)(2)(A) or (B) in his income. § 74(c)(2)(A) is cost of the award to the employer minus maximum deductible amount (i.e., portion of the cost of the award not deductible by employer). § 74(c)(2)(B) is the FMV of the award minus the maximum deductible amount (i.e., the FMV amount the employer cannot deduct).



COMPLETE DOMINION IRC §§ 61, 104(a)(2), 139F; Treas. Reg. § 1.104-1(a), (c)




Damages from Lawsuits


The taxability of the proceeds received from a lawsuit depends on the nature of the claim and the actual basis of the recovery in the suit. When amounts represent lost profits, the amount is taxable income; when all or part of the amount represents damages for lost capital, such amount is not taxable.




Punitive Damages


Punitive damages are considered an extension of compensatory damages and are thus taxable. See Glenshaw Glass Co.




Punitive Damages Exceptions §104(c)


Punitive damages can be excluded from income in a civil action where: (1) the suit is a wrongful death action, and (2) if, under state law, punitive damages are the only remedy for wrongful death. §104(c).




Personal Injury Damages


Damages for personal injury are nontaxable on the theory they are essentially a restoration of lost capital. Compensatory damages under workers’ compensation acts are excludable from income for both physical and nonphysical injuries. § 104(a)(1).



A taxpayer may exclude from income damages (except punitive damages) received “on account of personal physical injuries or physical sickness.” Interest earned on damages is includable in gross income under § 61(a)(4), but if payments are received over a period of years, the entire amount, including interest for the delay, is excludable. § 104(a)(2).



Damages for Emotional Distress Not Excludable - § 104(a) (flush language)


Emotional distress is not treated as a physical injury for tax purposes and must be included in income. § 104(a) flush language. However, the taxpayer can exclude from an emotional damages recovery the amount that is does not exceed the cost of medical care attributable to emotional distress as defined in § 213(d)(A), (B). § 104(a) flush language, last two sentences.



Limits to Personal Injury Exclusion from Income – Cannot double dip with § 213


A taxpayer may not exclude personal injury amounts recovered that have already been deducted under § 213, which permits a deduction for medical expenses in excess of 10% of the taxpayer’s gross income. §§ 104(a), 213(a).




Civil damages/ restitution for wrongful incarceration excluded from income - § 139F


Civil damages, restitution, or other monetary award are not included in the income of a wrongfully incarcerated individual where that money is related to the incarcerated individual for the covered offense. § 139F.




REALIZATION IRC § 1001(a), (b), (c); Treas. Reg. § 1.61-14(a)


The amount of the gain or loss is determined initially in a capital transaction under rules that apply generally. § 1001.




Computing Gain or Loss - § 1001(a)


In general, the gain realized from the sale or other disposition of property is equal to the excess of the amount realized over the adjusted basis of such property. § 1001(a). The loss realized from the sale or exchange of property is equal to the excess of the adjusted basis over the amount realized. § 1001(a).




'Amount Realized - '§ 1001(b)


The amount realized from the sale or other disposition of the property is shall be the sum of any money received plus the fair market value. Subsections (1) & (2) cover real property taxes defined under § 164(d). § 1001(b).




Recognition of Gain or Loss§ 1001(c)


Gains and losses are recognized on the sale or exchange of property, unless otherwise provided. § 1001(c).




Eisner v. Macomber – Our tax system defers the tax on appreciation until gain is realized. Something must be received out of which tax could be paid. The Code does not define realization, but Reg. § 1.1001-1(a) provides that gain or loss is realized when property is exchanged for cash or other property different “materially either in kind or extent.”


§ 1001(a) – Computing gain or loss.




Treasure Trove - Reg. § 1.61-14(a)


“Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.” Reg. § 1.61-14(a).




Three distinct categories of realization:


!--[if !supportLists]-->1. !--[endif]-->Windfalls (immediate income)


!--[if !supportLists]-->2. !--[endif]-->Market bargains (taxed at realization event)


!--[if !supportLists]-->3. !--[endif]-->Appreciation (taxed at realization event)



BASIS IRC §§ 1011, 1012(a), 1015(a), 1016(a)(1), (2), (b)


Basis maintains the tax history of property.



Adjusted Basis for Determining Gain or Loss - § 1011(a)


Before a taxpayer can figure any gain or loss on a sale, exchange, or other disposition of property, he must generally make certain adjustments (increases and decreases) to the basis of the property. The result of these adjustments is the property’s adjusted basis. § 1011(a).




Adjusted basis for determining gain or loss from sale or other disposition of property is the basis under § 1012 adjusted as provided in § 1016. § 1011(a).



Basis of Property - § 1012(a)


Unless a transaction falls within one of several specific Code exceptions, the basis of property is generally the cost, or, in other words, the amount paid by the taxpayer in cash or property. § 1012(a), Reg. § 1.1012-1(a).



If Property Acquired by Gift - § 1015(a)


If property was acquired by gift, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except where that basis is greater than the FMV at the time of the gift, then for determining loss the basis is FMV at the time of the gift. § 1015(a).




Add to Basis for the Following - § 1016(a)(1)


§ 1016(a)(1) – General rule for adjusted basis. Adjustment will be made for expenditures, receipts, losses, or other items, properly chargeable to a capital account.




Items Not Added to Basis - § 1016(a)(1)(A), (B)


but NOT for (i) taxes or other carrying charges described in § 266; or (ii) expenditures described in § 173, for which deduction have been taken in the taxable year or prior taxable years; or for mortality, expense, or other reasonable charges incurred under an annuity or other life insurance contract. § 1016(a)(1)(A), (B).




Subtract from basis for the following - § 1016(a)(2)


exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent (A) allowed as deductions, and (B) resulting in any deduction for any taxable year. § 1016(a)(2).



Items Used for Adjusting Basis - Reg. § 1.1016-2(a)


Cost or other basis shall be adjusted for any expenditure, receipt, loss, or other item, properly chargeable to capital account, including the cost of improvements and betterments to the property. Adjustments are not made for any item allowable as a deduction in computing net or taxable income for the taxable year. Reg. § 1.1016-2(a).




PROPERTY FOR SERVICES IRC § 83(a), (b), (c), (f), (h); Treas. Reg. § 1.83-3(c)(1), (2), - 3(e)




§ 83 applies in the case of services performed for another, whether by independent contractors or employees. Reg § 1.83-1(a)(1), 1.83-3(f), 1.83-7(a). Property transferred to a service provider (or beneficiary thereof) in recognition of the performance of, or the refraining from performance of, services is considered transferred in connection with the performance of services within the meaning of § 83. § 83 addresses the receipt of property in exchange for performance of services and provides more specific tax treatment than § 61 does.




The transfer of property is subject to § 83 whether such transfer is in respect of past, present, or future services. Reg. § 1.83-3(f).



When to Include Property for Services as Income - § 83(a), (c)


An employee must include income from the transfer the first year the transferred property vests, meaning the property is either transferable or no longer subject to a substantial risk of forfeiture. § 83(a).




The amount included under § 83(a) is (1) the value (FMV) of the transferred property at the time it vests less (2) the amount (if any) that the employee paid for the property.




Substantial Risk of Forfeiture Defined - § 83(c)(1)


Rights in property are subject to a substantial risk of forfeiture if the person’s rights in the property are conditioned on the future performance of substantial services by the employee. § 83(c)(1).




When Property is Transferable - § 83(c)(2)


Rights in property are transferable only if the employee can transfer the property to someone else who would not be subject to a substantial risk of forfeiture. § 83(c)(2).




Basis is Value at Time of Inclusion – Reg. § 1.61-2(d)(2)


The employee’s basis in the property is the value of the property at time of inclusion under § 83. Reg. § 1.61-2(d)(2).




Effects of Employee § 83(b) Election - § 83(b)


§ 83(a) does not apply if an employee makes an election under § 83(b). If an § 83(b) election is made, the employee includes in income, in the year the property was transferred, (A) the fair market value at the time of the transfer, less (B) the amount (if any) the employee paid for the property. § 83(b), (b)(A), (b)(B).




If Stock is Forfeited Before Vesting - § 83(b) (flush language)


If stock if forfeited before vesting, taxpayer does not get the money back AND cannot deduct the loss. § 83(b) flush language.




When an Employer can Take a Deduction - § 83(h)


An employer can take a § 162(a) deduction equal to the amount included in the gross income of the employee for property transferred under § 83(a), (b), or (d)(2). Employer can deduct in the year the employee includes the transfer in their income. § 83(h).




Difference between § 83(a) & (b)


Where § 83(a) applies: an employee will be taxed on the property at time of vesting at ordinary income rates.




Where § 83(b) applies: an employee will pay a tax at ordinary rates in the year of transfer, then pay the appropriate capital gains rate at the time of the subsequent sale of property


When making a § 83(b) election, the taxpayer is betting that accelerating the normal income tax rate, the property will appreciate enough so the capital gain tax paid at the subsequent sale will make up for the ordinary income tax paid initially. Also accelerates the amount of time it takes taxpayer to receive LTCG rates.




Reg. § 1.83-3(c)(1) – Substantial risk of forfeiture defined




RECEIPT OF SERVICES OR CONSUMPTION; IMPUTED INCOME



'3 CATEGORIES OF NON-CASH INCOME' – Look at Glenshaw Glass elements to determine if income or not



!--[if !supportLists]-->1. !--[endif]-->Receipt of Services''''


!--[if !supportLists]-->'a. !--[endif]-->Accession to wealth: Yes'


!--[if !supportLists]-->'b. !--[endif]-->Control: Yes'


!--[if !supportLists]-->'c. !--[endif]-->Receipt: Yes'



!--[if !supportLists]-->2. !--[endif]-->Receipt of Consumption''''


!--[if !supportLists]-->'a. !--[endif]-->Accession to wealth: Questionable'


!--[if !supportLists]-->'b. !--[endif]-->Control: Do not control experience (Get Mtn. Dew where you wanted a Coke)'


!--[if !supportLists]-->'c. !--[endif]-->Receipt: Yes'



!--[if !supportLists]-->3. !--[endif]-->Imputed Income''''


!--[if !supportLists]-->a. !--[endif]-->“Imputed income’s distinguishing characteristic is that it arises outside the ordinary processes of the market.”


