In this chapter, we consider the Code’s provisions for deductions and credits for certain personal expenditures. We select only a few 1 such provisions to examine, namely § 165's allowance of a deduction for casualty losses, § 213's allowance of a deduction for medical and dental expenses, § 170's allowance of a deduction for charitable contributions, §§ 164/275's allowance and disallowance for payment of certain taxes, and §§ 82/132/217's, allowance of a deduction for moving expenses or exclusion from gross income.
The Tax Formula
MINUS deductions named in § 62
EQUALS (adjusted gross income (AGI))
MINUS (standard deduction or
MINUS (personal exemptions)
EQUALS (taxable income)
Compute income tax liability from tables in § 1 (indexed for inflation)
➔MINUS (credits against tax)
Consider why there should be an allowable deduction of, exclusion of, or credit for any personal expenses. We might preliminarily observe that there are three basic purposes:
1. We want to encourage taxpayers to make a particular type of personal expenditure. We may choose to make a “tax expenditure.” In this group, we should place deductions, credits, or exclusions for charitable contributions, for home mortgage interest, and for adoption expenses.
2. We want to provide some relief to those taxpayers whose personal expenditures result from the exercise of choice among unappealing alternatives. When discretion among consumption choices is absent, a court is less likely to find that a taxpayer’s accession to wealth is in fact gross income. Cf.Gotcher; Benaglia, supra. Conversely, when taxpayers may spend an accession to wealth any way they choose – as when they receive cash – they have realized gross income. SeeKowalski, supra. However, taxpayers must on occasion make some expenditures that we feel do not result from meaningful choices. The Code names some occasions when the absence of such discretion entitles a taxpayer to deduct (or exclude) an expenditure from his/her gross income. Examples include casualty losses and medical expenses.
3. We want to enlarge the tax base. Some taxpayer expenditures are not necessarily trade or business expenses, but they in fact enhance a taxpayer’s ability to generate taxable income. If they do that, they would also increase tax revenues. We should encourage taxpayers to make such expenditures. In this group, we place the Code’s provisions for moving expenses and child care.