FEDERAL INCOME TAX

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FEDERAL INCOME TAX

• Prof. Anthony C. Infanti

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Section 61 Gross Income

• Except as otherwise provided in this
  subtitle, gross income means all income from
  whatever source derived, including (but not
  limited to) the following items
• Compensation for services . . .
• Gross income derived from business
• Gains derived from dealings in property
• Interest
• Rents
• Royalties
• Dividends . . . .

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Section 62 Adjusted Gross Income

• Above-the-line deductions are subtracted from
  gross income to arrive at adjusted gross
  income.
• Above-the-line deductions include the following
• Trade or business deductions (including certain
  trade or business deductions of employees),
• Losses from the sale or exchange of property,
• Deductions attributable to rents and royalties,
• Alimony,
• Moving expenses, and
• Interest on educational loans.

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Section 63 Taxable Income

• Taxable income is defined by 63, and its
  computation depends upon whether a taxpayer
  chooses to itemize her deductions
• Itemizers. For itemizers, taxable income equals
  adjusted gross income less the taxpayers
  itemized deductions and the taxpayers personal
  exemption ( 151).
• Itemized deductions are a residual category that
  includes all deductions other than the 62
  above-the-line deductions and the personal
  exemption. See 63(d).
• Non-itemizers. For non-itemizers, taxable income
  equals adjusted gross income less the standard
  deduction and the taxpayers personal exemption
  ( 151).

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The 2007 Standard Deduction

• Married taxpayers filing jointly 10,700
• Married taxpayers filing separately 5,350
• Unmarried individuals 5,350
• Heads of household 7,850

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Tax Rates

• The income tax has a graduated rate schedule.
• At present, the rates are
• 10
• 15
• 25
• 28
• 33
• 35

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Tax Rate Terminology

• Marginal rate the rate at which each
  additional dollar of income will be taxed (the
  same as your tax bracket).
• Effective rate the amount of tax paid divided
  by total income.

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Deduction v. Credit

• Because deductions are subtracted from gross
  income before the tax rate is applied, deductions
  are worth only the amount of the deduction
  multiplied by the taxpayers marginal tax rate.
• Because tax credits are subtracted after the
  appropriate tax rates are applied to a taxpayers
  taxable income, they result in a
  dollar-for-dollar reduction of the tax due.

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Hypothetical Rate Schedule
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Value of a Deduction v. a Credit
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Principles in Creating Tax Laws

• Equity
• Horizontal similar tax burdens on similarly
  situated taxpayers
• Vertical appropriate differential in tax
  burdens for people in different circumstances
• Efficiency (a.k.a. neutrality) avoiding the
  distortion of normal economic incentives
• Administrability fair and efficient
  administration (complexity v. simplification)