!--[if !supportLists]-->'b. !--[endif]-->There is no mechanism to tax self-services'




Goods and Services Taken as Payment - Rev. Ruling 80-52


A barter club where members trade services assigned dollar values is considered income. Reg. § 1.61-2(d) states a taxpayer must include the FMV of the property or services taken in payment must be included in income as compensation. Rev. Ruling 80-52.



Virtual Currency – IRS Notice 2104-21


A taxpayer who receives virtual currency as a payment for goods or services must include the FMV of the virtual currency in gross income. IRS Notice 2014-21.




Gotcher – The value of any trip that is by an employer or businessperson primarily for his own benefit should be excluded from the gross income of the payee. Control or lack thereof is a principal factor. Must be of personal benefit to the taxpayer to be included in gross income.



When Imputed Income is Taxed


Imputed income is only taxed when labor is put into property and then that property is sold for a profit. There, the gain resulting from imputed income would be taxed against the basis of the property.




LOANS IRC § 166; Treas. Reg. § 1.166- 1(c)


“A bona fide debt is a debt which arises form a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money.”




'Loan' – earnings with consensual recognition, expressed or implied, of an obligation to repay




Bad debts – § 166


Wholly Worthless Debts - § 166(a)(1)


A lender is allowed a deduction for any debt that becomes wholly worthless within the taxable year. § 166(a)(1).




Partially Worthless Debts - § 166(a)(2)


When a debt is only recoverable in part, an amount not in excess of the part charged off within the tax year is allowable as a deduction for the lender.




Basis for determining the deduction amount - § 166(b)


The purpose of determining the deduction amount of a bad debt, the adjusted basis provided in § 1011 shall be used for determining loss.




Nonbusiness debts - § 166(d)


§ 166(d) nonbusiness debts – for a taxpayer other than a corporation: (A) subsection (a) does not apply to any nonbusiness debt; and (B) where a nonbusiness debt becomes worthless in a tax year, the loss will be considered a loss from the sale or exchange of a capital asset held for not more than 1 year.



Nonbusiness Debts Defined - § 166(d)


For purposes of bad debt deductions, § 166(d)(2) defines the term “nonbusiness debt” in the negative. § 166(d)(2).


Under the provision, it means a debt other than: (1) a debt created or acquired in connection with a trade or business of the taxpayer; or (2) a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business. § 166(d)(2); Reg. § 1.166-5(b).




When you take a loan, you only pay tax when you earn money then pay the loan. A loan allows you to defer tax over a 15- or 30-year period. Deferral benefit is the first order tax value of loans.




You can leverage the interest rate of your loan to greatly increase your ROI.



Example


Investor wants to purchase $100k property 🡪 borrows $80k against property’s value and pays $20k out of pocket. $80k loan has an interest rate of 4% per year. 1st year investor pays $3,200 interest and property increases in value by 10%. Investor sells property for $110k. $110k - $3,200 = $106,800 - $80k loan = $26,800 - $20k out of pocket = $6,800 🡪 34% gain on investor’s $20k investment.




James – embezzled money is not a loan. No mutual understanding of an obligation to repay.



Contingent Advances


The Ninth Circuit incorrectly held that in Boccardo that gross fee contract contingent advances were not loans, but ordinary and necessary business expenses that could be deducted the year they were incurred.




Everywhere else in the country, both gross fee and contingent fee arrangements are held as loans to a client, which are not immediately deductible, but may be deductible as a bad debt under § 166 in the event there is no recovery on the claim.



Net Fee


A net fee arrangement is one where the attorney deduct their fee after applying expenses


to the amount obtained from the judgment. Example: $100k judgment w/ 33% fee &


$10k litigation expenses 🡪 $10k expenses deducted 🡪 $90k x 33% = $29,700 in fees 🡪 Client receives $60,300.




Gross Fee


A gross fee arrangement is one where the attorney deducts their fee from the total amount


obtained from the judgment. Example: $100k judgment w/ 33% fee & $10k litigation expenses 🡪 $33k in attorney’s fees then $10k expenses are deducted from the remaining amount 🡪 Client receives $56k.




If recovery stems from a personal injury suit, the client will not have to pay taxes on the compensatory damages awarded for those injuries. § 104(a)(2).



CANCELLATION OF INDEBTEDNESS IRC §§ 61(a)(12); 108(a), (b)(1), (d)(1)-(3), (e)(1)-(2), (5), (h)


§ 166 is for lenders & § 108 is for debtors




Discharge of Indebtedness as Gross Income § 61(a)(11)


Once a debt is cancelled and there is no obligation to repay, it becomes clear that the original receipt of the “loan” proceeds constituted an increase in the taxpayer’s wealth.




General COD as income rule


Forgiveness of debt has long been recognized by the courts as producing gross income, because it frees up assts that the borrower was previously obligate to use to repay his debts. Because this freeing up of assets results in an associated increase in the wealth of the taxpayer, gross income is produced. See U.S. v. Kirby Lumber Co.



COD as Compensation Income - Reg. § 1.61-12(a)


When a debt is canceled in exchange for services provided, the debtor realizes compensation income up to the value of the services provided, and any excess of the debt over the value of the services is discharge of indebtedness income. Reg. § 1.61-12(a).




Analyze each part of non-cash debt payment - Rev. Ruling 84-176


Non-cash payment of debt should be reconsidered as a two-part transaction. Thus, satisfying a debt by releasing a damage claim against the lender can be analyzed as a cash payment in settlement of damage claim (from the lender to the borrower) followed by a cash payment on the loan (from the borrower to the lender). Rev. Ruling 84-176.




Gifts not COD Income


There is no discharge of indebtedness where if either the original debt or the subsequent forgiveness of the debt is a gift under § 102.




Payment in any form is a satisfaction and not a discharge


This includes the transfer of appreciated property or performance of services. For performance of services, the debtor has personal services income and the creditor may have a deductible business expense under § 162. See Spartan Petroleum.




While the amount of a debt is disputed or being negotiated, it is not a debt because it has not been finalized. Therefore, any reduction in amount before debt is finalized is not cancellation of indebtedness income.



Discharges of Indebtedness That Are Not Income Under § 108


§ 108 provides that certain discharge of indebtedness income that would otherwise be includable in a taxpayer’s gross income under § 61(a)(11) is excludable. § 108(a). The 2017 Tax Act repurposed § 61(a)(12) to § 61(a)(11).



Discharge of Indebtedness Income Exclusions § 108(a)(1) Gross income does not include any amount that would be included under § 61(a)(12) if:




Title 11 Bankruptcy Cases - § 108(a)(1)(A)


For the exclusion of discharge of indebtedness income due to a Title 11 case, the taxpayer must be under the jurisdiction of the court, and the court must have granted the discharge of indebtedness or issued a plan for the discharge. § 108(d)(2). If income for discharge of indebtedness is excluded in a Title 11 case, no other exclusion applies. § 108(a)(2)(A).




Insolvency - § 108(a)(1)(B)


A taxpayer is insolvent when the taxpayer’s liabilities exceed the fair market value of the taxpayer’s assets immediately before discharge of indebtedness. § 108(d)(3). Only applies for balance sheet insolvency (liabilities exceed assets), not equity insolvency (unable to pay debts as they come due). The taxpayer has the burden of proving insolvency. NEED TO EXAMINE ALL ASSETS WHEN DETERMINING INSOLVENCY.



Limitation of Insolvency Exclusion - § 108(a)(3)


The exclusion of income resulting from the discharge of indebtedness due to a taxpayer’s insolvency is limited and cannot exceed the amount the taxpayer’s liabilities exceed the fair market value of assets immediately before debt is discharged. § 108(a)(3). Example: $1 million in assets 🡪 $1.6 million in debts 🡪 $600k in cancellation of indebtedness income.
 !--[if !supportLineBreakNewLine]-->
 !--[endif]-->


Treatment of exclusion - § 108(b), (c)


A taxpayer who excludes discharge of indebtedness income from gross income under any of the statutory categories does not avoid tax altogether. The taxpayer is only deferring the taxable event because, in return for excluding income, the taxpayer must reduce certain tax attributes, if they exist, or, in other cases, reduce the basis of property. § 108(b)(1), 108(b)(2)(E), 108(c).



Reduction of tax attributes - § 108(b)


A taxpayer’s discharge of indebtedness income that is excluded due to a Title 11 case, insolvency, or because it is qualified farm indebtedness must reduce the following tax attributes in a specific order. § 108(b)(1).


!--[if !supportLists]-->1. !--[endif]-->Net operating loss (NOL) – NOL for the taxable year and carried over to the taxable year must be reduced first, by the amount of the income excluded. § 108(b)(2)(A).


!--[if !supportLists]-->2. !--[endif]-->General business credits as described in § 38. § 108(b)(2)(B).


!--[if !supportLists]-->3. !--[endif]-->Minimum tax credits under § 53(b) at the beginning of the taxable year following the taxable year of discharge. § 108(b)(2)(C).


!--[if !supportLists]-->4. !--[endif]-->Net capital loss (NCL) under § 1212 for the taxable year of discharge or NCL carried over to taxable year of discharge. § 108(b)(2)(D).


!--[if !supportLists]-->5. !--[endif]-->Basis of property to the taxpayer, subject to § 1017(a). § 108(b)(2)(E).




'Basis of property reduction - '§ 108(b)(2)(E)


For you apply the cancellation to property’s basis, then capture the cancellation of indebtedness by recognizing a larger gain when you sell the property and thus pay a higher tax. § 108 functions essentially as a deferral.



Credit carryover reduction - § 108(b)(3)(A), (B).


