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

by Fabio Ambrosio

Overview

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.

Product Details

ISBN-13:	9781138362840
Publisher:	Taylor & Francis
Publication date:	10/05/2020
Pages:	420
Product dimensions:	6.88(w) x 9.69(h) x (d)

About the Author

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.

Table of Contents

List of figures xiv

List of images xvii

List of tables xviii

About the author xx

Foreword xxi

Preface xxiii

Part I Conceptual Foundations 1

1 A Historical Perspective on Tax Policy 3

Philosophical notions of taxation 3

History of taxation in the United States 6

The 16th Amendment remains powerful 11

Tax policy 13

Practice questions 17

2 The Structure of Tax Administration 21

Introduction to viable tax systems 21

Tax base 21

Tax rate 24

A system of preferences 27

A mechanism of tax administration 29

An opportunity to appeal 30

Focus on tax planning: avoidance or evasion? 30

Practice questions 32

Part II The Underpinnings of Tax in the United States 35

3 Tax Administration in the United States 37

Introduction to separation of powers 37

The legislative branch in U.S. tax administration 38

The executive branch in U.S. tax administration 38

Organization of the IRS 39

Examination of returns 40

Administrative appeals 44

The judiciary branch in U.S. tax administration 46

Practice questions 49

4 Speaking American Tax Language 53

Words matter! 53

Taxing jurisdictions 53

Tax system: worldwide or territorial 54

System of collection: direct or indirect 60

Tax rates and timing 60

Tax base 61

Tax base: income 62

Tax base: capital 64

Tax base: consumption 65

Preferences 66

Taxpayer 68

Tax classification 69

Practice questions 75

5 Locating and Researching Tax Authority 79

Classification of tax authority 79

Primary authority 79

Primary authority issued by Congress 80

Primary authority issued by the IRS 82

Primary authority issued by the Courts 84

Secondary authority 84

Researching tax authority 86

Subscription-based tax research 86

Open-access tax research 88

Citing tax authority 90

Formulating research questions 91

Practice questions 92

Part III The Mechanics of an American Individual Income Tax Return 95

6 Filing Status and Dependents 97

Identifying taxpayers 97

Filing status 98

Married Filing Jointly (MFJ) 99

Married Filing Separately (MFS) 100

Qualifying Widow(er) (QW) 102

Head of Household (HoH) 102

Single 103

Filing status examples 103

Dependents 104

Qualifying Child 105

Relationship 105

Age 105

Support 105

Household 105

Citizen/resident 106

Tiebreaker rules 106

Qualifying Relative 107

Relationship or housing 107

Gross income 107

Support 107

Citizen/resident 108

Personal and dependency exemptions 109

Practice questions 110

7 Taxes Imposed on Income 113

The largest source of federal tax revenue 113

Taxing income generally 113

Taxes on income 116

Income tax on ordinary income 116

Income tax at reduced rates 118

Net investment income tax 120

FICA taxes 120

Medicare surtax 124

Sources of taxable income 124

Measuring gains: basis and holding period 129

Most common exclusions from taxable income 130

Employment benefits 131

Social Security benefits 132

Gains on the sale of a principal residence 134

Municipal bond interest 135

Combat pay and parsonage allowances 136

Cancellation of debt 136

Compensation for injuries and sickness 137

Foreign earned income 137

Other exclusions 137

Closing remarks: illegal income 138

Practice questions 138

8 Deductions 143

What is a deduction? 143

Personal expenses generally 144

Personal expenses deductible above the line (for AGI) 144

Educator expenses 147

Student loan interest 147

Tuition and fees 150

Health Savings Accounts (HSA) 150

Deductible portion of self-employment tax 152

Self-employed health insurance 152

Alimony 153

Moving expenses 154

Individual Retirement Accounts (IRA) 155

Employment-related above-the-line deductions 155

Personal expenses deductible below the line (from AGI) 156

The standard deduction 158

Itemized deductions 160

Medical and dental expenses 161

Taxes 162

Interest 163

Gifts to charity 167

Casualty losses 169

Business expenses 171

