2. What is income

what changes tax liability

change in either the tax base or tax rate

how to calculate tax liability

function of two numbers (tax base + tax rate)

if an item doesn't appear in gross income

it'll never appear in the tax base.

before calculating tax liability, what can "taxable income" be split into:

Two components: ordinary income + "long term capital gain"

steps: how is the tax base calculated

1. calculate gross income 2. subtract above the line deductions to arrive at adjusted gross income 3. subtract the larger of the "below the line deductions" / "the standard deduction" to arrive at taxable income 4.

how can congress change the amount of taxes collected

1. change the tax rate 2. change the tax base

harder cases

1. valuation problems + payments made for "non-compensatory" business reasons with side-effects of conferring economic benefit on service rendering employee

Old Colony - FACTS

Mr. Wood received a very high cash salary and paid to the fed and state treasuries the amount of money Mr. Wood owed with respect to that salarty.

most important question when deciding whether gift should be included in taxable income?

Was the payment made in consideration of the services rendered by the employee

Old Colony - Are those payments to the state and fed treasuries included in Mr. Wood's Gross income in the year in which they were made?

Yes. Payment was in consideration of the services rendered by the employee. Payment was compensation within the statute.

what keeps tax rates down?

a broad-based tax

what should count as gross income?

anything that provides the taxpayer with an economic benefit

why did mr. wood lose?

scheme too transparent . so taxpayers learned to be devious.

gross income

the total amount of income from wages before any payroll deductions