General business credit carryovers, minimum tax credits, passive activity credit carryovers, and foreign tax credit carryovers are reduced 331/3 cents for each dollar of excluded income. § 108(b)(3)(B). NOL, capital loss carryover, and basis of property are reduced dollar for dollar. § 108(b)(3)(A).




Carryover - § 108(b)(4)


NOL for the taxable year of the discharge is reduced first, then NOL carryovers are reduced in the order of the taxable years that created the carryovers. § 108(b)(4)(B). Carryovers of the general business credit are reduced in the same order that an excess business credit is carried back and carried over. § 108(b)(4)(C).




(C) the indebtedness is qualified farm indebtedness


(D) other than C corp., the indebtedness is qualified real property business indebtedness


(E) qualified principal residence indebtedness discharged (i) before Jan. 1, 2018, or (ii) subject to an arrangement from before January 1, 2018.



Other Income from Discharge of Indebtedness Provisions



Charity and other deductibles provision §108(e)(2)


No income is realized from the discharge of indebtedness to the extent that payment would have given rise to a deduction. § 108(e)(2). This covers charity and church donations and the like.



Reduction of purchase price liability § 108(e)(5)


Purchase money or “lemon” provision. Where the seller of property takes back debt on the property sold, and later reduces the taxpayer’s debt, the reduction in debt is treated as a purchase price adjustment, NOT § 61(a)(12) cancellation of indebtedness.



Student Loans - § 108(f)


Discharge of indebtedness income does not include the amount of student loan debt discharged to the extent that the discharge is in exchange for work performed for a certain period in certain professions for any of a broad class of employers. § 108(f)(1).


§ 108(f) student loans – in Rev. Ruling 2008-34, IRS held that indebtedness forgiven under LRAP would qualify for exclusion under § 108(f).



Qualified Principal Residence Exclusion - § 108(h)


The exclusion for qualified principal residence indebtedness (§ 108(a)(1)(E)) allows an exclusion for up to $2 million ($1 million for married taxpayers filing separately) to taxpayers who lose a home in foreclosure if the lender sell the property for less that the balance of the mortgage and forgives any portion of the debt that remains unpaid after the sale. § 108(h). The exclusion shall not apply to the discharge of a loan if the discharge is on account of services performed by the taxpayer. § 108(h)(3).




Reduction of Basis for COD - §1017






DEDUCTIONS – CHILD CARE, TRAVEL AND LODGING IRC §§ 129(a), (c), (d)(1), 162(a), 262



Dependent care assistance programs - § 129



Definition of a dependent care assistance program


An employee may exclude from gross income amounts paid or incurred by an employer for dependent care assistance provided to the employee. Dependent care assistance is the payment of, or provision for, those services that if paid by the employee would be considered employment-related expenses necessary for gainful employment and eligible for tax credit under § 21(b) (§ 129(e)(1)).




Requirements for dependent care assistance program''''


This exclusion is available only if the dependent care assistance program is expressed in a separate written plan of the employer, maintained for the exclusive benefit of employees, meeting the following requirements (§ 129(d)):


!--[if !supportLists]-->1. !--[endif]-->the contributions or benefits provided under the plan must not discriminate in favor of highly compensated employees or their dependents (§ 129(d)(2));


!--[if !supportLists]-->2. !--[endif]-->the program must benefit employees who qualify under a classification set up by the employer and found by the Service not to be discriminatory in favor of highly compensated employees or their dependents (§ 129(d)(3));


!--[if !supportLists]-->3. !--[endif]-->not more than 25% of the benefits during the year are paid for shareholders or their spouses and dependents, each of whom (on any day of the year) owns more than 5% of the stock or of the capital or profits interest in the employer (§ 129(d)(4));


!--[if !supportLists]-->4. !--[endif]-->the average benefits provided to employees who are not highly compensated employees under all plans of the employer is at least 55% of the average benefits provided to highly compensated employees (§ 129(d)(8));


!--[if !supportLists]-->5. !--[endif]-->reasonable notification of the availability and terms of the program must be provided to eligible employees (§ 129(d)(6)); and


!--[if !supportLists]-->6. !--[endif]-->not later than January 31 of each year, a written statement must be furnished to each employee receiving dependent care assistance showing the amounts paid or incurred by the employer in providing such assistance to that employee during the previous calendar year (§ 129(d)(7)).



Who is an employee?


Self-employed taxpayers as defined in § 401(c)(1) are considered employees for the purposes of § 129. § 129(e)(3).



Definition of a qualifying child - § 152(c)


Basic definition of a qualifying child is: (1) satisfy a relationship test with the taxpayer; (2) have the same principal place of abode as the taxpayer for more than half the year; (3) not yet attained age of 19 though a qualifying student can be under 24; and (4) not provide over one-half of her own support during the taxable year. § 152(c).




Employer Reimbursed Childcare Expenses - § 129


Provides an exclusion for employee childcare expenses reimbursed by an employer pursuant to a written “depend care assistance program” as defined by § 129(d).




Amount excludible''''


The amount excludible under this provision is limited to the lower of:


1. the amount of earned income of an unmarried employee (§ 129(b)(1)(A), or, if the employee is married, the earned income of the lower-earning spouse (§ 129(b)(1)(B)(i) & (ii)); or


2. $5,000 ($2,500 for a married individual filing separately) § 129(a)(2)(A).



Payments to Related Individuals


The § 129 exclusion is not available if the employer’s payments are made to an individual for whom a personal exemption deduction is allowable to the employee or his or her spouse, or if the payments are to a child (§ 151(c)(3)) of the employee under the age of 19 (§ 129(c)(2)).




Mixed Business and Personal Expenses - § 162(a)


The determination of whether a trade or business exists requires an examination of the facts of each case. See Groetzinger.



Commuting - Reg. §§ 1.162-2(e), 1.212-1(f), and 1.262-1(b)(5)


Expenses of transportation to and from work are nondeductible. Reg. §§ 1.162-2(e), 1.212-1(f), and 1.262-1(b)(5). The distance the taxpayer must travel and the availability of housing nearer to the taxpayer’s worksite are irrelevant. See Coombs.




When Commuting Costs are Deductible Under § 162(a)(2)


Daily transportation expenses are deductible in the following circumstances:

  1. The taxpayer may deduct expenses going between his residence and a temporary work location outside the metropolitan area where the taxpayer normally works.
  2. Applies to location in same metro area. If a taxpayer has one or more regular work locations away from the taxpayer’s residence, the taxpayer may deduct daily transportation expenses between his residence and a temporary work location.
  3. Applies to location in same metro area. If a taxpayer’s residence is the taxpayer’s principal place of business within the meaning of § 208A(c)(1)(A), the taxpayer may deduct daily transportation expenses between his residence and another work location, regardless if the work location is temporary or regular. See Rev. Ruling 99-7.


Travel Expenses - § 162(a)(2)


Like other deductions authorized by Section 162, the travel expense deduction requires that the expense be: (1) ordinary and necessary, (2) incurred “while away from home,” and (3) incurred “in the pursuit of a trade or business.” § 162(a)(2).




An expense that serves primarily to furnish the taxpayer with a social or personal benefit, and is only secondarily related to business, is not a necessary business expense under Section 162(a). § 262.




“Away From Home”


Travel expenses must also be incurred while the taxpayer is away from his/her “tax home” for a period long enough to require sleep or rest (the overnight rule). § 162(a)(2).




Where business necessity requires a taxpayer to maintain to dwellings, and thus incur additional and duplicate living expenses, those duplicate expenses are a cost of producing income and should ordinarily be deductible. Andrews.




A taxpayer’s principal place of business depends on where the taxpayer: (1) spends more time; (2) engages in a greater degree of business activity; and (3) derives a greater portion of his income. See Markey.




An iterant worker is never away from home, because the worker effectively has no tax home. See Fisher; Kennedy.




Personal Expenses Not Deductible - § 262(a)


Unless expressly provided otherwise, no deduction shall be allowed for personal, living, or family expenses. § 262(a).



DEDUCTIONS – MEALS


IRC §§ 274(a)(1)(A), (b), (d), (e)(1),(2)(A)(3), (k), (n)(1),(2)(A),(B); Regs. §§1.62- 1T(e)(1), 1.62-2(c)-(d); 1.162- 2(a), 2(b); skim 1.162-17, 1.274-2(c)-(d), -5T(a)




Entertainment Expenses Before 2017 Tax Act


For amounts incurred or paid prior to 2018, a 50% deduction was permitted for expenses for activities “generally considered to constitute entertainment, amusement, or recreation” or with respect to a facility used in connection with such an activity. Former § 274(a)(1).




Entertainment Expenses After 2017 Tax Act''''


For amounts paid or incurred after December 31, 2017, no deduction is allowed for: (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. § 274(a), as amended by the 2017 Tax Act.



Entertainment Defined – Reg. § 1.274-2(b)(1)


Any activity constituting entertainment, amusement, or recreation, like night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting fishing, vacation and similar trips including activity relating solely to the taxpayer or the taxpayer’s family. Reg. § 1.274-2(b)(1).




Entertainment Exceptions – Rev. Ruling 2018-76


Taxpayer can “peel off” meal from entertainment expense. Ex.: hotdog at a baseball game. Rev. Ruling 2018-76.'




Meals Away From Home - § 162(a)(2)


Courts will not use distance alone as the determining factor for if a meal was taken “away from home.” See Correll. A taxpayer is unlikely to incur substantially increased living expenses because of business travel, regardless of distance traveled, if he does not find it necessary to stop for lodging. Correll.



Local Meals - § 274


To determine local meal deductibility, the taxpayer must consider the degree, circumstances, and frequency of the meals. Moss. If meals are not served on employer premises, attendees are primarily employees, and the meals are daily or almost daily, they are not deductible. Moss.




Infrequent or occasional staff meals may be deductible as an ordinary and necessary business expense. Wells.