Trade or business 171

Ordinary, necessary, and reasonable 180

Closing remarks on deductions 181

Practice questions 182

9 Losses and Loss Limitations 187

Losses vs. expenses 187

Context of losses 187

Nature of losses 188

Triggering event 189

Calculating the maximum loss amount 189

Loss amount from assets 190

Loss amount from activities 191

Tax treatment of losses 193

Unused losses 193

Losses: calling them names 194

Losses: facts and circumstances 194

The active participation exception for rental losses 208

Practice questions 209

10 Credits 213

Credits vs. deductions 213

Refundable and nonrefundable credits 214

Most common tax credits 217

Child Tax Credit and Family Tax Credit 218

Education credits 219

American Opportunity Tax Credit 219

Lifetime Learning Credit 220

Retirement Savings Contribution Credit 221

Foreign Tax Credit 222

Child and Dependent Care Credit 223

Earned Income Credit 226

Practice questions 228

Part IV Reflections on Policy and Practice 231

11 The Alternative Minimum Tax System 233

History of the AMT system 233

Defining "minimum" 233

AMT adjustments and preferences 235

Private activity municipal bond interest income 236

Personal and dependency exemptions 238

The standard deduction 240

Itemized deductions 240

Medical and dental expenses 241

State and local taxes 241

Mortgage interest 241

Depreciation 242

Incentive Stock Options (ISO) 242

AMT case study: Jolanda White 243

Practice questions 250

12 Tax Planning and Professional Standards 255

Notions of tax planning 255

Avoiding recognition of income 255

Controlling time 257

Controlling character 258

Shifting taxpayer 259

Evasion, avoidance, and the tax gap 260

Professional standards in tax practice 261

Credentialing: degrees, licenses, and certifications 265

Professional oversight 266

Closing remarks 267

Practice questions 267

Appendices 273

Index 391

Editorial Reviews

Through this book Professor Ambrosio offers an important contribution to the study of tax law and to the training of professionals qualified to practice in this field, gathering the technical elements necessary to understand the subject without losing the critical perspective on the topics covered. — Prof. Dr. André Alves Portella, Center for Studies in Taxation and Public Finance, Federal University of Bahia, Brazil

This book provides a completely fresh new and innovative way to learn about taxes. The text provides in-depth analysis of the historical background of the U.S. tax structure and an easy to read application of tax laws with numerous examples. The reader will walk away with a thorough understanding of modern tax administration in America, as this book brings clarity and simplicity to an otherwise complex subject. — John T. Schooler, Esq. Retired) Supervisory Appeals Officer, Internal Revenue Service, Adjunct Professor, University of California at Los Angeles Extension

This book is an excellent resource for anyone wishing to understand the intricacies of the U.S. tax system. Written clearly and comprehensibly, the book expounds the underlying principles of U.S. tax policy. — Dr. Gaurav Gupta, CMA, CFE, Assistant Professor, University of North Carolina Wilmington

Professor Ambrosio has produced a very useful treatise for those looking to familiarize themselves with the current taxation system employed in the United States. This book will provide a very good starting point for anyone looking to prepare themselves for further, more intense studies of the subject. — Greg C. Alwood, JD, (Retired) Partner, KPMG International Tax Practice

This book is a great instrument for ground zero tax learners who wish to grasp the essentials of the U.S. tax system. Through this admirable achievement, Prof. Ambrosio makes learning about taxes fun. — Edna Paule Désirée Gnomblerou, PhD, Guangxi University of Finance and Economics, Nanning, China

Professor Ambrosio has written a refreshing guide for individuals wishing to comprehend American tax theory and principles. I strongly recommend this book to anyone who ever interfaces with U.S. tax professionals on a professional or personal level. — Nancy Albers, PhD, Dean and Professor, College of Business, Louisiana State University Shreveport

From the Publisher