Principles of Taxation in the United States Theory, Policy, and Practice

Taxation is a discipline that does not receive sufficient academic attention. It is typically viewed as a subset of law, accounting, public policy, economics, or finance. In this respect, most academic efforts in the field of taxation are shadowed by a mother discipline. There is currently an unprecedented need to approach tax pedagogy in a way that is independent of another discipline. This book caters to that real and unmet need in tax pedagogy. One of the book’s advantages is that it is not tied to a specific tax year and does not coddle the reader with volumes of time-sensitive information. In this book the tax year is never the focus, as the center stage is reserved for teaching the principles and skills necessary to independently find answers. The reader will learn to appreciate the complexity of the American tax system and will be endowed with the contextual understanding necessary to formulate educated opinions about how taxes work and, most importantly, why. Contrary to common belief, taxation in the United States has remained fairly stable for the last 100 years. This book uses the federal individual income tax as a vehicle to unveil the mechanics that make up the American tax system. This book is essential reading for students taking a first course in taxation, at the undergraduate or graduate level, as part of programs in accounting, law, public administration, or business at large.

List of figures List of images List of tables About the author Foreword Preface PART I CONCEPTUAL FOUNDATIONS 1 A HISTORICAL PERSPECTIVE ON TAX POLICY Philosophical notions of taxation History of taxation in the United States The 16th Amendment remains powerful Tax policy Practice questions 2 THE STRUCTURE OF TAX ADMINISTRATION Introduction to viable tax systems Tax base Tax rate A system of preferences A mechanism of tax administration An opportunity to appeal Focus on tax planning: avoidance or evasion? Practice questions PART II THE UNDERPINNINGS OF TAX IN THE UNITED STATES 35 3 TAX ADMINISTRATION IN THE UNITED STATES Introduction to separation of powers The legislative branch in U.S. tax administration The executive branch in U.S. tax administration Organization of the IRS Examination of returns Administrative appeals The judiciary branch in U.S. tax administration Practice questions 4 SPEAKING AMERICAN TAX LANGUAGE Words matter! Taxing jurisdictions Tax system: worldwide or territorial System of collection: direct or indirect Tax rates and timing Tax base Tax base: income Tax base: capital Tax base: consumption Preferences Taxpayer Tax classification Practice questions 5 LOCATING AND RESEARCHING TAX AUTHORITY Classification of tax authority Primary authority Primary authority issued by Congress Primary authority issued by the IRS Primary authority issued by the Courts Secondary authority Researching tax authority Subscription-based tax research Open-access tax research Citing tax authority Formulating research questions Practice questions PART III THE MECHANICS OF AN AMERICAN INDIVIDUAL INCOME TAX RETURN 6 FILING STATUS AND DEPENDENTS Identifying taxpayers Filing status Married Filing Jointly (MFJ) Married Filing Separately (MFS) Qualifying Widow(er) (QW) Head of Household (HoH) Single Filing status examples Dependents Qualifying Child Relationship Age Support Household Citizen/resident Tiebreaker rules Qualifying Relative Relationship or housing Gross income Support Citizen/resident Personal and dependency exemptions Practice questions 7 TAXES IMPOSED ON INCOME The largest source of federal tax revenue Taxing income generally Taxes on income Income tax on ordinary income Income tax at reduced rates Net investment income tax FICA taxes Medicare surtax Sources of taxable income Measuring gains: basis and holding period Most common exclusions from taxable income Employment benefits Social Security benefits Gains on the sale of a principal residence Municipal bond interest Combat pay and parsonage allowances Cancellation of debt Compensation for injuries and sickness Foreign earned income Other exclusions Closing remarks: illegal income Practice questions 8 DEDUCTIONS What is a deduction? Personal expenses generally Personal expenses deductible above the line (for AGI) Educator expenses Student loan interest Tuition and fees Health Savings Accounts (HSA) Deductible portion of self-employment tax Self-employed health insurance Alimony Moving expenses Individual Retirement Accounts (IRA) Employment-related above-the-line deductions Personal expenses deductible below the line (from AGI) The standard deduction Itemized deductions Medical and dental expenses Taxes Interest Gifts to charity Casualty losses Business expenses Trade or business Ordinary, necessary, and reasonable Closing remarks on deductions Practice questions 9 LOSSES AND LOSS LIMITATIONS Losses vs. expenses Context of losses Nature of losses Triggering event Calculating the maximum loss amount Loss amount from assets Loss amount from activities Tax treatment of losses Unused losses Losses: calling them names Losses: facts and circumstances The active participation exception for rental losses Practice questions 10 CREDITS Credits vs. deductions Refundable and nonrefundable credits Most common tax credits Child Tax Credit and Family Tax Credit Education credits American Opportunity Tax Credit Lifetime Learning Credit Retirement Savings Contribution Credit Foreign Tax Credit Child and Dependent Care Credit Earned Income Credit Practice questions PART IV REFLECTIONS ON POLICY AND PRACTICE 11 THE ALTERNATIVE MINIMUM TAX SYSTEM History of the AMT system Defining "minimum" AMT adjustments and preferences Private activity municipal bond interest income Personal and dependency exemptions The standard deduction Itemized deductions Medical and dental expenses State and local taxes Mortgage interest Depreciation Incentive Stock Options (ISO) AMT case study: Jolanda White Practice questions 12 TAX PLANNING AND PROFESSIONAL STANDARDS Notions of tax planning Avoiding recognition of income Controlling time Controlling character Shifting taxpayer Evasion, avoidance, and the tax gap Professional standards in tax practice Credentialing: degrees, licenses, and certifications Professional oversight Closing remarks Practice questions Appendices Index

Fabio Ambrosio, JD, LLM, MBA, CPA/PFS/ABV, CFP, EA, CVA, MAFF, CFE, CGMA, is a Professor of Taxation at Central Washington University. In addition to being licensed as an attorney-at-law and Certified Public Accountant in the State of Washington, he is also a trained mediator, business valuator, and forensic analyst.