Ordinary Expense


An “ordinary expense” is one which is customary or usual within the experience of a


particular trade, industry or business community. The expense need not be one that is common for the particular taxpayer but must instead be one that is not rare in the taxpayer's business or industry.




Necessary Expense


A “necessary expense” is one that is appropriate and helpful for the development of the taxpayer's business. Thus, the expenditure need not be necessary in the common meaning of that term; that is, it need not be indispensable to the taxpayer's business. Instead, the expenditure must be intended to result in some benefit to the taxpayer's business. On the other hand, where the primary motivation for the entertainment or meal is personal and is related to business only in a tangential way, it is not deductible.




Limitations on Business Meals - § 274


Only 50% of the cost of business meals may be deducted under § 274. § 274(n).




Substantiation Requirement


No deduction is allowed for travel, including meal away from home unless the taxpayer substantiates through records: (1) the amount of the expense; (2) the time and place of travel; (3) business purpose of the expense; and (4) the business relationship of the taxpayer to the person receiving the benefit. § 274(d) flush language.



Employer assumes § 274 burden if employee uses expense account


Employee need not report reimbursement as income; employee need only provide an “adequate accounting” to the employer for expense account. See Reg. § 1.62-2(c)(4). The employer, not the employee is subject to the 50% deduction limitation. § 274(n)(2)(A).




“Accountable” Reimbursement Plan Req’ts – Reg. § 1.62-2(d) through (f).


To qualify for above treatment, the reimbursement plan must meet 3 requirements: (1) must have a business connection; (2) must require substantiation of the expenses; and (3) employee must return any reimbursement in excess of the substantiated expenses within a reasonable time. Reg. § 1.62-2(d) through (f).




“Nonaccountable” Reimbursement Plans – Reg. § 1.62-(c)(5)


Reimbursements under a nonaccountable plan must be reported by the employee as gross income. Reg. § 1.62-(c)(5).




DEDUCTIONS – LOSSES


IRC §§ 165, 166, 267(a)(1), (b)- (d)




When a Loss can be Deducted


A loss from the from the disposition of property only affects a taxpayer’s income and thus deducted when the loss is: (1) realized; (2) recognized; (3) allowed; and (4) not disallowed.



LOSSES - § 165


No deduction is allowed to the extent a loss is compensated for by insurance or otherwise. § 165(a). Under § 165(c), individual taxpayers can deduct: (1) trade or business losses; (2) losses incurred in transactions entered into for profit; and (3) with some limitations, personal casualty losses from “fire, storm, shipwreck or other casualty or from theft,” occurring in Federally declared disaster area. § 165(c), 165(h)(5). Additionally, § 67(b)(3) specifies that § 165(a) deductions are not miscellaneous itemized deductions.




Deduction Limit – Reg. § 1.165-1(c)


Deduction for the loss may not exceed the taxpayer’s adjusted basis at the time of loss. Reg. § 1.165-1(c).




Losses on Sale or Exchange of Property - § 165(c)(1), (2)


Individual taxpayers may take a deduction for a loss on the sale or exchange of property. § 162(c)(1) and (2).




Casualty Loss of Personal Use Property


Personal casualty or theft losses are deductible as itemized deductions only if they exceed $100 per casualty or theft. § 165(h)(1). Additionally, aggregate net casualty and theft losses are deductible only to the extent they exceed 10% of the taxpayer’s AGI. § 165(h)(2)(A). In tax years after December 31, 2017, and before January 1, 2026, personal casualty and theft losses may be claimed only if the loss is attributable to a disaster declared by the President under § 401 of the Robert T. Stafford Disaster Relief and Emergency Act. § 165(i)(5)(A).




If allowed, the amount of a casualty loss sustained by damage to personal property cannot exceed the taxpayer’s adjusted basis for the property or the decline in FMV, whichever is lesser. Reg. § 1.165-7(b)(1).



Amount of Deduction - § 165(b)


Basis for determining loss amount is the adjusted basis provided in § 1011 for determining loss from the sale or other disposition of property.



Limits



Dollar Limitation per Casualty - § 165(h)(1)


For casualty losses under subsection (c)(3) a deduction is allowed where the loss exceeds $100. You must subtract $100 from whatever loss you are claiming.




Minimum Amount for Net Casualty Loss - § 165(h)(2)(A)


If a taxpayer’s personal casualty losses exceed casualty gains, a taxpayer may only deduct losses that exceed 10% of the taxpayer’s AGI. § 165(h)(2)(A).



Subtract $100 then 10% of AGI to reach deductible amount.




Netting Casualty Gains and Losses and Losses Not Attributable to Federally Declared Disaster Area


Personal casualty losses not occurring in a federally declared disaster area are disallowed for tax years 2018 through 2025. § 165(h)(5)(A). However, those losses are permitted, but only to the extent of casualty gains. §165(h)(5)(B)(i). Personal casualty gains are netted against the non-federal disaster area losses, then any remaining gain is netted against any losses occurring in a federally declared disaster area. § 165(h)(5)(B)(ii).



Personal Casualty Gain - § 165(h)(3)(A)


The recognized gain from any involuntary conversion in subsection (c)(3) arising from fire, storm, shipwreck, or other casualty, or from theft. § 165(h)(3)(A).




Personal Casualty Loss Defined - § 165(h)(3)(B)


Losses from “fire, storm, shipwreck or other casualty or from theft,” occurring in a Federally declared disaster area. § 165(c)(3), 165(h)(3)(B).




When Casualty Gains Exceed Casualty Losses - § 165(h)(2)(B)


If the taxpayer’s personal casualty gains exceed casualty losses, the personal casualty gains and losses are treated as capital gains and capital losses from the sale of a capital asset. § 165(h)(2)(B).




Amount of Loss for Business or Investment Prop. – Reg. § 1.165-7(b)(1)


If the casualty involves business or investment property that is totally destroyed and the adjusted basis in this property is greater than the FMV before the casualty, the deductible loss equals that basis. Reg. § 1.165-7(b)(1).




Amount of Loss when Converted from Personal to Business or Investment Prior to Loss – Reg. § 1.165-7(a)(5)


If property is converted from personal to business or investment use prior to loss, the casualty loss is the lesser of either: (1) the property’s adjusted basis; or (2) the fair market value at the date of conversion.




“Other Casualties” - § 165(c)(3)


An “other casualty” must be a sudden, unexpected, and unusual event similar to a fire, storm, or shipwreck mentioned in § 165(c)(3). Rev. Ruling 72-592.




A casualty loss deduction will be denied if the taxpayer’s inaction amounting to willful negligence causes the damage. See Blackman (deduction disallowed where taxpayer burnt his house down in an attempt to burn his wife’s clothes).




HOBBY LOSSES - § 183


§ 183 reinforces the § 262 disallowance for personal expenses by disallowing deductions attributable to “an activity not engaged in for profit.” § 183(a). Whether a taxpayer had a primary profit motive for an activity is a factual question. Elliot v. Comm’r, 84 T.C. 227 (1985). To determine the taxpayer’s intent the trier of fact does not look at the taxpayer’s state of mind, but objectives factors.



Definition of Activity not Engaged in for Profit - § 183(c)


§ 183 does not provide any real guidelines for determining taxpayer intent. The section only provides instructions for what to do when an activity is found to be for personal use and not engaged in for profit.




Test for Whether an Activity is for Profit - § 183(d)


§183(d) creates a rebuttable presumption that an activity is engaged in for profit if the


gross activity exceeds the deductions attributable to it in 3 or more of the 5 consecutive year tax years ending with the year in question.




9 Factor Test – Reg § 1.183-2(b)


In addition to this rebuttable presumption, Reg. § 1.183-2(b) provides nine relevant factors to be considered when ascertaining taxpayer intent.




Expectation or Objective of Profit Required


Courts have held that a taxpayer must have either an expectation of profit independent of the tax benefits, or a “objective” of making a profit, even if the probability of financial success is small or remote. See Hines; Drecier. Additionally, there are nine relevant factors to consider when ascertaining taxpayer intent. Reg. § 1.183-2(b).



Tax Treatment IF a Business


If treated as a business, all operating costs and expenses are deductible under § 162(a). Also, any business deductions would qualify under § 62(a)(1) and would not be subject to any of the rules or limits concerning itemized deductions. If taxes and interest are operating costs, then those expenses are also deductible under § 162(a) and the taxpayer does not need to rely on §§ 163 or 164 personal deductions for interest or taxes.




Tax Treatment IF NOT a Business


If something is found to a hobby and not a business, all income from that hobby must be reported under § 61; there is no exclusion from income not derived from a trade, business, or investment activity. §183(b)(1) allows for the deduction of expenses whether personal or not, for example state and local property taxes under § 164(a)(1) and interest under § 163.




A § 163 deduction may be limited by § 163(h), because interest as allowed under § 183(b)(1) is a deduction for personal interest. Property interest must be “qualified residence interest” under § 163(h)(3)(i) or (ii). § 162(h)(2)(D). A taxpayer is not allowed to personal interest paid unless it is one of the enumerated exceptions. § 163(h)(2).




§ 183(b)(2) allows for deductions that would be allowable if the activity were engaged in for profit, but only to the extent the gross income derived from the activity exceeds the deduction allowable under § 183(b)(1). However, to the extent those costs are miscellaneous itemized deductions subject to the 2% floor and not listed in §62, they are disallowed under the 2017 Tax Act by § 67(g) from 2018 through 2025.




Hobby Deductions - § 183(b)(2)


Taxpayers may deduct the costs of their hobbies up to the income they earn from them. § 183(b)(2). However, to the extent those costs are miscellaneous itemized deductions not listed in §62 and subject to the 2% floor, they are disallowed under the 2017 Tax Act by § 67(g) from 2018 through 2025.



Bad Debts - § 166


§ 166 allows a deduction for any debt that becomes worthless within the tax year. In order to take the deduction, the taxpayer must show that the debt was bona fide. § 166 treats business and non-business bad debts differently. §166(a). Whether a debt is a business or non-business debt is a question of fact. Reg. § 1.166-5(b).




