Module 2: advanced individual tax topics
Tax law represents a remarkable feat of intellectual architecture, constantly evolving and demanding a deep understanding of its intricate framework to effectively apply its principles.
— Michael J. Graetz, Professor Emeritus of Law, Columbia Law School
Having established a foundational understanding of gross income, deductions, credits, and the basic mechanics of individual income tax calculation, we now turn our attention to more intricate and specialized areas within individual taxation. While the fundamental principles remain relevant, the complexities arise from specific types of income, sophisticated financial transactions, targeted tax incentives, and the need to navigate potential pitfalls. This section of the book will delve into these advanced individual taxation topics, providing you with the knowledge necessary to understand and address more nuanced tax situations. To establish a strong foundation, we will begin by identifying the primary goal of tax planning and exploring its fundamental strategies before delving into specific advanced tax topics.
Equity compensation and tax-advantaged savings plans for retirement, healthcare, and education are fundamentally interconnected through strategic tax planning and holistic financial management. Equity awards—such as stock options, restricted stock units (RSUs), and employee stock purchase plans (ESPPs)—represent a substantial component of wealth accumulation but introduce complex tax implications that demand proactive management to minimize liabilities and optimize after-tax outcomes. Simultaneously, tax-advantaged accounts (e.g., 401(k)s, HSAs, 529 plans) offer structured pathways to reduce current taxable income, defer taxes, or achieve tax-free growth for specific goals. The synergy emerges when equity compensation events—like exercising options or selling shares—are timed to fund contributions to these accounts, enabling diversification away from company stock while leveraging tax efficiencies.
Another integral part of personal financial life involves the strategic gifting of assets and making charitable donations. We will cover the tax implications regarding these transfers, including the rules surrounding gift tax under IRC § 2501 and the deductibility of charitable contributions under IRC § 170. Understanding these aspects is crucial for effective estate planning and philanthropic endeavors.
Lastly, we will navigate the complexities of income from pass-through entities such as partnerships (governed by IRC § 701 et seq.) and S corporations (IRC § 1361 et seq.), understanding how income, deductions, and losses from these ventures are treated for individual tax purposes. We will also touch on the loss limitation rules, including the passive activity loss rules under IRC § 469.