Non-Business Debts - § 166(d)


All non-business debts are treated as STCL (i.e., they cannot be deducted to the extent they exceed $3,000). § 166(d). Thus, the taxpayer who lends money out of friendship is treated the same as the one who lends for investment.




Business Debts - § 166(d)(2)


A business debt is defined as: (1) a debt created or acquired in connection with a trade or business of the taxpayer; or (2) a debt the from the worthlessness of which is incurred in the taxpayer’s trade or business. § 166(d)(2). Non-business debts are all other debts.




Losses, Expenses and Interest Between Related Taxpayers - § 267


Losses on the sale or exchange property normally allowed under § 165(c)(1) and (2) are disallowed when they arise from a transaction between related parties. § 267(a)(1).




Loss Limitation in Sale to Related Party - § 267(a)(1)


No deduction shall be allowed in respect of any loss from sale or exchange of property between persons specified in § 267(b). § 267(a)(1).



Who is related - §267(c)(4)


An individual’s family includes only bis brothers and sisters (whether by whole or half-


blood), spouse, ancestors, and lineal descendants.




Amount of Gain Where Loss Previously Disallowed - § 267(d)


In the sale or exchange or property where the property is transferred to the taxpayer, a


loss sustained by the transferor is not allowable per § 267(a)(1). § 267(d)(1)(A). When the taxpayer sells or otherwise disposes of the property at a gain, the gain is only recognized to the extent that it exceeds the original transferor’s loss in the property. § 267(d)(1)(B). Any excess amount of the loss is wasted and cannot be used by the taxpayer.




DEDUCTIONS – TAX FAVORED PERSONAL EXPENSES IRC §§ 213(a), (b), skim (d), (f); 164(a), (b)(1), (b)(2), (b)(5), (b)(6)



MEDICAL EXPENSES - § 213


To claim a § 213 deduction, medical expenses must not be compensated for by insurance or otherwise. § 213 is reminiscent of insurance because, like insurance, it is limited to the deduction of certain costs. A below-the-line deduction under § 213 is available for payments for “medical care” and includes payments for prevention, diagnosis, treatment, mitigation, and cure of disease, in addition to transportation primarily for and essential to medical care, and for insurance covering medical care. § 213(d)(1)(A). § 213 deductions are listed under § 67(b)(5) and thus are not disallowed as § 67(g) miscellaneous itemized deductions under the 2017 Tax Act. This deduction is available to the taxpayer for his medical care, his spouse, and his child (as defined in § 152, disregarding (b)(1), (b)(2), and (d)(1)(B)), to the extent those expenses exceed 10% of the taxpayers adjusted gross income. § 213(a).




Amount Deductible


There is no maximum limitation on the amount of the § 213 medical expenses deduction. Reg. §


1.213-1(c)(1). The cost of conventional medical care at hospitals, including lodging and meals, is fully deductible even if the taxpayer pays more than is necessary for adequate care. Reg. § 1.213-1(e)(1)(V).




Deductible Diagnostic Services – Rev. Ruling 2007-72


The following are deductible medical care expenses: (1) annual exams and lab tests (Reg. § 1.213-1(e)(1)(ii)); (2) a full body electronic scan, even without physician request; and (3) a pregnancy test kit.




Limitations for Drug Expenses - § 213(b)


Deductions for medicine or drugs are only allowed if under § 213(a) if that medicine is a


prescription drug or insulin. § 213(b).




Expenses to Improve General Health are not Deductible – Reg. § 1.213-1(e)(1)(ii)



Cosmetic Surgery - § 213(9)(A)


“Medical care” does not include cosmetic surgery or other similar procedure unless, it is


necessary to improve a deformity arising from, or directly related to, a congenital


abnormality, a personal injury from accident or trauma, or disfiguring disease. § 213(9)(A).




Limitations for Weight Loss – Rev. Ruling 2002-19.


Amounts paid for a weight loss program for obesity where obesity was diagnosed by a physician,


are deductible medical expenses under § 213. Amounts spent on weight loss programs to improve general health and appearance are non-deductible, since diet foods are a substitute for normal food consumption expenses.




HEALTH SAVINGS ACCOUNTS - § 223


To qualify for an HSA, a taxpayer must not be covered by Medicare and must have a High Deductible Health Plan (HDHP) and no other health insurance (other than ancillary coverage, such as accident, disability, dental care, vision care, or long-term care). § 223(c)(1).




A health insurance plan is a HDHP if: (i) annual deductible for an individual is not less than $1,000 or $2,000 for family coverage; and (ii)the annual combined deductible and out-of-pocket expenses are not more than $5,000 for individual coverage, or $10,000 for family coverage. § 223(c)(2). All amounts in this section receive a cost-of-living adjustment (COLA) calculated by multiplying the dollar amounts in subsection (b)(2) and (c)(2)(A) by the COLA determined in § 1(f)(3). § 223(g).




Above-the-line Deduction for HSA’s - § 223(a)


name="_heading=h.gjdgxs"Taxpayers can take an above-the-line deduction for contributions to an HSA and can exclude employer contributions to an HSA. § 223(a).




HSA Interest and Distributions Not Taxed - § 223(f)(1)


Income earned on the HSA is not included in the taxpayer’s income and distributions from the account are not included in the taxpayer’s income if they are used to pay unreimbursed medical expenses. § 223(e)(1), 223(f)(1).



DEDUCTIBLE TAXES - § 164


Taxpayers who elect to itemize under § __ can deduct their state and local sales taxes or their state and local income taxes, but not both. § 164(b)(5)(A).




SALT Deduction - § 164(a)


The 2017 Tax Act temporarily caps the SALT deductions at $10k per year for the aggregate of: (i) SALT property taxes (§164(a)(1)) and (ii) SALT income taxes (§164(a)(3)) (or sales taxes in lieu of income taxes). § 164(b)(6)(B). To deduct state sales tax in lieu of state income tax, a taxpayer must make a deduction under § 164(b)(5)(A).




This $10k limit controversial because it disproportionately affects “blue” states that have higher tax rates because taxpayers in these states reach the $10k ceiling quickly where “red” state taxpayers will not because of low income tax rates.




Taxes Paid in Acquisition of Property - § 164(a) (flush language)


If taxes are paid by the buyer, transfer taxes must be treated as part of the buyer’s cost in the property, whether or not the sale is a business transaction. Taxes incurred by the seller are not deductible, but instead reduce the amount realized on the sale. § 164(a) (flush language). See page 282 of textbook for an example.




Property Taxes After Property is Sold - § 164(d)


When real property is sold, the property taxes for the year must be allocated between the buyer and the seller. § 164(d)(1). Property taxes are allocated based on the part of the year the property was owned by each party and the buyer is treated as the owner on the date the property was sold. § 164(d)(1), 164(d)(1)(A).




Taxes that are not Deductible - § 275


Federal income taxes, social security taxes paid by an employee, and estate gift and inheritance taxes, whether Federal or state, are not deductible § 275.




INTEREST - § 163


For a noncorporate taxpayer, the general rule is that the taxpayer cannot deduct personal interest paid or accrued during the tax year. § 163(h)(1).




Principal Residence Exception - § 163(h)(3)


Taxpayer payments for qualified residence interest are deductible so long as the acquisition


indebtedness does not exceed $1 million. § 163(h)(3)(B). For tax years 2018 through 2025, the 2017 Tax Act has limited this amount to $750k. § 164(h)(3)(F)(II).




DEDUCTIONS – CHARITABLE CONTRIBUTIONS IRC § 170(a)(1), skim (b)(1), (c), (d)(1), (f)(8), (f)(12)(A), (f)(17)




CHARITABLE CONTRIBUTIONS


Itemized Deduction Permitted


An itemized deduction is permitted for charitable contributions is permitted under § 170(a)(1).


§ 501(c) contains additional guidelines for charitable deductions.




§ 170 allows taxpayers to deduct contributions to entities organized and operated “exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster nat’l or int’l amateur sports competition or for prevention of cruelty to animals or children.” § 107(c)(2)(B).



What is a Charitable Contribution?


A deductible transfer under § 170 must be a gift or contribution, not a payment for property or services that benefit the owner. § 170(a)(1) requires the payment of a contribution in cash or property. The tax consequences of to the donor depend, partly, on the type of contribution made by the donor. Courts look to the taxpayer’s motivation to determine whether a payment is a charitable contribution. See McConnell; Transamerica Corp.




Services as a Charitable Contribution – Reg. § 1.170A-1(g)


A taxpayer is not entitled to deduct the value of services contributed to a charity, and no income


is imputed to the taxpayer for the value of those services. Reg. § 1.170A-1(g). However, unreimbursed expenses incurred in rendering those services (other than childcare expenses) are deductible. Reg. § 1.170A-1(g). Childcare expenses incurred so taxpayer can donate charitable services are considered nondeductible personal expenses. Rev. Ruling 73-597.




Property as a Charitable Contribution


The amount of charitable contribution of property other than money is the FMV of the property at the time of contribution. Reg. § 1.170A-1(c)(1). A taxpayer does not realize gain where he contributes appreciated gifts. Rev. Ruling 55-410. The charitable contribution of ordinary income property or property not held long enough for LTCG will be limited to the taxpayer’s basis in that property. § 170(e)(1)(A).




Receipts Required – Reg. § 1.170A-13(b)(2)-(4)


Contributions of property other than money must have a receipt from the donee charitable


organization and a reliable written record of a specified information with respect to the donated property. Reg. § 1.170A-13(b)(2)-(4).




When Property Valued More Than $5,000 – Reg. § 1.170A-13(c)


Contributions of property valued in excess of $5,000 must comply with specified


appraisal requirements. Reg. § 1.170A-13(c).




LTCG Property


LTCG property is limited to donor’s adjusted basis if: (i) contributed property is tangible


personal property and donee’s use of that property is unrelated to the org’s charitable purpose; (ii) property is donated to certain private orgs; and (iii) contributed property is intellectual property or a patent. § 170(e)(1)(B).




LTCG Election For Basis Instead of FMV - § 170(b)(1)(C)''''


Contributions of long-term capital gain property to a public charity is limited to a deduction of not more than 30% of a taxpayer's contribution base if the donor deducts the fair market value of the property; however, the 50%/60% limitation applies if the donor so elects to deduct only the basis of the property. § 170(b)(1)(C).




Substantial Benefit Limit - Rev. Ruling 67-246


A § 170 deduction for the full amount contributed is only allowed if the donor receives no


substantial benefit from the contribution. If the donor receives a substantial benefit as a result of the contribution, the donor’s contribution is reduced by the benefit received. Rev. Ruling 67-246.


Example: Fund-raising dinner charges $300 for a dinner that has a value of $50. Donor is entitled to a $250 deduction. Only way donor gets full deduction is if they buy ticket and do not go to the dinner, i.e., they receive nothing in exchange for the donation.



Penalty for Substantial Misrepresentation of Contribution - § 6662


If a taxpayer claims the value of property contributed to a charity is 150% or more of the actual value of the property, the taxpayer will be liable for a nondeductible addition to the taxpayer’s income equal to 20% of the tax underpayment attributed to the substantial valuation misstatement. § 6662(a), (b)(3), (d), (e).




Documentation Required – Reg. § 1.170A-13


Taxpayers must maintain written documentation for each charitable contribution made. Reg. §


1.170A-13.




Where Donated Tangible Property Used for an Unrelated Purpose - § 170(e)(1)(B)


If a charitable donee puts tangible personal that is a capital asset to a use unrelated to its


charitable function or purpose, the amount of the individual donor’s deduction is reduced by the long-term capital gain the taxpayer would have reported if the taxpayer would have sold the property at its FMV. § 170(e)(1)(B).



Where Contribution of Cash or Property is $250 or More - § 170(f)(8)


A taxpayer will not be entitled to a charitable contribution deduction for a contribution of $250 or


greater unless the taxpayer substantiates the contribution by a contemporaneous, written


acknowledgment by the donee organization. § 170(f)(8).



Contribution Base Defined – Reg. § 1.170A-8(e)


“Contribution base” means AGI under § 62, computed without any net operating loss carryback


to the taxable year under § 172. See § 170(b)(1)(F).




Where Spouses File a Joint Return – Reg. § 1.170A-8(a)(1)


If spouses file a joint return, the deduction for contributions is the aggregate of the contributions made by both spouses, and the percentage limitations are based on the aggregate contribution base of the spouses. Reg. § 1.170A-8(a)(1).




Capital Gain Property Defined - § 170(b)(D)(iv)


Any capital asset the sale of which at its FMV at the time of contribution would have resulted in gain that would have qualified as LTCG.



No Deduction Allowed for Athletic Events Seating Rights - § 170(l)


No deduction is allowed for amounts paid in exchange for college or university athletic event seating rights. § 170(l).




Auditing Fees to a Church are Deductible but Tuition to Religious Schools is not''


Auditing payments to a religious organization are deductible. Rev. Rul. 93-73 (obsoleting Rev. Rul. 78-189). Religious school tuition is not a deductible expense. Sklar v. Comm’r.



Corporation Deduction Limit - § 170(b)(2)


Corporate taxpayer charitable contribution deductions are limited to 10% of the corporation’s taxable income, regardless of its charitable contributions and other considerations. § 170(b)(2).



50%/60% Limitation


Under § 170(b)(1)(A), the overall charitable contribution deduction is limited to 50% (60% for cash contributions from tax years 2018 through 2025) of the individual donor’s “contribution base” which is roughly equivalent to AGI. § 170(b)(1) (flush language). Any amount more than this limit may be carried forward for up to 5 years. § 170(b)(1)(G)(ii). Each carry forward deduction is subject to the same 50% / 60% limitation as contributions during the current tax year.


Cash contributions to public charities and certain private foundations are limited to 60% of a donor’s contribution base. § 170(b)(1)(A); 170(b)(1)(G)(i). Any contributions in excess of 60% of the taxpayer’s contribution base may be carried forward for five years. § 170(b)(1)(G)(ii). § 170(b)(1)(G) increased the deduction limitation from 50% to 60% for cash contributions to “A” charities (so named because they are listed in § 170(b)(1)(A)).




Noncash contributions to public charities and certain private foundations are limited to 50% of a donor’s contribution base. § § 170(b)(1)(A); 170(b)(1)(G)(i); Rev. Pub. 2018-526.




The 50%/60% limitation is applied before the 30% and 20% limitations or contributions for charitable organization use. § 170(b)(1)(A), (b)(1)(G). Thus, once a donor reaches the 50%/60% limit, no deduction is permitted for donations to 30% or 20% organizations.




A taxpayer’s contribution must be made “to” and not merely “for the use of” a specified public charity to qualify for the 50%/60% limitation. Reg. § 1.170A-8(b). “For the use of” is where charity is the beneficiary of a trust and “to” is a direct contribution.



Eight Categories of Public Charities - § 170(b)(1)(A)


!--[if !supportLists]-->1. !--[endif]-->Churches or a convention or association of churches. § 170(b)(1)(A)(i).


!--[if !supportLists]-->2. !--[endif]-->Educational organizations. § 170(b)(1)(A)(ii).


!--[if !supportLists]-->3. !--[endif]-->Hospitals and medical research organizations. § 170(b)(1)(A)(iii).


!--[if !supportLists]-->4. !--[endif]-->Endowment funds that benefit state and municipal colleges and universities. § 170(b)(1)(A)(iv).


!--[if !supportLists]-->5. !--[endif]-->Governmental units. § 170(b)(1)(A)(v).


!--[if !supportLists]-->6. !--[endif]-->Publicly supported organizations. § 170(b)(1)(A)(vi).


!--[if !supportLists]-->7. !--[endif]-->A private foundation described in § 170(b)(1)(F). § 170(b)(1)(A)(vii).


!--[if !supportLists]-->8. !--[endif]-->Organizations described in § 509(a)(2) or (3). § 170(b)(1)(A)(viii).



30% Limitation - § 170(b)(1)(B), (C)


The 30% limitation caps the charitable contribution deduction to the lesser of either 30% of the donor's contribution base, or the amount of the 50%/60% limitation left after subtracting contributions to under the 50% / 60% limitation group. § 170(b)(1)(B)(i), (ii). Excess contributions of capital gain property may be carried forward for the succeeding 5 years. § 170(b)(1)(C)(ii).




The 30% limitation applies to the following contributions:


(1) Cash and ordinary income property contributed to any charity but public charities or those charities treated as public charities (i.e., semi-private charities and private foundations). § 170(b)(1)(B); Reg. § 1.170A-8(c)(1).




(2) Contributions of LTCG property to a public charity is limited to a deduction of not more than 30% of a taxpayer’s contribution base if the donor deducts the FMV of the property; however, the 50%/60% limitation applies if the donor so elects under § 170(e) to deduct only the basis of the property. § 170(b)(1)(C)(iii) and (e)(1)(B).




20% Limitation – 170(b)(1)(D)


A 20% limitation applies to donations of capital gain property to semi-public and private foundations; the deduction of such contributions is limited to not more than 20% of the taxpayer’s contribution base. 170(b)(1)(D).



Percentage Limitations

Percentage of AGI

Cash or Ordinary Income Property

(1) To public or publicly supported orgs.

60% / 50%

(2) Nonpublic or nonpublicly supported orgs.

30%

Capital Gain Property

(1) All qualified charitable orgs., other than most nonoperating private foundations

30%

(2) Most private nonoperating foundations

20%


TAX POLICY AS SOCIAL POLICY: TAX EXPENDITURES IRC §§ 105(a), (b), 106(a), 23(a), (d)



AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS - § 105


Unless an employee can bring employer-financed sickness or disability payments under one of the enumerated exclusions, the total amount received is includible in gross income. § 105(a), (c).




Exclusions under § 105


Reimbursements for Medical Expenses - § 105(b)


Amounts paid to taxpayer to reimburse him for medical expenses as defined in § 213(d) for


himself, his spouse, or his qualifying child under § 152 are not excluded from gross income. § 105(b).




Payments Unrelated to Absence From Work - § 105(c)


Amounts paid to the employee, the spouse, or dependents for the permanent loss of a member or function of body, or for permanent disfigurement. § 105(c).





EMPLOYER CONTRIBUTIONS TO ACCIDENT AND HEALTH PLANS - § 106


Generally, an employee excludes from gross income employer-provided coverage under an accident or health plan. § 106(a).




Employer HSA Contributions - § 106(d)


Employer contributions to an employee’s HSA shall be considered contributions to an accident or health plan under § 106(a) and thus are excluded from gross income. § 106(d).




TAX POLICY AS SOCIAL POLICY: TAX CREDITS AND THE ACA IRC § 36B(a), (b), skim § 36B(c), (d)




ACA PREMIUM ASSISTANCE CREDIT - § 36B


§ 36B provides a premium tax credit for eligible individuals who purchase health insurance for themselves, their spouse, or any dependent through a Health Insurance Marketplace (or Exchange).




Married Taxpayer Req’ts - § 36B(c)(1)(C); Reg. § 1.36B-2(b)(2)


To be eligible for the premium assistance credit, married taxpayers must file a joint return. § 36B(c)(1)(C); Reg. § 1.36B-2(b)(2).




Variables for Determining § 36B Credit Amount


!--[if !supportLists]-->1. !--[endif]-->Modified adjusted gross income (accounting for family size). Treas. Reg. § 1.36B-1(e).


!--[if !supportLists]-->2. !--[endif]-->Cost of benchmark plan, which is second lowest cost silver plan


!--[if !supportLists]-->3. !--[endif]-->Cost of insurance purchased




Steps to Determine Credit Amount


!--[if !supportLists]-->1. !--[endif]-->Look at family unit and salary first. This will allow you to calculate the “applicable percentage” as specified in § 36(b)(3)(A). This percentage must be adjusted for inflation according to Table 2 below and located in the casebook on page 332.


!--[if !supportLists]-->2. !--[endif]-->Once you have the percentage from Table 2, multiply the taxpayer’s salary by that percentage. That is the maximum amount the taxpayer should spend on the benchmark plan.


!--[if !supportLists]-->3. !--[endif]-->Take the cost of the premium and subtract the amount from step 2. That is the amount of the taxpayer’s credit. If taxpayer elects to receive credit monthly, divide the difference reached by 12.




Table 1

Premium Subsidy Ranges by Income in 2019

Income % of Federal Poverty Level

Single Individual

Family of Two

Family of Three

Family of Four

Under 100%

Less than $12,140

Less than $16,460

Less than $20,780

Less than $25,100

100% – 133%

$12,140 – $16,146

$16,460 – $21,892

$20,780 – $27,637

$25,100 – $33,383

133% – 150%

$16,146 – $18, 210

$21,892 – $24,390

$27,637 – $31,170

$33,383 – $37,650

150% – 200%

$18,210 – $24,280

$24,390 – $32,920

$31,170 – $41,560

$37,650 – $50,200

200% – 250%

$24, 280 – $30,350

$32,920 – $41,150

$41,560 – $51,950

$50,200 – $62,750

250% – 300%

$30,350 – $36,420

$41,150 – $49,380

$51,950 – $62,340

$62,750 – $75,300

300% – 400%

$36,420 – $48,560

$49,380 – $65,840

$62,340 – $83,120

$75,300 – $100,400

Over 400%

More than $48,560

More than $65,840

More than $83,120

More than $100,400

Source: See Reg. § 1.36B-1.




Table 2

Subsidy Thresholds by Income 2019

Income % Poverty

Max % of Income for 2nd Lowest-Cost Silver Plan

Under 100%

No Cap

100% - 133%

2.08%

133% - 150%

3.11% - 4.15%

150% - 200%

4.15% - 6.54%

200% - 250%

6.54% - 8.36%

250% - 300%

8.36% - 9.86%

300% - 400%

9.86%

Over 400%

No Cap

Source: See § 36B(b)(3)(A).


Calculating the Credit


The § 36B is calculated by taking cost of the benchmark plan (§ 36B(b)(2)(B)(i)) minus the amount the family member is expected to contribute (§ 36B(b)(2)(B)(ii)). The amount the family member is expected to contribute is calculated as percentage of the taxpayer’s household income. § 36(b)(3).






TAX POLICY AS SOCIAL POLICY: ADDITIONAL TAX CREDITS IRC §§ 21(a), (b), 24(a)-(c), (h), 32(a), (b), (c)(1), (c)(2)(A), 25A(a), (b)(1)-(3), (c), (h), (i)



CHILD CARE CREDIT - § 21


§ 21 - Expenses for household and dependent care necessary for gainful employment


The childcare credit is equal to a percentage of qualifying childcare costs. § 21(a)(2). There is no inflation adjustment for this provision.




Employment-related Expenses Defined - § 21(b)(2)


“Employment-related expenses” are expenses incurred for the care of a qualifying individual, but only if those expenses are incurred to enable the taxpayer to work. § 21(b)(2).



Maximum Amount of Credit - § 21(b)(2), (c)(1), (c)(2)


The maximum amount of the childcare credit is $3,000 of qualifying child care costs if the taxpayer’s household includes 1 dependent and increases to $6,000 for 2 or more dependents. § 21(b)(2), (c)(1), (c)(2).




Calculating Percentage of Credit - § 21(a)(2)


For taxpayers with AGI up to $15,000, the credit amount is 35% of AGI. As AGI increases over $15,000, the percentage decreases from the maximum of 35% to as low as 20%. For each $2,000 (or fraction thereof) of income that exceeds $15,000, the credit percentage is reduced by 1%. § 21(a)(2).




The max credit for taxpayers with one child is $1,050 and for taxpayers with two or more children, $2,100. Low income families typically do not have enough income tax liability to absorb the full non-refundable credit.



Who Qualifies Under § 21 - § 21(b)(1)


A “qualifying individual” is: (A) a dependent of the taxpayer (as defined in § 152(a)(1)) who is under the age of 13, or (B & C) a dependent or spouse who is physically or mentally incapable of caring for himself. § 21(b)(1).




§ 21(c) flush language – The amount for either (c)(1) or (2) shall be reduced by the amount excludable under § 129.


Page 336 of textbook offers guide for determining whether to use § 21 or § 129.




CHILD TAX CREDIT - § 24


Under the 2017 Tax Act, the child tax credit is $2,000 per qualifying child. § 24(h)(2). Up to $1,400 of that amount can be received as a refundable tax credit. § 24(d), (h)(5).




Phaseout Thresholds - § 24(h)(3)


For tax years 2018 through 2025, the credit begins to phase out for taxpayers with AGI in excess


of $400,000 for married taxpayers filing a joint return and $200,000 in all other cases. § 24(h)(3).




The credit phases out at the rate of $50 for each $1,000 of AGI (or fraction thereof) in excess of


the threshold depending on taxpayer’s filing status. §24(b)(1).




Portions of Credit Refundable - § 24(d)(1)(B)(i), (h)(6)


For tax years 2018 through 2025, the refundable portion of the credit is limited to 15% of the excess of the taxpayer’s income over $2,500. § 24(d)(1)(B)(i), (h)(6).




Refundable Credit Cap - § 24(h)(5)(A), (B)


Also, for tax years 2018 through 2025, the maximum amount refundable may not exceed $1,400 per qualifying child. § 24(h)(5)(A). The $1,400 cap will be adjusted for inflation. § 24(h)(5)(B).




“Family Credit”



EARNED INCOME TAX CREDIT - § 32


An eligible individual’s EITC is the taxpayer’s earned income for the taxable year up to a statutory maximum multiplied by the applicable credit percentage. § 32(a)(1). The statutory maximum of earned income varies based on whether the taxpayer has children and, if so, how many. § 32(b)(2). The statutory maximum of earned income is adjusted annually for inflation. § 32(j)(1).





Earned Income Amounts for Maximum Credit - Rev. Proc. 2018-57, 2018-49 I.R.B. 827.

Earned Income Amount Adjusted for Inflation Maximum Credit Amount
One qualifying child $10,370 $3,526
Two qualifying children $14,570 $5,828
Three or more qualifying children $14,570 $6,557
No qualifying child $6,920 $529

Sources: § 32(b)(2), Rev. Proc. 2018-57, 2018-49 I.R.B. 827.




The applicable “credit percentage” also varies based on whether the taxpayer has qualifying


children, and, if so, how many. § 32(b)(1). The applicable credit percentage is:



An eligible individual with: Applicable credit percentage:

One qualifying child

34%

Two qualifying children

40%

Three or more qualifying children

45%

No qualifying child

7.65%

Source: § 32(b)(1).




Example. For 2019, an eligible individual with one qualifying child can qualify for a maximum EITC of $3,526 (earned income maximum of $10,370 x 34%); with two children, $5,828 (earned income maximum $14,570 x 40%); with three or more children, $6,557 (earned income maximum $14,570 x 45%); and no qualifying child, $529 (earned income maximum $6,920 x 7.65%).



EITC Phaseout


The EITC phases out for taxpayers with AGI between certain amounts. If AGI falls between these


levels the EITC must be reduced. If AGI exceeds the top of the range, no EITC is allowed for the year. Joint return filers begin using their credit at higher phaseout amounts than other filers – the threshold phaseout amount is increased for joint filers by $5,000, adjusted for inflation annually per § 32(j). § 32(a)(2)(A), (B).



AGI Phaseout Amounts by Filing Type

Qualified Children Joint Filers Phaseout Begins Joint Filers Phaseout Complete Other Taxpayers Phaseout Begins Other Taxpayers Phaseout Complete
None $14,450 $21,370 $8,650 $15,570
One $24,820 $46,884 $19,030 $41,094
Two $24,820 $52,493 $19,030 $46,703
Three + $24,480 $55,952 $19,030 $50,162

Sources: Rev. Proc. 2018-57, 2018-49 I.R.B. 827.




The applicable “phase-out percentage” varies based on the number of qualifying children. § 32(b)(1). The applicable percentage is noted below:


Phaseout Percentage Table

Eligible taxpayer with:

Applicable phase-out percentage:

One qualifying child

15.98%

More than one qualifying child

21.06%

No qualifying child

7.65%

Source: § 32(b)(1).




Example. Phase-out Threshold. In 2019, the maximum credit of $3,526 for a single taxpayer with


one qualifying child is available for those with AGI between $10,370 and $19,030. The credit begins to phaseout at a rate of 15.98% of earnings above $19,030; the credit phases out completely once earnings hit $41,094.




Qualifying Child - § 32(c)(3)


The term “qualifying child” means a qualifying child of the taxpayer (as defined in § 152(c),


determined without regard to paragraph (1)(D) and § 152(e)).




Definition of Qualifying Child - § 152(c)


An individual who:


(A) is a child of the taxpayer, a descendant of such a child, a brother, sister, stepbrother,


or stepsister, or a descendant of any such relative;


(B) has the same principal place of abode as the taxpayer for more than one-half of such taxable year;


(C) younger than the taxpayer and has not attained the age of 18 at the close of the year when the taxable year begins, or is a student who has not attained the age of 24 as of the close of such calendar year;



There is divorced parents exception under § 152(e).



AMERICAN OPPORTUNITY AND LIFETIME EARNING CREDITS - § 25A – Page 340 Casebook



American Opportunity Tax Credit - § 25A(b), (b)(2)(A)


The AOTC allows a taxpayer to deduct up to $2,500 of qualified tuition and related expenses paid for up to four years of college. § 25A(b)(1). The AOTC is limited to four taxable years of college. § 25A(b)(2)(A).





100% Credit up to $2,000, then 25% for another $2,000 - § 25A(b)(1)(A), (B)


AOTC provides a 100% credit for up to $2,000 of expense. § 25A(b)(1)(A). The additional $500 credit is available if the taxpayer pays an additional $2,000 in tuition and related expenses. § 25A(b)(1)(B).



Limit is per Dependent Student - § 25A(b)(1)(A), (B).


AOTC limitation is per student, so a taxpayer with more than one student dependent can claim more than AOTC.



40% Refundable – § 25A(i)


The AOTC is also 40% refundable, meaning it is available to needier taxpayers with little to no tax liability. § 25A(i).




AOTC Phaseout - § 25A(d)(1)


The AOTC phases out for taxpayers with income over $80,000 ($160,000 for joint return


filers, not inflation adjusted).



Lifetime Learning Credits - § 25A(c)


The LLC allows a taxpayer to credit 20% of qualified tuition and related expenses, up to a credit of $2,000, for qualified tuition and related expenses of higher education. § 25A(c)(1). If you are in graduate school, you are cannot use the AOTC and thus the LLC is your only option.




Lifetime Learning Credit Phaseout - § 25A(d)(2), (h)(2)


The LLC phases out for taxpayers with income over $58,000 for single filers, and


$116,000 for joint return filers, when adjusted for inflation. § 25A(d)(2), (h)(2).




Who Can Claim the Deduction? - § 25A(f)(1), (g)(3), (g)(6)


Qualified tuition and related expenses are for:


!--[if !supportLists]-->1. !--[endif]-->the taxpayer


!--[if !supportLists]-->2. !--[endif]-->the taxpayer’s spouse


!--[if !supportLists]-->3. !--[endif]-->any dependent the taxpayer could claim a § 151 deduction for. § 25A(f)(1).




Even if a dependent student pays their own tuition, the parents are entitled to the credit. § 25A(g)(3). This is to prevent high-income parents from avoiding the credit’s phaseout structure.




Married couples must file a joint return to claim either the AOTC or the LLC. If married taxpayers file separately, they will not be able to claim either credit. § 25A(g)(6).




CHARACTERIZATION: CAPITAL ASSETS AND CAPITAL GAINS IRC §§ 1221(a), 1222, 1211(b), 1212(b)(1), skim 1(h)(1), (h)(11)(A)


Once gain or loss is calculated under § 1001 following a sale or exchange, that gain or loss must be characterized as either ordinary or capital.




Capital Asset Defined - § 1221


§ 1221 defines a capital asset in the negative. A capital asset is property held by a taxpayer, excluding:


!--[if !supportLists]-->1. !--[endif]-->Inventory, stock in trade, or property held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business. § 1221(a)(1).


!--[if !supportLists]-->2. !--[endif]-->Depreciable or real property used in the taxpayer’s trade or business. § 1221(a)(2).


!--[if !supportLists]-->3. !--[endif]-->Specified literary or artistic property. § 1221(a)(3).


!--[if !supportLists]-->4. !--[endif]-->Business accounts or notes receivable. § 1221(a)(4).


!--[if !supportLists]-->5. !--[endif]-->Certain publications of the United States government. § 1221(a)(5).


!--[if !supportLists]-->6. !--[endif]-->Certain commodities derivative financial instruments held by a commodity derivatives dealer. § 1221(a)(6).


!--[if !supportLists]-->7. !--[endif]-->Certain hedging transactions. § 1221(a)(7).


!--[if !supportLists]-->8. !--[endif]-->Supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business. § 1221(a)(8).



Terms Relating to Capital Gains and Losses - §1222



Short-term Capital Gain - § 1222(1)


Gain from the sale or exchange of a capital asset held for not more than one year. § 1221(1).




Short-term Capital Loss - § 1222(2)


A loss from the sale or exchange of a capital asset held for not more than one year. § 1221(2).




Long-term Capital Gain - § 1222(3)


Gain from the sale or exchange of a capital asset held for more than one year. § 1221(3).




Long-term Capital Loss – § 1222(4)


Loss from the sale or exchange of a capital asset held for more than one year. § 1221(4).




Net Short-term Capital Gain - § 1222(5)


The excess of STCG for the taxable year over the STCL for the year. § 1221(5).




Net Short-term Capital Loss - § 1222(6)


The excess of STCL for the taxable year over the STCG for the taxable year. § 1221(6).




Net Long-term Capital Gain - § 1222(7)


The excess of LTCG for the taxable year over LTCL for the taxable year. § 1221(7).




Net Long-term Capital Loss - § 1222(8)


The excess of LTCL for the taxable year over LTCG for the taxable year. § 1221(8).




Capital Gain Net Income - § 1221(9)


The excess of the gains from the sales or exchanges of capital assets over the losses from such sales or exchanges. § 1221(9).



Net Capital Loss - § 1222(10)


The excess of losses from sales or exchanges of capital assets over the sum allowed under the capital loss limitation of § 1211. § 1221(10).



Net Capital Gain - § 1222(11)


The excess of the net long-term capital gain for the taxble year over the net short-term capital loss for such year. § 1221(11).




The Netting Process When Both Gains and Losses Are Recognized


Start with:




§ 1222(3) LTCG § 1222(1) STCG


minus minus


§ 1222(4) LTCL § 1222(2) STCL




Does LTCG exceed LTCL? Does STCL exceed STCG?


If yesIf yes


§ 1222(7) Net LTCG §1222(6) Net STCL




Does net LTCG exceed net STCL?


If yes




§ 1222(11) Net Capital Gain


First, taxpayer CG and CL losses are grouped into 4 categories:


!--[if !supportLists]-->1. !--[endif]-->STCG & STCL


!--[if !supportLists]-->2. !--[endif]-->CG & CL from 28% group


!--[if !supportLists]-->3. !--[endif]-->CG & CL from 25% group


!--[if !supportLists]-->4. !--[endif]-->CG and CL from “other gain” group




Second, STCG and STCL are netted.




Third, taxpayer computes long-term capital gain or loss. Taxpayer calculates gains and losses within the 28% ground and the “other gain” group, then nets the gains and losses in the 28%, 25%, and other gain groups. (Long term capital loss carryovers are netted in the 28% group. Notice 97-59.)




If there is a net loss in the 28% group, that loss is applied first to reduce any gain in the 25% group, then to reduce any net gain in the “other gain” or ANCG group.




If there is a net loss in the “other gain” or ANCG group, that loss is applied first to reduce any net gain in the 28% group, then to reduce any gain in the 25% group.




If a taxpayer has no net long-term capital gain or if his net long-term capital gain does not exceed his net short-term capital loss, he cannot use the reduced rates provided by § 1(h). Net short-term capital gains are taxed in the same manner as ordinary income.




Limitations on Capital Losses - § 1211


Noncorporate taxpayers are allowed to deduct up to $3,000 in excess of their capital losses in a given year and carry forward indefinitely the excess capital losses disallowed. §§ 1211(b), 1212(b)(1).




Capital Losses are an Above-the-Line Deduction - § 62(a)(3), (d)


A capital loss deduction is taken above-the-line, so it can be taken even though the taxpayer uses the standard deduction under § 63(b). § 63(a)(3), (d).




Capital Loss Carrybacks and Carryovers - § 1212


Any excess loss not currently deductible may be carried forward and used to offset capital gain or ordinary income in later years.



Capital Gains Rates - § 1(h)




Capital gains are grouped into three categories:

  1. The 28% group
  2. The 25% group
  3. The other gain group (ANCG)


28% Group - § 1(h)(4)


LTCG in this group is taxed at the lower of 28% or the taxpayer’s marginal ordinary income rate. § 1(h)(1), (4). The 28% group includes (i) CG from the sale or exchange of “collectibles,” and (ii) in some cases, a portion of the CG made on the sale “§ 1202 stock.” §§ 1(h)(7), 1202(a)(1), (b). Collectibles include artwork, antiques rugs, gems, metal, stamps, wines, and coins. §§ 1(h)(5)(A), 408(m).




25% Group - § 1(h)(1)(E)


LTCG in this group is taxed at the lower of 25% or the taxpayer’s marginal ordinary income rate. § 1(h)(1), (1)(E). Capital gain from the sale of improved realty (buildings), where the gain results from prior depreciation deductions, so-called unrecaptured § 1250 gain.



“Other Gain” Group (ANCG) - § 1(h)(1)(D), (j)(5)(B)(ii)


Adjusted net capital gains (ANCG) are the most preferred category and are taxed at a maximum rate of 20%. ANCG is gain from typical investment assets, like corporate stocks and securities or unimproved land. Gain in this group includes (i) any LTCG not in the 28% or 25% groups and (ii) qualified dividend income. § 1(h)(3).




2017 Tax Act Capital Gains Rates Adjustments - § 1(j)(5)


The long-term capital gains rate brackets provided in § 1(h) were amended by the 2017 Tax Act so that they no long trace the income tax brackets. LTCG brackets are now divided into 0%, 15%, or 20% based on the maximum amount of taxable income for each rate to apply. § 1(j)(5). For tax years from 2018 through 2025, the following rate table will apply to capital gains rates:



Adjusted Net Capital Gains Rates

Long Term Gains Rate

Single Taxpayers

Married Filing Jointly

Head of Household

Married Filing Separately

0%

Up to $39,375 Up to $78,750 Up to $52,750 Up to $39,375

15%

$39,376 - $434,550 $78,751 - $488,850 $52,751 - $461,700 $39,376 - $244,425

20%

Over $434,550 Over $488,850 Over $461,700 Over $244,425

Source: § 1(j)(5)(B), (f)(3), Rev. Proc. 2018-57.




Capital Gains Inflation Adjustment - § 1(j)(5)(C)